The Aaron's Company, Inc.
Q2 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

Good morning. Welcome to the Aaron's, Inc. Second Quarter 2017 Earning Conference Call Please note this event is being recorded. Participating this morning are John Robinson, Aaron's, Inc. President and CEO; Douglas Lindsay, President of Aaron's Sales and 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 and 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 are available on the company's Investor Relations website, investors.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, and could cause actual result to differ materially from those predicted in Aaron's forward-looking statements. Please see our SEC filings for certain risks inherent in our business 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, the update to our outlook for 2017, the benefits we expect from our acquisitions of the store operation of our largest franchisee SEI, 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 will now turn the call over to Aaron's CEO, John Robinson.

[John W. Robinson, III:]

Thanks, Kelly. Thank you for joining us this morning. We're very pleased with our performance in the second quarter. Non-GAAP earnings per share increased 15% on the gain in total revenues, and total customer count rose 3%. We've raised our full-year guidance to account for solid performance across the business, and we continue to invest to strengthen our leadership position in the lease-to-own industry. Progressive continued its strong momentum in the second quarter. Invoice volume rose at the fastest pace in two years. Growth is being driven by a diverse mix of retail partners, and the lease portfolio continues to generate strong performance. I couldn't be more proud of the team for achieving these outstanding results. We're encouraged about the progress we're making in the Aaron's business. The team has done an outstanding job to lift overall execution, and we believe there are multiple opportunities for further improvement. In fact, we're accelerating investment in several of the initiatives we discussed on our last call. These include investments expected to improve the customer experience, drive operational excellence, and optimize our product and service offerings. As announced this morning, we've acquired one of our most successful franchisees, SEI. The franchisee operates in attractive market primarily in the Northeast. It has a talented team of multi-unit and store level operators with a long track record of success. The business has consistently been a top tier performer in our entire system and the team has developed best practices that we believe can be rolled out to the broader base. This acquisition along with the investments underscore our confidence in the direct-to-consumer model. I would personally like to thank SEI Founder, Charles Smithgall; and CEO, Chas Smithgall for their many contributions to Aaron's over the past 22 years. The Smithgall's brought tremendous energy and insight to the company over the years. Along with Dave Edwards, they built a fantastic team and business which we are excited to operate into the future. So, thank you, Charles and Chas, very much for your partnership. We wish you the best of luck in the future. Overall, we're really pleased with performance in both businesses in the quarter. We've assembled an outstanding team and believe we have the financial capacity to continue to pursue our strategy. With that, I'll turn it over to Ryan to discuss Progressive.

[Ryan K. Woodley:]

Thanks, John. Progressive had an excellent quarter with record results driven by a diverse mix of verticals and strong lease portfolio performance. Total revenue increased 25% to $373 million. Invoice volume rose 32% driven by strength in new doors. Furniture, mobile and jewelry experienced particularly strong growth and we had solid gains across regional and national partners. Active doors increased 37% bringing the total number of doors that completed lease with Progressive during the quarter to just over 19,000. Invoice per active door declined 4.3%. Declines in invoice per active door moderated in the quarter due to strong performance from new and existing doors. EBITDA grew 20% and reached 13.4% of revenue. Financial performance reflected strong invoice growth and increased operating efficiency even as we continue to invest in people and systems to support current and future growth. The lease portfolio is performing extremely well. Bad debt expense was roughly flat with year-ago levels, and write-offs were 5.5% of revenue. Both bad debt and write-offs are on the lower end of the ranges we target, and we continue to have excellent visibility into the performance of the lease portfolio. We have raised our full-year outlook to reflect strong lease performance in the conversion of the pipeline ahead of expectations. New retailer relationships represent significant opportunity for future growth and underscore the strength of the lease-to-own value proposition for both customers and retailers. We remain excited about the large unserved market and optimistic about our ability to continue to convert those opportunities. I'll now turn it over to Douglas for an update on the Aaron's business.

[Douglas A. Lindsay:]

Thanks, Ryan. The second quarter reflected further progress on initiatives to improve operating efficiency and increase profitability. Adjusted EBITDA increased as a percentage of revenue by 100 basis points to 10.8%. Cost control, improved lease margin, and better customer retention rates all contributed to the result. Total revenues were down 10.7% and were impacted by a lower store count for the quarter. We closed 62 company-operated stores in the period and ended the second quarter with 10.5% fewer company-operated stores than the year-ago. Same-store revenues were negative 8.1%, and same-store customer counts decreased 4.8%. As in the first quarter, churn in the portfolio, delivery activity and average ticket price were better than expected. We've completed a significant amount of organizational work to effectively support our direct-to-consumer strategy, and the investments we are making are starting to pay off. The second quarter benefited from lower store and store-support-centered costs and greater efficiency in our inventory supply chain. Lease margins improved as we optimize promotional activity, and the ongoing focus on collections process resulted in year-over-year improvement in merchandise write-offs. Improved operating discipline and a more systematic focus on analytics is enabling the team to better attack opportunities in the business. As we outlined in the earnings release, our increased outlook includes some additional investment in people and technology to enhance our customer experience. Lastly, I'd like to reiterate how excited I am about the SEI acquisition, and particularly the opportunity to work with Dave Edwards and his team. Dave has one of the best track records in the industry of operating a large-scale, multi-unit lease-to-own business. Adding a team of this caliber will be a huge asset for the Aaron's business. I'll now turn it over to Steve to discuss the financials.

[Steven A. Michaels:]

Thanks, Douglas. Now I'll turn to the financial details for the quarter. Revenue for the second quarter of 2017 were $815.6 million, an increase of 3.3% over the same period a year ago. Net earnings for the quarter declined 5.6% to $36.3 million versus $38.5 million a year ago. Net earnings for the second quarter on a non-GAAP basis were up 12% to $48.5 million compared with $43.3 million for the same period in 2016. Earnings per share, assuming dilution for the three months ended June 30, were $0.51 compared with $0.53 for the same period in 2016. Diluted EPS on a non-GAAP basis for the quarter increased 15.3% to $0.68 in 2017 versus $0.59 in 2016. Adjusted EBITDA for the company was $95.7 million for the second quarter of this year compared to $88.2 million for the same period last year. At June 30, 2017, the company had $260.3 million of cash on hand compared with $308.6 million of cash at the end of 2016. Cash generated from operating activities was $115.6 million through the first six months of 2017 compared with $325.5 million in 2016. The difference was driven primarily by $181 million change in cash taxes paid between the two periods. Through normally scheduled amortization payments, we've reduced our total debt by $97 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 7.2% and no outstanding balance on our $225 million revolving credit facility. Regarding the acquisition announced this earlier this morning, as we stated, we used cash on hand to fund the approximately $140 million purchase price. Including one-time transition and integration-related expenses, we expect the purchase to contribute approximately $0.05 on a non-GAAP EPS basis in 2017. As stated in our updated outlook, this positive impact will be offset by additional investments in strategic initiatives within the Aaron's business. We remain conservatively capitalized following the acquisition with a pro forma net debt-to-capitalization of approximately 14.5%. The tax rate in the quarter was 36.2% versus 37% in the year-ago quarter. The company did not repurchase any shares during the quarter, and we currently have authorization to purchase an additional 7.9 million shares. Consolidated customer count increased 3% to 1,623,000 at June 30, 2017, up from 1,571,000 a year ago. The company has updated its outlook for 2017 as follows

[John W. Robinson, III:]

Thank you, Steve. Thank you for your interest in Aaron's. We're pleased with our results for the second quarter and excited about continuing to innovate our business to provide more customers access to quality products for their homes and families. That concludes our prepared comments. I'll now turn the call back to the operator to open the lines for Q&A.

[Operator:]

The first question comes from David Magee of SunTrust. Please go ahead.

[David G. Magee:]

Yes, hi. Good morning, everybody. Great quarter.

[John W. Robinson, III:]

Good morning, David.

[David G. Magee:]

A couple of things. Ryan, on the Progressive business being very strong and very impressive, how much contribution at this point if any are coming from the new accounts that you've announced this year?

[Ryan K. Woodley:]

Thanks for the question. As you know, I think from the timing of those press releases, both the larger accounts that were made public, Conn's and Signet, were weighted towards the end of that quarter. I think we barely started that rollout with Signet at the very, very end of the quarter. So, the results in Q2 would not reflect much in the way of door growth there but certainly, pleased to have those onboard and happy with the way they're ramping.

[David G. Magee:]

Okay. And how would you describe, Ryan, the price competition right now, is it about the same or has there been any change in the trends?

[Ryan K. Woodley:]

I think, I wouldn't say there's any material change from where we've been in previous quarters. It tends to be segmented as it has been in the past among different behavior at the regional level versus the national level. I'm certainly happy with the success we've had today. Great strong door growth in the quarter, super proud of the team for making that happen, I'm really happy with the folks, the retailers we're working with today. And really excited about the pipeline.

[David G. Magee:]

And maybe for Douglas, the better customer retention rates that you're seeing in business right now. How are you doing that and is there more upside to come from that metric?

[Douglas A. Lindsay:]

Yeah. We've been pleased with the churn numbers we've seen in the business. The biggest component of churn is our returns. We've seen lower return rates this year which I think is a reflection of our – I know is a reflection of our new promotional strategy. We were very promotional at the end of 2015 and so we saw a lot of returns come back in early 2016. We changed that strategy in late 2016, and we're not seeing as many returns now I think. What also is contributing to it is the lowering of write-offs and we're just getting better generally in the collections business. So, we expect to see that continue in the future and really pleased with the direction of that. And obviously that has helped us to hold a lot more accounts going into the end of the second quarter.

[David G. Magee:]

Thank you. And just one more for me. Over time if the store count were to come down further, I know this year, obviously the closures have been offset by the purchase, but over time, if you see more closures – are you able to adjust the cost structure of Woodhaven to sort of match that?

[Steven A. Michaels:]

David, yes, this is Steve. And we're very active in Woodhaven. We've got the ability to – they are very nimble and flexible down there, but we're also diversifying that base by selling to some outside retailers, and that's growing very nicely for us. So, we continue to believe Woodhaven is a strategic asset for us, and we'll obviously pay attention to it and be mindful of it, but it's still a big part of our future plans.

[David G. Magee:]

Great. Thanks, Steve. Good luck, guys.

[Douglas A. Lindsay:]

Thank you.

[Steven A. Michaels:]

Thank you.

[Operator:]

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

[John Baugh:]

Thank you. Good morning, team, and great quarter. I guess I have several, but the first one, I'm curious on the acquisition, the Smithgall's selling. Was that sort of their prompting? Was that your prompting? Mutual? I'm just trying to get a sense of strategy here and whether there is future opportunities with other franchisees in the system.

[John W. Robinson, III:]

Hey, John. It's, John. Thanks for the question. Yeah. In terms of the timing, I think it was opportunistic for both sides. Honestly, SEI is a business we wanted to own for some time for a lot of the reasons we discussed in the press release and I can talk about as well. And I think the Smithgalls, it was a tough decision for them. They've been at it 20-plus years, but they believe it was the right time for their team members or customers and themselves. So I think it was just kind of an opportunistic situation from both sides. From a strategic standpoint, it's a unique business. So, SEI is unique in its scale, unique in the fact that it occupies a single large region for us in the Northeast where we had a limited presence prior to the acquisition. And given, kind of, we think about it strategically in two big buckets. One is there's a big market opportunity out there for our lease-to-own products generally, so our omni-channel offering. We think 25% to 30% of the U.S. consumer population are our potential customers. And owning all of the assets in the right markets, whether it's stores, virtual offering, e-com, mobile, supply chain, that gives us more control operationally, and it gives us the flexibility to innovate our business model in whatever way the market dictates over time. And, as we've talked about, we believe the market is large, it's underpenetrated, and we need to continue to innovate to serve more customers. So, we believe owning all the assets in those markets will give us the best chance to do that. And then, from a SEI perspective, they're unique in the sense that they occupy a single large footprint, and they're a really profitable business. If you look at that business, it's about 100 stores, a little over 100 stores, which is the same size as our 10 operating divisions. They're all about 100 stores. And interestingly – and they typically occupy one region. So, we're basically bolting on a new division. The good part about this is SEI as our newest division will be, on a LTM basis, our most profitable division. So, they're more profitable than any of our other 10 divisions. And the exciting part about it is we're getting that plus we're getting the team. So, we're getting Dave Edwards, who's been doing this a really, really long time; one of the best operators in the industry, and a team of multi-unit and store-level managers that he put together. So, we feel like they're going to be fantastic for operating this newest division for us, but also pollinating into other parts of our business where we could use some of their magic dust that they've sprinkled over the Northeast. So we're looking forward to bringing them in, and couldn't be more excited about it. And the Smithgalls are incredible people, been great partners, and will remain great friends of ours in the company.

[John Baugh:]

Thanks for the color. Maybe a question for Ryan; or you could take it, John, if you want. But I'm curious on Progressive, and I guess, I'll weave in the loss number, which was up year-over-year, but I know well within the bounds of what you target. Could you help us – strategically what kind of margin, you're growing very rapidly there? We've talked in the past about certain, I don't know, growth infrastructure costs that had disrupted margins. But I'm just curious about how you're thinking about the margin profile of that business given your rapid growth and whether you're targeting a certain loss number. Obviously, investors want to see your losses go to zero, but if you do that in subprime you're out of business. So, just curious on strategy around margin. Thank you.

[Ryan K. Woodley:]

Yeah. Appreciate the question. John. Ryan here. I think we have shared a couple of ranges in the past to give folks a sense for our thought process on that. For the write-off figure, we've shared an annual range of 5% to 7%. So, to your point, we're trending to be well within that annual range, if anything, maybe a little low, little favorable on that range. 5.5% sets us up well to finish the year comfortably within that range. And as you know, the compare is more a function of Q2 of last year than it is of Q2 this year. We're very happy with the 5.5% performance in this quarter.

[John Baugh:]

Good. And should we expect the, sort of, and I know it's somewhat seasonal, but what EBITDA range are you targeting or returns on capital or whatever metrics you're looking at. We've got a lot of growth coming it looks like on an even bigger base and I'm just trying to get a sense of what you may need to build out infrastructure-wise and whether there'll be any drag on margin going forward.

[Steven A. Michaels:]

Yeah. We've said, on EBITDA, that we expect to be within an annual range of 11% to 13%, and the margin implied in the revised outlook provided today sort of puts us in that range comfortably. So, I think we'll take advantage of opportunities to continue to build out infrastructure as growth and scale provides it. We're growing very quickly, and we're investing a lot in people and systems, and we'll continue to do that. The growth is helping us obviously overcome some fixed costs, which is what you see helping us out on the margin front. But 11% to 13% is what we said in the past.

[John Baugh:]

Douglas, I don't want to leave you out. Last one.

[Douglas A. Lindsay:]

Thank you.

[John Baugh:]

The commentary was that we're going to spend, I guess, in the back half what the accretion from SEI will contribute, and I think you referenced a few things, but wondering, and appreciated competitive things if you don't want to get into much detail, but if you could get more specific about what you're doing there?

[Douglas A. Lindsay:]

Sure. I think, generally, as we think about the direct-to-consumer business, which we consider to be our stores and our e-com platform, I mean, we're really bullish about the business. We're servicing a huge market, and the way we see the market, it's about 30% of the U.S. consumer base, and that's both banked, underbanked and unbanked, and we've spent a lot of time listening to our customer over the last quarter or so. We've been investing a lot of time in research, and we think we've got a lot of opportunities there. So, we've begun the journey of investing in the people and technology to build a better platform for our new customer experience, and this is a omnichannel platform. The main focus of it is really around a couple of aspects. One is speed of service. So, we think there's a big opportunity in our underwriting, in our approval process to approve more customers. Second, we really think there's an opportunity in expanding our product selections. So, we're investing in platforms, so we can offer more opportunities to our customer, both online and in our stores. And probably, one of the biggest opportunities we have is our e-com channel, and we're really thinking about e-com as a platform where we can leverage the millennial customer that we're underserving right now and really getting more access to the customer base and this 30% that we're not touching right now. We know there are customers aging, and we think there's an opportunity to go after that customer more aggressively, and we're investing in that right now. And I think putting a wrapper around it, lower cost to serve, if we can serve this customer base at a lower cost in a more efficient way where they can self-serve and we can leverage our back-end logistics and collections processes, we think we win. So, we're working on all those things. We're kind of in parallel paths, and we're investing in that, and that's the investment that you're seeing in the second half of our guidance.

[John Baugh:]

Great. Thanks for that color. Good luck.

[Douglas A. Lindsay:]

Thank you.

[John W. Robinson, III:]

Thank you.

[Operator:]

The next question comes from Laura Champine of Roe Equity Research. Please go ahead.

[Laura Champine:]

Good morning and congratulation on the acquisition. Can you give us what the multiple was in terms of monthly sales on that deal price?

[Steven A. Michaels:]

Laura, this is Steve. We're not really disclosing any other of the terms of the deal. There will be disclosure in the subsequent Qs, but at this time, it's $140 million purchase price approximately, and that's where we're leaving it.

[Laura Champine:]

Understood. In light of that I wonder if you would give us the sales contribution you expect in the back half from that deal?

[Steven A. Michaels:]

Well, what I would say there is, there's some put and takes because as you know we've got non-retail sales that are derived from our franchisees and with 100 stores and that's recognized on the face of the income statement versus an inter-company transfer when it's the company owned stores, so that revenue which is low margin for us, but that revenue would go away and then the royalty revenue would go away, offset by obviously the full store front revenue. So, there is an impact in the back half on the revenue for those five months, and it's included in the increased revenue guidance but we're not saying exactly what it is.

[Laura Champine:]

Okay. With the deal do you think and I'm aware it's a healthy chain, but is there room for consolidation, maybe with company owned stores that are preexisting in those markets? How much overlap is there, and how does this change, if it does, your outlook for unit count at Aaron's core overall?

[John W. Robinson, III:]

This is John, Laura. I can address it and, Douglas, feel free to jump in. I think there's limited overlap. This is a market where SEI is primarily in the northeast and there's not a tremendous overlap with company owned stores. Having said that, we will use the same process in kind of evaluating stores on a go-forward basis and rationalizing stores and markets at SEI as we've done at the company stores in the past. So, we'll expect that process to start once we get this deal closed. So that would be the answer to the first question. And in terms of store count, I don't know if we'd provide any more guidance on that. Every quarter, we really look at our footprint broadly and just we're trying to be smart, look at spots where leases are coming due or if not where it makes sense to close the store early or move a store and we're just going to continue that process going forward. But I don't think we're giving any more guidance on that.

[Laura Champine:]

Got it. Thank you.

[John W. Robinson, III:]

Thanks.

[Operator:]

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

[Bradley B. Thomas:]

Hey, good morning everybody and let me add my congratulations as well.

[John W. Robinson, III:]

Thanks, Brad.

[Bradley B. Thomas:]

I wanted to first ask about the outlook for Progressive, very encouraging guidance here. It looks like the midpoint of your range is up by about $125 million for this year. I was hoping you could just help us think about how much of that is a function of the strong door growth that we'd already been seeing over the last few quarters versus some of these new accounts that are going to be ramping up in the second half. And, again, in particular Signet and Conn's that have the potential to be so significant. How much are you baking in from them in the second half?

[Ryan K. Woodley:]

It's great to see that it's coming from both areas of the business. Existing doors are performing extremely well. There's been great growth out of doors that were existing on the platform previous to the quarter as well as great expected growth coming from those new businesses. We're seeing new doors mature into increasing levels of productivity, perhaps even ahead of the pace we expected, which is great. There's obviously a lot of hard work being done by the teams on both sides, our teams and the teams at those retailers and ramping those doors, but they've done an excellent job. And what we see in the quarter, that accelerating invoice growth is really the function of onboarding a lot of new doors, as well as making sure those doors are increasingly productive. And that's what we're seeing. The pipeline remains robust. I'd say the revised outlook is a function of the accounts we have and know of today rather than expecting significant contribution from unknown accounts in the remainder of the year, but we're very happy with where we sit today.

[Bradley B. Thomas:]

Great. And then I wanted to follow up about the sort of synergies and interactions between Progressive and the legacy Aaron's business. One of the things that you called out about the acquisition is some investments in the supply-chain synergies between the two. Could you all just give us an update on how the two businesses interact today, and how you think you can improve that going forward?

[John W. Robinson, III:]

Yeah, sure, and Ryan, feel free to jump in. I mean, as you know we have 20-plus kind of hubs around the country where it's Progressive employees that are returning product from customers and QA-ing it and bringing it back to our Aaron's stores. Certainly, with the acquisition, it improves our supply-chain infrastructure from that perspective, so reverse logistics infrastructure I should say in the Northeast. That's an opportunity for us up there. In general, I would say it's been kind of consistent. We've gotten good performance out of it. It continues to grow, and I think there's more opportunity down the road. But it's not been, I wouldn't say a focal point for the Progressive business. I think they've done a great job while managing lease portfolios without it, it's been kind of an added plus in addition to the great analytics work we've done there. I don't know Ryan what comments you'd have on that.

[Ryan K. Woodley:]

Yeah. I'd just agree with what John said. For that area of the country in particular, it gives us extended reach into regions that may not be as well covered by the hub. We have a hub in the Boston area, but certainly it doesn't reach as effectively into New Hampshire or Maine or other markets where SEI is present.

[Bradley B. Thomas:]

Got you. Thank you so much.

[John W. Robinson, III:]

We just kind of see that as opportunity down the road, I think.

[Bradley B. Thomas:]

Sounds good. Thanks again.

[Operator:]

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

[Anthony Chukumba:]

Good morning. Thanks for taking my questions. So, I just had a quick question on Progressive. You got some pretty significant sequential improvement in terms of invoice volume per active door. I think you've touched a little bit on some of the drivers. But I was just wondering if you could give us a bit more color because that was definitely something that jumped out at me on a positive way. Thank you.

[Ryan K. Woodley:]

Yeah. Sure thing. So, I think we had mentioned that we onboarded a lot of new doors in Q3 of last year. We had door growth obviously in Q2 as well, but a significant increase in Q3. So, we haven't quite started to lap those yet. But what has happened is that those doors that were onboarded have had time to mature and we're just seeing increasing levels of productivity from those doors, which is a great sign. So, obviously, with that increase in productivity, once we actually start to lap the count in Q3, we expect to see continued improvement in that metric. What's also helping is that existing doors are performing well also. So, we're seeing increasing levels of productivity from increasing doors, which is helping us support that metric.

[Anthony Chukumba:]

Got it. And then, just one follow-up. I mean, I guess given those factors, would you expect to see a continued sequential improvement in terms of invoice volume per active door in the back half of this year at Progressive?

[Ryan K. Woodley:]

Yes.

[Anthony Chukumba:]

Okay. That's helpful. Thank you.

[Operator:]

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

[Kyle Joseph:]

Good morning, guys, and thanks for taking my questions. Most of them have been answered, but I just wanted to go and get your sense from a macro level. Have you guys seen sort of any changes in the level of credit available out there, or what's driving your improved outlook for same-store sales at the core?

[Douglas A. Lindsay:]

Yeah. This is me, Kyle. It's Douglas. We've seen a firming up of, I would say, a lessening of our decline in deliveries which is good. So, coming out of the end of the second quarter, there's been some strength there. And then I mentioned before lower churn rate. That's also given us a more positive outlook and our collection rates are obviously improving as well. So, as we look at comps going forward, we're seeing improving comps throughout the remainder of the year, and I would say, sequentially improving comps from the third or the fourth quarter.

[Kyle Joseph:]

Yeah. And again – sorry. Go ahead.

[Douglas A. Lindsay:]

In terms of the broader market, I think, we're just seeing what you're seeing in the paper. Our customer hasn't changed. We just think that we're collecting better on the customer and seem to be a little firming on deliveries.

[John W. Robinson, III:]

Yeah, Kyle, I don't know from a macro standpoint that we have any great insight. I mean it feels like there's still a lot of credit availability out there in general, but I think other than just kind of. we don't see that specific, Progressive probably sees it a little bit more than Aaron's directly given that they're in the stack along the other finance providers, but I think, in general, that's been the case for a while. So, I don't think we've seen a significant change there.

[Kyle Joseph:]

Got it. Yeah. Ryan, can you give any commentary there. I just asked because this is the first quarter we've really seen charge-offs rising for credit cards, specifically those that have gotten into subprime and seeing some guys pull back, and I'm just seeing, if that flows all the way down to your market?

[Ryan K. Woodley:]

I think just referencing the response we discussed earlier, I think what Progressive is seeing is very much in line with expectations, and that sort of falls nicely within the ranges that we'd expect to see in lease portfolio performance. The 5.5% write-offs, which is sort of the credit quality metric or lease portfolio performance metric we share is, if anything, maybe a little low. But we're happy with what we're seeing.

[Kyle Joseph:]

Great. Thanks. And I know you guys just announced an acquisition with John a couple of calls ago. I think you mentioned that you're looking at some strategic M&A, your balance sheet remains very strong. Can you just provide some updated commentary on the heels of that?

[John W. Robinson, III:]

Sure. I mean, in terms of kind of capital allocation, capital structure, we're not changing our thoughts on capital allocation. If you look over the past few years, we've taken a pretty balanced approach to our uses of capital. We've made acquisitions, we've invested in our business, and we've returned capital through dividends and share buybacks. And going forward, we expect to maintain a balanced approach. We do want to maintain our conservative balance sheet. It's been a strategic weapon for us in terms of giving us the flexibility to be opportunistic and as was the case this most recent acquisition. So following this acquisition, we're going to continue to be conservatively capitalized. Our net debt-to-cap, kind of pro forma for the deal is less than 15% and the businesses continue to generate cash. So, we feel like we continue to be in a good spot from a financial flexibility standpoint and feel good about being there longer term.

[Kyle Joseph:]

Great. Thanks very much for answering my questions, and congratulations on a good quarter.

[John W. Robinson, III:]

Thank you.

[Ryan K. Woodley:]

Thanks, Kyle.

[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. Thank you so much for your interest in Aaron's. We appreciate your participation on the call, and look forward to updating you on our next call. Thank you.

[Operator:]

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