The Aaron's Company, Inc.
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good morning. My name is Andrea, and I will be your conference coordinator. At this time, I would like to welcome everyone to Aaron's, Inc. Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. I would now like to turn the call over to Mr. Michael Dickerson. You may begin your conference.

[Michael P. Dickerson:]

Thank you, and good morning, everyone. Welcome to the Aaron's, Inc. third quarter 2018 earnings conference call. I'm Mike Dickerson, Vice President of Investor Relations. Joining me this morning are John Robinson, Aaron's, Inc. President and Chief Executive Officer; Ryan Woodley, Chief Executive Officer of Progressive Leasing; Douglas Lindsay, President of the Aaron's Business; and Steve Michaels, Aaron's, Inc. Chief Financial Officer and President of Strategic Operations. Many of you have already seen a copy of our Earnings Release issued this morning. For those of you who have not, it is available on the Investor Relations section of our website at Aarons.com. During this call, certain statements we make, will be forward-looking. I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of our Earnings Release. The Safe Harbor provision identifies risks that may cause actual results to differ materially from the content of our forward-looking statements. Also, please see our Form 10-K for the year ended December 31, 2017 and subsequent filings with the SEC, for a description of the risks related to our business that may cause actual results to differ materially from our forward-looking statements. Listeners are cautioned not to place undue emphasis on forward-looking statements and we undertake no obligation to update any such statements. On today's call, we will be referring to certain non-GAAP financial measure including EBITDA and 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. The Company believes that these non-GAAP financial measures provide meaningful insight into the Company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods, and to assist them in understanding the Company's ongoing operational performance. With that, I would like to turn the call over to John Robinson.

[John W. Robinson, III:]

Thanks, Mike, and thank you all for joining us today. I'm pleased with our third quarter results. Adjusted EBITDA increased 22% on a 14% gain in revenues, as compared to the third quarter of 2017. And we're making progress on our strategic initiatives. Progressive strong momentum continued with quarterly revenues exceeding $500 million for the first time and the Aaron's Business benefited from investments to improve our omnichannel offering. Non-GAAP EPS was $0.69, an increase of 60% over the third quarter of 2017 and we believe, we are on track to achieve the performance targets we previously outlined for you. We achieved these record third quarter results despite Hurricane Florence late in the third quarter. The damage to our assets was minimal and I'm very proud of our team's planning and execution throughout the event and its aftermath. There are many examples of our associates going above and beyond to assist those affected by the storm and I want to extend a heartfelt thank you to everyone involved in that outreach. Progressive continues to execute at a high level. The team is optimizing EBITDA growth as Progressive makes additional investments to innovate its products to serve more customers across our partners, stores and e-commerce platforms. We believe Progressive has significant growth opportunities and we're excited about the pipeline of potential retail partners, we're working on for 2019 and beyond. The Aaron's Business increased both revenues and adjusted EBITDA and continued to improve its platform to address the large market opportunity for omnichannel lease to own. Aaron's Business transformation initiatives are driving stronger financial performance and we continue to expect that same-store revenues will turn positive in the fourth quarter. We are investing capital and the resources to drive customer engagement and lower our cost to serve. We believe success in these areas will improve the customer experience for existing and new shoppers including millennials, where we are seeing stronger traction. We ended the third quarter with $35 million in cash and net debt to adjusted EBITDA of less than 1 times. Throughout 2018, we have bought back 2.3 million shares including 676,000 shares in the third quarter and paid our regular quarterly dividend. For the first nine months of 2018, we returned a total of $104 million to shareholders through a combination of share repurchases and dividends, which we have paid for 31 consecutive years. Our goal as always is to operate a model that helps our customers gain access to a wide range of high quality products in a transparent, flexible and affordable way. We plan to continue investing in our existing businesses to drive that outcome and to look for additional opportunities to innovate in existing and adjacent markets, using our unique set of assets and competencies. These include ongoing customer and retailer relationships, analytics and decisioning, customer and partner servicing platforms, last mile delivery and return capabilities and furniture manufacturing. In the absence of any significant acquisitions, we expect to maintain a conservative capital structure while returning capital to shareholders. I will now turn it over to Ryan, to discuss Progressive.

[Ryan K. Woodley:]

Thanks, John. Progressive continues to execute on our strategy to drive profitable growth, as we pursue a large and under-served market. Total revenues rose 27% in the quarter as compared to the third quarter of 2017 to a record $504 million. EBITDA increased to stronger 32%, driven primarily by operating expense leverage. This strong revenue performance was driven by a 26% increase in invoice volume in the quarter resulting from a 21% increase in invoice per active door and a 4% increase in the number of active doors. Invoice volume was again, led by robust growth and the number of transactions per door. We are cycling strong new door additions from a year ago, and we continue to make progress in increasing productivity across new and existing doors. Gross margin was modestly lower year-over-year, driven by 90-day buyout activity. EBITDA was 10.3% of revenues versus 9.9% in the year ago period. We generated leverage in SG&A expenses despite making planned investments ahead of expected future revenue growth. As I mentioned last quarter, we believe we're well-positioned to convert a large pipeline of potential new retail partners, and have shown evidence of that and a strong rate of sustained growth in the quarter. Write-offs were 6.8% of revenues and bad debt expense was flat with the year ago period at 12.7%. We expect these metrics to remain well within our annual ranges of 5% to 7% and 10% to 12%, respectively for the full year. As we look to the balance of 2018, we're encouraged by the sustained momentum in invoice volume and we're excited about our ability to continue driving strong growth as we innovate our product to best serve our customers and 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 solid progress in the quarter. Same-store revenues were flat, continuing the improving trend, we've experienced throughout 2018. I'm proud of our teams and encouraged by the momentum, we're seeing in the business. In Q3, we achieved the third consecutive quarterly increase in recurring revenue written into the portfolio and the seventh consecutive quarter with improvement in lease margin. We achieved these results despite somewhat higher write-offs and slower customer traffic, while at the same time, onboarding 90 acquired franchise stores and preparing for and operating through Hurricane Florence. Total revenues increased 1.7% as compared to the third quarter of 2017 with lease revenues up 5.4% in the quarter. As mentioned in the press release, lease revenues were driven in part by the addition of franchise stores acquired earlier in the third quarter. Same-store revenues benefited from a number of our business transformation initiatives, including our new aarons.com platform, which was re-launched earlier this year. E-commerce recurring revenue written into the portfolio was up almost 50%, compared to the third quarter of 2017, driven primarily by increases in traffic, online conversion and ticket. We expect that as we grow our e-commerce revenue, we can leverage our existing infrastructure of fulfilment centers, stores and last-mile delivery and reverse logistics, which is a competitive advantage that we believe will enable us to continue to scale our e-commerce business profitably. Adjusted EBITDA increased 6.3% and was 7.5% of revenues versus 7.1% in the year-ago quarter. Adjusted EBITDA growth benefited from an increase in lease margin, partially offset by elevated write-offs and investments related to our business transformation initiatives. Write-offs were 5.4% of revenues versus 5.2% in the same period last year. Planned increases in the number and type of promotional offerings and higher ticket are responsible for a portion of the increase in write-offs as were changes we made to reduce overall labor hours which we believe negatively impacted our collections performance in the quarter. As we look forward, we're encouraged by the underlying trends in our business. Our leading indicators remain positive for the third sequential quarter and we expect our business transformation initiatives will continue to drive improving performance. I'll now turn it over to Steve for an update on the financials.

[Steven A. Michaels:]

Thanks, Douglas, Now, I'll turn to some financial highlights for the quarter. Revenue for the third quarter of 2018 was $953.1 million, an increase of 13.6% over the same period a year ago. Adjusted EBITDA for the Company was $82.5 million for the third quarter of this year compared to $67.7 million for the same period last year, an increase of $14.8 million or 21.8%. Diluted EPS on a non-GAAP basis for the quarter increased 60% to $0.69 in 2018 versus $0.43 in 2017. As you will have seen from the earnings release, operating expenses increased $46 million versus the year-ago quarter. A bit more than half of the dollar increase was driven by the expected year-over-year increase in bad debt expense and write-offs at Progressive. Approximately two-thirds of the remaining increase was driven by the addition of personnel, occupancy, delivery and selling costs from the franchise stores acquired by the Aaron's Business. In the last 15 months, we have added a net 205 stores from franchise acquisitions. The balance of the increase is spread across investments in both our businesses, as well as intangible amortization expense and legal fees, resulting from our response to the previously-disclosed FTC CIDs. At September 30, 2018, the company had $35 million of cash on hand compared with $51 million of cash at the end of 2017. Cash generated from operating activities was $363 million through the first nine months of 2018 compared with $180 million for the same period in 2017. The improvement was driven primarily by $161 million change in cash taxes paid between the two periods. Through normally scheduled amortization payments, we reduced our total debt by $95 million since the end of 2017. The company has no further scheduled debt repayments through the balance of 2018. On October 23, 2018, the company amended its revolving credit facility and term loan agreement to provide for a $225 million term loan, a borrowing increase of $137.5 million, which the company intends to use for general, corporate and working capital purposes. The company also amended its franchise loan facility to reduce the total commitment amount from $85 million to $55 million and extend the maturity to October 22, 2019. As both John and Douglas discussed, we acquired 90 franchise stores in July 2018 for approximately $127 million. We used cash on hand and availability under our revolver to fund the acquisitions. We remain conservatively capitalized following the acquisitions and ended the third quarter with available liquidity of $400 million and net debt to adjusted EBITDA of less than one-time. During the third quarter, the company purchased approximately 676,000 shares of common stock for $31.6 million at an average price of approximately $46.72 per share. As of the end of the third quarter, the company has $400 million remaining under its share repurchase authorization. As noted in the earnings release, we are tightening our annual outlook for 2018. You will note that we have guided to the upper half of the revenue range for the Aaron's Business and maintained the midpoint of the expected revenue range for Progressive. For the Aaron's Business, we continue to expect positive same-store revenues in the fourth quarter. We expect consolidated non-GAAP EPS in the range of $3.30 to $3.45. This update does not assume any additional share repurchases during the balance of 2018. I'll now turn the call back over to John for some closing remarks.

[John W. Robinson, III:]

Thank you, Steve. We are pleased with our third quarter results and excited about the momentum we are seeing in our business. Our success is a direct result of the tireless efforts of our associates, franchisees and retail partners, who are committed to providing the best experience for our customers every day. Thank you all very much for your efforts. As we have discussed, we believe there is a large un-served market and we are well-positioned to capitalize on this opportunity. While we've made great progress over the past few years, the market continues to move fast. So, we're more focused than ever on continuing to innovate our business to better serve our customers. With that, I will turn it over to the operator for Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. And our first question comes from Bill Chappell of SunTrust. Please go ahead.

[William B. Chappell:]

Thanks. Good morning.

[John W. Robinson, III:]

Good morning, Bill.

[Ryan K. Woodley:]

Good morning.

[William B. Chappell:]

Can you just, I guess, help me understand where just on the quarterly profit, kind of where we I guess, as the street (17

[Ryan K. Woodley:]

Yeah, I'm happy on Progressive, Bill. Ryan here. The year, obviously pleased with the quarter. The revenue and EBITDA growth are obviously very strong, consistent with the strong growth that we've seen in the last several quarters now. I think as it relates to the narrowed outlook on the year, the story as you had kind of flow through the P&L. Gross margin is maybe a little bit tighter than we expected because of that 90-day buyout activity. SG&A maybe a little bit more leverage, operating leverage than we expected there just because of the continued rate of strong growth. And then, bad debt and write-offs, pretty much in line with what we expect them to be and we're not far off of the midpoint of the range there and feel pretty good about where we're going to end up.

[John W. Robinson, III:]

Yeah. I mean, Bill, this is John. And appreciate and understand the question. I think, if you look at the Aaron's Business too, I think traffic was soft, write-offs were higher and we had a lot of moving parts in the quarter. I mean, we had the onboarding on the Aaron's Business specifically. We had 90 stores that we on boarded that were franchise acquisitions. We had a lot of work going on here – around here preparing for the hurricane, that – Hurricane Florence which was got quite a bit of press and it was a big storm in its own right. And so, that just coupled with just running the business day-to-day and a lot of the levers we've been pulling I think that all kind of – all kind of goes into the pot along with the things that Ryan mentioned about that, that have resulted in that. Having said that, if you look at the outlook we provided for the year, which as you know we just provide annual guidance, we feel like it's going to be a really solid year, we've got good momentum in our businesses. We have a big market opportunity in front of us. And overall if you just look at the work we're doing in both businesses, we're really optimistic about 2018 and continue to be.

[William B. Chappell:]

Got it. No, I appreciate the hurricane color. Just, Ryan, just following up, there has been a fair amount of I guess, commentary about new customers, the past leader coming online our tests that are going nationwide. Does that change or I guess, if you want to confirm any of the thing that will be helpful? But also does that change any of the metrics or are these any lower margin or slower growth or anything different we should be looking at it as part of the part of the guidance?

[Ryan K. Woodley:]

Yeah. I'll just add a couple of things on that. Obviously, pleased with the fact that as you saw, we did onboard new partners in Q3, that tends at this scale you know at a base of 20,000 doors, that tends to be the case every quarter. We're pretty much and launching onboarding new partners in a quarter, adding new to the pipeline and that was the case in Q3 as well, which is evidenced by the fact that we're able to grow those active doors even on such a large basis. You saw the press release it went out about one relationship for particular, which we're very excited about, we're always bullish about what that pipeline would do for future growth. We're pretty excited about what it looks like today and we're investing ahead of that growth. So, we're generating leverage in spite of that SG&A but we're essentially adding people and systems across almost every functional area in an effort to build the infrastructure required to scale effectively and we continue to do that in Q3. And as we onboard new invoice volume, irrespective of where it comes from by channel, by partner, vertical, we're attempting to maintain a threshold of profitability and that has been the case and that will be the case, going forward. But very pleased with how the year is shaping up.

[William B. Chappell:]

Got it. Thanks so much.

[Ryan K. Woodley:]

Thanks, Bill.

[Operator:]

Our next question comes from John Baugh of Stifel. Please go ahead.

[John Allen Baugh:]

Thank you. Good morning. I guess, I'll ask a question on each side of the business. On the core store, if I'm right, the traffic's still negative, year over year. The tickets up nicely and you've been making some investments to grow the business. And I don't want to get in the 2019 guidance, but I'm just curious as to how we think about the margin structure of this business next year if comps are flat to up next year and the tickets up that would imply the margin potential is better, if the investments sort of flatten out or go down, is there any color about how the profits of that business may trend over time?

[Douglas A. Lindsay:]

Yeah. John, this is Douglas. Thanks for the question. Yeah, I mean you're exactly right on the leading indicators and we're really positive about three consecutive quarters of revenue written to the portfolios. I mentioned in my comments, we also had some higher churn this quarter, which will carry forward as a portfolio of business so the leading indicators are important as is the churn that comes out of the portfolio. Fortunately, we've seen margin expansion and good cost controls in the business. In this year, we expect that that will continue for some time and the ticket will carry us into 2019. However, as we work towards our planning for next year, we'll be looking at our business transformation investments and assessing which of those we want to accelerate and which of those we want to go deeper into the portfolio on in terms of testing and further validating. So, while we're happy with the underlying fundamentals, some of that investment is kind of on our radar and will be determined here over the next quarter.

[John Allen Baugh:]

Okay and Douglas, staying on, you've mentioned I think, some – a little bit of elevated write-offs and you mentioned some types of promotions and what not. Have you already altered that or I guess, I'm curious, what if any competitive landscape has caused this or is this something you tried on your own and it just didn't work as planned and just any color there?

[Douglas A. Lindsay:]

Sure. Yeah. We mentioned this in prior quarters. Most of it is self-inflicted. I would say good part of it is self-inflicted for the right reasons. We mentioned before our promotional activity. So as we're doing more of these low dollar deliver promotions, we see an acceleration of charge-offs at a higher net book value in the portfolio sooner than our non-promotional periods. And we like that because it's driving higher lift through the overall promotion periods in terms of revenue, although we're incurring a little bit more write-offs. We also – the merchandising strategy we've been employing, is really driving a trade-up strategy, where ticket is increasing and naturally, when ticket increases you have higher write-offs. The trade-off between those two has been a positive for us and we think we'll continue to make that trade-off in terms of an ROI, going forward. And the last thing is I mentioned labor cost as a reason. We are constantly tweaking our labor model. We've enjoyed some of the benefit of those savings. But in the quarter, I believe we may be cut a little too deep in labor and we're constantly assessing how we optimize labor, but still get the job done and collecting in our business. That's something we've corrected for and we've been staffing up in some of those tighter labor markets, where we overcorrected and we should see that correcting itself in the fourth quarter. So, that's something that's totally within our control and we're somewhat self-inflicted.

[John Allen Baugh:]

Okay. Thanks for that color. And then on the Progressive side Ryan, I am – is there any discernible impact from what's going on at that firm either in your results say, year-to-date or prospectively?

[Ryan K. Woodley:]

Thanks for the question. We tend to not comment on those specific accounts, but I realize our relationship there is pretty well known and there's been a decent out of press coverage on the business. They're a great longstanding partner and as you know, we have very close relationships with a team there and had for quite some time. I think, we continue to see growth in the partnership and I think, that's attributable in large part to the combined effort of both teams to execute the program while they do a great job of that. The store closures that were announced had been incorporated in the revised outlook that we provided today, we don't expect it'll have a material impact on the business. So, they are very great partner and we're looking forward to being a big part of their future growth.

[John Allen Baugh:]

Okay. And then finally and I appreciate not wanting to get into specific accounts and all these things, but doors and all these specific metrics, you brought on overstock, I believe that will add very few doors, but potentially a meaningful amount of invoice volume. You brought on Signet, I think Conn's is fully rolled out. I guess, I'm trying to get some sense with what you know and don't necessarily need to share with us, but how that very short term next couple of quarters, how the metrics of door count invoice volume might look based on what you added a year ago and how all those things are ramping? Thank you.

[Ryan K. Woodley:]

Yeah. Appreciate the question. We're obviously very, very happy with those accounts that you mentioned that we've on-boarded in the last year; they're all well-run businesses that are executing very well on our program. You saw that we had a pretty high sustained rate of invoice per active door in the period, it's actually the highest level of productivity we've seen out of our existing doors in over a decade. Second to just the holiday season last year, which you'd expect obviously, it being a holiday season, and that's coming in spite of a pretty flat year-over-year approval rate and even slightly smaller ticket. So, that's obviously what we're seeing drive the strong rate of revenue growth. I expect that level of productivity to continue out of this mix of doors. I mean, it remains to be seen what new doors on-boarded in future periods will do on the platform, but we're obviously pretty excited about what they can contribute. It's been a nice mix of doors and what we're pleased to see is that, not only have they performed well, but they've shown an ability to increase productivity over time. That's obviously a lot of hard work done by our partners and our team managing those relationships to produce that level of productivity, but we're happy with how that's playing out.

[John Allen Baugh:]

And lastly, the 90-day comment, was that something to do with the mix of business or the types of retail accounts. I just kind of given the sense is that a permanent change, is it something that surprised you or no because of the mix, is that to be expected and will continue?

[Ryan K. Woodley:]

As you know the offer, the 90-day feature, it's been around since the beginning. So we've seen wider variations in 90-day take rate and there are just a lot of variables that influence it. As you mentioned, there's – obviously there is seasonality around taxes and pricing, customer behavior and invoice mix. And because there are so many drivers, they tend to vary a bit from quarter-to-quarter. What we're seeing now is slightly elevated than what we had planned. But that's reflected in the revised outlook that we provided today. And you know as I sit here today, I don't expect to see significant movement in that number. They put this in place to deliver the results that we – that we kind of guided to previously.

[John Allen Baugh:]

Great. Thank you and good luck.

[Ryan K. Woodley:]

Thanks, John.

[Douglas A. Lindsay:]

Thanks, John.

[Operator:]

Our next question comes from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

[Bradley B. Thomas:]

Thanks. Good morning. I want to ask first on...

[Ryan K. Woodley:]

Good morning.

[Bradley B. Thomas:]

...the – on the Aaron's side of the business, just talk a little bit more about you know the drivers of the same-store sales. And congratulations on – on moving into growth territory here, I mean, I think it's been five years since we've seen a positive comp you know at Aaron's...

[Ryan K. Woodley:]

Thanks.

[Bradley B. Thomas:]

...business. So certainly very encouraging.

[Douglas A. Lindsay:]

Thank you.

[Bradley B. Thomas:]

But I guess as you look forward Douglas, I wanted to follow up on John's question. You know, the customers' accounts going – going down, you've done a great job of improving the merchandise, getting the customer to spend more. How much further can you raise you know that ticket or how can you get customers to keep you know, agreements out longer? I guess, if you could just try and put it – give us more context about the sustainability of this growth that you're seeing?

[Douglas A. Lindsay:]

Sure. So, I mean, I think that there's two things. One, we really enjoyed ticket, that growth has continued. We believe a lot of that ticket growth is overcoming some of these negative traffic patterns and more carry-offs in terms of comps into 2019. However, we can't raise a ticket forever as you mentioned and there's other things that have to happen in the business. And when I refer to investments, I mean, those are really where we're making our investments. You know, we started out with merchandising. How do we get a more relevant product assortment, how do we make sure that we've got pricing tiers that are appealing to our customer and product is appealing to our customer relative to retail? We see the competitive set as being the broader retail market and not just the players in rent-to-own. And we feel like we need to be competitive in that market and that's what we're working on. When you hear generally about business transformation, it's all about how do we improve the customer experience, at the same time lowering cost to serve. And in our case we think lowering cost to serve is also enhancing customer experience with the things we're doing. So longer term we were – between product assortment, expanding our hours of operation, new store concepts, rebuilding this e-commerce platform that we have going and centralizing and kind of modernizing a lot of our processes, we think it makes Aaron's more relevant. We've tested some of these concepts in small store groupings in test-and-learn environments and we're seeing considerable lift and we're optimizing those tests and rolling them out further to validate them. And so while ticket's going to carry us so for in 2019, we're hoping that some of these investments we make in the business will begin to turn the tides on customer traffic and the customer account decreases that you've been seeing over the last year.

[Bradley B. Thomas:]

That's very helpful. Thank you, Douglas. And Ryan, if I can ask you on the...

[Ryan K. Woodley:]

Yeah.

[Bradley B. Thomas:]

...aggressive side, the bad debts are up year-over-year – well, not up year-over-year this quarter but on an annual basis, it looks like it's tracking...

[Ryan K. Woodley:]

Yeah.

[Bradley B. Thomas:]

... year-over-year in line with the way you target the business. I guess, if we just step back, it feels like you guys had had better success with your underwriting the last few years or you're now tracking more in line with the range. As we think ahead to next year, what direction if any do you think bad debts may move? And does that mean that really the bad debt expense line starts to track more in line with sales and maybe give you some better potential for margin expansion in 2019? I guess, maybe you just help me connect some of the dots here, that would be great?

[Ryan K. Woodley:]

Thanks Brad. I appreciate the commentary. I know you all heard me say those things before about kind of what's driving those increases, but that's really the same message we've shared since we provided the guidance on Q4 of 17' which is, it was that expected, you know, it's healthy, expected shift and mix that we've kind of reiterated every quarter since then. So the year is playing out pretty spot on with what our expectations were, which is again reflected in the kind of narrowed outlook that we provided today. Obviously we don't have anything to share on 2019, but as you look through the remainder of 2018, very much in line with what we expected and the story is the same for both bad debt and write-offs.

[Bradley B. Thomas:]

Great. Thank you all so much.

[Operator:]

Our next question comes from Budd Bugatch of Raymond James. Please go ahead.

[Beryl Bugatch:]

Good morning, and thank you for taking my questions.

[John W. Robinson, III:]

Good morning, Budd.

[Beryl Bugatch:]

I guess, I'd like to think – hi, John. I'd like to step back just for a second and talk a little bit about seasonality and what's changed. I think Bill mentioned, we pretty much didn't get it or at least the seasonality right. Maybe you can just talk at a high level of how we should think about seasonality since you all do only provide annual guidance?

[John W. Robinson, III:]

Yeah, I mean, Budd this is John, I don't know if this is going to – maybe others can add in, but from a seasonality perspective, I mean we certainly – from the business perspective, first quarter is unique because of tax season and fourth quarter is unique because of the demand driven there. This is an unusual year from a compare perspective because of the hurricane impact, last year that we had. But you know, we tried to give a pretty good picture of what we think the year is going to look like and we still you know, we feel like we're on track for that and in terms of the quarters, we're just not giving any more guidance on that. But I don't think there's any other seasonal factors other than weather seems to continue to be a factor for us in the third quarter and that's just unpredictable.

[Beryl Bugatch:]

Got you. Okay. Ryan, on either the performance of the pools and in a recent pools, there's been some concern about credit quality as the economy has taken to some turns, can you talk a little bit about the performance of a more recent pools, is there anything there, that surprises you or might be notable?

[Ryan K. Woodley:]

I would just reiterate what I said before, apologies for the redundancy but they are performing in line with what we expected. You know, the thing we like to call out and we're talking about the performance of those leased pools, that really are quickly term pools so on an average, lease contractual term of 12 months, the life is about seven months. So we continue to have good visibility in the performance of those pools. I think, we're always investing in metrics and analytics to identify earlier on in the life of the lease, what its ultimate performance will be. And those indicators are pretty much in line with our expectations, which is ultimately driving bad debt and write-offs to be in line with what we expected on the year. So, I'm pleased with what we're seeing. And again this is kind of in line with the view of the year that we laid out when we provide that, we initially provided that outlook on the Q4, 2017 call.

[Beryl Bugatch:]

And you talk about planned investments ahead of revenue, anything more sequentially to come in the next quarter or so that we might not have been able to factor into what we're looking at?

[Ryan K. Woodley:]

Not really. That just continues to be the story generally. We just – we always seem to have a voracious appetite for talent and trying to onboard good people in every functional area we can find them. So it's our sixth consecutive quarter of growing faster than 25%. So we are always, in fields investing as quickly as we can and people on systems to support that growth.

[John W. Robinson, III:]

Yeah. I'll get back, Budd, this is John. One thing I'll add to that which goes back to the Bill's question in the beginning about the year as we have a lot of moving parts in the Aaron's Business and the Progressive business to think we get little spoiled by the growth these guys deliver. But business of that scale growing that fast, the fact that these guys are managing expenses as well as they have is super impressive to me and in fact that they're able to predict business as well as they are super impressive. So, I just want to make that point and also appraise our team for doing such an outstanding job at that, because to grow at that rate at that scale is really, really challenging and maybe just done it on a consistent basis for a long time now. So, it's hard to do.

[Beryl Bugatch:]

Understood, and well appreciated. I think, I understand that. Just for Douglas, just a quick one, any new issues on store platform or the store population, is it – you took some actions in the last year to reduce the store platform. Where are we on that? Is there anything more that you're looking at as you get to understand the population better?

[Douglas A. Lindsay:]

Yeah. I mean, we're constantly looking at it, Budd. I mean, as part of our normal real estate process as we look at lease expirations to assess. Are we in the right place? Do we need to relocate? What term do we need to put on the lease or do we need a close merge? As you know, over the last two years, we've really addressed a lot of our close mergers within the 5-mile radius. But there are always going to be further opportunities as we look at changing performance in the portfolio but just rest assured, we're looking at that all the time. The other thing I want to mention is, obviously, we on-boarded 90 franchise stores this quarter and we're constantly looking at kind of the franchise landscape, which is a little over 400 stores now and looking at deals opportunistically there. We're excited about these most recent franchise acquisitions, many of them, maybe are Out-West but they span from Out-West to Texas to up to the East Coast and the integration of that has been a distraction for the team, but they've been putting a lot of hard work and we think the benefits long term with our omni-channel strategy in acquiring those markets is going to be great. So we're really excited about that.

[John W. Robinson, III:]

And I'll add to that, Budd. There – the team has done an awesome job on that as Douglas said, the question we get asked and it's a great question. It's something we're trying to figure out is, we know our kind of direct-to-consumer Aaron's model has a great future in a lot of these – in these markets, we're in. The question is how many stores you're going to have, what are they going to look like, how do you go to market? We know we need to have a very strong mobile platform, a very strong e-com platform generally. And we believe we need to have store presence in these markets. And we're – Douglas' team is doing a great work now in figuring out what does that need to look like in markets. And we don't think it's one-size-fits-all for all markets. We think metropolitan areas may be very different than more rural areas, but we think we'll have a model that will address all of them and we're just in the process of figuring that out. And it's a multi-quarter, multi-year process and they're doing a great job of figuring that out while managing the business very carefully, as we go so that – there's more to come on that is what I would say as we figure it out.

[Beryl Bugatch:]

Okay. Thank you very much. Good luck on the fourth quarter and the balance of the year.

[Douglas A. Lindsay:]

Thank you, Budd.

[John W. Robinson, III:]

Thank you.

[Operator:]

Our next question comes from Kyle Joseph of Jefferies. Please go ahead.

[Kyle Joseph:]

Good morning, guys and thanks for taking my questions. Apologies, I hopped on a little late but if I missed this, but Ryan, if you wouldn't mind giving us sort of your quarterly update on the Progressive competitive environment?

[Ryan K. Woodley:]

No, we haven't got that question yet, and I'm happy to answer that. Unfortunately, you won't find much new in my response and I apologize in advance for that. It remains a very competitive market. As you know and as I mentioned on previous calls, there are literally dozens of competitors out there and it seems many continue to enter the market. The good thing is it's a large market and I think that obviously what is what continues to attract entrants to the market. We obviously benefit from having incomparable scale in the market and referenceable partner base and access to capital and all those other things. But that said, we don't know – if it continues to be true that we don't win every opportunity. There is some aggressive pricing out there from folks who have less experience, seeing these curves play out in 20 years of experience and knowing the leases puts us in a place we know when to play that game and when not to. And we try to maintain that discipline with each new opportunity that we see so, Budstrokes (43

[Kyle Joseph:]

Got it. And then just transitioning the credit, we've talked a lot about it in both segments, producing (43

[John W. Robinson, III:]

Yeah, Kyle, this is John and I'll say that we are seeing a very tight and strong job market out there. I think, we see that on the hiring side. So, I think it's as tight as I've ever seen it or as I can remember and wages are going up and you read about credit scores getting generally better. So, if you just look at a macro level from a consumer health perspective, it certainly seems to be a strong environment for the consumer. We also have been through a period in my opinion of a historic kind of liquidity that's created tremendous options for customers, which is great and but it's also competitive for us. I think as you see rates rise or maybe more – some tightening there, which could be a tailwind for us. I don't think we've necessarily seen it yet, but hopefully that will be something that could give us a little bit of a tailwind in the future. But, as you mentioned, if you look at the performance in both of our businesses, we can attribute – you never know exactly what causes change in write-offs, you don't know for sure. But we have very specific factors in both that point us in the direction of understanding why we've seen increases and there were levers we pulled in the Aaron's Business and a lot of it on the Progressive side is retailer mix as we've discussed. So, I think that's the best we can give you.

[Kyle Joseph:]

No. That's helpful. Appreciate it. And then one last one from me, just Ryan, as we think about you guys rolling out on sort of a pure-play, e-commerce, retail partner, can you give us a sense though of if there's any difference in how you roll out Progressive there? And sort of any different metrics you're looking at, in terms of that specific relationship?

[Ryan K. Woodley:]

Yeah, it is a bit of a different flow, as you can imagine, we're pretty excited about the early traction we have in that market, obviously a long-term potential there, that's one solid proof case. The opportunity to expand the offering online. It will obviously look a little different, instead of dialogue about taking Ups and POP and story, you are having a dialogue about pipe conversion and a bunch of digital metrics and our team is well-versed in those. And I think we'll be a great thought partner for these retail partners, as we grow their e-com businesses. I'm pretty excited about that market.

[Kyle Joseph:]

Got it. Thanks very much for answering my questions.

[John W. Robinson, III:]

Thank you, Kyle.

[Operator:]

Our next question comes from Anthony Chukumba of Loop Capital Markets. Please go ahead.

[Anthony Chukumba:]

Good morning and thanks for taking my question. So, last year, you did the FDI franchise acquisition and then did this most recent one, this quarter, the (46

[John W. Robinson, III:]

Yeah, Anthony, its John, thanks for the question. And yeah, you're right. We've may – I think we've acquired 200 plus stores over the last 15 months or so. And our mix is about 75% Company 25% franchise, we're not opening any new franchise markets and we have been acquiring franchise stores. So you know, I would expect that percentage of Company stores to go up. We've talked about the fact that we have a long term – long time horizon. We're excited about the market opportunity. We do think there are some advantages for us to control the market from an innovation perspective and a risk control perspective. And having said that, I will tell you, we just recently had our franchise – Annual Franchise Association Meeting and we have some great franchisees. It's a big part of our business, still meets 400 plus stores. They are great partners, they are some great entrepreneurs who give us great ideas, keep our feet to the fire on innovating and getting better and we're going to continue to support them and they're going to continue to be a big part of our business. To the extent, there's opportunities for us to acquire more in attractive markets. I expect we will and we intend to do that, over time. But as we've discussed in the past the – there's only 9 or 10 franchisees out there left that have more than 10 stores, I think, something like that. And so the ability to acquire and scale, there is just one or two left really, that we could do that. And that's what we're talking you know, 1 or 2, one with 50 stores and then beyond that, they get into the 20s kind of and so the ability to do deals at large scale, it goes down over time as we get into having you know, players with fewer stores. So my expectation is you know, our strategy on that is the same. My expectation is, we will acquire more, but you probably won't see it in the chunks that you've seen it in the last 15 months.

[Anthony Chukumba:]

Got it. That's very helpful. And then I just have one follow-up question, there was a question earlier about the competitive landscape in virtual and to owning, you talked about there are lot of competitors out there. I guess my question is somewhat related, one of your largest competitors is probably going private and will be capital constrained and I was just wondering, is that an opportunity for Progressive?

[John W. Robinson, III:]

Yes. This is John. I'll take that. I mean the reality of it is as Ryan said, we haven't seen any changes in the competitive market. I will say – and so, it's super competitive and if you talk about the team of Progressive, I mean, it just feels very, very competitive. What I will say is, we've had the advantage and we continue to have the advantage of a great balance sheet, that's one of our assets that is real strategic for us on the Progressive side and we start talking to these larger retail partners, it's a real advantage for us to have the balance sheet that we have. And that's across the board. I don't think there's any other competitor out there that has that. So, we believe that is an advantage for us and that will continue but in terms of any changes in the competitive landscape, we aren't anticipating any shift that would change our strategy. We're just going to keep trying to make our product better, keep providing great service to our customer, our retail partners and by doing that I mean, that's what these guys have been doing, we hope to continue to generate great results.

[Anthony Chukumba:]

Got it. Thank you so much, and good luck with the fourth quarter.

[John W. Robinson, III:]

Great. Thank you.

[Operator:]

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

[John W. Robinson, III:]

Thank you very much for participating in our call. We look forward to updating you on our fourth quarter on our next call.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.