The Aaron's Company, Inc.
Q1 2015 Earnings Call Transcript

Published: 24 Apr 2015

[Operator:]

Good morning. Welcome to the Aaron's, Inc. First Quarter 2015 Earnings Conference Call. All lines will be muted during the presentation portions of the call with an opportunity for questions-and-answers at the end. Participating this morning are John Robinson, Aaron's CEO; Gil Danielson, Aaron's CFO; Steve Michaels, Aaron's President; and Ryan Woodley, CEO of Progressive Leasing. At this time, I'd like to introduce Garet Hayes, who supports the Investor Relations for the company to begin the call. You may proceed.

[Garet Hayes:]

Thank you, and good morning, everyone. Welcome to our conference call to discuss the Aaron's first quarter result issued today. All related materials 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 presented in Aaron's forward-looking statements. These factors include matters such as changes in general economic conditions, competition, pricing, customer demand, legal and regulatory proceedings, customer privacy and informational security, risks related 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 statement disclaimer in 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 Aaron's CEO, John Robinson. John?

[John W. Robinson:]

Thank you, Garet. Good morning, everyone. Thanks for joining us today. I appreciate the opportunity to speak with you. I'm pleased to report solid first quarter 2015 results. Consolidated revenue increased 40% and net earnings and diluted earnings per share were up 28%. On a non-GAAP basis, net earnings and EPS were up 38%. Importantly, on a consolidated basis, excluding customers of our franchisees, our customer count was also up 38% to $1.5 million. I'm especially pleased with the contributions of our business segment. The core business achieved a slight improvement in EBITDA margin, despite a 2.6% decline in revenue. Inventory and pricing initiatives are gaining traction in addition to the cost reductions we have previously outlined. Progressive delivered another outstanding quarter. Our virtual lease-to-own segment continues to deliver solid profitability from an expanding base. Continued rapid growth of Progressive was underpinned by stable lease portfolio performance and profitability in this segment exceeded our expectations. We ended the quarter with $130 million in cash and no outstanding borrowings under our $225 million revolving credit facility. We intend to use this capital and free cash flow generated by the business to pay anticipated income tax payments during the remainder of the year and fund future growth. Based upon the strong quarter, we are raising our outlook for the year. This reflects stronger trends in Progressive and assumes the core business remains on track with our original guidance. Aaron's acquired Progressive Leasing a year ago this month to transform the company into an omni-channel lease purchase provider. While we've made good progress over the past 12 months, we still have work to do to realize our vision. The initiatives to improve our core business are crucial, because stores both company and franchise are central to Aaron's future. Our progress on reducing inventory and costs benefited our margins in the quarter. Looking to the rest of 2015, these initiatives as well as the introduction of smartphones and price increases remain big opportunity to drive revenue and profit. We also see e-commerce as a significant and exciting opportunity. We have approximately 20 million unique visits annually to aarons.com and those shoppers now have the ability to lease online. So we're very bullish on our prospects to acquire new customers through this channel. Progressive has been growing at an exceptional rate, importantly it's growing profitably. We'll continue to invest in people and infrastructure to support new and existing retail partners and in technology training and merchants support to drive higher productivity per door. We're also looking for ways to make the Progressive solution available to more customers, leveraging the Aaron's network, we are well positioned to serve our large addressable market. As we celebrate Aaron's 60th year in business, we will continue to innovate to maintain our industry-leading position. While we continue to evolve, our philosophy remains the same. At our core, are three key principles

[Steven A. Michaels:]

Thank you, John. I'm pleased to say that for the first time in seven quarters, the core business achieved an increase in earnings versus the prior year period. Although the revenues of the business continue to be challenged, we are cautiously optimistic, and feel good about our outlook for 2015. The cost cutting and efficiency efforts we have outlined previously have begun to produce results and we are confident in our ability to execute the revenue generating initiatives more recently launched. The core business generated $75.3 million in EBITDA, which represented 20 basis point margin improvement from the first quarter of last year. There are a couple of important call-outs here. Gross profit improved, as we managed our inventory lower and as the July 2014 price increases began to work through the system. At the same time, our cost initiatives are continuing to take hold. We were able to leverage operating expenses in the quarter and feel we are on track to meet our cost reduction goals for the year. Write-offs as a percentage of store revenues were 3%, which was flat versus the year ago period. This compares favorably to the 30 basis point year-over-year increase we experienced last quarter. Subsequent to March 31, we began the previously announced process of further optimizing our store base. During the remainder of the year, we expect to merge, sell, or re-franchise approximately 50 of our company-operated stores. We expect the majority of the company-operated store consolidations will be completed by the end of the second quarter. We're also excited to launch some initiatives that have meaningful potential to drive revenues and profit. Among these is the promotion of our e-commerce capabilities. We're currently able to transact online in approximately 70% of Aaron's existing markets and we're ahead of our original plans to be chain wide by this fall. We continue to be encouraged by the fact that over 70% of our online transactions are with people who have never done business with Aaron's before. We are planning a June event that will highlight our online capabilities, and we expect this promotion will help drive awareness and extend our customer reach even further. We're the only lease purchase company that can offer frictionless online processing, delivery and installation, complemented by an extensive store network, providing exceptional service to our customers. We're also looking forward to our smartphone launch. We have just over 100 stores in a pilot with T-Mobile. We'll continue to assess the results across the second quarter as we gear up for a full rollout in the fall. Turning to marketing. As John mentioned, it's our 60th anniversary. We celebrated that with the 60-day event in February and March that generated strong delivery activity and exceeded our expectations. We have filled the balance of the year's promotional calendar with additional events that we believe will continue to drive demand. Overall, our plan is taking hold and we're encouraged, though we're obviously not satisfied. Our efforts to streamline the business are on track. At the same time, pricing, e-commerce and smartphones have yet to fully kick in. So we feel good about where we are. I'll turn it over to Ryan for a rundown on Progressive. Ryan?

[Ryan Woodley:]

Thanks, Steve. During the first quarter, Progressive generated revenues of $251.6 million, up 85% over the year ago quarter. Growth continues to come from a diverse and broadening base. We partner with market-leading retailers to help them to grow their businesses, and that played out across organization in the first quarter. Our business with merchant partners across small, medium and large retailers, all grew at double-digit rates in the quarter. Looking at the key components of revenue growth, first quarter invoice volume was $198.4 million, up 62% from the first quarter of 2014. As we've stated, invoice volume is a dollar value of merchandise that we purchased from retailers and subsequently leased to consumers – to customers. Invoice volume is the best indicator of future revenue. Active doors, those with at least one Progressive transaction during the period, increased 17% in the quarter to 11,861. Average invoice volume per active door rose 39% over the same period last year to 16,727. The growth in volume per active door reflects strong production from new doors in addition to improving productivity in existing doors, as we continue to refine our training, product, and process. First quarter EBITDA was $28.3 million, a 112% increase from the first quarter last year. The healthy increase in EBITDA growth over revenue growth was driven by a mix of gross margin expansion and leverage on our operating expenses. Importantly, we're achieving strong rates of growth while maintaining consistent lease portfolio performance. Write-offs were 6.4% of revenues in Q1, a slight improvement over last year's 6.5%. As John mentioned, Progressive is leveraging Aaron's store footprint to improve our product service and recovery process. We now have 17 customer service hubs located in markets where we have large numbers of accounts. The hubs, which are staging facilities run by Progressive associates, enable us to pick up merchandise from customers and redistribute it, a capability we didn't have before the Aaron's acquisition. Although still in the infancy stage, we're very optimistic about the early results of the hub program and its potential benefits. We continue to see a robust pipeline for new retail partners and we'll continue to invest in the infrastructure we need to support that growth. The market is competitive as always, but we're achieving strong growth with discipline, and we believe we're the best choice to help our retail partners grow their businesses. I'll now turn it over to Gil, who'll give a more detailed overview of the combined financial results. Gil?

[Gilbert L. Danielson:]

Thanks, Ryan. Revenues for the first quarter were $821.8 million, up 40% over the same period a year ago. This increase is due to the inclusion in 2015 of revenues attributed to Progressive's operations. The company acquired Progressive in April of last year and its results were not included in our first quarter of 2014. Net earnings for the first quarter were up 28% to $49.2 million versus $38.3 million a year ago. Net earnings for the first quarter on a non-GAAP basis, which excludes amortization expense related to the Progressive acquisition, were $53.4 million compared to $38.3 million for the same period in 2014, a 38% increase. Earnings per share assuming dilution were, on a non-GAAP basis, $0.73 compared to $0.53 a year ago, also up 38%. EBITDA for the company was $103.7 million for the first quarter of this year, compared to $76.3 million for the same period last year. The increase in EBITDA is due to Progressive's EBITDA included in the company's results in the first quarter of this year. At the end of the first quarter, the company had $129.8 million of cash on hand, compared to $3.5 million of cash at the end of 2014. Cash generated in the quarter was a result of cash flow from operations, as well as a large $100 million tax refund we received in January. Our total debt during the quarter was reduced by $85.4 million. And at the end of March, we had no outstanding debt under our $225 million revolving credit facility. Aaron's Sales & Lease Ownership revenues declined 2% from the first quarter a year ago and HomeSmart revenues declined 3%. EBITDA for these core businesses was $75.4 million for the quarter compared to $76.3 million last year and, as a percentage of total revenues, was 13.2% compared to 13% for the same quarter a year ago. Even though we are continuing to experience revenue declines in the Aaron's and HomeSmart stores, we are effectively managing inventory and reducing operating costs, which is resulting in positive cash flow generation and stable EBITDA levels. Same-store revenues in the first quarter for company-operated stores in the core business decreased 3.8% compared to the same period last year, and customer counts on a same-store basis for company-operated stores were down 4.2%. Aaron's franchisees collectively had revenues of $260.8 million in the first quarter, down 3.9% from the same period a year ago. Same-store revenues for franchised stores decreased 3% and customer counts were down 3.9% in the first quarter compared to last year. Revenues and customers of franchisees, however, are not revenues and customers of Aaron's, Inc. Write-offs for damaged, lost, and unsaleable merchandise were 3% of revenues in both periods. Company-operated Aaron's stores had 1,047,000 customers and franchised stores had 576,000 customers at the end of the first quarter, a 3% decline from the end of March last year. Progressive exceeded our expectations in the first quarter with revenues of $251.6 million and EBITDA of $28.3 million. EBITDA, as a percentage of revenues, was 11.2%. It was higher than expected, due to higher revenues than expected and a mix of gross margin expansion and leverage on operating expenses. As Ryan mentioned, write-offs for damaged, lost and unsaleable merchandise were 6.4% of revenues. Progressive also had 453,000 customers at the end of March. We are increasing our previously announced full year 2015 guidance to reflect Progressive's strong results in the quarter. No changes are being made in the guidance for the core business. For Progressive, we now expect lease revenues for 2015 to be in the range of $1.05 billion to $1.15 billion, and EBITDA in the range of $105 million to $115 million. On a consolidated basis, we now expect revenues in the range of $3.1 billion to $3.3 billion, and EBITDA in the range of $305 million to $335 million. We are also increasing GAAP net diluted earnings per share guidance to a range of $1.78 to $1.98 for the year and, on a non-GAAP diluted basis, earnings per share in the range of $2.01 to $2.21. EPS guidance does not assume any significant repurchases of the company's stock or the potential impact of any significant costs associated with store closures. These are the financial highlights for the quarter. I will now turn it back over to John.

[John W. Robinson:]

Thank you, Gil. So overall, we're pleased with the quarter. Having said that, we have work to do. In the core business, we need to get revenue growing again and continue to maintain our focus on reducing costs. As the retail environment changes, operational execution becomes even more important. So we need to get better at running our company-operated stores, as well as supporting our franchise partners. At Progressive, we must continue to provide outstanding service for existing retailers, build relationships with new retailers, maintain our decisioning discipline, and continue to innovate our product and process. The opportunity in front of us is big, but we have to get better every day to capitalize on it. Lastly, I'd like to thank all of our associates in the Aaron's family. The best part of my new job has been getting to know many of the outstanding people of this great company. While the task ahead is difficult, I have great confidence in what we can accomplish together. Thank you for all of your efforts to make Aaron's such a success. With that, I will turn it over to your questions.

[Operator:]

Certainly. Our first question comes from David Magee with SunTrust. Please proceed.

[David G. Magee:]

Yeah. Hi. Thank you and congratulations on a terrific quarter.

[Gilbert L. Danielson:]

Thanks, David.

[Ryan Woodley:]

Thank you.

[John W. Robinson:]

Thank you.

[David G. Magee:]

John, are you changing your thinking with regard to the virtual RTO sector size and growth rate for the next several years based on the success you've seen over the past year?

[John W. Robinson:]

Well, I think we've been – David, I think we've been pretty consistent in saying that we think it's a large market, kind of in excess of $20 billion. So, we think that is still a significantly larger number than the market that's being served today. So, I think that's consistent with where we've been. And I think in terms of our – the pipeline that we have visibility into remains strong. So, overall, I think we are where we are – where we've been in terms of thinking it as a fantastic opportunity and a lot of it comes down to our ability to execute with – continue to improve our relationship with our existing retailers and sign up new retailers. So, I think we're pretty much where we've been on that and feel really good about it.

[David G. Magee:]

Yeah. Some of the big industry sectors in electronics with TVs and appliances have been sort of soft this year. Does that help your business do you think or is your business sort of impervious to that right now?

[John W. Robinson:]

No. I wouldn't say we're impervious. I don't think it helps us either. I mean, I think we benefit from a better retail environment. The reality of it is I think we've been masking more macro trends with our ability to get better at what we do. I think our products and process has gotten much better inside of our existing retail doors and our training and our merchant support. And so that's helped us mask some of the fluctuations you might see at a macro level. And so, I think that's the reality of what kind of – what we see. It's kind of – we feel like it's on us right now more than macro trends.

[David G. Magee:]

Thanks, John. And just lastly the – did you give a depreciation number for Progressive? Maybe I missed it.

[Ryan Woodley:]

We did not, David. This is Ryan. But it's in line with the guidance that we had previously provided.

[David G. Magee:]

Okay, great. Thanks. Thanks, Ryan.

[Operator:]

Our next question comes from John Baugh with Stifel. Please proceed.

[John A. Baugh:]

Thank you and terrific results as well. I wanted to focus on corporate and franchise customer count, by my calculation that was a reversal of a negative trend of 11th consecutive quarters in the core business. Can you go into – do you think that's macro? Do you think that's something you've done with advertising? And then, maybe discuss as well, how the tax season went, early payout options, et cetera?

[Steven A. Michaels:]

Hey, John. This is Steve. I'm not sure the customer counts in both corporate and franchise stores were still down in the quarter, sequentially.

[John A. Baugh:]

That's correct, but they were down last and the prior quarter and that's the first trend reversal in the 11 quarters?

[Steven A. Michaels:]

Right. Right. So I mean we had a lot of early payout activity in the first quarter, although a little bit less than the previous year's quarter as a percentage of the customer base in both corporate and franchise. So we were – while we lost customers, we're pleased with those results. We have work to do as John mentioned. But certainly the 60th anniversary promotion that were on TV and had some compelling offers helped, but we're still seeing a challenging cautious customer that we're having to work hard to try and get them to re-up, if you will, or convert – or payout conversion as we refer to it, when they do come in and do that early payout, so it's a constant challenge.

[John A. Baugh:]

And if it relates to the 50 odd stores – and I don't know whether this is for John or Steve, but is that a part of all the original cost saves that you've been talking about in terms of calendar 2015? Or is that maybe now incremental?

[Gilbert L. Danielson:]

Originally, we – in our first cost – when we announced our cost reduction, we did assume we were going to close some stores in 2014, which we did. This next round here of closings and mergings and consolidating is on top of that. So that will be some more cost we'll be taking out of the system here in 2015. I think to keep in perspective, we – a year ago, we decided that we're going to take $50 million of cost out of our run rate at the second quarter of 2014, and we're certainly on track to do that. We have done a few things, obviously that we weren't planning to do back in 2014, including the store consolidation, but I think in the end, it still will be pretty well on track with overall growth of $50 million, John.

[John A. Baugh:]

Okay. And my last question, I'll defer to others. How do we think about debt reduction for the year particularly with the tax cash payments? And I have no sense of the timing of what happened in the first quarter which you had obviously a great first quarter debt reduction number.

[Gilbert L. Danielson:]

Yes. What was the question, John? The...

[John A. Baugh:]

So, when we get to the end of the year of – I think you mentioned you paid down $85 million of debt in the first quarter. But, now we've got – I don't where cash tax has come, I'm just curious where we move in the latter nine months of the year.

[Gilbert L. Danielson:]

Yeah. We have about $180 million, maybe a little more cash taxes to pay, basically starting in June. It's our estimate for the rest of the year. We really haven't paid any cash taxes so far in the first quarter and so far today. So that will definitely take some of the cash that we have on our balance sheet and go to the government. I do believe though that by the end of this year, we will still at the end of year probably not have any drawings under our revolving credit facility. We may have some, but I think it'll be small. I think we will pretty much be cash flow neutral or maybe a little bit positive from operations the rest of the year, but we'll have to use our cash to pay the taxes that we have looming. So that's kind of in a summary.

[John A. Baugh:]

Great. Thank you. Good luck.

[Operator:]

Thank you, Mr. Baugh. Our next question comes from Brad Thomas with KeyBanc Capital Markets. Please proceed.

[Bradley B. Thomas:]

Yeah. Hi, good morning and let me add my congratulations as well. I wanted to first ask about the Progressive side. And just, with respect to the change in guidance on EBITDA, I was wondering how much of that is a function of the revenues coming in better than expected versus some of the efficiency. And just general operating improvement initiatives that you've had in place within Progressive?

[Ryan Woodley:]

Yeah, Brad this is Ryan. Good question. So it comes from a function of several of those factors. Obviously, we did well on revenue a bit north of our expectations. And then, in terms of the margin influence, it's roughly split from a combination of our performance at the gross profit level as well as leverage on operating expenses. And operating expenses, as you know the business is seasonal. We tend to see a payment lifter in tax season. But we also saw efficiency improvements in operations, for example, that were a bit ahead of schedule. And we're really starting to see the benefit of things like the sales infrastructure we built out last year, which leaves us very confident in the margin guidance that we've given.

[Bradley B. Thomas:]

Great. And as – I know you aren't giving quarterly guidance specifically, but as we think about 2Q from a seasonal standpoint for Progressive, is it similar to what we tend to see with Aaron's where the sales for the quarter could be lower in 2Q than what you get in dollars in 1Q?

[Ryan Woodley:]

We haven't – as you said, Brad, we've decided not to give guidance, but we feel pretty confident about how we're lined up for the revised annual guidance that we provided.

[Bradley B. Thomas:]

Great. And then, John, if I could just follow up on a comment that you made earlier, I think in answering one of the other questions, you were saying that perhaps the success of Progressive maybe masking some underlying macro trends, I mean, I guess, if I could just follow up, what do you think the underlying macro trends have been for the Progressive business?

[John W. Robinson:]

Yeah. I guess, what my point on that is, is we haven't focused on that as much as we've focused on improvements that we know need to be made to our system or to our process or to our training. And so honestly, we're much more focused on those things than kind of what's going on more broadly in the environment. We certainly have a lot of retail partners and anecdotally get feedback from them. But for us, we feel like we're still at a point in the growth cycle of this company that we can continue to mask that as we get our – as we make our product better and more efficient. So I'm sure it has an effect. I just honestly can't tell you that we spend much time focusing on that right now.

[Bradley B. Thomas:]

Got you. Great. Well, thanks and keep up the great work.

[Steven A. Michaels:]

Thank you.

[John W. Robinson:]

Thank you.

[Operator:]

Thank you, Mr. Thomas. Our next question comes from J. R. Bizzell with Stephens, Inc. Please proceed.

[J. R. Bizzell:]

Yeah. Good morning, guys, impressive quarter and thanks for taking my questions. John...

[John W. Robinson:]

Thank you.

[J. R. Bizzell:]

...you brought up aarons.com earlier, and I think it's something that we're interested in hearing. And I'm wondering if you could just give us an update, I know you said it's fully rolled out. Where are you in the innings? I know, it's still very early, kind of what's the data you're seeing from it on the customer, the demographic, the times of day, is it something that I'm sure you're pretty excited about driving traffic into the store?

[John W. Robinson:]

Well, absolutely, J. R. Thank you. And Steve Michaels, our President has been leading that charge, so I'll let him address the specifics. But overall, you're right, we're very excited about it, and continue to kind of to be most surprised for the fact that we're attracting largely new customers to our system, which is very exciting. But I'll let Steve comment more specifically.

[Steven A. Michaels:]

Yeah. Thanks, John. And, J. R., one clarification. We're not fully rolled out. We are fully transactional online, but we are in approximately 70%. We reached approximately 70% of the markets where we have stores. And we're working every day to improve that reach and we'll – are ahead of the plans to be there before really at the end of the summer and fall timeframe. So – but, we're having great success and very encouraged by the results. We have work to do on the customer experience, but we're happy with the mix of products. It's very similar to the mix of product that we lease in our stores with fully 40% being from furniture. As John mentioned, the reach to new customers that have never done business with Aaron's before is an exciting statistic and we look to leverage that further. As you mentioned specifically hours, and that's another great aspect of aarons.com being opened 24/7, approaching just between 40% and 50% of the transactions are actually completed when our stores are closed. So, our general managers in our stores and our associates in our stores are very excited about this new channel that's driving customers and business into their stores, and we couldn't be more excited about it. We haven't really even told anybody that we are doing it, when I say anybody, meaning the consuming public. And that's why we're excited about the June promotion where we're going to actually promote our online capabilities and think that can ramp it even further.

[J. R. Bizzell:]

Steve, thanks for the detail. And kind of building on that, since you're not rolling out any kind of advertisement around until June, I'm guessing either you or Gil can answer, if at all, if any of the revenue, probably doesn't assume any e-commerce at this point, and that could be more of a FY 2016 revenue event?

[Steven A. Michaels:]

That's right. We do have a small amount, but nothing material in this really the second half of 2015 as we continue to build the program. It's a second half fourth quarter, but mostly a 2016 story.

[J. R. Bizzell:]

Right. And then lastly on this, I'm beating a dead horse. But, given that you're using Progressive's model to kind of help build out this model and thinking about kind of Progressive's stability around credit and that customer performing well. Could you kind of give us an idea of the approval rates that you're seeing on aarons.com, versus the brick-and-mortar versus Progressive? Is the e-commerce skewing more towards the Progressive approval? Or is it skewing more towards the brick-and-mortar, could you kind of fill us in on that?

[Steven A. Michaels:]

Yeah. So I mean, so we're leveraging the Progressive technology certainly, which was a huge win from the acquisition. We're always looking for a way to say yes at Aaron's and so, we're figuring out ways to talk to customers through chat, and on the phone if not a frictionless transaction. We're not really getting into approval rates, but we're seeing a very – we're seeing a good customer that to-date is actually performing very well, is slightly better than what we see in our stores, and so, we have the ability to continue to tweak and adjust that decisioning tool just like Progressive does and their merchants. But we're pleased with the results and the performance of those customers to date.

[J. R. Bizzell:]

Thanks for taking my questions and again impressive quarter.

[Steven A. Michaels:]

Thank you.

[John W. Robinson:]

Thanks, J. R.

[Operator:]

Thank you, Mr. Bizzell. Our next question comes from Budd Bugatch with Raymond James. Please proceed.

[Beryl Bugatch:]

Thank you, and add my congratulations. And thank you for taking my questions. I guess, I've got a couple of modeling questions. First, if you've given it and I didn't hear it, I apologize. Can you give us the cost of lease revenues for Progressive?

[Ryan Woodley:]

This is Ryan. We did not provide those. We just said that it's in line with the guidance that we previously provided, which I think was the 37% to 39%.

[Steven A. Michaels:]

And Budd, the depreciation for Progressive was inside the range of our guidance was 61% to 63% of revenues. So, depreciation was in that range and then the gross profit margin as Ryan said was in the range of 37%, 39%.

[Beryl Bugatch:]

When we'll get that on the Q then, Gil was that correct?

[Gilbert L. Danielson:]

May not get that granular on the Q, but you'll get the information on the revenues and the pre-tax profit of the segment on the Q. And I think the pre-tax profit on a GAAP basis was around $15 million for the quarter.

[Beryl Bugatch:]

Okay. The 17 service centers that you've added to the – that you've installed or for pickup merchandise, how has that impacted gross margins? Can you quantify that at all on Progressive?

[Ryan Woodley:]

Good question, Budd. So we're excited about those hubs, they are all operational at the end of Q1, and it's obviously still early, but the early results are positive. So we'll keep you posted as the work in the hubs progresses, but it's looking good so far.

[Beryl Bugatch:]

I keep putting positive into that calculator and I keep getting ERR. I can't quite understand why. If they were negative, I wouldn't think you would do it. So is there any way to get a positive quantification?

[Ryan Woodley:]

An alphanumeric calculator.

[Gilbert L. Danielson:]

I think we can say it's not material at this point, Budd, (35

[Beryl Bugatch:]

And how many service centers do you think you will have ultimately or how many by the end of the year?

[Ryan Woodley:]

Yeah. Good question. So we feel 17 is the right number for now, but we're constantly evaluating that. And in our sort of calculator, it's a function of the performance that we see come out of the 17, so that's a bit dynamic.

[Beryl Bugatch:]

And ultimately, what would cover the country or cover the Aaron's if you did?

[Ryan Woodley:]

We haven't put a number to it.

[Beryl Bugatch:]

Okay. Let me try some other numbers. Early payouts versus last year, can we quantify maybe how that impacted revenues and earnings?

[Gilbert L. Danielson:]

I don't know. Early payouts were down a little bit from last year.

[Steven A. Michaels:]

For the core business, they were down.

[Gilbert L. Danielson:]

Core business, yeah.

[Beryl Bugatch:]

Okay.

[Gilbert L. Danielson:]

Next question?

[Beryl Bugatch:]

And so that would help then ultimately gross margin going forward, right?

[Gilbert L. Danielson:]

I mean, are you just modeling one quarter to the next quarter?

[Beryl Bugatch:]

Yeah.

[Gilbert L. Danielson:]

I mean, the core business is – margin is depressed a little bit in the first quarter, but if revenues are much higher because of the early payouts, but maybe it's a slight positive there, but I wouldn't say it's a huge thing.

[Beryl Bugatch:]

Okay. And how about cash flow? I don't think we got any cash flow details, cash flow from operations. So can you give us what that might have been?

[Gilbert L. Danielson:]

Yeah. You'll see the cash flow statement in the Q. But cash provided from operating activities were about $170 million for the quarter.

[Beryl Bugatch:]

Okay. And CapEx?

[Gilbert L. Danielson:]

Very small. Less than $10 million.

[Beryl Bugatch:]

Okay. Great. And when will the Q be out, Gil?

[Gilbert L. Danielson:]

Well, it's required to be out pretty soon. But it'll be around probably May 5, May 6, somewhere in the mid week in that week.

[Beryl Bugatch:]

Okay. Great. Congratulations, again. Good luck on the balance of the year.

[Gilbert L. Danielson:]

Thank you.

[Ryan Woodley:]

Thanks, Budd.

[Operator:]

Thank you, Mr. Bugatch. Our next question comes from Matt McCall with BB&T Capital Markets. Please proceed.

[Matthew S. McCall:]

Thanks. Good morning, everybody.

[Gilbert L. Danielson:]

Good morning.

[Matthew S. McCall:]

So, back to the Progressive guidance, and maybe it's for you, Ryan. Can you talk about the active door assumption, the invoice volume per active door assumption, and the way we should look at the trends there, and what's in the guidance for this year?

[Ryan Woodley:]

So a good question. We're obviously proud of the fact that we saw a good strong growth in both those metrics, and we continue to anticipate given the trends we're seeing coming out of Q1 that that will continue throughout the rest of the year. We haven't provided guidance and aren't providing guidance on the growth rates for the active door count and the invoice per active door. But what we are investing a lot and is ensuring that we see that production come from both new and existing doors and that came through in Q1 and we're investing and making sure that happens in Q2 through Q4.

[Matthew S. McCall:]

Okay. All right. So anything with the trends you just reported that we should keep in mind that would not allow them to continue, whether it'd be invoice volume, active doors, invoice volume per door?

[Ryan Woodley:]

No, we expect to see good growth in both those metrics, and that's up to us to execute on that.

[Matthew S. McCall:]

Okay. That's fair. And then on the – if I look at the EBITDA guidance, it looks like the projected EBITDA margin is up about 50 bps. And I think you said it's kind of a combination of growth and the leverage on growth and the gross margin, but can you talk specifically about the gross margin? I think Gil just provided 37% – or you said it's in that range of 37% to 39%, Ryan. What's the assumption for the year and maybe what's the assumption for loss rates?

[Ryan Woodley:]

We feel like the 37% to 39% is still a good number for the year. Obviously, as you know, there is some seasonality to the business with the early buyouts in Q1. So in terms of how we see the dynamics in the business shaping up. We've seen a bit of – to Budd's questions, a favorable shift in the mix of lease disposition versus the prior year and results have seen a slight shift in mix toward a bit higher pricing. So those have both given us a bit of gross margin left in the business. Those I anticipate continue to benefit us throughout the year.

[Matthew S. McCall:]

Okay. I know we've heard some comments in the industry about the gross margin pressure from the 90-day cash option, is any of which you just said tied to better pricing, as it relates to that specific product?

[John W. Robinson:]

I'll comment on that. This is John. I mean, one thing to know about Progressive is the 90-day option has been part of our program in all of our retailers from the beginning, so the founders of Progressive that was really part of their kind of DNA of the product. So from our perspective that number had it moved around a lot. As Ryan said, I think we saw some slightly different tax season this year. So, we will benefit from that, but that's not something that you'll see a big change in our business.

[Matthew S. McCall:]

A big change from a pricing perspective...

[John W. Robinson:]

90-day, you weren't going to see a big shift in that as a percentage. In terms of disposition, that won't change drastically for us throughout the year relative to other years.

[Matthew S. McCall:]

And you are pleased, John where the margins are for that part of your business?

[John W. Robinson:]

Sure. I mean, we are happy that they're stable to up and we just – we think they are in a good range right now and we always are trying to figure out ways to make them better, but from a guidance perspective, I think we feel good about our guidance.

[Matthew S. McCall:]

Okay. Okay, perfect. And then, Steve, one for you, I think you say e-commerce is really a 2016 story, the other two that you mentioned they weren't fully kicked in, were pricing in smartphones, can you talk about what's assumed in the 2015 guidance and then what could be the full incremental benefit from all three of those as you move out to 2016?

[John W. Robinson:]

Yeah. So, smartphones is also not – it is slightly in some fourth quarter numbers, but it's not a material impact on the fourth quarter because of the really the fall rollout. And pricing, we've talked about – we had a small round in the summer of last year that has started to work through the portfolio, the lease portfolio and a more recent round that is very early. I think we said that it is a 40-ish basis point improvement in the gross profit is what we anticipate for 2015 from a pricing standpoint and we are not really commenting on 2016 at this point as far as really any of the initiatives.

[Matthew S. McCall:]

Okay. Okay. And then – final one, T-Mobile – you mentioned T-Mobile, specifically is that your offering, Progressive is going into the T-Mobile stores or T-Mobile products are in your stores?

[John W. Robinson:]

No. So, good question. T-Mobile is who we are in the Aaron's stores partnering with as our prepaid provider.

[Matthew S. McCall:]

In Aaron's stores. Got it. Okay. Thank you.

[Operator:]

Thank you, Mr. McCall. Our next question comes from John Rowan with Sidoti & Co. Please proceed.

[John J. Rowan:]

Good morning.

[John W. Robinson:]

Good morning.

[Gilbert L. Danielson:]

Good morning.

[John J. Rowan:]

Gil, did you say CapEx is $10 million, was that for the quarter or for the year?

[Gilbert L. Danielson:]

For the quarter.

[John J. Rowan:]

I just wanted to drill down a little bit. Obviously, Progressive's revenue is up over 80% per year, but the doors are up 17%. I want to understand why there is so much growth on an active door basis, right. You mentioned these service centers that are picking up merchandise, I'm curious if Progressive has, now that they have Aaron's as a partner, been able to be more aggressive with the customers that they are accepting, how acceptance rates change, in-store, year-over-year. And I just want to understand, if you are taking on a different consumer than you have historically?

[Ryan Woodley:]

Where we found we win with retailers is when we can deliver the highest sustainable approval rate and highest sustainable conversion rate, and we do that by constantly improving our underwriting algorithm, which allows us to buy as deep as possible. We feel we're the market leader in that regard and we've invested a lot in continuing to maintain that edge and that goes to, exactly, I think what your question is, which is for us it's a function of several things, getting smarter in a front-end with underwriting and then getting more efficient on a backend with pickup and recovery. And certainly having 17 hubs out in the field has enabled us to be more efficient than we have been historically, non-recovering – non-performing assets in the field and ultimately what that will help us be able to do for our retailers is save more sales, buy deeper for them, increase their approval rates and do that sustainably better than anybody else, and so that's what we're focused on.

[John J. Rowan:]

So in general the approval rates are increasing within Progressive?

[Ryan Woodley:]

We've seen that we've been able to deliver a slight increase in approval rates for our retailers and obviously, the onus is on the team to make sure that that volume is predictably profitable, which is what they've been able to execute extremely well on.

[John J. Rowan:]

Okay. And then, when you look – when you consider the increased approval rates, has there been any change in the return patterns?

[Ryan Woodley:]

By that do you mean keep rates for the leases or the dispositions?

[John J. Rowan:]

Yes.

[Ryan Woodley:]

I think as we said earlier, we've seen a slightly favorable shift in the mix of lease dispositions toward more full-term payers, which hopefully is a good trend. What we try and do is make sure that the function of all those variables, which is the mix and shift of – or the shift and mix of lease dispositions and pricing and everything yields an improvement in curves year-over-year in the performance of our lease portfolio, which is exactly what we're seeing.

[John J. Rowan:]

Okay. And then just last question. What are the macro trends that you're seeing that are driving the decline in same-store sales within the core business?

[Steven A. Michaels:]

Well, I mean, the macro trends part – this is Steve, by the way, they've been persistent for a long time with the customer under stress and declining disposable income, and the same-store revenue guidance that we put out for 2015 was a function of where the portfolio stood at 12/31 and what our view was on 2015. As you've heard other retailer report, we haven't really seen an uptick in demand related to the lower energy prices yet. We certainly hope that it – as they prove to be more sustainable that that kicks in, but we have not seen that and we're continuing to see a cautious consumer.

[John J. Rowan:]

Okay. Thank you very much.

[Operator:]

Thank you, Mr. Rowan. Our next question is a follow-up question from the line of John Baugh with Stifel. Please proceed.

[John A. Baugh:]

Thank you. I was wondering you mentioned inventory was coming down, I believe in the core Aaron's business, any quantification of that?

[Gilbert L. Danielson:]

Yeah. We'll give a little quantification. If you look at our – inventory has come down about $50 million March-to-March, year-to-year, from where it was March 2014 to where it is in 2015. So, that's part of the big inventory reduction kind of program that we have had going on, having as percentage 14% reduction in inventory in that one-year time period.

[John A. Baugh:]

So that's in the core business, Gil?

[Gilbert L. Danielson:]

That's right.

[John A. Baugh:]

And is that happening at the DC levels, at the store level, any feel for inventories that's "available for rent or not on rent"?

[Gilbert L. Danielson:]

I'll just break down. At the DC, at our fulfillment centers, there's about a $15 million reduction, of that $50 million, that's about 10% or so reduction at the fulfillment centers and then the rest of the reductions at the stores, $33 million, $34 million, up 16%.

[John A. Baugh:]

Okay. Super. And then, on HomeSmart, any comment about how that performed relative to your expectations? It looked like it turned a profit and sort of where we sit with that concept? Thank you.

[Gilbert L. Danielson:]

Yeah. It had a pretty good quarter, actually it was EBITDA positive. I think their pre-tax profit was around $500,000 or so, which is a big turnaround for them. Again, first quarter is good in this business. Past refunds helped their business, too. But even though the revenues have gone down, they've managed their cost very, very well and have improved the profitability. So it's at a point where it's a positive EBITDA business at this point. Again, revenue is not – are declining a little bit along with the core, but it's stable. And I think it will be that way for the rest of the year.

[John W. Robinson:]

Hey, John. This is John Robinson. We look at the business, I mean, not early assessment, but it's a good concept. We've made some good improvement there. We have great people in that business and we're going to continue to refine it. And I think there is a good future for it.

[John A. Baugh:]

Great. Thank you. And then, lastly, I think you took a 5%-ish price increase last summer in the core business and you just mentioned another recent round of price tweaks. Do I have that 5% right and what did you do here recently?

[Gilbert L. Danielson:]

Yeah. Last summer was in the 4% to 5% range based on obviously product mix. This more recent is in the 7% to 8% range.

[John A. Baugh:]

Okay.

[Gilbert L. Danielson:]

And it didn't really kick in until, call it April 1. There was some in March, but more recently – more across the second quarter is when it will really be surfaced.

[John A. Baugh:]

Thank you. Good luck.

[John W. Robinson:]

Thank you.

[Gilbert L. Danielson:]

Thanks, John.

[Operator:]

Thank you, Mr. Baugh. Our next question is a follow-up question from the line of Budd Bugatch with Raymond James. Please proceed. Your line is open, Budd.

[Beryl Bugatch:]

Sorry, can you hearing me now?

[John W. Robinson:]

We can.

[Beryl Bugatch:]

Yeah. Just trying to get some of the numbers to foot on the Progressive side from some of the numbers I think were given in the past and it just – it looks like the cost of operations went down by about $10 million, is that right or am I just – from the fourth quarter or – and if so, how do we think about the SG&A going forward? Have you been able to get that much cost efficiency?

[Gilbert L. Danielson:]

I think, again, Budd, I mean, the gross margins and the depreciation expense for Progressive were in our ranges – our stated ranges of guidance. So I think that – I think I noted their pre-tax profit. So you should have the numbers, you have to kind of work your model up.

[Beryl Bugatch:]

I have. I get – yeah, I've done that, Gil and I am just comparing it against the kind of the fourth quarter and the run rate from at the end of last year, just trying to see how that foots or how that marries going forward?

[Gilbert L. Danielson:]

Well, I don't know, I mean I can't see your spreadsheet here, so why don't you – maybe we just follow-up later off-line.

[Beryl Bugatch:]

Great. Thank you very much.

[Operator:]

Thank you, Mr. Bugatch. And there are no additional questions waiting from the phone lines.

[John W. Robinson:]

Thank you very much for being on the call. We'll talk to you next quarter.

[Operator:]

Ladies and gentlemen, thank you for attending the conference call. This now concludes the conference. Enjoy the rest of your day.