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Edited Transcript of AAN earnings conference call or presentation 27-Oct-17 12:30pm GMT

Q3 2017 Aaron's Inc Earnings Call

ATLANTA Oct 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Aaron's Inc earnings conference call or presentation Friday, October 27, 2017 at 12:30:00pm 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

* Kelly Wall

Aaron's, Inc. - VP of Finance, IR & Treasury

* 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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* Anthony Chinonye Chukumba

Loop Capital Markets LLC, Research Division - Analyst

* Bradley Bingham Thomas

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

* David Glenn Magee

SunTrust Robinson Humphrey, Inc., Research Division - MD

* John Allen Baugh

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

* Kyle M. Joseph

Jefferies LLC, Research Division - Equity Analyst

* Laura Allyson Champine

Roe Equity Research, LLC - Senior Analyst for Consumer and Retail

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Presentation

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Operator [1]

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Good morning. Welcome to the Aaron's Inc. Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

Participating this morning are John Robinson, Aaron's Inc. President and CEO; Douglas Lindsay, President of Aaron's Sales and Lease Ownership; Steve Michaels, Aaron's Inc. CFO and President of Strategic Operations; and Ryan Woodley, CEO of Progressive Leasing.

Now I would like to introduce Kelly Wall, Vice President of Finance, Investor Relations and Treasury. You may proceed.

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Kelly Wall, Aaron's, Inc. - VP of Finance, IR & Treasury [2]

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Thank you, and good morning, everyone. Welcome to our conference call to discuss Aaron's third quarter results, which were released today.

All related material, including Form 8-K with the Q3 earnings release, 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'll remind investors about the safe harbor statement. Except for historical information, the matters discussed today are forward-looking statements. As such, they involve several risks and uncertainties, which could cause the actual results to differ materially from those predicted in Aaron's forward-looking statements. Please see our 10-K for the year ended December 31, 2016, and subsequent SEC filings for a description of certain risks that may cause actual results to differ. Forward-looking statements that may be disclosed today include Aaron's and Progressive's projected results for future periods; Aaron's strategy and other matters, including those listed in the forward-looking statements disclaimer; and our earnings press release published today. Listeners are cautioned not to place undue emphasis on forward-looking statements, and we undertake no obligation to update any such statements.

During the call, we will also be referring to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net earnings and non-GAAP EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release.

I will now turn the call over to Aaron's CEO, John Robinson.

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

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Thanks, Kelly. Thank you for joining us this morning. I'm proud of our overall performance in the third quarter. Hurricanes Irma and Harvey presented extraordinary challenges for our teams, given their scope and the importance of Florida and Texas to both the Aaron's Business and Progressive Leasing. We mobilized the entire organization to provide crucial support to customers, communities and associates. In affected areas, we temporarily suspended our collection activities, and in many cases, replaced damage products in our customers' homes. We sent more than 10,000 cases of water to areas in need and raised approximately $200,000 from our associates and the company to support local charities and our employees impacted by the storm. Despite the significant distraction, we executed our business effectively.

Total revenues for the quarter increased 9%, and we're on track to deliver our full year outlook, excluding the impact of the hurricanes. Third quarter top line performance was driven by strong momentum at Progressive Leasing and positive trends in (inaudible) .

Progressive achieved a 36% gain in invoice volume, with increases in both new doors and volume per existing door. That level of momentum in the business' size is -- attests to our outstanding team and the significant market opportunity. The lease portfolio is performing in line with our expectations, and the current pipeline and door productivity underscore our confidence in Progressive's potential to continue to deliver significant growth.

I'm also excited by the Aaron's Business. We're investing in our omnichannel platform to drive revenues and operating efficiency. The work is in progress, and we're seeing encouraging results, particularly in some of our leading indicators. The third quarter benefited from a sequential and year-over-year improvement in lease margin, continued progress on write-offs and better-than-expected top line trends. We're excited about the progress we're making and believe the fourth quarter can build on this momentum.

Our balance sheet is in great shape with $126 million in cash in the quarter and net debt to capitalization of 12.7%. During the quarter, we extended the terms, lowered the cost and increased our revolving credit facility to $400 million from $225 million. Our strong financial position gives us the flexibility to remain opportunistic in managing the business. We'll continue to employ a capital strategy that balances strategic investments, acquisitions, dividends and share repurchases.

With that, I'll turn it over to Ryan to discuss Progressive.

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

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Thanks, John. Progressive had a very strong quarter with increases across all our revenue metrics and solid profitability.

Total revenues increased 29% in the period to $398 million. Invoice volume rose 36%. That's an acceleration from the strong growth rate achieved in the second quarter of this year and the biggest increase we've seen since the first quarter of 2015. We experienced growth across virtually every industry vertical.

Growth came from both new and existing partners. New partner growth included retailers new to lease-to-own as well as retailers with experience in the LTO market who chose Progressive over incumbents. We're very proud of wins on both fronts and very encouraged by the continued penetration of lease-to-own in a large addressable market.

Active doors were up 26% versus a year ago, bringing the total number of doors that completed a lease with Progressive during the quarter to approximately 20,000. We started the cycle with some significant additions to new doors made last year, and we're very happy with the strong continued growth in this metric.

We're also enthusiastic about the growth in invoice volume per active door, which increased 8% in the quarter. Recently added partners are ramping nicely, and we're likewise pleased with the levels of production from existing doors lapping their anniversary mark. This strong contribution from both new and existing doors should continue to benefit gross invoice volume in future periods.

EBITDA increased to $39.3 million or 9.9% of revenues versus 12.1% last year. There are 2 main factors driving the margin decline versus the third quarter of 2016. The first is the storms, which we estimate impacted EBITDA margin by approximately 110 basis points in the third quarter. As John mentioned, we suspended collections activities for affected customers, and that resulted in a higher provision for bad debt expense and write-offs in the quarter.

The second factor is the stronger rate of invoice growth. Higher growth results in modest margin pressure as we absorb normal levels of 90-day payout activity on a younger average account, and as we make investments in people and systems to fuel that growth. Excluding the impact of the hurricanes, the EBITDA margin implied and our reaffirmed full year outlook is well within the 11% to 13% annual range we've previously provided.

The lease portfolio is performing well and continues to reflect our disciplined decisioning process. Write-offs were 6.2% of revenue and bad debt expense was 12.7%. We estimate that the hurricanes accounted for approximately 30 basis points of the write-off increase and approximately 65 basis points of the bad debt expense increase over Q3 of 2016. The increase in bad debt expense, as a percent of revenues, is also being driven by provisioning from our increasing rate of invoice growth. We expect these metrics to remain well within our annual ranges of 5% to 7% and 10% to 12%, respectively, for the full year.

Overall, we're extremely pleased with the existing pipeline and acceleration in invoice volume from new and existing doors. We believe we have good visibility in the lease portfolio, and we're achieving solid performance across all our industry verticals. I'm proud of the team's results in the quarter and their exceptional efforts to serve our customers. We're excited about the large uncertain market and optimistic about our ability to continue to grow the business.

I'll now turn it over to Douglas for an update on the Aaron's Business.

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

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Thanks, Ryan. We're pleased with our third quarter results and the positive momentum we're seeing in the Aaron's Business. Delivery activity, same-store revenues and lease margin all exhibited favorable trends in the quarter.

Total revenues decreased 4.9% versus a year-ago period, impacted in part by the hurricanes and our recent store closure programs. We closed or sold an additional 23 stores in the quarter and ended the period with 9.4% fewer company-owned and franchised stores than a year ago. In most cases, we were able to consolidate customers from a closed store into a nearby Aaron's store.

Same-store revenues declined 5.6%. Excluding the 2 hurricanes, which temporarily closed a total of 189 stores, same-store revenues were down 5%. Both measures were ahead of our full year guidance.

Revenues benefited from well-executed promotional events and more favorable store traffic in the quarter, offset by the 873 lost store days due to Hurricanes Harvey and Irma. Thanks to the extraordinary efforts of the team, we rebounded very quickly from the storms with an average of 5 days closed per affected store. At the end of the quarter, 3 stores remain closed, and we expect them to reopen early in the fourth quarter.

We saw improving trends in customer deliveries, driven by more effective marketing and promotional activity. The average ticket per new agreement increased sequentially as investments in our new merchandising team are beginning to pay off. Merchandise write-offs were 5.2% of revenue for the quarter compared to 4.9% last year, with all of this increase attributed to the hurricanes.

Adjusted EBITDA margin was 7.1% of revenue for the quarter versus 8.9% in the year-ago period, but its revenues and operating expenses were impacted by the storms, which we estimate reduced adjusted EBITDA margin by approximately 100 basis points. The remaining difference in margin reflects investment in business transformation initiatives and benefits in the year-ago quarter, resulting from aggressive cost-cutting initiatives.

We're encouraged with the direction of the business. Our transformation initiatives are well underway, and we're seeing improved results as we apply stronger operating discipline and analytics across the business.

We also began the integration of the SEI stores in the quarter. And while the hurricanes were a significant distraction, the integration is on track.

In merchandising, we implemented initiatives to improve product selection, bundling and pricing. During the quarter, we saw sequential improvement in deliveries across key categories, including furniture, bedding and appliances.

We're also moving forward with initiatives to lower the cost to serve our customers, while, at the same time, enhancing their experience. One example is our EZ Pay program, which automates recurring payments and aligns payments to pay dates. EZ Pay saw a solid increase in the quarter and is starting to positively impact collections, increase ownership rate and reduce our labor cost. We've rolled out the club program to all stores and have approximately 75,000 active club agreements, which represents penetration across approximately 7.5% of our customer base. Both club and EZ Pay have been met with great enthusiasm by our associates and our customers.

In summary, we're pleased with the progress of our business transformation initiatives, which are focused on improving our customer experience and reducing the cost to serve. I look forward to further updating you on our progress in future quarters.

I'll now turn it over to Steve to discuss the financials.

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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 the financial details for the quarter. Revenues for the third quarter of 2017 were $838.9 million, an increase of 9.1% over the same period a year ago. Net earnings for the quarter declined 14% to $25.3 million versus $29.5 million a year ago. Net earnings for the third quarter on a non-GAAP basis were down 14.9% to $31.3 million compared with $36.8 million for the same period in 2016.

Earnings per share, assuming dilution for the 3 months ended September 30, were $0.35 compared with $0.40 for the same period in 2016. Diluted EPS on a non-GAAP basis for the quarter decreased 14% to $0.43 in 2017 versus $0.50 in 2016.

Adjusted EBITDA for the company was $67.7 million for the third quarter of this year compared to $76.4 million for the same period last year.

The tax rate in the quarter was 35.4% versus 34.9% in the year-ago quarter. The company did not repurchase any shares in the quarter. We currently have authorization to purchase an additional 7.9 million shares.

Consolidated customer count increased 9% to 1,705,000 at September 30, 2017, up from 1,563,000 a year ago. We estimate that hurricanes reduced our Q3 EPS by approximately $0.06 to $0.08, which was generally spread evenly between Progressive and the Aaron's Business. This impact is made up of increased reserves and write-offs of damaged or destroyed merchandise in our stores and in our customers' homes. Losses to our recurring revenue base, missed delivery opportunities and our temporary suspension of collection activities negatively affected our revenues in the quarter. This is a portfolio nature of our business. We expect to have modest unfavorable effects from the storms in Q4. Our estimates for the non-GAAP EPS impact is currently $0.02 to $0.03.

We maintained various lines of insurance coverage, including property and business interruption. To the extent the insurance recovery is probable, we have recorded a receivable for the net book value of the disposed merchandise. Business interruption, including lost store operating days and disrupted customer shopping and tenant behavior, will be calculated over the next several months, and we expect the insurance proceeds to be received sometime in 2018.

We have 189 stores closed for at least one day due to the storms and 873 total lost store days during the quarter. At quarters end, 3 stores remain closed. We have excluded these 3 stores from our comp store base in accordance with our definition of the same-store set. We have presented the Q3 comp with it and without the storm-affected stores. The hurricanes lowered our reported comp by 60 basis points in the quarter. As we have seen during previous storms, we expect the impact to be short-lived, and we will maintain our normal comp store-based methodology in Q4 reporting.

During the third quarter, we amended and extended our senior credit facilities and paid off and terminated the DAMI credit facility. The revolver was increased by $175 million to $400 million, the term loan was increased to $100 million, and both maturities were extended to September 2022 with pricing reduced by up to 50 basis points.

At the end of the quarter, net debt to capitalization was 12.7%, and the company had total available liquidity of over $525 million. We appreciate the ongoing support of our existing lenders and are pleased we were able to add 2 new banks to our facilities, which, we believe, provides us with additional borrowing capacity.

At September 30, 2017, the company had $126.3 million of cash on hand compared with $308.6 million of cash at the end of 2016.

During the 9 months of 2017, the main drivers of the change in cash are the SEI acquisition of $140 million; debt repayments of approximately $125 million; and share repurchases totaling $34 million, offset by cash generated from operating activities of $180.3 million.

As stated in our earnings release, excluding the estimated Q3 and Q4 impact from the hurricanes, we are reaffirming our 2017 full year outlook.

On a consolidated basis, we believe we will end the year around the midpoint of the ranges we have provided, excluding the impact of the hurricanes. That implies adjusted EBITDA margin expansion for the fourth quarter and full year 2017 versus the prior year periods.

On a final note, I'd like to add that we will be filing our Q3 10-Q later today, as opposed to our prior practice of approximately a week later.

Now I'll turn it over to John before we open the line for questions.

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

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Thank you, Steve. We're pleased with our results for the third quarter, despite significant challenges from the storms. The level of dedication, focus and compassion our teams showed during this quarter are truly inspiring and underpin my confidence in Aaron's for 2017 and beyond.

Thank you for your interest in Aaron's. That concludes our prepared remarks. I'll now turn the call back to the operator to open the lines 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 John Baugh of Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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So maybe we could start out with Progressive. And I guess, I'm curious, I know we had an impact on the provision and bad debt from the storms. And we also had the invoice volume growing. I think we also -- correct me if I'm wrong -- had really strong performances year-to-date on those metrics. So my question is, is there anything you can tell us about the recent pools of origination, how they're performing? I'm particularly interested whether Conn's or Signet or any other new customers are influencing those numbers at all. Or are we tightly within the bounds of kind of where you expect to be going forward with losses?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [3]

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Thanks for the question, John. Ryan here. As you pointed out, the stories in bad debt are really the hurricanes and growth. For the hurricanes, as John mentioned, we ceased collections activities in impacted areas, and that caused those accounts to move into delinquent status, which, obviously, caused the provision sitting inside of bad debt to grow. And then on growth, as you pointed out, in our provisioning policy requires that we reserve even for current receivables. So healthy growth in invoice will translate into an increase in that provision. There are a couple of points I'd share to help paint the picture of overall portfolio quality just given the year-over-year shift in bad debt expense. The first is that the changes I pointed out is really in the provision and the stories there are really the storm and growth. If you look at gross charge-offs as a percentage of revenue year-over-year, they're actually down in the quarter, which, I think, is a strong sign of underlying quality in the portfolio. The second point I'd make is that excluding the effects of the storms, at the end of the quarter, we were at 3-year lows in the percentage of accounts that are delinquent on both the dollar and account basis. And I know we don't traditionally share that measure, but I thought it will be helpful in light of the year-over-year delta to just give you that additional bit of insight on delinquencies. And the final point I'd make is just the write-off percentage. Once adjusted for the 30 bps due to the storm is also down year-over-year, which, I think, is another good supporting indication of the quality of the portfolio. The accounts you mentioned are performing in line with expectations. We don't really talk about this, in particular, as you know, but those are meeting our expectations. I feel very good about how the lease pools are performing. We continue to have good visibility into their performance, and the trends we're seeing are good.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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All right. Maybe we could go to the core side, and there were, I think, 3 things cited. The deliveries increasing same-store sales, I believe, improving, at least, sequentially, if not year-over-year as well, then lease margin. I guess, I was particularly interested in the latter comment in terms of pricing indoor, what you're seeing happening and how that plays out into Q4 and into next year.

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

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Sure. John, it's Douglas. So what we're seeing in the lease margin is really 2 things. One is the deals that we did in late 2015, early '16, when we were doing heavy promotions, I think we mentioned this last quarter, are rolling out of the portfolio. So that's giving us some natural lift in lease margin. We're also doing a great job with our merchandising and marketing team and doing new promotions that are driving more customer traffic. And I think that's what we're seeing in these enhanced deliveries. It's really promotional cadence and better discipline. Or probably more importantly, our merchandising team is doing a great job of product assortment and a trade-up strategy, where we're leading with higher-priced items that are more attractive to the customer and less of lower-priced items. That's driving higher rent per agreement. At the same time, we're doing less promotion, so it's translating into better margin. We see that margin improving. We've seen it improving the last couple quarters, and we're happy about that. We can't raise margin forever, we realize that, so there has to be a balance there between strengthening our margin and driving deliveries, and we're finding that balance. We're investing a lot in analytics and in our pricing function to try to figure out where that sweet spot is.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6]

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Okay. And Steve, you get the DAMI question, a $4 million pretax loss in the quarter. I suppose it's not worth spending a lot of time on it. But I guess, my simple question is, is this -- was this part of your annual guidance? Or is there any change there relative to the annual guidance hurting or helping you in terms of that performance?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [7]

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John, I appreciate you giving me the DAMI question. Yes, listen, DAMI is continuing to perform in line with our expectation. It was included -- it is a small part, as you alluded to. It was included in our annual guide and it is included in our reaffirmation, although on that particular segment, would -- it'd probably be towards the lower end. But on the -- it is included in the reaffirmation of our guide. So there's some post -- as the composition of the book becomes more weighted towards post-acquisition originations, that provision is going to continue to kind of weigh on us in a growth environment. So -- but having said that, it's still performing in line with our expectations for 2017.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [8]

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Okay. So there might be a slight headwind maybe to the original part for year guidance, but not meaningful. Is that fair?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [9]

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Not meaningful, that's correct.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [10]

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Okay. And then my final question is -- and I guess, Ryan or John, either one of you could take this. But I think there was a reference to picking up some LTO business from retail partners who were playing with other LTO providers. Did I hear that right? And I don't expect you to give me names, but I'm curious to -- as to what the competitive landscape is like there, how those discussions go, how and why you win and/or maybe lose accounts to the extent that's happening as well.

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [11]

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Yes, I appreciate the question, John. I'll let John chime in as well here. On the competitive front, I hate that I sound a bit like a broken record here, but no material change from previous quarters. There are about 40-or-so competitors in this market, but it's been that way for a while. We've seen some come and go, but there's always been a pretty healthy level of competition. I'm very happy with our success today. And as you've pointed out, it -- we don't win everything, but we win more than our fair share, which is, I think, what's driving the strong growth in active doors and invoice volume. As you know, we don't tend to publish press releases on those wins. A couple went out this quarter about those accounts that you had mentioned previously. But I'd say in any quarter, we're engaged in dialogue with folks and, potentially, even pilots with folks who are both new to rent-to-own for the first time as well as those who are considering a move to Progressive from an existing partner. And the team has done an excellent job executing on both of those types of opportunities, and I expect they'll continue to do so. What gets me most excited is that we're talking about a $20 billion-plus market, only $3 billion of which is currently being addressed. That means that as time passes, I expect us to always have an ongoing pretty robust set of conversations, which are with folks who are new to rent-to-own because that's just how the math plays out if we're only addressing $3 billion of the $20 billion today.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [12]

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And this is John. John, I'll add one thing to that. The thing I would say that Progressive has done such a great job on is that the product offering has not stood still. So when Ryan talked about taking accounts from incumbent providers, Progressive has pushed itself and our retail partners have pushed us to get better. And Progressive has stepped up and done that, and that's been the reason, in many cases, that we have been able to take incumbent businesses because we have continued to innovate the product, continued to do a better job, and that's a testament to the team. But the product team at Progressive and the support team out there and the whole ops team who's supporting the merchant partners and the customers, and we just keep getting better and keep innovating. And that's one of the things that's made Progressive so successful. And there -- one of the pieces of the culture, we've got to maintain to make sure we stay ahead of it because it doesn't always -- we hear a lot about coming down to price. It doesn't always come down to price. It comes down to being a value-added partner for your -- for the retailer. And we're working every day to do that better and better. And I think that's one of the reasons that we've been so successful. And we'll continue to invest in our team and in our products, so that we continue to be value-added for our partners.

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Operator [13]

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The next 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 [14]

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Wanted to, I guess, first ask about top line trend sort of before and after the hurricane for both sides of the business and see if you could give us a little more color about maybe how customers in the Houston area and Florida are reacting and what new agreements look like post hurricane as the quarter wrapped up and as we move into -- moved into the fourth quarter.

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

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Brad, it's Douglas. Yes, first of all, the hurricanes were a big deal in the quarter for our team. And I'm really proud of the way our team rallied, probably more proud of the way they handled their relationship with the customer. And I think that went a long way to where we are today, which is we got our stores opened at an average of 5 days, in many case -- in many cases much sooner. And we're seeing a lot of customer demand now. So we're seeing a lot of customers coming in the door, needing us. As we mentioned, we suspended some of our collection activity, which gave them a chance to get on their feet. And both our employees and our customers were very grateful that we did that, and I think that goes a long way. We think about ourselves in the relationship business and I think we did good by the customer, and we did good by our associates as well in that. So proud of the team and their strong demand in both markets.

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [16]

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And then just to touch on Progressive as well. Again, we saw similar trends. Obviously, business dropped off during the most intense periods of the storms in both areas and then returned to normal levels relatively soon thereafter.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [17]

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And Brad, I would add that based on the performance of our -- both businesses and the kind of the collection activity and the portfolio performance, we would feel like, excluding the storm, our customers are doing, at least, as well as they've done over the past few quarters and maybe a little better. And as Douglas said, in the hurricane-affected areas, and it's different for Harvey and Irma, but certainly -- particularly on -- in the Harvey affected areas, we're still going through a process of working with customers and replacing damaged products. And that's something that's going to go on for a bit. So -- and Douglas said it just right. I mean, we think about our customers in both businesses as long-term relationships. And so we're trying to do everything right to help them and take care of them right now.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [18]

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That's great. And if I could ask a follow-up question about expenses. There's a lot of noise or nuance here to this quarter between amortization that you'll have and the SEI acquisition and the hurricanes. I guess, as we try to do the adjustments, it does look like the underlying expense growth may have accelerated here in the third quarter. Could you all maybe just talk a little bit about what's going on within the expense structure of the Aaron's Business and Progressive?

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [19]

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Sure. This is Doug. I'll start with the Aaron's Business. As I mentioned in our comments, our margin was under pressure. That half of that pressure relative to last year was related to the hurricanes. Some of that was expenses that flowed through in the form of write-offs related to the hurricane and just less business that we were doing in those markets. The remainder of the expense increase was related to both business transformation initiatives, which we've talked about in the past. We're beginning to invest in the business transformation projects to both enhance customer experience and reduce our cost to serve. And getting those underway, it's a little -- there's an upfront investment in doing that, which we incurred in the third quarter. In addition, we were comping over some credits last year as we started our aggressive cost-cutting initiative, store closure initiative. We got some benefits in the third quarter that we were comping over. So that's the Aaron's Business. I don't know if you want to address Progressive.

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [20]

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Yes. And the story in Progressive isn't too dissimilar. So on the decline year-over-year, about half of that is due to the hurricanes. And other half is pretty evenly split between gross margin, SG&A and bad debt expense. From a gross margin perspective, we talked about the pressure that arises from just having a younger average account. And when an account is slightly younger, you tend to see a higher percentage of those accounts within their 90-day buyout window, which will drive slightly more buyout revenue, which is, as you know, lower margin revenue for us. So even though 90-day buyout levels on a vintage maybe flat or slightly down in periods of high growth and calendar periods, you'll see a higher percentage of revenue attributable to 90-day buyouts and see gross margin pressure as well. From an SG&A perspective, obviously, the growth requires an investment in people and systems, as John was referring to, especially given that we expect that growth to continue. And then we covered, earlier on John's question, the bad debt expense. But it's really a provisioning story about storms and growth.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [21]

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Just -- and so if I tie it all together, I mean, the trend over the last several quarters had been flat or pretty strong leverage of your operating expenses. There's clearly some uniqueness to what happened here in the third quarter. But do you think we'd be getting back on a path here of OpEx growth once we get past some of the storm issues here for 3Q?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [22]

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I think what -- we've guided to stay within the range we -- just about the Progressive business, Brad.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [23]

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I should say at a higher level just as we think about putting together the 2 businesses and how the model will flow going forward.

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [24]

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Yes. Brad, this is Steve, and I think, as Douglas talked about, specifically for the Aaron's Business and, to some extent, for the AAN business, year-over-year comps last year, so this year compared to last, last year had some onetime credits as we were doing this. Well, some of it was onetime, as we were doing this cost reduction and -- which included a reduction in force in the Aaron's Business. You'll also see, we started a pretty aggressive campaign to manage our workers' comp cost back in '15 and early '16. And you'll see in our commentary in our Q that we'll file later this afternoon that there's -- it doesn't quantify, but there are some swings in the actuarial assumption, so we got an actuarial report in Q3 of last year that -- and we had landed some previous claim pools favorably. So there are some adjustments there. And this year, we changed the sequencing cadence on our actuarial report. So we'll get -- we did not get an actuarial report in Q3. We'll get one in Q4. The meat is -- there's not much meat on the bone on that initiative as there was last year, so we're not expecting the same credit. But there is some timing differences there that caused the year-over-year comps to look a little bit out of whack.

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Operator [25]

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The next question comes from Laura Champine of Roe Equity Research.

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Laura Allyson Champine, Roe Equity Research, LLC - Senior Analyst for Consumer and Retail [26]

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I appreciate the quantification of the impact that the hurricanes are having on your expenses and so forth with a $0.02 to $0.03 hit in Q4, but are there offsets there? It seems as if your products would be really appealing to some people who've been affected by the storms. And are there offsets in terms of new customer adds in Q4? And then what do you expect from a lift as these areas recover in 2018?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [27]

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Yes, Laura, this is Steve. I'll start and then the other can jump in. But on the demand side, as Douglas and Ryan have said, we did see some traffic activity bounce back after the storms. But as you know, the majority of our businesses in this portfolio is already out in the customers' homes. And so we've done our best to contact our customers and get a sense for the impact of the storms. But from a recurring revenue basis, we expect there will be some lingering effects into Q4. But on the -- so that would be kind of like the existing base. But on a new demand side, as we have experienced in previous storms over the last 30 years, we have seen some bounce back. And we're not really commenting on '18, but we've seen some bounce back even since the mid-September. But I'll let Douglas and Ryan chime in here as well.

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

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Yes, and I think I'll just reiterate what you said. Our customers are under pressure in all the affected areas, particularly the flooding in South Texas. And so there is lost property, which we have insurance for, but -- had some coverage. But the customers are going to be under pressure for a while. And while there's demand for new product, the collectability becomes more challenging on those markets.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [29]

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And Laura, this is John. And we hope that there's a tailwind from it coming out of it. But we don't -- we aren't necessarily planning for that. So we're just kind of watching it unfold, but that's certainly not part of our current plan. We're just going to react to it as it comes. And hopefully, customers get back on their feet, and we can serve them. That's the hope.

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Laura Allyson Champine, Roe Equity Research, LLC - Senior Analyst for Consumer and Retail [30]

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And if there -- if you do see a resurgence or new customers who are looking to replace their home furnishings, will you have adequate in-stock positions to service that demand, if you do see a surge?

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [31]

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Absolutely. Our fulfillment centers in Texas are up and running. And they were -- right after the storm, and we're fully stocked and ready for business.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [32]

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And our Woodhaven -- I would add our Woodhaven division is actually preparing some special lines and runs to put into that, especially the Houston market, where the flooding was most prevalent, to try and help customers with certain price point -- opening price points or other upholstery items to the extent that those people need those products. And I wouldn't think that the retailers -- Ryan can chime in here, but the retail partners on the Progressive side are well positioned as well from an inventory standpoint.

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [33]

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I think they mirror John's statements. I think they all expect to see recovery in their business. And based on their experience with previous hurricanes, they've -- they're hopeful that, that will occur here again. And we're, obviously, in the field ready to support them.

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Operator [34]

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The next question comes from Anthony Chukumba of Loop Capital Markets.

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Anthony Chinonye Chukumba, Loop Capital Markets LLC, Research Division - Analyst [35]

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So in your prepared remarks, you alluded to some changes in the merchandising in the Aaron's Business that were driving some of the improvement there. And I was just wondering if you can just give us a little bit more color in terms of those merchandising changes.

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [36]

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Sure. We're going through a number of initiatives in merchandising. We brought in Steve Olsen as our Chief Merchandising Officer, and he's brought a more analytical approach to our merchandising program, some of which is just looking at each product category and making sure we have true good, better, best options for the customer. In addition, we're bringing in more style, more color, more functionality into our mix. And it's not just in furniture. It's in electronics, and it's really in sort of rationalizing our computer assortment and TV assortment. So feel like we're doing a great job on a show-room floor of getting products the customers want at different price points. And as I mentioned before, also leading with those products and our advertising, a lot of our advertising is going to more product and price-driven advertising. And we're seeing great -- good response from our customer base on that. So really happy with that. We're investing a lot in pricing as well and understanding the various price points that the customer -- that attracts the customer and the customer can afford. So just a lot of good blocking and tackling and execution by the merchandising team.

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Anthony Chinonye Chukumba, Loop Capital Markets LLC, Research Division - Analyst [37]

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Okay, that's helpful. And then I just had one follow-up on SEI. I mean, I know it's obviously early, but any early learnings from the acquisition? And I guess, just an update in terms of where you are in terms of sharing best practices since you alluded to as definitely one of the big opportunities with SEI.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [38]

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This is John. I'll speak. And then Douglas, feel free to give any more color. But in terms of the SEI acquisition, I'm really proud of the team, SEI and the team here at Aaron's because of the distractions we had during the storm and the timing of the close was not ideal. But as Douglas mentioned in his comments, the integration is on track. We're really excited to have Dave Edwards as a leader for our organization. And he's working hard on the integration, along with Douglas and his team, and we expect, over time, Dave's span to extend into a broader region within the Aaron's Business. But right now, it's a matter of just getting them integrated over. And it's a sizable operation that takes effort to get all of their employees transitioned over. And we're just -- there's a plan there. We're on track with that plan, but it's in process. And Douglas, feel free...

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [39]

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Yes. In terms of the integration and best practices, actually, we just had a quarterly business review down here. Dave attended and he's bringing a lot of good ideas from the SEI business, and we've socialized those with our DVPs. I think as we go into 2018, we'll begin taking those into account in the broader business. But so far as everything, I'm very pleased with the integration efforts and the SEI team.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [40]

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Yes. In terms of timing, Anthony, I mean, certainly, our expectation in '17 was to try to get them transitioned over. But the real learnings I expect to be '18 and beyond, as we get them integrated and then get Dave and his team spread over more stores.

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Operator [41]

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The next question comes from David Magee from SunTrust.

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David Glenn Magee, SunTrust Robinson Humphrey, Inc., Research Division - MD [42]

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Couple of things. One is, would you expect the expenses to be elevated over the next couple of quarters, sort of above and beyond the hurricane impact?

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [43]

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Yes. I mean, as far as the hurricane impact, we've tried to quantify it as best we can. I don't know, there'll be a little bit into Q4, but -- as we've talked about. But expenses on the Aaron's Business will be -- we are investing in the business transformation, as Douglas has alluded to. But as we said in our remarks, we expect that there will EBITDA margin expansion year-over-year in Q4 and for the full year in the Aaron's Business and on a consolidated basis. So we're making those investments. And we -- but we also expect to have some top line benefits as well.

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David Glenn Magee, SunTrust Robinson Humphrey, Inc., Research Division - MD [44]

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Okay. And the fact that the actual charge-off numbers less on the Progressive side than the provision, would you expect the provision to come down from that third quarter level because of that differential being so wide?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [45]

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On that, what I said, David, is that I feel good about the underlying quality of portfolio, which means that gives us confidence. We'll continue to be in that 10% to 12% of revenue range we provided for overall bad debt expense. There are a few components, so those charge-offs being one and change in provision being one, and recoveries being one. But we think the story of those will tell in Q4 will get us to that 10% to 12%.

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David Glenn Magee, SunTrust Robinson Humphrey, Inc., Research Division - MD [46]

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Okay. The -- any color you can give on Signet or the comps relationship at this point, maybe number of stores that were on the system at this point and sort of how that's going?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [47]

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I appreciate the question. As you know, we try and leave it to our partners to comment on their business. I understand those 2 are a bit unique in that press releases were issued on both accounts. And I'll just reiterate what I said earlier, performing in line with expectations. We're obviously really happy to be working with both retailers. Great examples of the kinds of wins that I referred to earlier. Teams on both sides are working really hard to grow each of those accounts. And I think a lot of upside remains for both businesses.

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Operator [48]

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The next question comes from Kyle Joseph of Jefferies.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [49]

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Most of them have been answered. Just a few sort of follow-ups. I'll start with you, Ryan. Progressive, the top line growth is very impressive. Just wondering if you can quantify any impacts from the storm there, whether it's the number of doors and impacted markets or kind of what you did for the core and the sense you gave same-store sales number, including and excluding storm-impacted stores.

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [50]

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Sure. So we did see an impact in invoice. I'm looking at Steve, I don't know if we actually quantified how much that was. On the quarter, it wasn't tremendously meaningful, but it does kind of help spread the gap between the storm and -- the overall storm impact of 110 basis points and the 95 bps we quantified for you arising from bad debt and write-offs. I think a rough way to think about the remainder is the impact of the invoice volume and the contribution margin that would have come from that. So that's what I would say. Appreciate the comment on overall growth. Super excited about it. The team is working really hard. We remain really excited about the pipeline at Progressive and just really proud of the distinguished list of retailers we work with and remain really bullish.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [51]

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Got it. And then in terms -- actually, a Progressive partner recently commented on their October comp. Have you guys -- in hurricane-impacted areas. Have you guys seen similar trends in both your stores and other Progressive partner's?

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [52]

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Yes. I don't know if we're -- Kyle, this is John. I don't know if we know exactly which one was that. But I think we've talked about that. I mean, we're seeing some increased demand sort of in the Aaron's side. And as Ryan said, we've snapped back with the retailers in those markets. But we've got -- on the Aaron's side, we've got the inventory to serve if that continues. And on the Progressive side, we're ready to aid our retail partners. But we don't have any more comment beyond that or any more insights beyond that. We're kind of taking it as it comes and just be prepared to help.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [53]

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Got it. And then just one last question stepping back from a macro perspective. Have you seen any changes in the sort of availability of credit to your customer? I'm asking this because we really started to see credit card growth kind of decline in recent periods and just seeing if that explains why both segments are improving or if it's just more execution.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [54]

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It's been -- we've talked about it on prior calls. It's been a pretty open available credit market for our customer for the last few years, frankly. And I don't know that we've seen a change there from our perspective. I don't think so on either side of the business. And we're just, from a collection standpoint, seeing, as I said earlier, a little bit improvement. So that's encouraging, in some cases, even more buyouts, which says the customer may be doing a little bit better. So we're hopeful that, that's the trend and will continue. But that's just this quarter and we'll see how that goes going forward. But from an availability standpoint, Kyle, it feels like it's kind of the same as it's been for us.

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Operator [55]

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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 [56]

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Thank you very much for your participation on this call. And we look forward to updating you on our fourth quarter and full year results next year. So thank you very much.

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Operator [57]

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