The Aaron's Company, Inc.
Q3 2016 Earnings Call Transcript

Published: 29 Oct 2016

[Operator:]

Good morning. Welcome to the Aaron's, Inc. Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask question. Please note this event is being recorded. Participating this morning are John Robinson, Aaron's CEO; Douglas Lindsay; President of Aaron's Sales and Lease Ownership; Steven Michaels, Aaron's CFO and President of Strategic Operations; and Ryan Woodley, CEO of Progressive Leasing. At this time I would like to introduce Garet Hayes, Director of Public Relations. You may proceed.

[Garet Hayes:]

Thank you, and good morning everyone. Welcome to our conference call to discuss Aaron's third quarter results issued today. All related material, including form 8-K, 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 would like to read the company's Safe Harbor statement. Except for historical information, the matters discussed today are forward-looking statements. As such, they involve a number of risks and uncertainties which could cause actual results to differ materially from those predicted in Aaron's forward-looking statements. Please see our SEC filings for certain risk 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, 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?

[John Robinson:]

Thank you, Garet. Good morning, everyone. Thanks for joining us today. Our third quarter results reflect outstanding performance at Progressive and additional steps to improve the core business. Total revenues increased slightly to $769 million. Growth was driven by a 16% increase in revenues at Progressive. Consolidated EBITDA increased 23% on an adjusted basis, and represented 9.9% of revenues versus 8.1% in the third quarter of 2015. We successfully managed costs and inventory at the core business. And the lease portfolio at Progressive continues to perform well. Progressive had an excellent quarter with a double-digit gain in invoice volume and an improvement in profit metrics. We have good visibility into a lease portfolio that's performing solidly within the ranges we target. In addition, our future growth prospects remain strong. The 28% increase in new doors in the quarter underscores that. And we are encouraged about our ability to drive profitable growth in a large addressable market. Revenue at the core business declined, as same-store revenues came in lower than we anticipated. We have done a significant amount of work streamlining our expense structure and improving operational execution, which helped offset negative revenue trends. During the quarter we reduced expenses at our store support centers, and also began an initiative to further right-size the store base, with 56 closures completed. We anticipate more closures in 2017. We're confident the team is taking appropriate action in light of the challenging operating environment. We ended the quarter with $320 million in cash, which gives us ample flexibility to support our strategic priorities. As announced, we completed the sale of our HomeSmart business in the second quarter of 2016. We deployed that cash in the third quarter, repurchasing 1.4 million shares of common stock for $35 million. These decisions reflect our goal to run the core business with a focus on profitability, invest in growth initiatives in all our businesses, and return excess cash to shareholders. With that, I'll turn it over to Douglas to discuss the core business.

[Douglas Lindsay:]

Thanks, John. Total quarter revenues for the quarter were $454.1 million, down 9.5% from the same period last year. Excluding revenues from HomeSmart, revenues were down 6.7%. The decline stems from a 4.1% reduction in lease revenues and fees and the 17.6% decline in our non-retail sales. Comparable store revenues were down 4.6%. Texas stores, which represent approximately 18% of revenues, were down 8.1% compared with 9.4% last year. Non-retail sales and sales of merchandise to our franchisees remained under pressure, due in part to an 8% reduction in franchise store count year over year and franchisees continuing to aggressively manage their inventory levels. Merchandise write-offs were 4.9% versus 4.1% in the third quarter of last year. Our collections teams continue to operate in the challenging environment. Write-offs are still outside of our comfort zone, and we have identified opportunities for improvement. As a percent of revenues, core adjusted EBITDA was 8.9%, flat with the same quarter a year ago excluding HomeSmart. Our gross margin benefited from a decline in non-retail sales and we worked hard to control our operating expenses and working capital, both at our store support centers and in our stores. For example, we reduced our store support centers' annual overhead by approximately $12 million and we reduced inventory by 31% versus a year ago quarter. As we outlined in our press release, our initiative to right-size the store base resulted in the closure of 56 stores this month. We anticipate more closures in 2017, but do not expect to close stores in the fourth quarter given the timing around our holiday season. The store restructuring reflects our goal to optimize sales productivity, and is not confined to a particular market or region. Our decisions were made based on quantitative analysis of store density, four-wall profitability, and qualitative input from our field operators. Based on our experience we expect to retain approximately 50% of customers after the first year, and believe the initiative can both improve our profitability and right-size our footprint in many markets. We expect a payback on the restructuring charge related to the store closures to be less than 18 months. I will now turn it over to Ryan for an update on Progressive.

[Ryan Woodley:]

Thanks, Douglas. Progressive had a great quarter. And we still really good about the business as we enter the fourth quarter. Revenues increased 16% in the quarter to $308 million. A key driver of top-line growth was a 28% increase in the number of retail locations that completed a lease with us during the quarter to a new record of approximately 15,500 doors. This represents the fourth consecutive quarter of accelerating growth in active doors. The significant growth in new doors had an impact on average invoice per door, which was down 13% in the quarter. As we have said, new doors put natural pressure on invoice volume per door, as they enter our mix at lower volumes than mature doors. That dynamic was exacerbated this period as we on-boarded a significant number of doors in the final weeks of the quarter. In addition to the impact of adding new doors late in the quarter, the invoice per door metric is influenced by shifts in the door mix across our portfolio. We've been successful in adding a broad and profitable mix of new doors across all our industry verticals, but not all doors have the same production profile. We have smaller locations and larger locations in our base of 15,500 doors, both are healthy and welcome additions to the portfolio, even though they produce invoice at different levels. So as the mix shifts to include opportunities at smaller locations, average invoice volume per active door may come down but that's a healthy indicator of growth in the broad appeal of our low cost virtual model. We grew invoice volume 10.5% in the quarter, continuing our pace of double-digit increases. We're very pleased with our invoice and revenue performance, and note that our new doors are in verticals where we have a long and profitable history. Turning to our profit metrics. EBITDA doubled in the quarter versus the same period last year to $37 million. Our EBITDA margin was 12.1% of revenues. As we've done all year, we maintained price discipline and we continue to benefit from improvements to our decisioning and collections processes. The results bear that out. Write-offs and bad debt expense improved to 6.1% and 11.4% of revenues respectively, well within the ranges we target for the business. Finally, we're very happy with our pipeline. During the quarter we saw strong contribution to our new door count from pipeline conversions and we continue to be excited about other opportunities progressing within the pipeline. In summary, Q3 was a great quarter. We added a large number of new doors, our portfolio is performing well, and we're continuing to invest in people and systems to support future growth. I will now turn it over to Steve to discuss e-commerce and the financial details. Steve?

[Steven Michaels:]

Thanks, Ryan. In Q3 we continued to improve our e-commerce capabilities. We increased our online conversion, strengthened the use of our existing supply chain to include existing store inventory, and increased engagement with our store associates to provide an improved omni-channel customer experience. E-commerce as a percentage of lease revenues was 4.6% in Q3 versus 4.1% in Q2. We're pleased with the channel and we remain on track to reach our 2016 goals. Now I'll turn to the financial details for the quarter and the nine-month periods. Revenues for the third quarter and nine months of 2016 were $769 million and $2.413 billion, up 0.2% and 2.3% respectively over the same periods a year ago. The increase was driven by Progressive revenues, which were up 15.9% and 18.1% respectively over the third quarter and nine months of 2015. Net earnings for the third quarter were 29.5 million versus 24.2 million a year ago. Net in earnings for the nine months were 117.7 million versus 114.0 million in the prior year. Net earnings for the three and nine month periods include a loss of 2.5 million and 7.7 million respectively for Dent-A-Med which was acquired in October 2015. Dent-A-Med has performed in line with our 2016 expectations. Net earnings for the third quarter on a non-GAAP basis were 36.8 million compared to 28.6 million for the same period in 2015. Net earnings for the nine months on a non-GAAP basis were 132 million compared with 126.6 million for the same period in 2015. Earnings per share assuming dilution for the third quarter of 2016 were $0.40 compared to $0.33 for the same period a year ago and earnings per share assuming dilution for the nine months ended September 30 was $1.61 compared to $1.56. Diluted EPS on a non-GAAP basis for the third quarter was $0.50 in 2016 and $0.39 in 2015 and diluted EPS on a non-GAAP basis for the nine months was $1.80 in '16 and $1.73 in 2015. Non-GAAP net earnings and diluted earnings per share in 2016 exclude the effects of amortization expense from the acquisition of Progressive, a gain on the sales of the Company's headquarters building, retirement and severance charges, an impairment charge related to the HomeSmart asset sale, and the core business restructuring and costs initiatives. In 2015 non-GAAP results exclude the effects of Progressive amortization. Adjusted EBITDA for the Company, which excludes the aforementioned charges and adjustments discussed above, was 76.4 million for the third quarter of this year compared to 62 million for the same period last year. Adjusted EBITDA for the nine months was 258.6 million versus 255.5 million a year ago. At September 30 the Company had 320 million of cash on hand compared to 15 million of cash at the end of 2015. Cash generated from operating activities was 136 million for the quarter and 460 million through the first nine months of 2016. Our total debt was reduced $111 million during the nine months and at the end of September we had a net debt to capitalization ratio of 9%, and no outstanding balance on our 225 million revolving credit facility. During the quarter we repurchase 1,372,700 shares of common stock for $34.5 million. We currently have authorization to purchase an additional 9,123,721 shares. Our consolidated customer account increased 5% to 1.563 million at September 30, up from 1.483 million a year ago. In our outlook, diluted earnings per share is presented on both a GAAP and on a non-GAAP basis, excluding Progressive-related intangible amortization and any future onetime or unusual items. Adjusted EBITDA also excludes any future onetime or unusual items. The Company updated certain elements of its outlook and currently expects to achieve the following for fiscal year 2016. For the core business, quarterly same-store revenues of approximately negative 5% to negative 3% for the remainder of the year, adjusted EBITDA in the range of $195 million to $205 million compared with the previous outlook of $195 million to $215 million. For Progressive, EBITDA is expected to be in the range of $140 million to $150 million compared with the previous outlook of $135 million to $145 million. And for the consolidated results, which include the results of DAMI, adjusted EBITDA in the range of $330 million to $350 million compared with the previous outlook of $325 million to $355 million. GAAP diluted earnings per share in the range of $1.79 to $1.93 compared with the previous outlook of $1.92 to $2.12 and non-GAAP diluted earnings per share in the range of $2.16 to $2.30 compared with the previous outlook of $2.13 to $2.33. With that, I'll turn it back over to John before we move on to Q&A.

[John Robinson:]

Thanks, Steve. We're very pleased with the performance of Progressive and the steps the core team is taking to address the continuing challenges in the business. Despite a difficult environment, we remain on track to deliver revenue and earnings growth while significantly strengthening our balance sheet. We're generating strong cash flow and we're happy to have returned capital to shareholders in the quarter. We've reduced debt considerably since the Progressive acquisition and our balance sheet gives us a lot of financial flexibility. As you know, we have a significant opportunity to grow Progressive, given its large addressable market. The recent growth in our door count underscores that. Given the size of some of the opportunities out there, we have a significant competitive advantage in terms of our ability to fund invoice growth and we want to maintain that advantage. We're also investing in our omni-channel platform, which extends the reach of our store network and positions us to maintain our market leadership, as customer shopping preferences evolve. We also have a long history of returning capital to shareholders. So over time we will continue to look to buy back shares and increase our dividends. I want to close by thanking our associates, franchisees, and retail partners for your efforts to deliver the best value proposition to customers across all our markets. We appreciate your commitment and all you do to make Aaron's such a success. Operator, we're ready for Q&A.

[Operator:]

[Operator Instructions] the first question comes from John Baugh at Stifel.

[John Baugh:]

Thank you. Good morning, John, Ryan, and Steve. Great job. If I could, and I appreciate the color, Doug, on some of the efforts to reduce costs. I think you mentioned lower inventory and an annual reduction in overhead of $12 million. Are there other things that you are working on? And I'm trying to get at with a reduced comp number, of how you feel about holding profits relatively flat going forward in the core business in light of the challenging environment?

[Douglas Lindsay:]

John, no problem. So there's a couple things. One, is as we close stores we will continue to see the benefit of the store closures going into next year. And that should benefit our EBITDA margin, and definitely our store profit numbers. In addition the $12 million I mentioned on cost savings was really our SSC cost savings. We continue to work on our store cost savings, both in the labor model and in the controllable cost at the store. And that's something that is an ongoing process that we continue to chip away at. And we think we have the opportunity for efficiencies there. And we will continue to work on that through the rest of this year and into next year.

[John Baugh:]

Okay. And you mentioned opportunities to address the high charge-offs there, which are pushing 5% now. What precisely are you going to do? And when would you expect to see a stabilization, or maybe improvement in that ratio?

[Douglas Lindsay:]

Sure there are two things. One is just operational execution. We have some inconsistency across the network in the way we go about working our age portfolio. And we're working on standardizing that and making sure we're all driving to the same set of numbers and the same rhythms every day of collecting our past due amounts. And the second thing is automation. So we are developing more automation around how we allow the customer to pay. And if we can make it easier for the customer to pay, we think we get a lift over time.

[John Baugh:]

Okay. And you give some color on the franchisees and their customer accounts and their comps, and they are better than corporate. Is there any color you can give us on their loss rates and collection processes? Are they also superior to corporate?

[Douglas Lindsay:]

We don't disclose the franchisees' loss rates. But we do give their same store comps. One comment I will have there is they are less exposed to oil-affected markets. And that's one of the big drivers.

[John Baugh:]

Okay. And then maybe question, John, the last one for you. I noticed I think you bought 15 franchise stores in the quarter. Talk to us about, is that accretive? And more strategically going forward, what maybe you'll trade in terms of buying franchise stores, as well as possibly maybe giving franchisees some corporate stores? Thank you.

[Douglas Lindsay:]

Yes, absolutely. That is something, John, we do on an ongoing basis, is we look, we're constantly talking to franchisees across our network to work with them to optimize markets. And so if there are opportunities for us to add customers and increase our footprint in markets where we have management talent or a critical mass of stores, then we are open to doing that, and where it makes sense. Also, we will sell stores to franchisees in certain cases if it makes sense for them and economic sense for us. So in some cases we can, from an economic standpoint, be better from the royalty than we can from operating the store. And so we will continue to do deals with the franchisees there. And we have some strong franchisees who we feel great about. And they have the appetite to grow, and we want to continue to enable that. And we also want to maximize our profitability. And that's an opportunity for us in certain markets. So that will continue, probably on the same scale relatively right now to what you have been seeing over the last year. I think it's kind of, the cadence will probably continue for a while.

[John Baugh:]

John, am I presumptuous to assume that it's accretive, or how does the financials work on acquired franchisees typically?

[John Robinson:]

It certainly is in certain cases, not necessarily in all cases. In certain cases we do have guaranteed debt with our SunTrust program. And so certain cases we are already in the business to some extent in those markets. And so we are taking over stores in certain cases. But other cases it can be very accretive. So it just doesn't always come down to that calculus when we are making a decision in terms of accretion or dilution to earnings.

[John Baugh:]

Understood. Thank you. Good luck.

[Operator:]

Next question is from Brad Thomas of KeyBanc Capital Markets.

[Brad Thomas:]

Hi. Good morning everyone, and congratulations on solid results here in a difficult backdrop. I want to ask a couple questions on the Progressive side. We don't have a lot of history with quarterly data from Progressive. But in our data, this looks like by far the strongest quarter for door growth that the Company has had. I was hoping maybe you could give us a little more color. If you don't want to -- maybe you don't want to name which accounts you are adding, but maybe even a little bit more color on the types of doors, the categories that you are adding right now. Thank you.

[Ryan Woodley:]

Thanks, Brad. The -- as I mentioned in the prepared, I know the lack of detail there is frustrating, but did say that we added doors across all industry verticals. And I will just restate that. We are really pleased with how the team is -- the sales team is doing a great job identifying and executing on opportunities across all our industry verticals. And that's what we saw again this quarter.

[Brad Thomas:]

Fair enough. And then, Ryan, as we look at the broader landscape of, particularly furniture and the mattress retailers, we've seen a period of weakness in recent months. Could you give us a little bit of a characterization of what you are seeing out of your larger retail partners in that area? And how, if at all, perhaps that consumer weakness may have shown up in result of late?

[Ryan Woodley:]

As the results indicate, we're benefiting from really nice growth trends across the portfolio. As you know, that said, the trends are not necessarily indicative of underlying traffic and customer behavior patterns seen by retail partners. In other words, we don't necessarily see every customer that walks through the door. They don't all apply for financing and leasing, and they don't get declined by the lenders who sit above us. So the growth we do see, we are very pleased with and happy to deliver those results for our retail partners. The growth is coming from a pretty broad base of regional and national accounts, new and existing doors, and the comp there is certainly helping us.

[Brad Thomas:]

Great. And then, as you mentioned in your remarks, solidly within the range that you target in terms of the performance of these agreements but I guess a question on approval rates, any change in how your approval rates have been? Or any opportunity to loosen those or need to tighten those as you looks at how things may play out going forward?

[Ryan Woodley:]

Approval rates are roughly in line where they have been. As you know, decisioning is more of a function of several variables, approval rate being one of those. And we are considering all those variables as we think about evolutions to our decisioning algorithm. We're constantly enhancing our approach to decisioning. And it's really a function of several variables, not just that one, but that one is roughly in line with where it's been.

[John Robinson:]

I will add one thing. This is John. To remember is that we do have the vast majority of our portfolio is the 12-month lease. And so we have such fast feedback on our portfolio that it gives us comfort that our portfolio performance is going to remain in line with where it's been. I know that's a concern, given a lot of the economic backdrop. But we feel great about the fact that it's a 12-month term and we have the ability to manage that portfolio, react pretty quickly, given the short duration of it.

[Brad Thomas:]

Great. Thank you, John and Ryan. And congrats again, and good luck going forward.

[John Robinson:]

Thank you.

[Operator:]

The next question is from Laura Champine at Roe.

[Laura Champine:]

Good morning. I wanted to ask about the core business and what your longer-term view is of where the store count eventually settles there? And also just get a sense of what you think are the issues, whether it's macro or cannibalization by your own Progressive offering. What's impacting that business and has been hurting sales, in your view?

[John Robinson:]

Hey, Laura. It is John Robinson. Long term we have added -- it's a good question and something we think about a lot. We've added the omni-channel platform to our offering. And so as that evolves, we're learning how the store footprint should evolve as well. And so I'd say we're working on that and we're learning from that. At this moment we would say we expect the footprint to get smaller, but I can't tell you by how much. We just don't have a good idea. It's really market by market, and we're trying to look at each market and optimize the footprint in that market. We do think the omni-channel platform extends the service area of a store. So we're still learning about how that is going to look. I think it's just an evolution. It's going to be completely transparent about how we're thinking about that. That is what we're thinking right now. In terms of the store performance, we think the macro environment is challenging. There is little to no real wage growth for our customer, healthcare costs are rising for our customer, and there's a lot of different options for our customer out there. And so we think those are definitely macro headwinds to the business. But we also see a lot of internal execution opportunities that we know are there, that we're working hard to improve. And so we are optimistic that we can make improvements there that will actually improve our performance. And we've said this before in the past, we do have some franchisees who are outperforming us, and give us the comfort and a goal to reach for in terms of our performance. So there's -- and a number of our Company stores as well. So there's opportunity. It's just the market is changing a bit and we're just having to evolve with it.

[Laura Champine:]

Thank you.

[Operator:]

The next question is from Kyle Joseph at Jefferies.

[Kyle Joseph:]

Good morning, guys. Thanks for taking my questions. Most of them have been answered. But John, on the call you addressed earlier, obviously you guys have a ton of liquidity, which is a great thing. But you talked about potentially increasing the dividend and ongoing buybacks. I just wanted to get -- trying to understand your prioritizations they are a little bit better. And how you think about a dividend versus share repurchases.

[John Robinson:]

Sure. So our thinking on capital allocation certainly continues to evolve. In terms of prioritization, as I mentioned, we have big available market to go after with Progressive. And we want to make sure that we continue to have the competitive advantage that we have currently with our strong balance sheet. And when a big partner looks to us they can see that we have great capacity to grow with them, both with our cash on hand as well as our unfunded revolver. So that is a big priority. We also have some important projects that are innovating our core business, including the omni-channel platform. And so we want to continue to invest in that as well. And so those are our top priority. And after that will continue to look for complementary businesses that might make sense for us. But also return capital to shareholders. And we do have a history of growing our dividend. We will expect to continue to do that. And we expect to continue to be opportunistic buying back shares. But we haven't put out a specific target on debt, for example, or a capital ratio because our thinking is evolving and we want to remain flexible, given an uncertainty that we do face with the Progressive pipeline. That is the one thing about that business that we've learned over time, is that it can be unpredictable in terms of its growth patterns and it could be stair steps at times. And we want to make sure we're always well prepared for that.

[Kyle Joseph:]

Great, thanks. And then just shifting back to the core a little bit, as we lap sort of the big decline of gas prices in 2015, at what point do you think comps in the Texas market start to ease going forward?

[John Robinson:]

I wish we could tell you. If we could tell you, we'd probably would all be more successful. But we don't know. The Texas is a challenging market. And the oil-affected markets specifically are challenging. So we just don't have a great insight into that. We saw a little bit of stabilization, and then it seems it's still challenging now. So I wish we could tell you, Kyle, but we don't know. We're just reacting to it the best we can. We're trying to tighten our operations there, make sure we're doing all the things that we can to control our business. And then reacting appropriately to the macro environment. But we don't have any more insight.

[Kyle Joseph:]

No problem. That's helpful. And then, just on the credit outlook, we talked about it in the quarter a little bit. But just in terms of your outlook for Progressive credit, I know it improved a lot year over year. This quarter you had some easier comps there. But given you guys have owned the business for a little over two years at this point, are you still seeing sort of the benefits from the storefronts there? And sort of what your outlook for write-offs in that business?

[Ryan Woodley:]

Ryan here, Kyle. Very bullish on how the business is performing from a lease pool perspective. Obviously, you mentioned the easy comp from last year. But the lease pools are performing historically well. And that's just the result of ongoing enhancements to the decisioning process and really strong performance from our operations team. We have customer service hubs in the field that we didn't have prior to the acquisition that are contributing to those performance metrics, and just a great collections team in general. But the pools are performing extremely well. We expect the pools to continue to perform well, based on the indicators that we see.

[Kyle Joseph:]

Got it. Lastly, and then Ryan, and while I have you. Just any sort of color you can give on the long-term outlook for revenue growth at Progressive?

[Ryan Woodley:]

No. We are not quite 2017 guidance yet. But we think it is a very big market. We talk about a $20 billion-plus market. And the beauty of the virtual model is that all those doors are addressable to us. As we've proven in the quarter, we can add small doors as well as large doors. And to address the full $20 billion, you have to have the ability to do that, to do both of those.

[Kyle Joseph:]

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

[John Robinson:]

Thanks, Kyle.

[Operator:]

Next question is from David Magee, SunTrust.

[David Magee:]

Hi. Good morning, and congrats on the stability, great to see that. Ryan, with regard to Progressive and the door growth and acceleration, what drove that? Is it just the inherent lumpiness of the business, or is there may be a better message being crafted out there with regard to your stability versus others, perhaps?

[Ryan Woodley:]

I was pleased to see the growth not just come through a single vertical, but all our verticals. Again, I think that goes back to the team doing a great job identifying and executing on those opportunities, the technology and product teams building solutions that resonate with retailers and customers. So I think that's going well. But I do think there's continuing evolution among retailers' levels of awareness, I will say, about the tertiary offering, the lease purchase offering. And if you think about the opportunity in the context of where we sit today, a very small fraction of the addressable market is currently being served. And I think it's only a matter of time before we have the opportunity to address the full 20 billion-plus. So as each quarter comes, we're fortunate to see more retailers open to introducing tertiary into their finance and lease waterfall. As we mentioned in the comments, we were fortunate in Q3 that we saw some pipeline conversions. Some of those were national, which contributed strongly to the door growth. But in that mix we're also regional doors. So it's pretty broad based. Obviously, the national opportunities move door count in ways that the regional opportunities don't. But there's a lot of opportunity out there that remains.

[David Magee:]

Thanks, Ryan. Doug, I think I heard you say that the retention rate for your closed stores might be around 50%. And if that's the number, it seems like that could be low, given the contractual nature of your business. Is that just conservatism on your port?

[Douglas Lindsay:]

First of all, that 50% is after a 12-month period. So what happens when we close the stores, we move all the customers into the merged store. And so we're consolidating two customer bases. And we also, for a period of time, move the staffing over that [indiscernible] over time. And we find that we continue to service those customer, but there is attrition, just because of some of the distances the customers have to drive. But we believe 50% is a good number over a 12-month period. And we believe, even with that number and applying gross margin, we are well better off than operating that store individually.

[David Magee:]

Thank you. And my last question, John, is just with regard to the broader environment next year in 2017. Are you seeing any signs that that improve? I am thinking maybe signs of tightening with other forms the credit for these customers, or something that would enhance your value proposition?

[John Robinson:]

Well, in terms of the environment, we read the same things you guys read. And we don't really see anything different right now in our business that would lead us to feel differently about the future necessarily than we've been seeing the last few quarters. So I guess that would be my answer in that question. In terms of what we're going to continue to do to innovate, yes, we've got -- we're working hard across all the businesses to innovate, to be more relevant to customers, and to serve customers where they want to be served with the very best value proposition in the market. And we feel like the customers are speaking and it showing up in the numbers at Progressive. And we think there's a lot of opportunity for -- they're also speaking with our omni-channel platform as well the quarter. And so we feel good about that, but the customers' preferences are evolving. We have to evolve, and we're going to continue to do that.

[David Magee:]

Okay, great. Thank you.

[John Robinson:]

Thanks, David.

[Operator:]

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

[John Robinson:]

Thank you very much for your interest in Aaron's. And we look forward to updating you after the fourth quarter.

[Operator:]

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