The Aaron's Company, Inc.
Q3 2014 Earnings Call Transcript

Published: 24 Oct 2014

[Operator:]

Good morning, and welcome to the Aaron’s Inc. Third Quarter Earnings Conference Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. Participating this morning are Gil Danielson, Aaron’s Interim Chief Executive Officer and Chief Financial Officer; Steve Michaels, President, who is joining us remotely today; and John Robinson, Executive Vice President of Aaron’s and CEO of Progressive. At this time, I’d like to introduce Garet Hayes, Director of Aaron’s 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. The Company’s earnings release issued today and the related Form 8-K are available on the Company’s Investor Relations website, investor.aarons.com, and this website 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 projected in Aaron’s forward-looking statements. These factors include matters such as changes in general economic condition, competition, pricing, customer demand, legal and regulatory proceedings, customer privacy and information security, which relates to the Company’s recent Progressive acquisition, risks related to its new strategy and other issues, including those discussed in the Company’s SEC filings. Forward-looking statements that may be discussed today include Aaron’s projected results for future periods, Aaron’s new strategy, the future effects of the Progressive acquisition and other matters including those listed in the forward-looking statements disclaimer and our earnings press release published today. Listeners are cautioned not to place undue emphasis on forward-looking statements. I will now turn the call over to Mr. Gil Danielson.

[Gilbert L. Danielson:]

Thank you, Garet. Good morning, everyone, and thanks for joining us today to discuss Aaron’s third quarter results. This is my first earnings call as interim Chief Executive Officer of Aaron’s. I am pleased to report that we have made solid progress on the strategic initiatives outlined earlier this year. We’ve strengthened our core business, especially pertaining to cost reduction, e-commerce and the synergy opportunities from the Progressive acquisition. However, even though the retail environment remains challenging, the revenues of our core business are disappointing. The number one priority of the Company is to create the same amount of growth of our customer and agreement based. We believe there is still substantial demand from credit constrained customers for the products we offer at our attractive prices and payment terms. We are working very hard on plans to better reach these customers with the high level of service they want and deserve. We believe strengthening our omni-channel platform and the closer integration of our core business with Progressive will significantly enhance the future operating performance of the Company. We took decisive action during the third quarter to reduce our operating cost, including closing underperforming stores and restructuring our home office and field support staffs. Operating more efficiently and cost effectively is a primary focus of the Aaron’s management team. We are well on our way to achieving our goal of $15 million in annual cost savings by the end of 2015. As far Progressive, it is growing rapidly and continues to see our expectations in just about every important metrics. In the upcoming quarters, we expect Progressive to become a larger part of our overall business as we had new retailer relationships and grow existing ones. With that, I will now turn the call over to Steve for an overview of the performance of the core businesses along with a detailed discussion of our initiatives. Then John, will review Progressive’s results. After John concludes I will return to discuss the financial results for the quarter. Steve?

[Steven A. Michaels:]

Thank you Gill, and good morning everyone. As Gill mentioned during the third quarter, we continued to make progress on our strategic initiatives to strengthen the core business. On the revenue side, we are continuing to position our product offering to provide customers with a value they come to expect from Aaron’s. While we’re mindful of today’s highly promotional retail environment, we are focused on providing sustained everyday value rather than one-time benefits. Our Wi-Fi program, which we discussed last quarter, leverages our vendor partnerships to offer customers an affordable lease price throughout the term of the lease. We’re very enthusiastic about our upcoming Black Friday Deals, and are confident our customers will find these specials to be a compelling value. We have multiple in-store initiatives underway to improve the customer experience. We’ve talked about text messaging capabilities for renewals and marketing and we’re pleased with the initial progress we made on the front. We’re also making great strides on expanding the options for customer payments. Allowing customers to set up recurring payments and match renewal dates with their pay dates will increase convenience and allow our store associates to shift even more focused to sales and service. We continue to see improvement on the inventory side and optimizing our inventory offering so that we can better support high demand and advertising items as well as refine our in-store selection on a regional basis to make sure we have available the core goods that our customers are looking for. The strategic price actions that we discussed in last call and implemented in July are in effect and while it will take some time for them to have an impact on the overall agreement portfolio. We are encouraged with an early impact and we will continue to monitor the progress and look to identify further opportunities to enhance margin. Perhaps the most exciting revenue enhancing initiative underway is what we’re doing with Aaron's online. We recently launched the second phase of our e-commerce pilot program, broadening both our product offering and our target audience and are extremely pleased with these results. Using the learnings from our pilot programs as well as the technology and expertise of the Progressive team, we are preparing for a wider online experience for Aaron’s online in time for Black Friday and Cyber Monday. With our widely distributed store footprint and our own national distribution network, we have a unique ability to provide customers with a great online leasing experience with quick product delivery supported by local store, service and support. Transforming Aaron’s online will take time, and while we don’t expect the revenue and earnings contribution from the online business to be significant in the remainder of 2014, we continue to believe it will be an important revenue driver in years to come. Now turning to our efforts to control cost, we remain confident in our ability to operate as a leaner overall organization. As Gil mentioned, during the third quarter we restructured our home office and field support to more closely align with business conditions. We adjusted our activity based store staffing model, which will allow us to operate more efficiently without compromising the customer experience. This support restructuring, which included a workforce production along with the store staffing efficiencies that will be realized throughout Q4, should lower operating expenses by an anticipated $10 million in 2015. As planned, this quarter we closed 44 stores, transferring customers to nearby Aaron’s stores. We expect these closures to reduce operating costs on an annualized basis by an estimated $17 million in 2015. Overall, we are continuing to evaluate our store portfolio and we’ll make further adjustments as necessary. To sum up, there’s still work to be done to turnaround Aaron’s core business. But as you can see, we have a serious of both near and long-term initiatives to drive revenue growth. We expect to start seeing a positive impact from these efforts over the coming quarters. Now, I’d like to turn the call over to John Robinson, who will review Progressive’s performance this past quarter. John?

[John Robinson:]

Thank you, Steve. The third quarter was another excellent quarter for Progressive. Our outstanding team continues to execute at a high level for our retail partners and customers, which resulted in Progressive beating both our revenue and EBITDA guidance for the quarter. As we’ve discussed previously, invoice volume is the dollar value of the merchandise we purchase from retailers. Invoice volume for the third quarter was approximately 160 million versus approximately 89 million in third quarter of 2013, representing an 80% increase year-over-year. Invoice volume for the first nine months of 2014 was approximately $419 million versus approximately $245 million in the first nine months of 2013, representing a 71% year-over-year growth rate. Given that invoice volume today represents revenue over approximately the following 12 months. We’re very pleased that our invoice volume growth rate accelerated in the third quarter versus the first two quarters of 2014. We continue to generate growth from existing retail partners both with respect to existing and new doors as well as from new doors at new retail partners added to the Progressive program. Our pipeline continues to be robust as more and more retailers across a variety of formats, recognized that our technology enabled unmanned RTO product can help them to serve more customers. In addition, customer demand for our product continues to increase as more and more customers recognized that they can transact at retailers that previously do not have an option for them. We continue to invest in R&D. The focus of our R&D is primarily in two areas. Both areas of focus will enable us to increase revenue for our retail partners and offer more customers the option to lease products at the retailer of their choice. The first area of innovation is improving the process at the point of sale for both the retailer and the consumer. The goal here is to increase efficiency in the application process and to increase the percentage of applicants that we capture in our process. The second area of innovation involves expanding our product offering, so that we can serve more customers in our addressable market. Progress on both of these fronts is proceeding on schedule and we’re excited about the incremental growth these projects can generate in 2015. We’re also pleased with our progress in terms of our integration with the Aaron's. As we have discussed previously, we believe there is significant opportunity for Aaron's to help Progressive, improve our returns process and customer retention efforts. We have been piloting a new process with Aaron's and a couple of markets over the past few months. But we’re working to streamline it. We’re very pleased with our results thus far. Both in terms of saving customer relationships as well as picking up and re-leasing merchandise from customers, who chose to return it to us. Aaron's physical store presence is a huge asset for Progressive and our retail partners as it will ultimately enable us to serve more customers. Overall, we’re very pleased with our third quarter performance of Progressive and are focused on taking full advantage of the opportunities we have through our combination with Aaron's, but we’re still in the early stages of integration, we’re really encouraged about the potential of our combined businesses. With that I would like to turn the call back to Gill.

[Gilbert L. Danielson:]

Thanks John. Now, I’ll review the financial results for the quarter. Revenues for the third quarter in the first nine months of 2014 were $707.6 million, 1.965 billion up 32% and 17% respectively over the same period a year ago. These increases are due to the inclusion in 2014 of $189.8 million and $328.7 million respectively of Progressive’s revenue from the acquisition date. Our franchisees collectively had revenues of $240.1 million for the third quarter and $754.1 million for the first nine months down 2% and 1% respectively from the same period a year ago. Please note that revenues of franchisees are not revenues of Aaron's, Inc. Same-store revenues in the third quarter for company operated stores decreased 2.8% compared to the same period last year and customer count on a same store basis was down 3.9%. Same-store revenues for franchised stores decreased 2.5% in the quarter and their customer count was down 4.1%, again revenues and customers of franchisees are not revenues and customers. Revenues in our HomeSmart division were $15.6 million in the third quarter up 5% compared to the $14.8 million a year ago. HomeSmart revenues for the first nine months of the year were $48.9 million versus $47.6 million last year a 3% increase. Net earnings for the third quarter were $9.3 million versus $21.1 million a year ago. Net earnings for the nine months were $56.1 million compared to $98 million for the same period last year. During the third quarter of this year, pre-tax earnings were negatively impacted by $9.1 million of expenses pertaining to the retirement of both the Company's CEO and COO. $6.9 million in restructuring charges resulting from store closings and realignment of operations in the company’s core business. $11.3 million in amortization expense related to the Progressive acquisition, partially offset by a $1.2 million reduction in previously recognized regulatory expense. During the second quarter of this year pre-tax earnings were negatively impacted by amortization expense and transaction costs related to the Progressive acquisition. In addition, the company incurred financial advisory and legal costs and restructuring charges. Included in pre-tax earnings in the second quarter of last year was an accrual for a regulatory investigation and charges related to retirement expenses and the change in vacation policies. Finally included in the third quarter of 2013 was additional accrual for the same regulatory investigation. On a non-GAAP adjusted basis, excluding all the above items and all other special charges, costs and expenses described above from all periods, net earnings for the third quarter of this year would have been $28.2 million compared to $30.8 million for the same period in 2013 and earnings per share assuming dilution would have been $0.39 compared to $0.40 a year ago. Net earnings for the first nine months of 2014 would have been $93.6 million compared to $119.6 million last year, and earnings per share would have been $1.29 versus $1.56 last year. The effective tax rate increased in the third quarter of this year was 29.6% compared to 28.2% in the third quarter of last year. Adjusted EBITDA for the company adjusted to exclude the special charges and cost and expenses was $60 million and $201 million for the three and nine months ended December 30, 2014. In terms of guidance, we have updated our guidance for the fourth quarter and full year 2014. We are updating our guidance on diluted earnings per share both on a GAAP basis and a non-GAAP adjusted basis that excludes transaction related amortization and special charges, cost and expenses. Consolidated fourth quarter revenues excluding revenues of franchisees are expected to be approximately $740 million including Progressive revenues of approximately $205 million. For the fiscal year 2014, revenues are expected to be approximately $2.71 billion including Progressive revenues of approximately $534 million since the April 14 acquisition. Fourth quarter and fiscal year adjusted EBITDA is expected to be in the range of approximately $57 million to $62 million for the quarter and $257 million to $262 million for the year respectively including Progressive EBITDA in the range of $15 million to $18 million and $47 million to $50 million. Fourth quarter and fiscal year GAAP diluted earnings per share is expected to be in the range of $0.24 to $0.29 and for the year $1.01 to $1.06. Fourth quarter and fiscal year 2014 non-GAAP adjusted diluted earnings per share is expected to be in the range of $0.34 and $0.39 and $1.62 to $1.67 respectively. Those are the major financial highlights for the core. In conclusion, while we identified what we believe are the right actions to position Aaron's for long term profitability and enhanced value, and we are pleased with our progress. We recognize that there is still much work to be done. We are very optimistic about the many initiatives we have underway and are excited about Progressive’s (indiscernible) we are now projecting significant gross profit. Before we move on to questions, I would like to especially thank the associates who are working hard every day building customer relationship. The commitment, dedication and enthusiasm of Aaron's and progressive associates were the corporate franchise who work drive this company forward. We will now open the call up for questions. Operator?

[Operator:]

(Operator Instructions) First question comes from the line of John Baugh with Stifel. Please proceed.

[John A. Baugh:]

Good morning, Gil, Michael, John. Thanks for taking my questions. I wanted to start may be on Progressive, John, any changes in the loss rates or any changes in the P&L what you are seeing in terms of early purchase exercise, same as cash et cetera?

[John Robinson:]

This is John. So on the – seasonally, we typically have higher bad debt expense in the third quarter, that’s just been our experience for number of years. So we saw that in it, we tend do kind of operate around 10% of bad debt expense relative to revenue and we see it fluctuate a little bit about around that number and we saw little bit of increase in the third quarter of this year as we would have expected. We probably saw a little bit higher than we would expect but part of that is driven by the fact that, most of its driven by the fact that we outperformed on invoice. So as we outperform on invoice, we tend to have a younger pool of leases out there and the younger year pool of leases, the higher your bad debt expense will be relative to revenue, just because you take most of your bad debt expense early in the life of lease. So, I hope that answers your question. I think that’s the primary answer. From a margin profile otherwise, we were very similar in Q3 to Q2, and we were in line with our expectations overall from an EBITDA perspective.

[John A. Baugh:]

But there wasn’t an appreciable change in early purchase or anything like that?

[John Robinson:]

No.

[John A. Baugh:]

Okay. And then, could you talk without I guess naming names, you probably don’t want to, but see an acceleration in invoice volume at the rates you’ve been growing is hard to do with the base building. And I was wondering do you – are you adding new retailers or the retailers you have are adding doors or both? I was just curious on that.

[John Robinson:]

Yes, our growth is coming from – we kind of think of it in three buckets

[John A. Baugh:]

Okay. And my last question for Steve or Gil, could you discuss on the core business? You break out the quarter’s adjusted EBITDA. If I’m looking at it right year-over-year was down about $11 million or $12 million. And you had, I think – that’s about a 50% flow-through in terms of the revenue reduction in that area. And I was curious if we assumed going forward – I know you’re not giving 2015 guidance, but if we assumed you continued roughly a 4% revenue bleed. And then assumed the cost phase that I believe Steve, you called out, which were $10 million and $17 million and $27 million respectively. We get the numbers in the core business on EBITDA next year that might be down in the $20 million to $25 million range. Do I have any of that math wrong? Is that a rough guesstimate of where you think you might be? Thank you.

[Gilbert L. Danielson:]

Yes, we haven’t really obviously clarified our 2015 guidance yet. We plan to do that certainly before the end of the year. We just are going through our planning process now and really have all the components (indiscernible). I will address a little bit the core business. One way to look at it, if you look at the core business, you just look at our OpEx for the second quarter which is probably the highest business for a while and it was a $264 million. The OpEx in the third quarter has gone down to $260 million. So we brought $4 million at third quarter (indiscernible). That will continue to trend down in the at least we believe in the fourth quarter. And then as you get into the next year into 2015 as our cost initiatives or $50 million initiatives and the things that Steve said by detail comes into effect, you will see that operating expense – but certainly believe we will continue to do that. So we can certainly share that with you and that might give you – kind of give you some numbers are to work out as you look at the…

[John A. Baugh:]

Well, so just following up, so Steve you mentioned in $10 million in op costs and then I think from $17 million from store closures that’s $27 million. That is kind of a calendar 2015 number? Or a number you get to as you moved through the year on an annual rate?

[Steven A. Michaels:]

We believe that from the benchmark of the second quarter that $50 million will be achieved during the 2015. You won’t see much of this in the third and fourth quarter which is as the plans gets in place. You will see, our plan is to bring that down – on an annual basis.

[John A. Baugh:]

Great, thank you.

[Operator:]

Your next question comes from line of David Magee with SunTrust. Please proceed.

[David Magee:]

Hi, good morning. It’s Magee. I have a couple of questions here. One is with regards to Progressive and the virtual market. Are you guys seeing any new competition or any sort of change in terms of pricing structure out there as you market to new customers?

[Gilbert L. Danielson:]

And we definitely see more competition in the market today than we saw a year ago and a year before that. So there is definitely more activity in the market. We think we compete very well on price. We think of ourselves as kind of the sustainable price leader. So we haven’t seen a lot of pressure there, but we have seen more competition and I have to characterize the market is more competitive every day. I think that there is recognition out there for the opportunity and more folks are chasing that, but we’re kind of at a good spot given the transparency we have in terms of our balance sheet with Aaron's, our proven track record of great customer service both for the end-user as well as the merchants. And so we’re still seeing ourselves to compete very favorably but we have to get better every day. We’re definitely not staining still. We’re still trying to work harder to make our product better and make our delivery better, so that we can remain one of the leaders in the market.

[David Magee:]

Thanks, John. Given what you said though in terms of new competition. Is the pricing structure still stable in your mind? I think the advantage is quite on the spread per se, but I’m just curious…

[John Robinson:]

Yes, I mean I think as we stand today it feels stable for sure.

[David Magee:]

Great, thanks. Second question is on Progressive. As you get better at taking back product given Aaron's capabilities, how much of a benefit will that be to your EBIT number over time you think?

[John Robinson:]

Yes, I mean good question. We’re thinking that number is somewhere between 200 basis points and 300 basis points of reductions in bad debt expense, so kind of netting down bad debt expense, we think that’s achievable and that’s kind of how we’re thinking about it. You know that only captures that kind of the Progressive side. The other side of that is that pre-leased merchandise will now be released out of Aaron's stores and there is revenue opportunity, profit opportunity there as well. So I’m not really factoring that into it, but from a purely Progressive standpoint that’s kind of how we’re thinking about it. We have got work to do to get there, but we think that’s achievable.

[David Magee:]

Thank you, John. Just a question on the quarter two. You mentioned some initiatives to improve the tone of that business. Which of those are you most excited about or do you think is most promising? And is there any reason to think that you know the core customer will behave better next year? Is there release insight for the – financial situation in your mind?

[Steven A. Michaels:]

Yes, Dave, this is Steve. As far as – we’re not anticipating a huge improvement in the headwinds that are based on our core customer, but we feel like we still have enough customers coming on the door and we just need to embrace them and really focus on that customer relationship that we have. The thing that we’re most excited about probably from an initiative standpoint is our omni-channel and online presence. We have a lot of new entrance to the market coming and visiting us on aarons.com and we are not able currently to have a fully operational transaction online that to turn those visits into actual customers and deliveries. And we’re making we’re making great progress on that every day and we look forward through the operational Black Friday and Cyber Monday initiative. And then that will be opened up to aarons.com in a limited number of space, but following that in the early part of 2015 with the fully functional online site. So we really think that we’ll be able to drive new customers into our Aaron’s stores and leverage our store base to provide the support and that’s the thing that we’re most excited about.

[David Magee:]

Great. Thanks, Steve. Good luck, guys.

[Steven A. Michaels:]

Thank you.

[Operator:]

The next question comes from line of Brad Thomas with KeyBanc Capital Markets. Please proceed.

[Bradley B. Thomas:]

Thanks. Good morning, Gil, John and Steve. I wanted to ask a couple questions. First starting with Aaron’s. I think on the pricing side most of the changes were going to be price increases if I’m not mistaken. Just wondering how much that benefit sales in the quarter and what that run rate could look like once it fully starts to flow-through your agreements? And then secondly what the customer response has been to those price changes?

[Steven A. Michaels:]

So those price increases, we took were approximately on a weighted basis about 5% and they were in effect in July. And we haven’t seen. We obviously had some challenges from a delivery standpoint during the quarter, but the feedback from our stores in the field is not related to those specific price increases. And so, obviously it takes long time to turnover – to have an impact on the agreement base of $1.6 million, but from our delivery activity the new deliveries done in June, July and August, we did see an improvement in the margin from those price increases. And, obviously, it was impacted by a mix shift, but we do think that as we get further into Q4 and the base continues to turnover we’ll see improvements in margin, and then throughout the first half of 2015, it will be fully impacted, I believe, for the most part. And then, as I mentioned, we’re going to continue to look for opportunities as we see them to take additional margin enhancements.

[Bradley B. Thomas:]

Great. And then just a follow-up on Aaron’s. One of your major competitors has talked about expanding into smartphones and adjusting their labor model. As you look at what they’re doing and what their opportunity is, is that something that you can work on a pilot program for, and how quickly could you tackle that if you think it’s worth while?

[Steven A. Michaels:]

Well, on the smartphones, or on the labor, or on both?

[Bradley B. Thomas:]

Both.

[Steven A. Michaels:]

Both. Okay. So the labor model, we’ve already been reviewing that model and have taken some steps to adjust our staffing in the stores based on our activity and that will continue to roll out in Q4 and be fully implemented in Q4 and we’ll continue to adjust that. The part time opportunity is interesting and we are going to be looking at that, but at this time we haven’t made any decisions on that front. The Smartphone opportunity, we are very lucky in that. We’ve got great learnings and experience from the folks at Progressive because they are big in the Smartphone business with their retail partners. So we have good intelligence on that front and we do think there is an opportunity there. And most of our customers are viewing that as almost a tablet replacement. And as our competitor said, there was some cannibalization from that category, but we do think that are opportunities there and we’ll continue to work with Progressive to figure out how we Bass want to tackle that. I don’t know, John, if you wanted to add anything on that?

[John Robinson:]

No, I think you – yeah, we know there is great demand there from the customer, particularly for the higher end phones and largely the phone is replacing the computer, the tablet in many cases and we’ve seen good success there at Progressive and I expect that we could have similar success in the Aaron stores.

[Bradley B. Thomas:]

Great. And then just one follow-up for John if I may, John, it seems clear there is a huge opportunity to partner with Aaron's on the collection side to reduce bad debt expense. What would the timing be for rolling out the pilot program once you feel like you’ve got the model right?

[John Robinson:]

Yeah, good question. We launched our pilot really kind of late July somewhere in there, July, mid to late July and we had great success both repeating customers as well as taking return to the customers wanted back and releasing. So, but there is some work to be done there and we are hoping kind of by the end of Q1 to have a pretty meaningfully rolled out solution out there that can start to have a meaningful impact on our business. I don’t think until after Q1 should we expect that. That’s the kind of the timing that we are operating on right now.

[Bradley B. Thomas:]

Great. Thanks so much.

[Operator:]

Our next question comes from the line of Matt McCall with BB&T. Please proceed.

[Matthew McCall:]

Thank you. So Gil, running through the savings again, I thought you said that you recognized about $4 million of SG&A savings in the quarter. I am just trying to get an idea of the cadence of the savings and others $10 and $17 expected next year, but what have you recognized so far and what’s the cadence of the savings as we go through the next few quarters and reach $6 million?

[Gilbert L. Danielson:]

Just for the third quarter, it would be (indiscernible) we’re going on in the third quarter, our net savings was just a little bit under $1 million, yet it will be higher than that in the fourth quarter. We’re not going to have much of an effect in total savings until we get into 2015 and that’s when the target of $50 million goes into effect. So we wanted to cadence I guess I mean very small amount here in 2014, but as we get into 2015 it will pick up (indiscernible).

[Matthew McCall:]

Okay, all right. Okay and then I guess, John, you talked about some of the innovation, there was some questions around the competitive pressure you were facing. Is your innovation aimed at top line, is it aimed at margin, is it aimed at giving more flexibility on pricing? When you talk about some of those point-of-sale efficiencies, what’s really the goal of those efforts?

[John Robinson:]

Yeah, the goal of those efforts is largely to kind of holding margins constant to drive more incremental revenue for retail partners. So if you think about where we’re spending our time and money, it’s to make the process flow better for the customer and the retailer so that have you have less fallout in the process at the retail point of sale. So that’s obviously going to drive more customers into our funnel and more incremental revenue for our retail partner. And on the other hand, it’s to expand our product so that we can serve more customers. So that we can – there is a large underserved market out there and we want to serve more of it and so by expanding our product, we can do that. And it may involve some different products with different pricing, but overall we’ve would – it’s not with the intent to necessarily grow our margin. I think we will see and then coming back to another question on the returns in customer retention efforts we have out there, we think about it as how to generate more incremental revenue. So how to grow the top line more than it is to grow margin. So we may see our bad debt expense remain constant but that means we’re able to serve many more customers as we innovate. So honestly we’re kind of working through that to figure – hopefully we could get both but we’re certainly focused on being a better partner for retailers out there.

[Matthew McCall:]

Okay. And then – so in the past, you’ve given some idea the doors are in. Can you give us an idea of the kind of invoice volume per door or per agreement and the trends there that you’re seeing either quantitative or qualitatively? And then what’s the outlook, how would you have us look at the next year to three years?

[Steven A. Michaels:]

I’ll let Gil kind of answer the guidance question. But in terms of kind of tends, we’ve see – I mean what I can tell you is in terms of vertical growth, for example, we’ve seen interestingly some more growth in furniture relative to some of our other verticals here in the last few quarters, which is a real positive for us. That’s a great vertical for us. But we’re seeing steady improvement across all our verticals and we’re trying to be consistent about serving all those verticals, but we have seen more growth in the furniture segment in the last two quarters than maybe we anticipated.

[Gilbert L. Danielson:]

Yes. And John did talk about invoice growth and that’s really the early indicator of the future revenue stream of the business and invoice growth figure is up to kind of where the number was. It will continue to up – all expectations, and so as we get into 2015, we expect that invoice growth to continue, and maybe not on at rate, but a substantial rate and that will drive the revenues and the sales progress moving forward. And, again, we’ll tie all that into our 2015 guidance when we come out with the math.

[Steven A. Michaels:]

One thing I will note that’s unique about our product being an unmanned virtual product is that when you start talking about doors, just all doors aren’t the same. So obviously if you add a large foot print furniture store that’s very different than adding a small mobile wireless store for example. So it’s difficult to just extrapolate off of door growth, because there’s many types of doors for us and because we can serve so many different formats. So I just want to add that. That’s the difference between us and some of our competitors who operate like a manned kiosk where they’re in a primarily large footprint environment.

[Matthew McCall:]

Okay, all right. Thank you, all.

[Operator:]

The next question comes from the line of Budd Bugatch with Raymond James. Please proceed.

[Budd Bugatch:]

Good morning. Thank you for taking my call. John, you told us the three buckets of which the like-for-like or which the growth and the invoice volume occurs. Can you maybe quantify those three buckets? What were the same door growth? What’s the same retailer growth outside of the same doors? And what was the new retailer growth? Maybe your invoice volume or any which way that you can give us either a characterization of that or a quantification of it?

[Gilbert L. Danielson:]

It’s really hard to do that. Again, as John says, all doors are not created equal and you may have a door that we’re doing business with three or fourth months ago and they don’t do any more business till next month or so. So it’s very, very hard to give that statistic. I mean people want to see what the same store revenues are, things like that. I mean it’s very high, but to really quantify that and Progressive is very, very tough especially that they’re growing so fast. And the retailers always adding new retailers all the time and you have existing retailers that are doing a lot more business with than they were two quarters, so it’s tough, that’s not a good answer, I know, but it is tough to come up with some statistics on.

[Gilbert L. Danielson:]

Whenever, we have Budd is – we look at it in bunch of ways, but about 35% of our invoice volume in the third quarter came from merchants that did at least one deal in the quarter, but not in the third quarter of 2013. So I don’t know if that helps. But then I think last call, we talked about the fact that most of the volume we generate in a quarter – in a month or quarter, it comes from retailers that we are – that are existing before that quarter started. I mean you don’t get – typically, even if you add merchants, you don’t get a big pop from them right out of the gate typically. So it’s like 80% to 90% of our revenue or our invoice is generated by existing merchants. But we’re still seeing a strong pipeline as I said and we’re still working hard to build that pipeline. We’re talking to some outstanding retailers, so we’re very encouraged about our growth prospects and as far as we can see right now.

[Steven A. Michaels:]

We’re actually use to that with rent to own and then we see stores mature in the second year and they do much more volume than they do in the first because we start from a zero. So I mean we understand that kinds of growth and we understand the one deal versus no deals for how that grows. I was just hoping that we can get maybe it’s not today in the future, some quantification of those buckets, since it is such an important way to look at the way you’re growing in gross volume. So I will make that that…

[John Robinson:]

Good point and we’ll work on that that communication in the future.

[Budd Bugatch:]

Okay, John you talked we think a big deal for Progressive over – its future life will be the one application or the consolidated application of the universal application; however, it’s called can you give us an update of where that process or that that project sits?

[John Robinson:]

That’s certainly – if you talk to retailers out there, it’s certainly something that folks want and it makes great sense. And I don’t want to give too much detail, but we’re making great progress to make the process much smoother the point of sale and that’s certainly a major aspect of that. So it’s something that we expect will be an incremental benefit. And that’s one of the examples of that kind of technological improvement is a great example of how you can generate. The industry is just so – I know you can still generate a lot of same store growth with things like that just by capturing more customers would have traditionally fallen out of the process so we're working hard on that to make it bigger difference for our retail partners, but yeah that’s a – that is something that’s definitely important part of the future, I think for retailers and for Progressive.

[Budd Bugatch:]

So, have any of the retailers gotten there or do we have any retailers that have a universal application and the – what’s a timeframe for maybe the first major retailer to Progressive now.

[Steven A. Michaels:]

Budd, it’s still in the test stage, I mean, that there is bits and pieces here and there, but we are still working on it and since we have some significant progress report, we’ll make sure, we do.

[Budd Bugatch:]

Okay. What was Progressive’s gross margin in the quarter, I don’t think I saw it in the release, I may have missed it?

[Gilbert L. Danielson:]

As you know Progressive had a $190 million of revenue in the quarter, and then on a pre-tax basis, obviously that has a small profit on.

[Budd Bugatch:]

I got that, I was trying to get inside of the – the income statement and see what some of the parts were.

[Gilbert L. Danielson:]

The depreciation is about $110 million for the quarter.

[Budd Bugatch:]

That’s the depreciation of merchandise.

[Gilbert L. Danielson:]

That’s right and then the interest – I think the interest is probably on is about $5.2 million and then the rest is the operating expense.

[Budd Bugatch:]

Got you, okay. That’s helpful. Thank you very much, and my guess, my last question is, do you have the title of Interim CEO and was emphasized I think there is a call began, what’s the process, where are we in that process of searching for a CEO over the longer term.

[Steven A. Michaels:]

The process still continues and it will goes on and we don’t have any information report on that and the – but certainly we have to know we have engaged a search form to search for both external and internal candidates and I don’t know have any information on that, but obviously sometime soon.

[Budd Bugatch:]

Well, I got you, that's what I was trying to get at is soon end of the year first quarter, second quarter of 2015, what – how does soon look to the Board I’d assume, look to the Board or to you?

[Steven A. Michaels:]

As I get older I don’t know – but I think it will be, I don’t know, I really couldn’t speculate on that, but I don’t know, we just don’t know.

[Budd Bugatch:]

Okay. Thank you very much. Good luck on the rest of the year.

[Operator:]

(Operator Instructions) The next question comes from the line of John Rowan with Sidoti & Company. Please proceed.

[John J. Rowan:]

Good morning, guys. This is John.

[Gilbert L. Danielson:]

Hi, John.

[John J. Rowan:]

Just two quick questions, how much stores are you actually accepting return merchandise from progressive in.

[Gilbert L. Danielson:]

We’re just testing that as John noted and we’re testing it in two or three major metropolitan markets at the moment.

[John J. Rowan:]

Okay.

[Gilbert L. Danielson:]

And so it’s not a large sample. It's just some stores in some markets.

[John J. Rowan:]

Okay. And then just last question are you guys talked about the bad debt expense in Progressive, but I was wondering how that’s trending in the core business.

[Gilbert L. Danielson:]

Yeah, we look at it as write-off as you know and believe the write-offs for the quarter were about 4.1% of growth revenues which – it’s higher typically it’s in the 3%. So write-off's been higher this year in those regions.

[John J. Rowan:]

Okay. Thank you very much.

[Gilbert L. Danielson:]

Okay. Thanks.

[Operator:]

The next question comes from the line of Rob Straus with Gilford Securities. Please proceed.

[Robert Straus:]

Hi, guys just one question for John. You’ve talked about the technology advancement and your focus on revenue expansion while holding margins for that business. If I heard you correctly I think you had alluded to perhaps trying to gain more of those sales at the POS. In other words not losing in many, can you add any color to the percent of customers you think you’re losing or not executing on at the POS level?

[John Robinson:]

Yes, that’s a great question. The problem for us is if we don’t see them then the retailer would have better information on that and we would – we just – if we don’t see and we just don’t know they were up are there. So we’re early in that process. We think it’s a – we pride ourselves that our process is easy and that people haven’t fallen out. But I think the reality of it is – it’s a number – we kind of think about it if we represent 6% to 8% incremental for retailers that we think we can get that number to 10% or higher if that process – if you reduce that fall out in the process that’s kind of the way we think about it but I don’t have any more specific data than that. But it’s an excellent question that we’d all like to know because that is obviously that’s the ROI for us on this work so – but I just anecdotally we feel like its meaningful they really do.

[Robert Straus:]

Thank you very much. Good luck.

[Operator:]

There are currently no further questions coming from the phone lines.

[Gilbert L. Danielson:]

Well. We’d like to thank everyone again for joining us today. We have certainly made significant progress towards getting Aaron’s back on track. And position for future success. We look forward to updating you on the additional progress on all our initiatives next quarter. Thank you very much.