The Aaron's Company, Inc.
Q2 2018 Earnings Call Transcript

Published: 26 Jul 2018

[Operator:]

Good morning, and welcome to the Aaron's, Inc. Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. Participating this morning are John Robinson, Aaron's, Inc. President and CEO; Douglas Lindsay, President of the Aaron's Sales & Lease Ownership; Steve Michaels, Aaron's, Inc. CFO and President of Strategic Operations; and Ryan Woodley, CEO of Progressive Leasing. Now, I would like to introduce Kelly Wall, Vice President of Finance, Investor Relations & Treasury. You may proceed.

[Kelly Wall:]

Thank you, and good morning, everyone. Welcome to our conference call to discuss Aaron's second quarter results, which were released today. All related material, including Form 8-K, with the Q2 earnings release are available on the company's Investor Relations website, investor.aarons.com. And this webcast will be archived for replay there as well. Before the results are discussed, I'll remind investors about the Safe Harbor statement. Except for historical information, the matters discussed today are forward-looking statements. As such, they involve several risks and uncertainties, which could cause actual results to differ materially from those predicted in Aaron's forward-looking statements. Please see our 10-K for the year ended December 31, 2017, and subsequent SEC filings for a description of certain risks that may cause actual results to differ. Forward-looking statements that may be discussed today include Aaron's and Progressive's projected results for future periods, Aaron's strategy and other matters including those listed in the forward-looking statement disclaimer in our earnings press release published today. Listeners are cautioned not to place undue emphasis on forward-looking statements, and we undertake no obligation to update any such statements. During this call, we will also be referring to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net earnings, and non-GAAP EPS, which have been adjusted for certain items which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. I'll now turn the call over to Aaron's CEO, John Robinson.

[John W. Robinson, III:]

Thanks, Kelly. Thank you for joining us today. We're pleased with our performance in the second quarter. We achieved record revenues led by exceptional growth at Progressive and an increase in revenues at the Aaron's Business. We also served a record number of customers in the quarter. Adjusted EBITDA improved over the year-ago period despite expected higher operating expenses, which included planned investments in each of our businesses. Progressive is optimizing performance across a large base of retail doors, which is positively influencing EBITDA growth. Invoice volume increased 25% in the quarter, continuing its strong trend. Progressive's lease pools are generating results that are in line with our targets and we're excited about the pipeline of potential new retail partners. The Aaron's Business is making continued progress. We increased recurring revenue written into the lease portfolio; and key metrics, including lease margin are benefiting from our business transformation initiatives. We strengthened our market strategy with a significant improvement to the e-commerce platform in the quarter and the acquisition of several franchisees to start the second half. We believe there is a large opportunity to serve the direct-to-consumer market; and we'll continue to invest in initiatives to improve the Aaron's omni-channel platform. I'm encouraged by our momentum and believe we have the right teams and strategy in place to profitably grow. In addition to investing in our business, we returned capital to shareholders through $50 million in share repurchases under our existing authorization. We ended the quarter with $94 million in cash, net debt-to-capitalization of 8.9%, and we believe we are well-positioned to execute on our long-term strategy. As we start the third quarter, we have acquired 90 franchise stores. We believe these stores are in attractive markets and position the Aaron's Business to further benefit from our business transformation initiatives. I'll now turn it over to Ryan to discuss Progressive.

[Ryan K. Woodley:]

Progressive had an excellent second quarter, with a 29% increase in total revenues and an 11% gain in EBITDA. This strong revenue performance was driven by a 25% increase in invoice volume in the quarter, resulting from an 18% increase in invoice per active door and a 6% increase in the number of active doors. The strong gain in invoice volume per active door was again driven by robust growth in the number of transactions per door, as well as an increase in the size of the average ticket. We expect these continuing positive trends in both new and existing doors to support strong revenue and profit growth in the second half. Gross margin was modestly lower than last year driven by 90-day buyout activity. This was offset by leveraging our SG&A expenses resulting from the significant increase in revenue. Write-offs and bad debt expense increased versus last year as planned; and we expect to perform in line with the 5% to 7% and 10% to 12% annual ranges that we'd previously outlined. We're continuing to benefit from our long-stated philosophy of maintaining price and performance discipline across the portfolio. We're pleased with the current pace of our business. The team is executing at a high-level; and we believe we are well-positioned to convert our large pipeline of potential new retail partners. I'll now turn it over to Douglas for comments on the Aaron's Business.

[Douglas A. Lindsay:]

Thanks, Ryan. The Aaron's Business continued to make progress in the second quarter. Total revenues increased over a year-ago quarter, and we're on pace to meet our 2018 full-year guidance. In Q2, we continued to see positive trends in key leading indicators. We achieved the second consecutive quarter of increases in recurring revenue written into the lease portfolio and the sixth consecutive quarter of improvement in lease margin. Notably, we're seeing strong revenue and margin performance across our key product categories. Lease revenues increased 5.1%, driven primarily by franchisee acquisitions we completed over the last 12 months. Same-store revenues declined at a slower rate for the fifth consecutive quarter, as ticket size continues to increase in the portfolio. We continue to believe these trends support our guidance of delivering positive comparable store revenues in the fourth quarter of 2018. Operating expenses in the second quarter of this year were higher than the prior year. This increase was primarily attributed to the franchisee acquisitions completed in prior periods, continued investment in our business transformation initiatives, higher transportation costs, and increased write-offs. These increases were partially offset by benefits from our prior-year store close/merge strategy and continued efforts to lower our cost to acquire and serve our customers. Write-offs increased 40 basis points to 4% of lease revenue, driven, in large part, by an increase in the number and type of promotions we're employing in 2018. Despite higher write-offs in the near term, we expect these promotions to generate an attractive return on investment. Our business transformation strategy is on track, and we have multiple test concepts in flight, ranging from new merchandising strategies, to technologies that will greatly enhance the customer experience at Aaron's. In the first half of 2018, we launched several new store concepts designed to attract the next generation of customers and to drive top line growth. These concepts include

[Steven A. Michaels:]

Thanks, Douglas. Now, I'll turn to financial highlights for the quarter. Revenue for the second quarter of 2018 was $927.9 million, an increase of 13.8% over the same period a year ago. Net earnings for the quarter increased 6% to $38.5 million versus $36.3 million a year ago. Net earnings for the second quarter on a non-GAAP basis increased 22.9% to $59.6 million compared with $48.5 million for the same period in 2017. Earnings per share assuming dilution for the three months ended June 30, 2018, were $0.54 compared with $0.51 for the same period in 2017. Diluted EPS on a non-GAAP basis for the quarter increased 24% to $0.84 in 2018 versus $0.68 in 2017. Adjusted EBITDA for the company was $97 million for the second quarter of this year compared to $95.7 million for the same period last year. Adjusted EBITDA and diluted EPS on a non-GAAP basis for the quarter excluded the full impairment and related expenses of our 2011 investment in Perfect Home. Perfect Home is a UK rent-to-own business, and as we have disclosed in our last several 10-Qs and our 2017 10-K, Perfect Home has faced recent liquidity challenges and covenant violations under its credit facilities, including the Aaron's subordinated secured notes. These challenges were caused primarily by business model adjustments, resulting from regulatory changes in the UK. As a result of the liquidity constraints and the debt acceleration by a senior secured lender, Perfect Home entered into the UK's insolvency process in early July, and was subsequently acquired by a senior secured lender. As a result, we believe we will not receive any further payments on our notes and have recorded a full impairment and related expenses of approximately $22 million in the second quarter. As in recent quarters, we expect to file our 10-Q after the market closes this afternoon. I would like to give a little more color on the increase in operating expenses versus the year-ago quarter. For the company, OpEx increased $58 million, just under half the dollar increase was driven by the expected year-over-year increase in bad debt expense and write-offs at Progressive. The other half of the increase was driven by a $17.5 million increase in personnel expense. $10 million of that increase was in the Aaron's Business, resulting from increased store count from our franchise acquisitions, as well as investment and support staff for our business transformation initiatives, offset by some store closures and optimization of labor in our store operations. Progressive personnel expense increases resulted from continued investments in all of our key functional areas. The balance of the OpEx increase was primarily in the Aaron's Business and was spread across several areas, including higher occupancy cost due to store count growth, higher maintenance, and higher transportation costs, partially offset by lower advertising expense in the quarter. Other operating expenses increased $8.8 million driven by investments to support our business transformation initiatives, expenses associated with the Perfect Home notes, and the increase in intangible asset amortization from our franchisee acquisition activity. At June 30, 2018, the company had $94.3 million of cash on hand compared with $51 million of cash at the end of 2017. Cash generated from operating activities was $266.8 million through the first six months of 2018 compared with $115.6 million in 2017. The difference was driven primarily by $134 million change in cash taxes paid between the two periods. Through normally scheduled amortization payments, we reduced our total debt by $96 million since year end. The company has no further scheduled debt repayments through the balance of the year. At the end of June, we had a net debt to capitalization ratio of 8.9% and no outstanding borrowings on our $400 million revolving credit facility. As both John and Douglas discussed, we acquired 90 stores following the end of our second quarter for approximately $127 million. We used cash on hand and availability under our revolver to fund the acquisitions. Including one-time transition and integration-related expenses, we expect the purchases to contribute approximately $0.05 on a non-GAAP EPS basis in 2018. We believe this positive impact will be partially offset by the acceleration of additional investments in the business transformation initiatives within the Aaron's Business. We remain conservative to capitalize following the acquisitions with pro forma available liquidity of over $350 million and debt to adjusted EBITDA of less than one times. The tax rate in the quarter was 23% versus 36.2% in the year-ago quarter. During the quarter, the company purchased 1,233,670 shares of common stock for $50 million. We currently have authorization to purchase an additional $431.6 million of common stock. Consolidated customer count increased 5.7% to 1,714,000 at June 30, 2018, compared to 1,622,000 at June 30 last year. As noted in the earnings release, we are reaffirming our annual guidance for 2018 including our same-store revenue update we provided in April. To add additional color on the guidance front, we now expect the tax rate to come in at approximately 23.5% for the year. We expect the tax rate assumption, as well as the diluted EPS impact from our share repurchase activities through June 30, to result a non-GAAP EPS in the upper half of our range of $3.20 to $3.50. This update does not assume any additional share repurchases in the balance of the year. As we think about non-GAAP EPS growth for the remainder of the year, we expect strong growth in Q3 and Q4 with the rate of growth in Q3 slightly higher than the rate of growth in Q4. With that I'll now turn it back to John before we move on to Q&A.

[John W. Robinson, III:]

Thank you, Steve. We continue to be excited about the large market opportunity for our company. Aaron's has a long history of innovation, and we're working hard to maintain our leadership position in the industry. I want to thank all of our associates, franchisees and retail partners for your efforts to deliver the best value proposition to our customers. We appreciate your commitment and all you do to make Aaron's such a success. With that, I'll turn it to the operator for Q&A.

[Operator:]

We will now begin the question-and-answer session. The first question will come from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

[Bradley B. Thomas:]

Hey. Good morning, everybody; and thank you for taking my questions.

[John W. Robinson, III:]

Good morning.

[Douglas A. Lindsay:]

Good morning.

[Bradley B. Thomas:]

I got on a couple of minutes late after getting off of another call, but wanted to ask two questions. First, about sort of the write-offs in the two businesses. And then, secondly, just about guidance in general. I guess, first, zooming in on the write-offs, Ryan, could you just give us a little bit more color around how the leases are performing relative to your expectations in 2Q, with those metrics taking up some year-over-year, but it looks like they're continuing a pretty similar cadence from what they were performing at in 1Q? How are you feeling about the book of leases right now?

[Ryan K. Woodley:]

I appreciate the question. Short answer is feeling good. Write-offs were 6.7% in the quarter. And I think as we mentioned in the script, it keeps us right in line to deliver in the annual range that we provided and consistently reiterated at 5% to 7%, the annual range. As you know, we've discussed in the past, there's a lot of variables that go into those write-off levels, but we feel good about where we're at. It's being driven primarily by what we think are healthy and expected shifts in invoice mix among retailers and verticals and the ongoing optimization of our decision models. But again, right in line with where we expected to be. And we feel good about staying inside the 5% to 7% annual range we provided.

[Bradley B. Thomas:]

Great. And Douglas, a similar question for you?

[Douglas A. Lindsay:]

Yeah, sure. So, our write-offs went from 3.6% to 4%, so 40 basis point increase. It was mainly driven by a promotional strategy year-over-year. So, in early 2017, based on some analytics, we changed our promotional strategy from giving away economics over the life of the agreement to sort of low first payment promotions, which we've done more frequently this year. Those promotions accelerate charge-offs, but over the life of those lease pools, they perform in the same way as we've historically seen. So, we're driving a lot more traffic through those promotions but taking slightly higher write-offs.

[Bradley B. Thomas:]

Great. And then, as we think about the full-year guidance, at a high-level, obviously, you all have reiterated the guidance from last quarter. You do have $0.05 coming from the acquisitions you've just announced. The pace of improvement in the Aaron's Business looks very encouraging. I guess, as we stand here halfway through the year, what do you think has changed, if anything, about how we should think about your guidance versus three months ago?

[Steven A. Michaels:]

Yeah, Brad, this is Steve. I mean, the guidance, we have a range out there, and there's been some puts and takes in both sides of the business. We're fighting off increased transportation costs and other things that we had thought about at the beginning of the year, but probably not baked in the magnitude of the changes. And we're encouraged by, on the Aaron's side of the business, these business transformation initiatives. And as we said in the prepared remarks, we're accelerating some of those investments due to our optimism into the back half of 2018, which will partially offset the contribution from the franchise acquisitions. So, we're comfortable in the ranges, and we'll look for opportunities to update you guys in further calls. We did tighten or guide to the top half on the non-GAAP EPS side, primarily driven by changes in assumptions around tax rate and then the share repurchase activities. But we're comfortable with the ranges and optimistic about the business. And we still continue to expect positive comps in the Aaron's Business in Q4.

[Bradley B. Thomas:]

Great. Well, really encouraging quarter. Thanks, and good luck.

[Ryan K. Woodley:]

Thank you.

[Douglas A. Lindsay:]

Thank you.

[Steven A. Michaels:]

Thank you.

[Operator:]

The next question will come from Bill Chappell with SunTrust. Please go ahead.

[William B. Chappell:]

Thanks. Good morning.

[John W. Robinson, III:]

Hey, Bill.

[Ryan K. Woodley:]

Good morning.

[William B. Chappell:]

Hey, Ryan, just to kind of go back to the prospect of new customers over the – we're now seven months into the year. I understand they're all very lumpy, but I didn't know if that's lumpy, meaning one year, yes; next year, no. And just overall, whether improving kind of retail environment is kind of slowing that process, where they maybe don't see that they need you right now or need you immediately, and if maybe that's postponing some new customer signs?

[Ryan K. Woodley:]

Yeah, good question around the pipelines. We feel really good about it. As you pointed out, we're always stack ranks in a rank order set of priorities at any given retailer. And while we believe the value proposition is universally compelling, it's difficult obviously for us to control where we get slotted and that prioritized list of initiatives at each of those guys. But Q2 is another interesting quarter of us seeing continued progress in the pipeline at both the regional and the national level. If you think about the book being comprised of both those, we saw progress on both those fronts, which we're excited about. And as you pointed out, it would just be always difficult to predict exactly when that's going to happen. I think we've said in the past, certainly, we don't have baked in today the outlook that we provided winning those big national accounts. But we're certainly excited about the prospect of rolling them out at some point in the future. But pipeline continues to be robust; the team's doing a great job servicing and executing on new opportunities; and we feel fortunate to continue to have really interesting pilots, both the national and the regional level.

[William B. Chappell:]

Okay. I'll stay tuned. And Douglas, just on the Aaron's, I guess, two things. With the acquisitions, as you're acquiring some of these businesses, is there an opportunity to improve same store sales of those businesses? Are they relatively healthy, anyways? Just kind of understanding the criteria behind which ones you're looking at versus not. And then, also on the online business, how does that, as that grows faster and faster, affect your ability to kind of get positive same-store sales? I would think it would, but actually slow that, if you were going away from the stores, but I don't know how that's exactly counted.

[Douglas A. Lindsay:]

Sure. First, just on the franchise. So, the recent acquisitions, we mentioned the 90 stores. They're all in different markets and really all have, we feel, like good long-term potential. They all are performing at different levels. So, we've got some good stores. We have some other opportunity stores. And we plan on taking the good solid operators that we're acquiring and trying to build upon some of the momentum they have, but also introducing some of our operating practices, which recently have been outperforming our franchise peer group. So, we feel good about that. I'd say, as a group, they're all performing in line with our company trends, all the stores we're acquiring. And so, we don't think they would be dilutive. And we're hoping to build as we introduce our business transformation initiatives, build on that over the long term. In regards to e-comm, e-comm is interesting. We're really bullish on e-comm, and we talked about a lot on this call. We feel like we've got a real competitive advantage there, mainly because we have the plumbing in place through our store network to leverage our supply chain, and our store resources, and our last-mile logistics to deliver that product into our customer's home. We really think that's a competitive advantage. We're able to get big heavy product into the customer's home, but quickly and profitably, which is something a lot of folks struggle to do in the marketplace, particularly in the furniture and appliance business. So, I think, the other really important aspect of e-comm is most of these customers are new customers to us about – over 60% of the customers we're seeing coming through the e-comm channel are new to Aaron's. Many of them are buying outside of our store hours. So, there's big opportunity there for new customers, younger customers and to get product through our existing cost structure into their homes. We believe e-com is also a cost driver or a big benefit to us on the revenue side, because a lot of the revenue written in the quarter was from e-comm. I think we mentioned we were up 50% in revenue written into the portfolio on the quarter. And we think that's accretive to the overall business.

[John W. Robinson, III:]

And one thing I'll add, Bill, this is John, is that the e-comm revenue is credited to the store closest to the deal that it happens, so it does flow through our comps. So, as e-comm volume increases, it should help our comp store base.

[Steven A. Michaels:]

Right. This is Steve. I was going to add that. And then, one other technicality on how the comps are calculated. These franchise stores will not be in the comp base until we have operated them for 15 months. So, it will be basically Q4 of 2019 before these stores are in the comp base. They always will be in total revenue, but not in the comps. And then as John said, the e-comm revenue is booked at the store level where the customer is being serviced, and so it's already in the comp.

[John W. Robinson, III:]

Yeah, and that goes with what Douglas was saying about the value proposition, because, as Douglas said, it's big heavy product, so you need someone locally to deliver, install the product, service the product, because during our lease, we service it at Aaron's and return it if there's a return. So, because we have all that plumbing already in place and paid for, these are profitable deals and is also is the reason we credit to the store, because the store has a big part in the execution of our e-comm business.

[William B. Chappell:]

Got it. Thanks so much for the color.

[John W. Robinson, III:]

Thanks.

[Ryan K. Woodley:]

Thank you.

[Operator:]

The next question will come from Dillard Watt of Stifel. Please go ahead.

[Dillard Watt:]

Thanks guys. Good morning.

[John W. Robinson, III:]

Good morning.

[Dillard Watt:]

Ryan, maybe could you give us a little more color on what you're seeing from a number of transactions per door and ticket. Is that more explained by verticals, or are there other factors at play?

[Ryan K. Woodley:]

Great question. Profile of door level productivity certainly varies by vertical, and that's actually an interesting dynamic to look at across the portfolio. It's certainly being positively influenced by new introductions to the portfolio. We've seen great productivity coming out of accounts we on-boarded recently over the last 12 months, which is great to see. But we're also seeing strong levels of productivity out of previously existing doors which is good, and that just goes back to the team working well with our retail partners to generate increasing levels of volume. We try and be a trusted adviser in an ideal state where sort of the thought partner with a retailer thinking about customer acquisition across the subprime consumer base, given that, that's going to – all we do, we tend to have a lot of insight about how to support their demand gen activities. And same thing applies in store, just thinking about things like how to educate them on retail sales associate talking points and in-store marketing materials and POP, and obviously, our centralized decision as well. We're always trying to optimize that to approve as many folks we can. So, I think, it's a great effort by the team across the board that influences that and strong partnership with the retailers that we work with. And the great thing is that it's happening in both new and existing doors. And those new doors are maturing nicely into the portfolio.

[Dillard Watt:]

And then, on the 90-day buyouts picking up, is that something you expect to continue with the balance of the year or is that sort of a timing or lapping situation?

[Ryan K. Woodley:]

Yeah, good question. As you know, there's a lot of variables that play into the levels of the 90-day buyout with purchase (00

[Dillard Watt:]

Okay. And then Douglas turning to you on the transformation initiatives. We're talking about accelerating some of those initiatives. Could you give us a little more color on which of those you're pulling forward, and what's working?

[Douglas A. Lindsay:]

Sure. As we mentioned earlier on the year, we had a number of these business transformation initiatives in our initial guidance. We're spending a little bit more in the second half of the year on things that are showing more promise right now, after doing a lot of testing around these things. I put on that list, new store concepts, which I mentioned. We've got a couple of new store concepts that are really making progress, and we're going to be testing and sort of flexing some of those in the market. We're also working on centralized collections and centralized decisioning, and that's moving forward, and we're going to make more investment there. And of course e-comm, which we talked about. E-comm has been a success. We launched our new website on April 1, and we're going to continue the next phases of the e-comm investment. We've got ongoing merchandising initiatives, which we're also focused on. There's a recurring list of those. And as you've seen through the increase in ticket, we're getting near-term returns on that, so we'll continue to invest in those as well.

[Dillard Watt:]

Great. Thank you guys very much.

[Ryan K. Woodley:]

Thank you.

[John W. Robinson, III:]

Thanks, Dillard.

[Operator:]

The next question will come from Budd Bugatch of Raymond James. Please go ahead.

[Beryl Bugatch:]

Good morning, and thank you for taking my questions. So, can you talk a little bit...

[Ryan K. Woodley:]

Hey, Budd.

[Beryl Bugatch:]

...Ryan, give us some color please on the lease margins inside the Progressive segment? How are they looking, what changes have you seen, and what's the outlook for them?

[Ryan K. Woodley:]

Yeah. The Progressive, that would be primarily our gross margin and then, our bad debt, and write-off levels. And the commentary on the gross margin is pretty thin, because there wasn't much movement there. It was just down slightly year-over-year because of those slightly higher 90-day buyout levels, which was offset by some leverage in our SG&A expenses. Even though we continue to invest in SG&A, just a strong revenue growth kind of exceeded the rate of growth in SG&A there. So, that was a push between those two. And then the gap is really being driven – year-over-year in terms of margins, really being driven by bad debt and write-offs, which we said were in line with our expectations, what we had planned for, and spoke about previously. And the comfort we offer there is just that we get those ranges of 5% to 7% on write-offs and 10% to 12% of revenue on bad debt expense. And we're definitely in line with those ranges on the year. So, feeling good about the lease portfolio, feeling good about margins heading into the back-half of the year.

[Beryl Bugatch:]

And at bad debts, you often have a seasonality impact, where the second half is higher than the first half. Is that again the situation we look forward this year in terms of percentages?

[Ryan K. Woodley:]

As you know, we benefit earlier in the year from our customers being flushed with cash around the tax season, and then that sort of plays out over the year. And we expect that same trend to continue this year as well.

[Beryl Bugatch:]

Okay. E-commerce, Doug is helping some of your comp sales. Can you give us a basis point impact of e-commerce on comp store sales in the quarter and maybe year-to-date?

[Douglas A. Lindsay:]

Yeah, Budd, we don't have that deconstructed here. I don't know if (00

[John W. Robinson, III:]

When you look at the – one of the indicators we've been talking about, Budd, is recurring revenue written into the portfolio. And certainly a big piece of that growth is coming from e-comm, and that's very encouraging because, as Doug also mentioned, it's a lot of customers who are young customers, which has been an issue for us in the legacy store business, we've had an aging customer base, so we're now attracting younger customers. And it's a number of customers that we've never transacted with before. So, it's a great source for us of new customers. And Aaron's, we do a great job in both businesses of having lifetime long-term customers. But, we've got to attract them in, in the first place. And so the fact that we have this new avenue with e-comm is very exciting for us.

[Douglas A. Lindsay:]

Yeah, and I mean, I just want to mention that Manus Varghese, who's our leader of e-comm, and his team has done an excellent job of really optimizing the funnel and taking the traffic we already had coming to our site and making it more profitable and more flow through. So, the team's done a great job getting us where we are. We've got a long way to go, but we're very optimistic about it.

[John W. Robinson, III:]

And we just launched the new platform in April, so much of the game that we've seen in our results has come off of the old platform, which was an extremely high-ROI investment. Steve Michaels and John Trainer, really launched that a few years ago, and we've gotten tremendous volume off of that. And to have this new platform that Manus and his team have brought in, just gives us a lot of confidence in the scalability and the opportunity, because we can really expand what we're offering, our SKUs. And our shopping experience for customers is going to improve significantly over time. It's a multi-year process that we have a platform to do that, which we're real encouraged about.

[Beryl Bugatch:]

And that 7% number, that 7% of business, is that of the Aaron's Business, or of consolidated? I would think it's just Aaron's, but...

[Douglas A. Lindsay:]

No. That's of the Aaron's Business. It's the Aaron's Business, Budd.

[Beryl Bugatch:]

All right. And so, on the new acquisition, you paid $127 million or thereabouts for it. What was the revenue annual run rate of those businesses? And I think, Steve, you said it was $0.05 on a non-GAAP basis. What does the GAAP basis look like for that?

[Steven A. Michaels:]

Yeah. Budd, we're not really disclosing more details on these acquisitions. As there was last year, there will be some tables in the Q3 10-Q when we file. But that's what we're going to give on those acquisitions right now.

[John W. Robinson, III:]

Yeah. And then, Budd, this is John. What I would say on that though, just to remind you, and I know we've talked about this, but when we're thinking about these franchise acquisitions, we have a long-time horizon, because we believe there's a real benefit and value for us to own and control certain and many markets. And we believe that because we're real optimistic the future of Aaron's Business, and specifically, a lot of the business transformation initiatives we have going on. And we're taking into account the potential for these markets as well as near-term results that we expect when we're thinking about the acquisition of these. And we expect to acquire more as we go forward. We don't necessarily think we'll buy all of them. And we we're kind of opportunistic in the approach we're taking. But over time, we expect to acquire more because we do think there's real value in controlling these businesses. Controlling the operating practices it gives us more flexibility to innovate those businesses, and we're really changing. We're listening to our customer, and we're really changing our model to make sure in the markets that we are in that we're serving the customer where they want to be served. And by controlling these, we also can manage our brand better and control that. And also, we can manage our risk better, which is important in a regulated business. So, we're taking all those factors into account, and we're having a long-term perspective in buying these. And we're now at 75/25 company/franchise, and we would expect that company-owned percentage to increase every time.

[Beryl Bugatch:]

I share your optimism on the Aaron's Business and I just – but it's interesting you are bringing in franchisees – or bringing franchisees back into the company. Franchise stores, we see some of that moving exactly the other way for others. How many different operators did you acquire? What are the number of operators left in the franchise system?

[John W. Robinson, III:]

We acquired – this is three entities, obviously, large teams, and one of the benefits of getting some great talent from all three of these companies. We have about 100 left. If you look at the mix, there's only 9 or 10 with more than 10 stores, so it starts to get to smaller operators. And you're right, our strategy is different than others potentially in the market. Obviously, from just a pure short-term return on capital perspective, the franchise business is very attractive. From our perspective, we think – we're in this business for a really long haul, and we're focused on innovating it and getting it to where it can be a real growth business again and serve the customer where they want to be served. We think there's a lot of technology, a lot of innovation. Douglas talked about some of those things. Centralizing collections is an example. We may have different store concepts, we may not have the same store concept across the market, because stores and e-comm are all flowing together now in mobile and all those things, and we're trying to build that value chain together, optimize our cost structure. And all of that stuff makes a lot more sense, in our belief, from our perspective, in a company-controlled environment. It's harder to execute with franchise. So, that's the reason we're going that way. We think, long term, it'll have a great payoff. Certainly, there's a capital allocation. There's a use of capital to do that that we think is the right thing to do for the long-term.

[Beryl Bugatch:]

Okay. And the new store concepts, are they all under the Aaron's banner, or is there some others with a different nameplate?

[John W. Robinson, III:]

We have them under Aaron's, but we're testing some other nameplates as well, which you can talk about.

[Douglas A. Lindsay:]

Yeah. Budd, we've got several concepts, and I think most of them are under the Aaron's brand. We do have an outlet concept that we're testing right now. Most of our early success has been in store concepts, where we put new merchandise into the store, therefore, we've got to clear out our pre-lease inventory, and we're testing different ways to do that. But, overall, we're seeing very positive signs in these new stores.

[Beryl Bugatch:]

Okay. Thank you very much. Congratulations, and good luck on the balance of the year.

[John W. Robinson, III:]

Thanks, Budd.

[Douglas A. Lindsay:]

Thanks, Budd

[Operator:]

The next question will come from Anthony Chukumba of Loop Capital Markets. Please go ahead.

[Anthony Chukumba:]

Good morning, and thanks for taking my question. So, your largest competitor is going to be going private. And I guess I was wondering what your thoughts are on that in terms of the fact that your largest competitor is now going to be somewhat capital-constrained given the leverage they're going to take to go private? If that changes at all your outlook or your go-to-market strategy in either the Aaron's Business or Progressive? Thanks.

[John W. Robinson, III:]

Thanks for the question, Anthony. This is John. I'll give it a shot. The proposed transaction that you're talking about doesn't affect what we're doing. I mean, honestly, we've had a plan, we've been executing it, we're working hard in both businesses to innovate our businesses. The market's competitive, so we haven't seen any change and don't expect to see any change from a competitive standpoint. It's real competitive, and we have to be better and better every day. And so, we're just sticking to our plan, don't anticipate any changes from that. And know that they're a great competitor, and there's a lot of other great competitors out there. And we've got to be on our game and execute our plan. So, we're not anticipating any changes, but we just don't know if any. And honestly there're so many other competitors as well that we'll have to deal with them in the regular course anyway. So, we're not seeing any changes or expecting any for now.

[Anthony Chukumba:]

That's helpful. Thank you.

[John W. Robinson, III:]

Thank you.

[Operator:]

The next question will come from Kyle Joseph of Jefferies. Please go ahead.

[Kyle Joseph:]

Morning, guys. Thanks for taking my questions. Most have actually been...

[John W. Robinson, III:]

Morning.

[Kyle Joseph:]

...asked and answered. I just wanted to talk and apologize if I missed it, got a couple of earnings going on right now. But, just in terms of the seasonality of the business, it looks like the economics contribution by quarter shifted a bit this year. Is that just a one-time thing in terms of expense timing, or should we anticipate that going forward?

[Steven A. Michaels:]

Yeah, We could talk about specifics of what you're talking about Kyle, this is Steve, but we don't think we've seen any major shifts in seasonality. Progressive continues to grow. And we've had some acquisitions that might have on the Aaron's side related to franchisee stores that might have made it look like there's a shift, but we haven't seen any major shifts in the way year flows.

[Kyle Joseph:]

Got it. And Ryan just now that we're, call it, a year-plus out, since adding two big partners last year, can you just give us an update about how the two new relationships have performed versus your expectations?

[Ryan K. Woodley:]

Really, good. Really good on both accounts. I mean, great relationships with great partners who know how to run their businesses extremely well, and certainly benefiting from that as we look to grow our program within their doors. They're just create operators. And you're seeing that show through in the numbers. I think there's significant upside on both accounts, but certainly pleased to be partnered with them and very pleased with the pace of how those rollouts have gone.

[Kyle Joseph:]

Great. That's all I got. Thanks for answering my question.

[John W. Robinson, III:]

Thanks, Kyle.

[Ryan K. Woodley:]

Thanks, Kyle.

[Operator:]

The next question will come from Vincent Caintic of Stephens. Please go ahead.

[Vincent Caintic:]

Hey, thanks. Good morning, guys. On the Aaron's Business, I just kind of wanted to think of broadly, I want to put in baseball analogies, kind of how far are you innings-wise in terms of the transformation of the business and in terms of how you think about the level of elevated investments that you've been making into the business?

[Douglas A. Lindsay:]

Hey, Vincent. This is Douglas. So, I would say, we're very early. We've taken a real test-and-learn approach. All of the concepts I mentioned are well underway, some of them are gaining traction. As we see concepts that we can spread to the rest of the network through our 1,700 stores, including our franchise network, we'll push those out and make that investment. And to the extent that there are investments like new store concepts that could take a number of years to implement, so it's varying. I mean, I would think some things like technology-driven decisions would be more immediate and longer-term real estate decisions would take multiple years. We'll probably give you a better indication of that as we go into 2019 as to the ongoing investment. But I think our revised guidance or our updated guidance gives you a feel for where we are in 2018.

[Vincent Caintic:]

Okay, got it. And then when you – so specifically, on the franchise acquisitions and how that helps with the omni-channel platform, could you maybe describe in more detail how that works, and maybe the cadence of the improvement when you acquire a franchise to how it benefits your omni-channel? Thanks.

[John W. Robinson, III:]

Yeah. I mean, the way it would benefit, Vincent, is just our ability to take advantage really of all the initiatives that Douglas mentioned. I mean, there's a number of things, but just to be specific about to Doug's, centralized collections or decisioning, both of those things work in a company-controlled environment. Maybe more difficult in a franchise model where the business was set up and runs really like each store is its own entity. And it's kind of a – it does everything out of that store from delivery through all of its collection and reverse logistics. And we think a lot of that could be optimized if you have a scale of more stores that can network together and get scale advantages from that. So, that's an example specifically of how that could work better. There's also reverse logistics opportunity with Progressive that are better in a company-controlled environment. In terms of – I can't remember the second part of the question. Was it about in terms of the improvement that the franchisees? I mean, I think that takes time. I mean, it depends. The scale of an acquisition makes a big difference, the location, how it fits in with our operations. The three deals we just did is – there's some great overlap with each other and with some company stores, depending on which one you're talking about. So, that will help drive improvement in those. I think there's some good opportunity to improve some of those. And our operators are excited about working with those teams. But, in terms of the omni-channel initiative, that's a multi-year kind of benefit that we're seeing in our company stores. And as Douglas said, we're starting to get the benefit of that in franchise stores that we've acquired, but it takes some time for that to flow through.

[Vincent Caintic:]

Okay, got it. That's helpful. Maybe just one, switching to Progressive. Ryan, in terms of the strong pipeline you mentioned, has there been any, I guess, difference in the level of discussions you had? Have there been more urgency, about the same urgency with retailers? Are they looking for different things before they sign you? And kind of what's the angle that they are looking for before they turn you on? Thanks.

[Ryan K. Woodley:]

Yeah, a consistently positive dialogue with all the folks in the pipeline. And I would say the business development conversations we're having are very similar to those we've had in the past, I think, acknowledging the strength of the value proposition. And it really comes down to prioritization. There's also competition. As John mentioned, it remains a very competitive market. We've discussed in the past, that's primarily felt in the regions where there are more competitors. That's been the case for some time; still the case today. So, for those opportunities, it tends to be us having a conversation with the retailer, along with several other competitors in the market. But, those conversations have gone well and consistent with how they have been in recent quarters. We're bullish on how we're positioned relative to others. We've got the benefit of 20 years of scale and experience in how to execute this program, we believe, than anybody else. And we think that bodes well for us as we work through these pipeline conversations and hope we prevail at every opportunity, but we'll see that play out over time. We just continue to be really positive.

[Vincent Caintic:]

Great. Thanks very much.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to John Robinson for any closing remarks.

[John W. Robinson, III:]

I'd just like to thank you for your interest in Aaron's. And we look forward to updating you all in our next earnings call.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.