The Aaron's Company, Inc.
Q4 2016 Earnings Call Transcript

Published: 17 Feb 2017

[Operator:]

Good morning, and welcome to the Aaron's, Inc. Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. Participating this morning are John Robinson, Aaron's CEO; Douglas Lindsay, President of Aaron's Sales and Lease Ownership; Steve 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 fourth 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 W. Robinson, III:]

Thanks, Garet, and thank you for joining us this morning. 2016 was another strong year for Aaron. Our leading platform expands retail lease-to-own stores, e-commerce, virtual lease-to-own, and second-look financing program. This combination drove record financial performance for the year. Earnings grew faster than revenues on an outstanding year from Progressive. Customer count reached 1.6 million, a record for Aaron. We generated significant cash flow and deployed capital to support our growth and strengthen the balance sheet. We took aggressive action to reduce costs and tighten our focus in the Aaron's Business, including the sale of HomeSmart. We significantly strengthened the management team, which now has a solid balance of long tenured lease-to-own executives, complemented by talent from outside the industry. At the same time, we sustained impressive momentum at Progressive. Progressive's revenue metrics accelerated in the quarter and the lease portfolio continued to perform well. Our balance sheet is in great shape. We ended the year with $309 million in cash and net debt to capitalization of 9.6%, down from 30% last year. As we look forward, we have the people, strategy, and capital to continue to grow shareholder value over the long-term. We expect to generate cash in 2017 and we intend to grow Progressive and evolve the Aaron's Business. Our outlook for 2017 includes embedded investments in both businesses. Over the long-term, we'll look to grow organically and through strategic acquisitions. During 2016, Progressive delivered exceptional results across all its key metrics. We continue to be excited about the large addressable market for virtual lease-to-own and Progressive's ability to capitalize on this opportunity. Our goal for the Aaron's Business is to build on the work we accomplished in 2016. We will continue to manage our cost structure and make strategic investments in areas that we expect will generate profitable revenue in future periods. Finally, we returned nearly $42 million to shareholders in 2016 through share repurchases and dividends. We have 9.1 million shares remaining on our existing repurchased authorization and we'll continue to look for ways to enhance shareholder return. With that, I'll turn it over to Ryan.

[Ryan K. Woodley:]

Thanks, John. Progressive had an excellent fourth quarter, fueled by accelerating growth and active doors, invoice volume and revenue. Total revenues increased 17% in the quarter to $324 million, up from 16% in Q3. Invoice volume was up 19%, which represents the strongest growth in that metrics since the second quarter of 2015. Accelerating invoice and revenue growth was driven by a 36% increase in new doors. We added 4,700 new locations in the quarter compared to the same period last year, bringing the total number of doors that completed a lease with us in Q4 to a new record of approximately 18,000. It's our fifth consecutive quarter of improving door growth and was driven by gains across all industry verticals with particularly strong growth in the smartphone and jewelry categories. Invoice per active door was down 12.6%, an improvement from the third quarter. The decline in volume per active door is to be expected given the exceptionally strong growth in new doors. As we've mentioned previously, the invoice per door metric is influenced by the number, timing, and mix of new doors we add in a given period. We're on boarding a broad range of profitable doors which is providing a solid base for current and future growth. The lease portfolio continues to perform extremely well with write-offs at 5.9% of revenues in the fourth quarter down from 7.1% in a year-ago period. Likewise, bad debt expense saw strong improvement, down 110 basis points to 11.3% of revenues in the quarter. EBITDA increased 84% to $41.7 million. As a percent of revenue, EBITDA reached 12.9% versus 8.2% in the fourth quarter of 2015. Dent-A-Med also delivered strong results achieving our growth and profitability expectations for the year. It continues to be a great addition to our broader platform allowing us to fulfill the need expressed by retailers who wish to have all among (07

[Douglas A. Lindsay:]

Thanks, Ryan. Total revenues for the Aaron's Business were $463 million, 15% decline from a year-ago quarter. Decline was driven by a decrease in our non-retail sales, slower (07

[Steven A. Michaels:]

Thanks, Douglas. Revenues for the fourth quarter and 12 months of 2016 were $795 million and $3.208 billion, down 3.2% and up 0.9%, respectively, over the same periods a year ago. The increase for the year was driven by Progressive revenues, which were up 17.9% over 2015. Net earnings for the fourth quarter were $21.6 million versus $21.7 million a year ago. Net earnings for the 12 months were $139.3 million versus $135.7 million in the prior year. Net earnings for the 3 months and 12 months ended December 31, 2016 include a loss of $1.6 million and $9.3 million, respectively, for Dent-A-Med, which was acquired in October 2015. As Ryan mentioned, Dent-A-Med has performed in line with our expectations in 2016. Net earnings for the fourth quarter on a non-GAAP basis were $36.3 million, compared to $29.8 million for the same period in 2015. Net earnings for the 12 months on a non-GAAP basis were $167.7 million, compared with $157 million for the same period in 2015. Earnings per share, assuming dilution, were $0.30 in the fourth quarter of both 2016 and 2015. Earnings per share, assuming dilution for the 12 months ended December 31, 2016, were $1.91, compared to $1.86. Diluted EPS on a non-GAAP basis for the fourth quarter was $0.50 in 2016 and $0.41 in 2015. Diluted EPS on a non-GAAP basis for the 12 months was $2.30 in 2016 and $2.15 in 2015. Adjusted EBITDA for the company was $73.8 million for the fourth quarter of this year, compared to $67.4 million for the same period last year. Adjusted EBITDA for the 12-month was $342.5 million versus $323.8 million a year ago. At December 31, 2016, the company had $309 million of cash on hand compared to $15 million of cash at the end of 2015. Cash generated from operating activities was $465.4 million through the 12 months of 2016. Our total debt was reduced $109 million during the 12 months. And at the end of December, we had a net debt to capitalization ratio of 9.6%, and no outstanding balance on our $225 million revolving credit facility. 2016 cash flow from operations benefited from favorable cash tax payments, which netted to a refund of $55 million. Cash tax payments in 2017 are expected to be approximately $125 million. 2016 operating cash flow also benefited from the idle (14

[John W. Robinson, III:]

Thank you, Steve. We're pleased with Progressive's continued momentum and the steps we're taking to evolve the Aaron's Business. We're conservatively capitalized, which gives us the flexibility to invest in the business and increase value for all of our stakeholders. I want to close the call by thanking all of our associates, franchisees, and retail partners for your efforts to deliver the best value proposition to our customers. We appreciate your commitment and all you do to make Aaron's such a success. With that, I'll turn it to the operator for Q&A.

[Operator:]

We will now begin the question-and-answer session. Our first question comes from Budd Bugatch of Raymond James. Please go ahead.

[David Joseph Vargas:]

Good morning. This is David on for Budd. Thank you for taking my question. Ryan...

[John W. Robinson, III:]

Good morning.

[David Joseph Vargas:]

...I was hoping you can give a little color on the cadence that the doors were added during the quarter. Were they frontend loaded or more towards the end of the quarter? And also, the types of retailers that were added.

[Ryan K. Woodley:]

Thanks, David. We saw those doors exist for most of the quarter in contrast to the trends, I think, we discussed in Q3, where they were added more toward the end of the quarter. That certainly helped support the invoice per door metric. And then, as I mentioned in the prepared comments, we did see growth across all industry verticals, which was great to see, with particularly strong growth in mobile and jewelry, where we now work with many of the largest retailers in the country. Those programs are growing nicely, and demonstrating really solid lease performance. They tend to have smaller store footprints, and slightly smaller deal sizes, which is what impacts that invoice per door metric, but they're nevertheless excellent doors for us and we're thrilled to have them.

[David Joseph Vargas:]

Great. Thank you. And are there any pilots going on right now with large – any larger retailers?

[Ryan K. Woodley:]

Good question. So, we completed leases in 22,000 unique locations last year and that comes across several thousand retail partners. So, at that scale, we're – we tend to always be engaged in various stages of pilots with prospective retail partners at both the national and regional levels. That's true today. Acknowledging that not every pilot immediately converts to a rollout, even with good execution, we're really happy with our performance on those pilots in 2016 and very optimistic about our current pilots.

[David Joseph Vargas:]

Okay. Thanks. And one more, for Doug, looking at the comp guidance for next year in the Aaron's Business, that (20

[Douglas A. Lindsay:]

Sure. Yeah. The guidance we've put out is really consistent with where the business is today. We have assumed, through the same trends we're seeing and deliveries in our collection rates, and as I mentioned in my prepared comments, a slightly lower ticket size than we've experienced before. So, as you know in this business, we care about business and that business turns out from previous years and so, it's just reflective of continuing trends we're seeing today. We have all sought (20

[David Joseph Vargas:]

Okay. All right. Thanks for taking my questions and good luck going forward.

[Douglas A. Lindsay:]

Thank you.

[John W. Robinson, III:]

(21

[Operator:]

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

[John Baugh:]

Thank you for taking my questions. Good morning. I was curious on – given the performance is so divergent between the core and Progressive, you've talked in the past about limited overlap and I guess, you've judged that by history with existing customers. I'm just curious, are you seeing maybe more encouragement there than previously? Or what does your research tell you about the cannibalization rate there?

[John W. Robinson, III:]

John, thanks for the question, it's John Robinson. What we know is there are more options available to our customers today than ever before. And the customer is going to pick how and where they want to transact, and our goal is to serve customers where they want to do business. And we think we've proven to be successful at that in 2016 as evidenced by the growth of our customer count, the fact that our stores have slower traffic than they have historically. The good news is that we have new channels like aarons.com where we're attracting new customers, customers we've never seen before. And in fact, the majority of those customers are new. But the reality is we've got to continue to innovate our bricks and mortar model. We've got to continue to rework our footprint and make sure we're compelling to our customer there, as we have been historically. What we see from – I don't have any updated statistics from a cannibalization standpoint, but we see weakness in our stores, it doesn't necessarily correlate with the virtual competition in any particular way. For example, product categories maybe were progressive, doesn't do as much business foreseeing (23

[John Baugh:]

Is there an influence still negative on the business, either business I guess, from Texas or are you seeing that flatten out or even get better?

[John W. Robinson, III:]

Yeah. Texas overall is comping at a lower rate than the rest of the country, but we've seen improvement year-over-year in Texas.

[John Baugh:]

All right. Delayed tax refund this year, how does that impact both businesses if you think about first quarter?

[John W. Robinson, III:]

Yeah. I mean, tax refunds have definitely been delayed from our perspective and I think that's been pretty widely distributed information. We expect that it'll pick-up towards the back half of February and obviously, that is – that has an impact on collections across all of our businesses and sales activities. So, we're hopeful that – and our model kind of assumed that it would pick-up soon. So, we hope that it will. It will drive, obviously, higher payout, but also higher sales activities. So, we're hopeful that's what's going to happen.

[John Baugh:]

John, is that, I mean, clearly, it'll happen to some degree. Is the (24

[John W. Robinson, III:]

Yeah. I mean, I don't think delays have historically been great for us in the Aaron's Business, for example. So, we probably are exercising a little bit of caution given that delay. On the Progressive side, honestly, we don't see it as – there is so much diversity. We don't see it quite as much there. We certainly see it from a collection standpoint. But the Progressive business is driven largely – some of the large retailers what their cadence is from a promotional perspective and that gets – it gets lost a little bit with all the diversity of retailers there. We see it more clearly in terms of...

[John Baugh:]

Questions for Ryan, is Dent-A-Med helping you win business with retailers and any of these larger retailers in particular?

[Ryan K. Woodley:]

Yeah. Good question, John. So, when we acquired the business, we did it with the expectation that it would both help us land and expand retailers within our pipeline and also attract new retailers, including those who may have been on the Dent-A-Med platform, but not yet explored tertiary. And since the acquisition, we have examples of both of those happening which kind of leads to the commentary in us (26

[John Baugh:]

Okay. And jumping maybe back to Doug, is this Club – I mean, what are we doing with firm or price? You mentioned there's a better value proposition. What precisely is going on there?

[Douglas A. Lindsay:]

You're asking about in terms of the mix of products and the way we're pricing product?

[John Baugh:]

Well, yeah. It relates to the Club.

[John W. Robinson, III:]

Yeah, right. It does relate to the Club rollout plan later in the...

[Douglas A. Lindsay:]

Sure. Yeah. What I'm referring to in Club is so we're rolling Club out. We think it offers additional benefits we've not been able to offer to our customer before. So, effectively, a basket of benefits from dining benefits to medical benefits and greater optionality in are (27

[John Baugh:]

Interesting. Okay. And then finally, John, maybe for you, you mentioned the acquisitions. I guess, you said before (27

[John W. Robinson, III:]

In general, just kind of capital allocation more broadly, we expect to continue to raise our dividend as we have in the past. Steve mentioned we have 9.1 million shares of – to authorize – authorized to repurchase. We expect to do that as we did – in 2017 as we did in 2016. In terms of other acquisitions or other investments, we're still going to continue to make organic investments and look opportunistically for M&A. I mean, one of the advantages we have is we have conservatively capitalized balance sheet. Aaron's has traditionally have that. It served (28

[John Baugh:]

Great. Thank you. Good luck.

[Douglas A. Lindsay:]

Thanks, John.

[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. My question is about the Aaron's Business. As you try to turn that comp back to flat, what do you think will be the biggest strategic drivers of that goal? And at what point does that become a reasonable expectation for that business?

[Douglas A. Lindsay:]

Yeah. So, Laura, this is Douglas. As you guys know, the Aaron's Business has been under revenue pressure. We're sort of carrying that forward in our guidance. What we're busy doing is what I said, sort of innovating, but really listening to what the customer wants. I think this Club program is a good example of it. We're also trying to take the friction out of the customer transaction by making it easier for them to conduct business at Aaron's. We've brought in new talent in our marketing department, our merchandising department, and our e-commerce department. And we think we have a lot of upside in all of those areas, from increased product selection to really converting our customer to an omnichannel customer. So we're focused on doing all of that, we'll continue to try to find efficiencies in the business. And honestly, we're looking at how we evolve the model going forward, from our cost structure to how we interact with our customer. And we'll just continue to do that. And we think we're beginning to make progress in that area.

[John W. Robinson, III:]

And Laura, this is John. I mean, we forecasted down this year, as we've – given (30

[Laura Champine:]

Got it. Thank you.

[Operator:]

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

[Vincent Caintic:]

Hi. Thanks. Good morning, guys. Just a question on the Aaron's Business; for your same-store sales guidance for 2017, I was just wondering how much of that down to 8% from (31

[Douglas A. Lindsay:]

Yeah, just to be clear, our same-store sales guidance excludes our closed stores, so what's reflected in there is the trends that we're seeing, driven by what we mentioned before, our lower beginning balances and our delivery trends. So, any consolidation benefit coming from closed stores would not be reflected in that number, but is in reflection of (32

[John W. Robinson, III:]

It also reflects – it does not – the comp does not reflect stores, Vincent, that receive accounts from closed stores. So, if you think about a store closing, it could potentially push accounts into multiple stores, one or more. And those stores that receive meaningful accounts from a closed store will also be excluded from the comp, and the runoff – the economics of that are that we push these accounts from a closed store into another store, and we expect to retain a high percentage of those customers. We would expect some loss, but over time, we expect to retain about half of those customers in the stores that receive the accounts. And so, that's obviously a big pop for those stores from a profitability standpoint, but they stay out of the comp for about 20 – over two years.

[Vincent Caintic:]

And then, just kind of a follow-up question, as you're probably aware, your largest competitor is going through a bit of a turnaround story. I was wondering if some of that disruption for them might present some opportunity for you to take some market share? Are you seeing, say, any customers shifting to you ,or maybe some of the franchises or retail partners that you might be able to take advantage with the market share?

[John W. Robinson, III:]

Yeah. I mean, those guys are – they're great competitors and do a great job. We don't expect anything from – we're all working to reengineer the store model to some extent. So, I don't expect there'll be any tailwind, particularly from that, for us. The significant – the reality of it is, it's a real competitive market out there for our model, and we've just got to continue to innovate it. I don't expect anything significant from that for us, although we're going to keep working hard to take their customers, just like they work to take ours every day. So, we hope so, but I don't think that's something that we're counting on.

[Vincent Caintic:]

Got it. Makes sense. The last one I had from me (34

[John W. Robinson, III:]

Yeah. I mean, I think the way we – in terms of excess capital, that's a good way to think about it. It's important for us to be conservatively capitalized, given how dynamic the market is, and there is a couple of ways, this dynamic for store model's changing. Progressive is growing. It has some big opportunities. We want to make sure we have ample of capital to execute on all the things we need to do. We aren't really giving a number in terms of what we think the excess capital is in our model. We are delevering this year and we are generating cash. So as I said, we expect to continue to increase our dividends we have and also buybacks from shares. Those are the things we're pretty certain we're going to do this year. We remain opportunistic about M&A, looking for businesses that complement ours, and we have a team working on that all the time. And so, hopefully, there're some things that makes sense to pop up, but if not, we'll continue returning that, but that (35

[Vincent Caintic:]

Got it. Very helpful. Thanks so much, guys.

[Operator:]

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

[Kyle Joseph:]

Hey. Good morning, guys. Thanks for taking my questions.

[John W. Robinson, III:]

Good morning.

[Kyle Joseph:]

Ryan, I think I'll start on Progressive, if you don't mind. You talked about growth into the smartphone and jewelry categories. Just wondering, are the margins and the economics on those – on that merchandise, are they pretty similar to the existing base or should we expect any impact there?

[Ryan K. Woodley:]

Yeah. Fair question. So, the great thing about those verticals consistent with all the other verticals, we added doors in this quarter. We have several years of experience positioning those applications, applications from those verticals, and are very confident in the performance that we've modeled. And that's what we're seeing as those leases continue to come on the book and continue and begin to perform. So, we're happy with what we're seeing there and confident in their ability to contribute to both the top and bottom line of the business.

[Kyle Joseph:]

Got it. And then, going back to tax refund, I'm just wondering, obviously, I know that a delay would not necessarily be a great thing for the first quarter. But I'm just wondering, does that change the seasonality of the business? Do you get some of those economics in the second quarter? If tax refunds are, in fact, delayed, so what's looking like late (37

[John W. Robinson, III:]

Yeah. I mean, we hope so, Kyle, but our experience in the past has been from a delivery standpoint that when there is delays, sometimes, we don't – doesn't that – the delivery delay doesn't follow us into the next quarter or later into the first quarter. And so, that's when the question was asked earlier, why we're somewhat cautious about forecasting those deliveries to be there. We typically do see the early buyouts and the churn out of portfolio, but not always the deliveries following through. So, we're a bit cautious about that.

[Kyle Joseph:]

Got it. And then just going back to the core, just to get a little better understanding, can you give us a sense of – I know you'd talked about how there wasn't any correlate-or there was a lack of correlation between the stores and sort of Progressive, and so, it doesn't seem to be cannibalization. But do you think these customers are getting – is it more the second look market? And then at the same time, from a broader perspective, for general purpose cars, we're starting to see charge-offs go up. We're starting to see rates increased. Do you have any optimism for sort of the supply of credit to this customer going down, whether it's the near-term or the more intermediate or longer term?

[John W. Robinson, III:]

Yeah. We certainly have seen over the last few years of real strong supply to these customers. So, on the margin, that might get better for us. Hopefully, it will. In terms of the write offs, they've been trending positively for all our businesses, so we feel good about that. So, I came over the first part of your question now. But the second part, in terms of the credit availability, we feel like that, on the margin, could help us, but I don't know if there is anything significant there. I think the real – I know what your first part. What I was going to say on the first part is that, in terms of options available to our customer cannibalization, what we see is fewer new customers coming into the system through these doors. So, that's what we're trying to solve largely. It's getting the new customer to come in through our bricks and mortar doors. And so, the question is where they're going. And there is just a lot of options available to that younger customer, that newer customer, where they can go and how they shop, what their preferences are. That's a different world that we're trying to crack.

[Kyle Joseph:]

All right. Great. Thanks very much for answering my question.

[John W. Robinson, III:]

Thank you.

[Operator:]

Your next question comes from David Magee of SunTrust. Please go ahead.

[David G. Magee:]

Yes. Hi. Good morning, and a good fourth quarter.

[John W. Robinson, III:]

Good morning. Thanks.

[David G. Magee:]

A couple of things, Steve, could you talk a little bit about the stores that are closing and are they making money? Are the cash flow positive or not? Any sort of color there would be helpful.

[Steven A. Michaels:]

Yeah. Thanks, Dave. I can start and Douglas can add on as well. So, the stores that we closed, I think we've mentioned in Q3, the stores that we closed in the fourth quarter were, on aggregate, losing money. They were a drag on the business. The stores that we've identified which we will be closing in Q2 are – were performing as a group a little bit better, kind of breakeven to slightly positive. But the act of closing them, as Douglas has referred to, in transferring the agreements we think is a good economic decision from a probability standpoint and a good continued step in our ability to rightsize our store footprint and continue to grow customers or gain customers while within a more asset-light approach. Douglas, if you want to add to that?

[Douglas A. Lindsay:]

Yeah. I mean, we'll continue to monitor this as time goes on. I mean, as we have our portfolio that roles every month, we continue to monitor stores where the – regardless of whether they're slightly positive or negative, where the economic benefit of consolidation exceeds the standalone benefits of that store. So, that's part of our ongoing process that these stores we've been monitoring and we felt like the better decision was to consolidate them at this time.

[David G. Magee:]

If you all come in of the year at the low-end for unfavorable end to your comp expectations for stores, does that create another batch of stores that might be break even or losing money in 12 months, (41

[Douglas A. Lindsay:]

I think that's a possibility, again, this – all is dependent on the distance from one store to another. So, it depends on where that performance is in our portfolio.

[David G. Magee:]

Okay. On the core business, with comps being down both the doors (42

[John W. Robinson, III:]

Yeah. I mean, we're certainly doing work to figure out the market and where customers are going as you're seeing in our business. I can't say I can speak for the whole industry. In our business, we're seeing some growth albeit strong growth in Progressive and declines in the core business or the Progressive business. I mean, the Aaron's Business, excuse me. But, yeah, we're just trying to understand where the new customer wants to shop and we want to make sure we're there for them, whether it's in a bricks and mortar store, on aarons.com, through a retail partner, through a mobile application. That's what we're focused on; it's generally understanding where the flow of customers is, how they want to shop, where they want to shop, and make sure we're there for them and they can do it economically.

[David G. Magee:]

Thanks, John. Is there something that you all could offer that would sort of plug that hole for you for that younger customer?

[John W. Robinson, III:]

Yeah. We're working on those things all the time. So, we've got a great team working on that. And as I mentioned, we're – we need to be in multiple channels. So, that's certainly one option, but we're working on a number of initiatives. We've talked – Douglas has talked about some. The Progressive guys are working on things. We've got to keep innovating. Progressive is doing great, but we feel as much pressure there to innovate as we've ever felt before. I mean, the reality of it is it's a competitive and that's reflected in our outlook for both businesses. There're big investments in both businesses, because if Progressive stays still, we think it'll – the competitors will catch it and so, we got to keep working hard to innovate it so that it continues its advantage in the market, which we think we have right now.

[David G. Magee:]

Thanks, John. And then, Ryan, great numbers on Progressive; are you seeing any change with regard to the pricing environment?

[Ryan K. Woodley:]

I think, broadly – I appreciate the question. Broadly, as a reflection on commentary on the competitive landscape, it feels like it's roughly consistent with previous periods, no material changes, and that's creating environment where we've sort of maintained price discipline, which is what's showing through and the margins that you saw in the quarter, and specifically the performance and bad debt and write offs. We have no plans to change that. But certainly, as John said, it remains a competitive market and there are those out there doing things that we would not do, but price discipline is sort of one of the mantras.

[David G. Magee:]

But the national account is still sort of seen as a two-horse race. That's, or three other (45

[Ryan K. Woodley:]

Yeah. I would say it varies. I wouldn't want to discount the sort of competitive nature of either the national or the regional level. We sometimes see different folks in different places. Sometimes, we're in exclusive pilots, sometimes we're in competitive pilots. But you certainly wouldn't see as many competitors at those larger national opportunities as you would in the regional opportunities as you might expect.

[David G. Magee:]

Great. Thanks, guys, and good luck.

[Ryan K. Woodley:]

Thank you.

[John W. Robinson, III:]

Thank you.

[Operator:]

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

[Anthony Chinonye Chukumba:]

Hi. Good morning. This is Anthony Chukumba with Loop Capital Markets, not Stephanie.

[John W. Robinson, III:]

Good morning.

[Anthony Chinonye Chukumba:]

Just one real quick question, I just want to get some clarification on this Aaron's Club. I wasn't really following exactly what that is. I mean, is that like, sort of, like an add-on to a lease agreement or I mean, what exactly is that?

[John W. Robinson, III:]

Sure. It is a – it's a program that our customers can purchase for $10 a month that allows them to be a member of Club program that gets them sort of purchasing power or buying benefits at local restaurants, dining facilities, auto repair shops, hotels. In addition, it provides them some extended protection on the product that they currently are leasing from us. On top of that, there are some other advantages in terms of, if you fall ill and can't make a payment or you lose your job, we'll (46

[Anthony Chinonye Chukumba:]

Got it. And – okay. And this is – is this currently – I know you mentioned the pilot, is that – is this currently in all of your stores?

[John W. Robinson, III:]

It's not. We've piloted it in a number of stores in the Southeast, and we've seen positive results. So we're currently in the process of rolling it out. We'll begin that in the second quarter, and that will continue over the course of the year.

[Anthony Chinonye Chukumba:]

Okay, got it. Thank you.

[John W. Robinson, III:]

Thank you.

[Operator:]

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

[Bradley B. Thomas:]

Yeah. Hi. Thanks, guys. Good morning.

[Steven A. Michaels:]

Good morning.

[Bradley B. Thomas:]

Good morning.

[Bradley B. Thomas:]

Just wanted to ask a follow-up – a couple of follow-ups on the Progressive side, if I could.

[John W. Robinson, III:]

Sure.

[Bradley B. Thomas:]

Hey, Ryan, obviously, you guys have a lot of pilots out there all the time, and just thinking back to last year's positive test with Walmart that didn't end up manifesting itself in a broader rollout. As you all are talking to some of these big-box retailers, could you just give us an update on what you're hearing from them, in terms of perhaps the likelihood that they might capitalize on what a nice tailwind to revenues they could get if they added you to their stores?

[Ryan K. Woodley:]

Yeah. Appreciate the question. Our team there, led by Blake, is doing an awesome job. They just – we built a really strong organization serving retailer needs. And I think they're trying to do what John mentioned earlier. They're trying to find more and better ways to serve the customers walking through their door, and the conversations we have with them are about the customers that they're currently not able to serve because they don't have a tertiary solution, or not the one that they'd like to have. I'd say, having several billion-dollar retailers as customers of ours certainly has helped erode what stigma may have existed among others out there. And I guess I said in the comments, but I'm very, very bullish about the continued evolution of rent-to-own and where I see it going in the market. And we continue to have great conversations with leading retailers about the opportunity to rollout tertiary in their stores and online. We mentioned we have ongoing pilots in both regional and national opportunities, and that tends to be a consistent theme and expect that to continue throughout 2017 and into the future.

[Bradley B. Thomas:]

Great. And then again, on the Progressive side, Ryan, can you talk a little bit how you're thinking about margins for 2017? And what level of investing in the business you're continuing to put forth? And then, longer term, how you're thinking about where the margin opportunity could be?

[Ryan K. Woodley:]

Yeah, good question. The investments in 2017 could be characterized as exactly as John said

[Bradley B. Thomas:]

Very helpful. Thank you so much.

[Operator:]

The next question is a follow-up from David of Raymond James. Please go ahead.

[David Joseph Vargas:]

Thanks for taking my question again. It's a follow-up on Progressive. I see that you're guiding revenue up year-over-year for 2017, yet keeping your EBITDA margin guidance roughly flat. I was wondering if you can give me some color on the underlying assumptions that you're using to construct that guidance?

[Ryan K. Woodley:]

Yeah. Sure, David. It goes back to – it goes back to the – the commentary right there on Brad's question. It's really about our confidence, and the opportunity that remains in the market and building the solutions we need to go land and expand those retail opportunities. So, if you looked at our plan for 2017, you'd see a lot of investment in people and systems across functional areas that we feel is prudent to go tackle that opportunity.

[David Joseph Vargas:]

Okay. So, it's more of a – more of a – more expensive investment than deterioration in the pricing environment?

[Ryan K. Woodley:]

Right. No. We certainly wouldn't – we certainly plan to continue to be price disciplined. You see that reflected in the gross margins and bad debt and write-off assumptions in the plan, if you were to see those. There'll be puts and takes. Obviously, we don't expect to drive bad debt to zero, or write-offs to zero. That wouldn't be the prudent thing to do. But we absolutely will continue to be price disciplined, and we will invest in the people and systems required to go tackle the opportunity that we think remains in the market.

[David Joseph Vargas:]

Okay. All right. Thank you very much.

[Operator:]

The next question is a follow-up from David Magee of SunTrust. Please go ahead.

[David G. Magee:]

Yes. Hi. Thanks. Ryan, do you anticipate any disruption in the Mattress business this year as one of your important customers?

[Ryan K. Woodley:]

They are a very important customer of ours, I appreciate the question. As we've done in the past, we tend to leave commentary on our partners' businesses to them to share directly, and that's the case here as well. We are fortunate to have a longstanding relationship with Mattress Firm. They're an excellent partner of ours. We expect they will be into the distant future. You know, referring to specifically to the issue, I think that you're addressing the mattresses that fall in those price points tend to be fairly high price points, which, as you might guess, represents a very small percentage of the business we do there. And obviously, you'd expect the Mattress Firm to sort of revolve the line up in the wake of those changes. So, I don't think you should expect that to materially impact our metrics. Again, it's a great partner, will continue to be a great partner of ours, and look forward to supporting future growth in their business.

[David G. Magee:]

Great. Thanks, Ryan.

[Operator:]

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

[John W. Robinson, III:]

Thank you very much. Thank you all for your interest in Aaron's and we look forward to talking to you next quarter.

[Operator:]

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