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Edited Transcript of AAN earnings conference call or presentation 14-Feb-19 1:30pm GMT

Q4 2018 Aaron's Inc Earnings Call

ATLANTA Feb 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Aaron's Inc earnings conference call or presentation Thursday, February 14, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas A. Lindsay

Aaron's, Inc. - President of Sales & Lease Ownership

* John W. Robinson

Aaron's, Inc. - President, CEO & Director

* Michael P. Dickerson

Aaron's, Inc. - VP of IR

* Ryan K. Woodley

Aaron's, Inc. - CEO of Progressive Leasing

* Steven A. Michaels

Aaron's, Inc. - CFO & President of Strategic Operations

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Conference Call Participants

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* Alessandra Jimenez

Raymond James & Associates, Inc., Research Division - Research Analyst

* Anthony Chinonye Chukumba

Loop Capital Markets LLC, Research Division - SVP

* Bradley Bingham Thomas

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* John J. Rowan

Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance

* Kyle M. Joseph

Jefferies LLC, Research Division - Equity Analyst

* Vincent Albert Caintic

Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning. My name is Carrie, and I will be your conference coordinator. At this time, I would like to welcome everyone to the Aaron's, Inc. Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I will now turn the call over to Mr. Michael Dickerson, Vice President of Investor Relations for Aaron's, Inc. You may begin your conference.

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Michael P. Dickerson, Aaron's, Inc. - VP of IR [2]

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Thank you, and good morning, everyone. Welcome to the Aaron's, Inc. Fourth Quarter 2018 Earnings Conference Call. Joining me this morning are John Robinson, Aaron's, Inc. President and Chief Executive Officer; Ryan Woodley, Chief Executive Officer of Progressive Leasing; Douglas Lindsay, President of the Aaron's Business; and Steve Michaels, Aaron's, Inc. Chief Financial Officer and President of Strategic Operations.

Many of you have already seen a copy of our earnings release issued this morning. For those of you who have not, it is available on the Investor Relations section of our website at aarons.com.

During this call, certain statements we make will be forward looking. I want to call your attention to our safe harbor provision for forward-looking statements that can be found at the end of our earnings release. The safe harbor provision identifies risks that may cause actual results to differ materially from the content of our forward-looking statements. Also, please see our Form 10-K for the year ended December 31, 2018, and any subsequent filings with the SEC for a description of the risks related to our business that may cause actual results to differ materially from our forward-looking statements. Listeners are cautioned not to place undue emphasis on forward-looking statements, and we undertake no obligation to update any such statements.

On today's call, we will be referring to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, non-GAAP net earnings and non-GAAP EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provide these measures to help investors facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance.

With that, I would now like to turn the call over to John Robinson.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [3]

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Thanks, Mike, and thank you all for joining us today. Continued revenue and earnings growth in the fourth quarter capped off a strong year. Despite many challenges, our team delivered on the outlook we provided in early 2018. I want to thank the associates across all of our businesses for their leadership, hard work and resilience they demonstrated to help the company achieve that accomplishment. Ryan and Douglas will discuss the fourth quarter results for each of their businesses in more detail. But before that, I want to share with you how we're thinking about the direction of the company, both where we've been and where we are going.

Over the last several years, Progressive has performed incredibly well. Progressive's revenue has doubled from $1 billion in 2015 to $2 billion in 2018 while maintaining consistently strong profitability. Along the way, the team has broadened our retail partner network, invested in infrastructure, product and compliance and developed an exciting pipeline of potential new retail partners. I'm incredibly proud of Ryan Woodley and the Progressive team not only for their results but also for how they delivered their results. The most exciting part for me is that there is still tremendous unserved market opportunity. And I believe Progressive is well positioned to continue to profitably grow.

The Aaron's Business has also made significant progress over the past few years on transformational initiatives that we believe will help the business get back to sustainable growth. We've invested in initiatives to improve the customer experience, streamline our operating model and improve compliance. We now have an e-commerce platform that is growing meaningfully over the last few years and is attracting new and younger customers to Aaron's. We invested in analytics to better inform us on merchandising and marketing decisions, which has resulted in higher average tickets and improved lease margins. We've been piloting new store concepts that, thus far, are generating substantial lift in store-level traffic and revenue.

The results we have seen in our business transformation initiatives give us the confidence to continue making strategic investments in the Aaron's Business. The investments we intend to make will be centered around improving our customer experience, operating efficiencies, compliance and employee engagement. We expect these investments will put the Aaron's Business on a path to sustainable long-term growth and revenue and earnings.

I would like to thank the Aaron's Business team led by Douglas Lindsay. The balancing act between maintaining near-term profitability and transforming the business to a new, more attractive omnichannel operating model is complex and difficult. It takes strong leadership and a committed team to execute on both. I'm very proud of the team, and I'm optimistic about the business's prospects as we continue to innovate it.

Our strong earnings and cash flow over the past few years have provided the resources and flexibility to make capital allocation decisions that benefit shareholders both in the short and long term. In 2018, we were able to make significant investments in all of our businesses, acquire franchise stores across a number of attractive markets, return $175 million to shareholders through dividends and buybacks and maintain a leverage ratio of about 1 turn. Our strong balance sheet is a competitive advantage for us. We expect it will provide Progressive the financial capacity to scale with potential pipeline partners, give us the flexibility to continue to innovate the Aaron's Business and explore strategic development opportunities.

Overall, I'm very pleased with the company's performance in 2018 and excited about the opportunities that lie ahead in 2019 and beyond.

I will now turn the call over to Ryan to discuss Progressive's Q4 results and 2019 outlook.

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [4]

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Thanks, John. I'm pleased with the results the Progressive team delivered in the quarter and for all of 2018. We're driving rapid growth while making significant investments in technology and infrastructure to position ourselves to convert and scale our large pipeline of retail partners.

Total revenues rose 22.4% in the quarter as compared to the fourth quarter of 2017 to a record $524 million. EBITDA increased by 31.2% as compared to the same period last year, driven primarily by gross margin improvement and operating expense leverage. The strong revenue performance was driven by a 14.1% increase in invoice volume in the quarter, resulting from an 11.6% increase in invoice per active door and a 2.2% increase in the number of active doors.

In terms of notable changes to the door count from prior periods, the number of active doors in our Mattress vertical is down over 100 locations due in part to store consolidations occurring in the industry. We expect some additional reductions to our Mattress door count in the first quarter of 2019 due to the timing of closures during the fourth quarter. In spite of these reductions in door count, we experienced invoice growth in our Mattress vertical during the quarter and the year.

We are now comping strong new door additions from the second half of 2017 and are pleased with the increasing contribution from these new partner locations. We've worked diligently to continuously improve the playbook for optimizing performance across new and existing doors while, among other strategies, focusing on the alignment of partner teams with program goals and using advanced store-level performance tools and analytics.

EBITDA was 12.5% of revenues versus 11.7% in the year-ago period, an increase of 80 basis points. We generated leverage in operating expenses despite making planned investments ahead of expected future revenue growth. Write-offs were 5.1% of revenues in the fourth quarter of 2018, down from the 5.4% reported in the year-ago period. Bad debt expense was 12.8% of revenues in the fourth quarter of 2018, compared to 12.1% in the fourth quarter of last year. Our full year bad debt expense for 2018 was 11.4%, well within the 10% to 12% target range we'd previously communicated.

With the change in lease accounting, Progressive's bad debt expense will no longer be reported in operating expenses but will instead be reported as a contra revenue account. Given that the net effect of this accounting change is a reduction in the reported revenues, we're revising slightly our write-off target range to 6% to 8% of revenues from 5% to 7% of revenues and roughly the same expected lease pool performance.

As we look to our growth plan for 2019 and beyond, we expect to continue to benefit from a strong pipeline of potential new retail partners across a variety of industry verticals. Consistent with past practice, our outlook for 2019 includes anticipated growth from our existing book of retail partners as well as the expected conversion of a portion of our retail partner pipeline where we have near-term visibility.

In keeping with that approach, this year our outlook includes the rollout of one of the National partners with whom we have been piloting. Our modeling of the impact from this opportunity considers the fact that rollouts require time to mature, as new partners and their locations become increasingly familiar with the program and fully integrate it into their marketing and selling activities. Virtually all of our large partners have exhibited this trend of increasing productivity over time as is evident in the strong rates of growth we continue to see across many of our largest accounts, some of whom have been with us for several years.

Again, I'm proud of the team's performance in the quarter and the highly productive relationships we have forged with our retail partners. The majority of the $20 billion-plus virtual lease-to-own market remains unserved, and we believe our investments in people and technology position us well to continue to grow existing partnerships as well as attract, convert and profitably scale new retail partner opportunities.

I will now turn the call over to Douglas to discuss the Aaron's Business segments' Q4 results and 2019 outlook.

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [5]

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Thanks, Ryan. I'm proud of our teams and encouraged by the momentum we're seeing in the Aaron's Business. We experienced the best holiday selling season in the last 3 years, both online and in our stores, and finished the fourth quarter with the fourth consecutive quarterly increase in recurring revenue written into the portfolio and the eighth consecutive quarter with an improvement in lease margin. Our investments in people and technology are paying off, and we believe they're enabling us to move faster on margin-enhancing opportunities that also improve the customer experience.

Same-store revenues in the quarter were negative 0.5%, an improvement of 490 basis points from the prior year quarter but slightly below our previous guidance.

In the fourth quarter, we employed more low first payment promotions, which we believe will benefit same-store revenue in future periods but resulted in lower-than-expected revenue in the fourth quarter. Total revenues in the Aaron's Business increased 2.9% as compared to the fourth quarter of 2017. Lease revenues increased 8.6% as compared to the same quarter last year, primarily driven by the franchise stores acquired throughout 2018. Lease revenues also benefited from investment in our aarons.com platform, which grew 50% in revenue written into the portfolio in the fourth quarter as compared to the same quarter last year.

Aarons.com is a key pillar of our omnichannel retail strategy and is attracting a younger, higher ticket customer who prefers a mobile shopping experience. We expect that aarons.com will continue to grow in our existing infrastructure of fulfillment centers, stores and last-mile delivery. As a competitive advantage, this should enable us to continue to scale our e-commerce business profitably.

Adjusted EBITDA increased 15.1% and was 10.4% of revenues, versus 9.3% the year-ago quarter, an increase of 110 basis points. Adjusted EBITDA growth benefited from an increase in lease margin, partially offset by higher write-offs and investments related to our business transformation initiatives, including investments in people and technology.

Write-offs were 5.1% of revenue versus 4.2% in the same period last year. Contributing to the increase in write-offs was an increase in the number and type of promotional offerings, higher-ticket leases written into the portfolio and an increasing mix of e-commerce as a percent of revenue. While e-commerce leases charge off at a higher rate, we remain pleased with the profitability of the channel. Given the number of new customers generated in this channel, we believe profits generated by e-commerce are largely incremental.

I remain encouraged by the underlying trends in our business in 2018 as well as our performance in the fourth quarter and our momentum going into 2019. As we look to 2019, I also want to take a moment to provide you with visibility into the Aaron's Business transformation initiatives. These initiatives continue to be centered around improving the customer experience, driving demand and lowering our cost to serve. Many of our test-and-learn pilots from 2018 have proven successful and are ready for further scaling and rollout in 2019.

The first of these initiatives is our rapid customer onboarding and decisioning tests, which has been very successful. This new process allows us to digitally onboard our customer through a totally paperless experience that results in better data capture and a significantly faster sales process. The customers' and associate feedback have been very positive. And we expect to immediately begin the rollout, which should be completed in all company-owned stores by the end of 2019.

Next, the centralization of certain collection activities is moving forward as well. Testing is being significantly expanded, based on promising early results both in collections productivity and in in-store sales lift. Pending the successful outcome of our expanded testing, we expect to begin rolling out this initiative to additional stores in the second half of 2019 and into 2020.

In addition, we've tested a couple of different versions of our next-generation store concept in the greater San Antonio market in 2018, and we're experiencing meaningful delivery and revenue lift. The new concept includes a more modern look and feel inside and out, a static retail showroom of new product with a separate pre-lease area, expanded store hours, digital customer onboarding and a new sales-focused operating model.

As you know, we operate stores across a variety of markets, from large metro areas to small rural markets. We don't think there's a one-size-fits-all solution, but we believe components of our new store concept will be relevant in all of our markets.

In 2019, we plan to expand the next-generation concept to 40 to 50 locations, which will be a combination of renovating existing stores and repositioning to new, more attractive store locations. We expect these stores will create a drag on earnings growth in the short term due to the initial investment costs and ramp-up periods, but we believe they'll have an attractive return on invested capital for the long run. We will continue to evaluate results from our business transformation initiatives, and we're taking a measured approach to these investments. We've included incremental operating expenses of approximately $15 million in our 2019 outlook for these and other marketing and demand-generating initiatives.

Before I hand it over to Steve, you may have also seen that during our 2018 holiday season we expanded our store hours to include opening on Sunday from noon to 5 p.m. Early indications are that greater numbers of new customers are transacting in our stores on Sunday, and that revenue lift from these store sets where we have adopted Sunday hours have been meaningful. We expect nearly all of our company-owned stores to be open on Sunday in 2019, and both the expected lift in sales and the related costs are included in our outlook. I'm excited about our progress in 2018 and the prospects for advancing our business transformation in 2019.

I'll now turn the call over to Steve.

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [6]

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Thanks, Douglas. Now I'll turn to some financial highlights for the quarter. On a consolidated basis, revenues for the fourth quarter of 2018 were $993.2 million, an increase of 12.3% over the same period a year ago. Adjusted EBITDA for the company was $112.7 million for the fourth quarter of this year, compared to $89.9 million for the same period last year, an increase of $22.8 million or 25.3%.

Diluted EPS on a non-GAAP basis for the quarter increased 57% to $1.02 in 2018, versus $0.65 in 2017.

As you have seen from the earnings release, operating expenses increased approximately 13%, or $49 million, versus the year-ago quarter. About 40% of the increase is due to the addition of acquired franchise locations throughout the year. Another 1/3 of the increase was driven by the year-over-year increase in bad debt expense and write-offs at Progressive, in line with expectations and with their significant revenue growth. The balance of the increase is spread across investments in both our businesses, including marketing, personnel and intangible amortization expenses, as well as legal fees resulting from our responses to the previously disclosed FTC CIDs.

Cash generated from operating activities was $356 million for the full year of 2018, compared with $159 million for the full year of 2017. The improvement was driven primarily by a $162 million change in cash taxes paid between the 2 periods.

On October 23, 2018, the company amended its revolving credit facility and term loan agreement to increase its term loan by $137.5 million, to $225 million. The company also amended its franchise loan facility to reduce the total commitment amount from $85 million to $55 million and extend the maturity to October 22, 2019.

During the fourth quarter of 2018, we acquired 49 franchise stores for approximately $48.8 million. We used cash on hand and availability under our revolver to fund the acquisitions.

During the fourth quarter, the company purchased approximately 1.45 million shares of common stock for $68.7 million. For the full year, the company purchased approximately 3.75 million shares of common stock for $168.7 million at an average price of approximately $45 per share. As of the end of the fourth quarter, the company has approximately $331 million remaining under its share repurchase authorization. We remain conservatively capitalized following the acquisitions and share buybacks and ended the fourth quarter with available liquidity of $388 million and a net debt-to-adjusted EBITDA ratio of just over 1 turn.

Lastly, you will see in the 10-K we expect to file later today that in January 2019, the company initiated a restructuring program to further align its company-operated Aaron's store-based portfolio with marketplace demand. Because of management's strategic review of the existing store portfolio, the company is closing approximately 85 underperforming company-operated Aaron's stores during the first quarter. The company currently expects to incur between $12 million and $15 million of restructuring charges, which will all be incurred within the Aaron's Business segment. The restructuring charges will primarily consist of impairment charges associated with the closed stores.

Now let's turn to our outlook for 2019. On a consolidated basis, we expect revenues for 2019 to be between $3.9 billion and $4.06 billion, an increase of approximately 8% to 13% compared to 2018. For purposes of these growth rates, we have assumed that Progressive bad debt expense is reported as contra revenue, rather than a component of operating expenses, for all periods presented.

Non-GAAP earnings per share is expected to grow between 9% and 15%, to $3.65 to $3.85. This assumes an effective tax rate of approximately 23.5% and a diluted share count of 68.7 million shares.

For 2019, on a consolidated basis, we expect to invest approximately $100 million to $120 million in CapEx. We expect that $50 million to $60 million will be for ongoing normal-course capital expenditures for our business. So let's discuss the incremental spending from that baseline. The increase is primarily in 3 areas. First, due to the change in lease accounting, we reevaluated our vehicle acquisition strategy and plan to purchase trucks in the Aaron's Business instead of leasing them going forward. The incremental capital expenditures for trucks should be approximately $15 million for 2019. Another $15 million relates to both hardware and software to complete the rollout of rapid customer onboarding, centralized decisioning and other IT-required support for our Aaron's Business.

Finally, you heard Douglas talk about the success of the new store concept that we have tested over the last year. The improvements we have seen include an increase in deliveries in excess of 30%. Given these results, we are quickly, but in a disciplined way, expanding our tests to some additional markets and increasing our sample set by 40 to 50 locations during 2019. We expect to spend approximately $30 million for these real estate-related improvements. We believe it is prudent to take this additional step to confirm our findings before we decide about a possible broader rollout. As Douglas mentioned, we do not expect these new store concepts and related capital expenditures to apply throughout our entire system. Offsetting these internally focused investments, we expect to scale back the pace of our franchise acquisitions compared to the last couple of years. We do not have any material franchise acquisitions planned at this time. However, we would certainly evaluate the right opportunity were it to present itself.

Let's talk about seasonality. We expect Progressive EBITDA to grow throughout the year, while we anticipate that Aaron's Business EBITDA will be front-end loaded, due primarily to the impact of significant investments in business transformation initiatives and real estate costs associated with the further rollout of our new store concepts, both of which will ramp throughout the year and have the biggest impact in the second half of 2019. On a consolidated basis, we expect revenues, adjusted EBITDA and non-GAAP EPS to be slightly higher in the second half of 2019 versus the first half and expect the fourth quarter to be the peak revenue and earnings quarter of the year.

With that, I will turn it over to John for his final comments.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [7]

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Thanks, Steve. We are pleased with the ongoing improvements in our business and look forward to another strong year in 2019. Progressive continues to generate outstanding results and the Aaron's Business is beginning to experience the fruits of its business transformation efforts. I would like to thank our associates, retail partners and franchisees for their dedication to our mission of providing high-quality products to credit-challenged and underserved customers. Our success is a direct result of your commitment to providing the best experience for our customers every day. Thank you very much.

That concludes our prepared remarks. I'll now turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Brad Thomas of KeyBanc Capital Markets.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [2]

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I wanted to ask a question on Progressive and one on Aaron's, if I could. First, I guess, Ryan, on the Progressive side, could you give us a little more color on the pipeline, the scheduled rollouts here for this year? What's baked into your guidance from -- in terms of new accounts versus existing partners? And at a high level, how you're thinking about that affecting the profitability of Progressive?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [3]

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Sure. Happy to. Thanks, Brad. As you might have taken from the comments, we're excited about the pipeline. It continues to be comprised of both regional and national accounts and I think the team is doing a great job of surfacing the opportunities and as well as working existing opportunities through the pipe. We did mention in the prepared remarks about one of the rollouts that's occurring. We're not commenting on the specifics of that program, but as I mentioned in the remarks, it's a partner who we've been piloting with for some time and have obviously enjoyed a successful pilot and excited about the prospect of the program progressing to a rollout. There's obviously still a lot of work to do, but we're excited about the potential of the program for us and our partner. Generally, we remain very bullish about where the pipeline is today.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [4]

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Brad, this is John. I would add to that. I mean, in terms of our outlook, we're -- we do try to include pipeline in that, and we've done that historically and we're doing that again. But we have to -- we kind of keep it to what we think there's a lot of near-term visibility on, and there's a lot of conservatism that we have to take into account in any of that because the schedule of rollout with the national partnering with regional accounts is uncertain. And so there's always a portion of that in there. There's uncertainty in that as well. So we've been consistent in that approach from the prior years and in this year again.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [5]

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Got you. And then in terms of how you're thinking about margins for Progressive, as you scale up with some of these national accounts, are you still having to heavily invest ahead of that, or do you think the flow-through can be pretty good this year?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [6]

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There is definitely investment ahead of that. I think we've been pretty vocal about our bias toward investing ahead of expected future revenue growth pretty consistently now for several quarters. And I think that remains how we think about the business, certainly in the case with this opportunity and others that remain in the pipeline. And you can think about that in a number of ways, but at the end of the day, there's a technology investment in preparing solutions that we think are best suited to that retailer's selling environment as well as sales and support investment and building out the team to support that account and help ensure the success of the rollout. And we've done both of those. We continue to do both of those and that kind of buttresses our belief and how we think these pilots and programs will rollout and expand over time.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [7]

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Okay. And Douglas, could you just talk a little bit about the same-store sales performance in the quarter. I mean, I think the good news is that these last 2 quarters have been some of the best in years. But obviously, we did take a little bit of a step back in the trend here in 4Q. What is it that slowed down a little bit?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [8]

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Sure. I mean, first of all, we're happy with the 490 basis point increase year-over-year. Sequentially, they did dip down a little bit and we're below where we were originally guiding. Biggest driver of that is we got into -- particularly late in the fourth quarter into our holiday season -- and decided to really double down on a lot of our promotional offerings, as you've probably seen. Many of our promotional offerings are low first-dollar delivers, and we did more of those, and so by nature of doing that we get lower first payments, which adversely impacts revenue in the quarter but helps us build our business long term. So we had a really successful fourth quarter in terms of revenue written into the portfolio, and we'll see the benefit of that in 2019, but it caused the quarter to be down below where we had initially estimated. The other thing that happened during the quarter is we had higher charge-offs, as we talked about, and those adversely impact the portfolio as well. So it was a combination of both of those things. But we're really happy about our outlook for 2019; we think that the deals that we drove in the fourth quarter will help our positive comp outlook in '19, and we think that's, net-net, a real benefit to the business.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [9]

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And Douglas, as you think about sort of 1Q, 2Q, it's been unusual backdrop with having a government shutdown, tax refunds potentially delayed a little bit out of the gate, but then hopefully a good refund season. How are you thinking about those puts and takes impacting trends?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [10]

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Yes. I mean, generally, we've got a portfolio of business that's, as I said, healthy rolling in 2019, we'll continue to see the benefit of ticket -- higher ticket that we rolled into the portfolio last year. And we're working on the demand environment side of things. So -- and I'm not going to prognosticate on what's going to happen during tax season or anything else, but we continue to sort of run the same plays we've been running and enjoying sort of the benefits of building the portfolio into '19.

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Operator [11]

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The next question will come from Anthony Chukumba of Loop Capital markets. I'm sorry, our next question will now come from John Baugh of Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [12]

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I was curious, on the core side, that -- obviously the comps were a little disappointing and you had to promote. I guess, from a very high level, and it sounds like these tests are working and you're going to expand these store concepts to see how that flows. And obviously that has some kind of an earnings drag, so my question is simply, as we look at the core business and we look at '19 earnings, if we were able to extract the incremental investments in real estate or other areas, are we kind of budgeting flat performance there? Or how are you thinking about that, John or Douglas, strategically, going forward, given the difficulty to get traction in that side of the business?

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [13]

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John, it's John Robinson. Thanks for the question. It's a good question. And I mentioned it in my prepared remarks, it's definitely a balancing act that Douglas and the team are managing. And that they've done a great job for the last few years really, doing it -- managing between profitability in the short term and innovating the business for the long term. And that's just where we are with the business right now. We are very optimistic about the results we've seen from the tests that have been running -- and they've been really been running over the last couple of years -- and it's kind of all culminated into some new store concepts that we're testing in Texas and it's had very good results. What we're going to do is take -- and what we have been doing and will continue to do is take a measured approach to that investment and the drag that it creates on earnings as we move forward. We're really optimistic about some of the results. We're going to expand the test of the -- we have been running. We've got kind of a 4, 5 store test that we've been running. We're going to expand that to more stores this year, and our outlook takes into account that. Obviously without that, we'd have higher near-term profitability and it'd probably be materially higher in 2019, but we have a long-term perspective on the business. We really like the prospects of it, longer term, and are really encouraged by our ability to innovate into a really attractive model. But it's a process and we're in that process right now. E-com is another great example of where we've had great results and we're going to continue to expand, it's up 50% on a revenue-written basis during the year. So a lot of optimism, but we're trying to be very measured and balanced about it, and have provided what we think is our best estimate of our combination of maintaining profitability and investment for 2019 in our current outlook.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [14]

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And John, I was going to follow-up on that e-commerce, you've -- clearly still growing. Is there a way to isolate what your charge-offs are on that business versus, say, the promotions you just ran, which, if I'm not mistaken, in your press release you alluded that that was the driver of the increase? Are you able to limit fraud basically on the e-commerce? And what has your charge-off experience been on that side of the growth for the core?

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [15]

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Yes, John, it's Douglas. So e-commerce is now roughly 10% of the revenue we write in to the portfolio and a bigger and growing piece of our overall revenue. So we incur slightly higher losses on e-commerce, but we have great visibility into those pools and monitor those curves all the time. So we're constantly taking action to try to reduce those, but also take the appropriate amount of risk. We incur a much larger percentage of new customers in e-com than we do in the storefront business. And so new customers typically charge off at a much higher rate and all of the product that's on e-commerce is new product, so it has a higher book value. But even accounting for all of that, we're really happy with the margins we're seeing in e-com. They're higher dollar margins and they're higher-ticket deals. So -- and they're largely incremental; there's really low overlap between our e-com business and our store business. We expect that may evolve over time as we take a more omnichannel approach to our customers, but right now, really happy with the result.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [16]

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And one thing I want to add to that on the e-commerce side, you mentioned fraud, John, which is definitely a consideration that anyone in the e-commerce business has. We do benefit substantially from the knowledge we have from Progressive. So that's one of the synergies of the combination for sure is the knowledge we have been able to port over from Progressive to Aaron's from a decisioning standpoint, which is a considerable advantage for us on the Aaron's side.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [17]

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Great. And I apologize, I joined late, so if you addressed this, my apologies. Any update on sort of the virtual inventory available in core stores via -- off the Internet or computer or whatever, with Ashley, for example. Is that still something that's driving your business?

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [18]

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John, it's Douglas. So typically, we refer to it now kind of as expanded aisle, generally. Part of the replatforming of our e-com business was allowing us to upload and have direct technical and those sort of relationships or connectivity to our vendors. And so every day we're adding more product on to e-com. I think what you're referring to in-store is our digital showroom, our product in our stores, and we continue to put that in stores as we renovate them. You will see in these 40 or 50 new stores we do this year, we'll have expanded aisle. I believe, over time, that our e-com site and that functionality in our stores will overlap and we'll just have a different user experience in our stores that will tie in with the same product that we offer online. But we continue to broaden the selection and are happy with progress there, particularly with this new e-com platform we have put in place.

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Operator [19]

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The next question will come from Bill Chappell of SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

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A little bit, Douglas, first on the stores. What's the expectation -- I understand the fourth quarter impact on same-store sales, but do you expect them to bounce back with -- as those -- kind of the new promotions start to kick in, where you could see positive same-store sales in first quarter of this year?

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [21]

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Yes, Bill. So we're guiding to full year guidance on comps, which is 0 to 2%. You can look at the trajectory where comps have been. We're not providing quarterly guidance. I will tell you that we've got momentum coming out of the fourth quarter into the new year. I made comments about Sunday hours as well in my prepared remarks. And almost all of our stores were open on Sunday the first week in January and will continue to be. We're seeing good lift there, even -- a really strong lift, even after the investment in labor. And so that will further help comps and it is baked into our guidance. So we -- I also mentioned that we -- ticket has been increasing, and we see that continuing into the first quarter and first half of the year as well as sort of carrying the benefits of the portfolio from 2018, the work that we did on ticket there.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

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So I'd just -- not to put words in your mouth but sounds like you're comfortable that comps would still be up this year even without just opening on Sunday, is that fair?

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [23]

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Let me put it this way: Sunday is helping comps. We are looking at the business holistically for all 7 days of the week, so we haven't really taken out Sunday to see what the cannibalization is across the business. We believe that we're still going to ride the wave of ticket, but the underlying demand issue with customer traffic is one that we're solving over the course of the year through all these business transformation initiatives. So we're not going to parse out the Sunday versus non-Sunday comp piece.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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Got it. And then, Ryan, I might have missed it, but the bad debt improved a little bit sequentially or -- in the quarter? Anything to that as we look into 2019 or just kind of the way the mix worked?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [25]

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Yes. Write-offs were down in the quarter. End of the year, right in the middle of the range of 5% to 7% that we used under the old accounting. Yes, I'd say, the lease pools are performing in line with expectations, happy with what the portfolio looks like and how we head into '19.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]

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And just -- like, a big new rollout of a national vendor, does that help on the write-offs? Or does that usually actually have a negative impact to start with?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [27]

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We -- all invoice volume, all doors don't look the same. And part of the work that we've put into decisioning is to make sure that we can manage the portfolio to achieve the target returns that we've given, specifically the EBITDA range of 11% to 13%, in spite of that variability, and that's the case with this opportunity to grow the pipeline and that's kind of what we're shooting for, is to target those ranges.

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [28]

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And Bill, I'll add to that. The rollouts that we expect in 2019 are in verticals that we have been in for a long time, so these verticals do have predictability around them. And so that gives us comfort in our forecasting, and the national rollout that Ryan mentioned, as he said, is the continuation of a pilot that we have been working on for a while. So that gives you comfort as well. Not that it's necessarily completely predictable in terms of how the scaled version will look relative to a pilot, but it does give you good insight into forecasting pool performance.

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Operator [29]

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The next question will come from Anthony Chukumba of Loop Capital Markets.

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Anthony Chinonye Chukumba, Loop Capital Markets LLC, Research Division - SVP [30]

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So just 2 -- real 2 quick questions. One's just a clarification. So you talked about, for the 2019 guidance, you said, okay, so Progressive EBITDA you have year-over-year growth throughout the year. But then you said Aaron's Business is front-end loaded. I wasn't really sure what you meant by that.

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [31]

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Yes, I think we just -- since we give -- this is Steve -- since we give annual guidance, we were trying to get a little bit of kind of mapping for the year. The initiatives that we spoke to about the Aaron's Business will kind of ramp throughout the year and have -- and the OpEx that Douglas spoke about, as well as the capital, will have a more of an impact on the back half of the year. So we just meant to say that from an EBITDA standpoint the first half will be bigger than the second half. And that's partially influenced by the tax season, which is a normal occurrence in this business.

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Anthony Chinonye Chukumba, Loop Capital Markets LLC, Research Division - SVP [32]

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Okay. So the Aaron's Business EBIT -- you have higher Aaron's Business EBITDA dollars in the first half than the second half?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [33]

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Yes.

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Anthony Chinonye Chukumba, Loop Capital Markets LLC, Research Division - SVP [34]

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Or are you saying that the growth year-over-year -- okay, but you're not saying the...

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [35]

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No, dollars.

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Anthony Chinonye Chukumba, Loop Capital Markets LLC, Research Division - SVP [36]

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Okay, dollars. Okay. Got it. Okay. That's helpful. And then, just one question. You talked about the -- part of the reason that the Aaron's Business comps were a little disappointing was the lower upfront payments. If I recall, in this industry generally, lower upfront payments down the line lead to larger write-offs, and I guess I was just wondering how you were sort of thinking about that?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [37]

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Sure. What we're seeing in write-offs is these lower ticket offers do accelerate write-offs. So we see higher write-offs in the near term, and I'd say the first 60 days we see a spike in write-offs, and those are typically higher net book value deals because depreciation hasn't occurred on them. But over time, we see those write-offs normalize and look -- and we believe just the acceleration of those write-offs plus the lifetime value of those deals are just as attractive as non-promotional periods. But we drive more volume during those promotional periods, so we're happy with the results.

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Operator [38]

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The next question will come from Kyle Joseph of Jefferies.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [39]

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Steve, just a quick one for you. I think I could back into it, but it would be helpful if you could give us sort of a -- what the 2018 Progressive revenues were pro forma ASC 842, if you have it off the cuff?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [40]

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I actually -- let me look for it, while you have another question, if you have another one.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [41]

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Yes. Sure. And then Ryan, just on the write-offs outlook you gave, is that just because of the Progressive accounting that you talked about the write-offs being up 100 basis points?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [42]

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It is, Kyle, yes. We have mentioned that we expect roughly similar lease pool performance in 2019. So we're just adjusting the range to reflect the new accounting guidance that we're implementing this year.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [43]

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Got it. Okay. And then, just on a modeling question related to that, going forward under ASC. Are we going to get both the gross and the net revenue numbers from Progressive going forward? Or should we just model for it on a net basis?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [44]

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Yes. We expect this year there will be color because of the footnotes on the bad debt expense, but moving forward, we would expect just to have the -- net revenue would be what we would be working off on -- in reporting.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [45]

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Sure. And then one last one for me for Ryan, if you could talk about the rollout of Overstock, how that's going? And kind of give us a sense for how that -- if there's any impact on the metrics that you guys provide there, in terms of invoice volume per active door and whatnot?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [46]

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Sure. I recognize there was a press release there. So we'll acknowledge that we have a program there, we're excited about it. We have run a successful pilot and we're pleased to see that expand more fully on the site. And it's going well. I think it's evolving in line with our expectations. We're continuing to see increasing productivity. I think they've done an excellent job of developing a very simple intuitive flow for customers on the site. Proud of the work that went into that by both teams, both the Overstock team and our product team, and excited about how it's going. As with all accounts, there continues to be upside as we identify more ways to refine the process, make it easier and better for customers and that's what we're doing with Overstock.

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [47]

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Kyle, this is Steve, to answer your first question. For the year, it was $1.77 billion under the ASC 842 method for '18.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [48]

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Okay. Perfect. And then one last one for me. Ryan, if you -- you talked about your pipeline, can you give us a sense, is that primarily brick and mortar, or is it e-commerce, or is there a balance?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [49]

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So, I was going to tack on to the Overstock question just the point that I expect that's a harbinger of things to come. E-com, obviously, is a very significant next way of growth for our business, and effectively, virtual lease-to-own in general, as more purchases shift online and that's the fastest growing segment. And I think that's true with us as well. We've obviously -- not obviously, but we've invested more in our business development resources to target that opportunity. And I think it's beginning to bear fruit and we're excited about what it will contribute long term. Obviously, a big portion of the pipeline remains brick and mortar opportunity. We're a very effective tool in helping our retail partners generate positive comps year-over-year, both new and existing, and I think that will continue to attract folks from the brick and mortar channel, but the same customer wants to purchase online. New customers in our demographic want to purchase online, and we're working hard to help online retailers capture that opportunity as well.

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [50]

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The only thing I would add to that, which -- Steve is exactly right -- is the fact that through our bricks and mortar relationships, many of them are taking a more omnichannel approach to their businesses, and Progressive has done an excellent job of making that step with those partners and developing processes to help them do that. So it's not only e-com-only retailers, but it's retailers out there who were bricks and mortar traditionally becoming more omnichannel. Progressive is migrating to that format with them.

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Operator [51]

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The next question will come from Budd Bugatch of Raymond James.

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Alessandra Jimenez, Raymond James & Associates, Inc., Research Division - Research Analyst [52]

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This is Alessandra Jimenez on the line for Budd Bugatch. My first question is in the Aaron's Business. What was the year-over-year performance of the acquired stores that were not in the comp?

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [53]

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Yes. Thanks for asking. Obviously, last year was a big year for acquisitions. We bought some of our biggest franchisees and we're really excited about those acquisitions. We bought markets that we admire and want to be in long term with our omnichannel strategy. We're in the process of integrating those transactions, many of them happened in the second half of the year, so it's really hard to opine on performance yet. We're going through the integration process, switching out our teams, making sure we got the right level of staffing, making sure we're setting up the stores under our operating model, and we're really optimistic about the markets, but we're not going to speak to any one transaction. All I could say is these -- each of these deals operate at different levels and we inherit them at different levels and we're in the process of integrating them into our system and we'll report out more on them in the future.

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Alessandra Jimenez, Raymond James & Associates, Inc., Research Division - Research Analyst [54]

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Okay. That's helpful. And then you had mentioned that you promoted heavily in 4Q in core and that resulted in a lower first payment. On a comparable store basis, how much did the portfolio of contracts and contract value change year-over-year?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [55]

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I'm sorry. I missed the last part of your question.

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Alessandra Jimenez, Raymond James & Associates, Inc., Research Division - Research Analyst [56]

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How much did the portfolio of contracts and contract value change year-over-year?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [57]

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Are you talking about the value of the portfolio, how much did they go down?

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Alessandra Jimenez, Raymond James & Associates, Inc., Research Division - Research Analyst [58]

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Yes.

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [59]

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So we reported year-over-year in the fourth quarter negative 0.5% for comps and that's a proxy for the size of the portfolio. So if you want to think about it at 0.5% of the degradation in the fourth quarter.

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Alessandra Jimenez, Raymond James & Associates, Inc., Research Division - Research Analyst [60]

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Okay. And then for Progressive, on Best Buy's website, it says that leases with Progressive Leasing will not be eligible for My Best Buy or Pay with Points program. How widely available is leasing for Best Buy?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [61]

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No comment on any specific retailer. I appreciate the question, Alessandra. We just -- we tend to refrain from commenting on specific retailers.

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Operator [62]

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The next question will come from Vincent Caintic of Stephens.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst [63]

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First on the Aaron's Business side of Aaron's, just the slight decline in the same-store revenue. So I appreciate that you talked about it being the result of some of the promotional activity and the lower upfront payments. Is there a way to normalize for that, so maybe another way to see how the business has performed in the sense of, maybe, if you could give us the number of contracts, maybe, that grew year-over-year in the fourth quarter of '18 versus '17? Or if you were to, say, normalize away from the lower payments, is there -- would there have been same-store revenue growth?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [64]

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Yes, Vince, there is another way to think about sort of our projected balance of business year-over-year, which I just said was down 0.5% in the quarter, is to talk about it in its pieces. So our leading indicators are revenue that we write into the portfolio and what we churn out of the portfolio. I think I had mentioned in my initial comments on same-store comps that we did churn out -- we had higher write-offs, so we churned more out of the portfolio, but we had a really strong selling season, it was our best selling season in 3 quarters -- sorry, 3 years. And so you can take from that, that as we move into 2019, we feel the portfolio is building and that that revenue written in to the portfolio, which was very strong in the quarter, will carry into the first quarter of next year. We're not disclosing any specific numbers on both the churn and the revenue written in.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst [65]

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Got it. Okay. On the customer counts on the same-store sale basis just being down 5%. Any color on that? If there was any one-timers or if something's just driving those customer counts lower?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [66]

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Yes, as you know, we've talked about this in the past. What's been driving our same-store improvement over the last year and 490 basis points over last year is largely ticket. Our underlying customer traffic has been down and we've seen quarters where it's like this fourth quarter. We've seen improvement on that. We drove more customers into our store. But longer term, that is the issue that we're trying to solve for and it's our biggest focus internally. I mentioned that we're spending a lot of money this year on business transformation and on demand generation, and we have multiple demand-generation projects as well as -- and those include marketing -- but also we're investing in this store of the future e-com and merchandising piece of the business, all of which are addressing this demand part of the business that we're focused on. So demand will be the focus going into 2019 and we think we have a solid plan to address it.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst [67]

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Okay. Got it. Switching over to the Progressive side. So I appreciate the active doors grew but was impacted by some store closures and I think that Mattress bankruptcy was well publicized. But is there a way to normalize against that, so excluding that -- those Mattress closings, what the growth otherwise have been for the rest of your portfolio?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [68]

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I think we did provide the detail that it was several hundred locations in the prepared remarks, on a base of about 20,000 locations. As we said in the past, unfortunately, doors isn't the perfect indicator of how the portfolio is growing and the business is performing with -- and this quarter is a good example of that. We had 14% growth in invoice, 22% growth in revenue, 18.5% growth in the customer base, which are all metrics we're very excited about, even on that lower average store growth. But we're very happy with how those doors are continuing to be productive, and increasingly productive, and excited about where the pipeline sits in into '19.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst [69]

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Got it. And then just the last one from me. So I know there's been a focus on the bad debt expense increasing. Understand the focus on EBITDA margin and I think that's great. But I think the concern on bad debt expense is really -- we're kind of where we are in the cycle and if you're seeing anything -- so there's a worry that if you're kind of opening up to a certain customer, that maybe that exposes you a bit more if we enter the correction or a recession. But if you could give us comfort around that, what you're seeing, that would be really helpful.

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [70]

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Sure. Happy to. Just to recap on bad debt expense. So it was up in the quarter year-over-year 12.8% versus 12.1% in the prior year. But it ended the year at 11.4%, which is right near the middle of the range that we provided in the past on the old accounting, the 10% to 12% of revenues. And I'd say that's reflective of the fact that the lease pools are performing in line with our expectations, kind of in line with the increases, in line with what we had in mind when we talked about the general level increase when we provided the 2018 outlook initially. And then how those pools perform over time, I'd just say a couple of things on that. We've obviously operated the business through previous recessions and have some history of seeing pools play out, not only across economic cycles and seasons but also different verticals. And I'd also say that the unique aspect of the lease that tends to get overlooked in the context of consumer finance more broadly is just the short average lease life. These leases play out in 7 months, we have a good bit of visibility into the performance of the leases relatively soon after origination. So you combine the visibility with the short average lease life and it really puts the -- our ability to manage portfolio in a different place than a typical consumer finance business.

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Operator [71]

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The last question today will come from John Rowan of Janney.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [72]

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Just quickly on the expense guidance. I heard 3 different numbers, just want to make sure I understand it. Is it $15 million for transformation, $15 million for restructuring and then $30 million for demand initiatives incremental into 2019?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [73]

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John, I think we're maybe conflating 2 different issues. We unpacked in my comments the -- some of the CapEx guidance. So there is $15 million for fleet acquisition, $15 million for capitalized software and other -- and hardware related to some of the initiatives and then $30 million for the build-out -- real estate-related improvements for the 40 to 50 stores that we mentioned. I guess some of that is included in the $15 million of OpEx that Douglas mentioned in his section as well. So there is certainly an investment burden on the outlook for the Aaron's Business for 2019, but part of it is in capital and part of it is in OpEx.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [74]

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Okay. And there was -- there's $15 million of restructuring expenses in 1Q, correct?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [75]

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$12 million to $15 million is the -- yes.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [76]

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Okay. And just to be clear, you guys aren't seeing any change in early payment activity given the delayed tax refund yet?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [77]

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We don't really have any indications of anything different at this point in either business.

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Operator [78]

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

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [79]

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Thank you for participating on our Q4 earnings call. We appreciate your interest in Aaron's. And we look forward to updating you on our first quarter 2019 results at the end of April. Thank you.

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Operator [80]

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