Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Executives

Gilbert L. Danielson – Executive Vice President & Chief Financial Officer

Robert C. Loudermilk, Jr. – President & Chief Executive Officer

William K. Butler, Jr. – Chief Operating Officer

R. Charles Loudermilk, Sr. – Chairman of the Board

John Baugh – Stifel Nicolaus & Company, Inc.

Analysts

Dennis Telzrow – Stephens Inc.

Arvind Bhatia – Sterne, Agee & Leach

John Baugh – Stifel Nicolaus & Company, Inc.

Kris Rapplejay – Suntrust Robinson Humphrey

Laura Champine – Morgan Keegan

Laura Richardson – BB&T Capital Markets

Jordan Hymowitz – Philadelphia Financial

John Harlowe - Barrow Hanley

Joel K. Havard - Hilliard Lyons

[Mike Smith - Kansas City Capital]

Aaron Rents, Inc. (RNT) Q3 2008 Earnings Call October 29, 2008 10:30 AM ET

Operator

Good morning, Ladies and Gentlemen, and welcome to the Aaron Rents third quarter earnings call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Gilbert Danielson.

Gilbert L. Danielson

Well, thank you for joining us today. Today Charlie Loudermilk, Chairman, Robin Loudermilk, CEO, Ken Butler, Chief Operating Officer and myself, Gil Danielson, Chief Financial Officer is on this call. The company’s earnings release issued yesterday and related Form 8-K is available on our website, www.AaronRents.com in the investor relations section and this webcast will be archived for replay there as well.

Before we discuss the results I would like to read the company’s Safe Harbor Statement. Except for the historical information, the matters discussed today are forward-looking statements of the company. As such they will involve a number of risks and uncertainties including factors such as changes in general economic conditions, competition, pricing, customer demand and other issues that could cause actual results to differ materially from such statements including the risks and uncertainties discussed under risk factors in the company’s 2007 annual report on Form 10-K, including without limitation the company’s projected revenues, earnings and store openings for future periods.

We’ll now begin our comments. Robin will have a few opening comments; then Ken will follow up from that and then Charlie will add some comments and then at the end I’ll add some further information and then we’ll take questions from the participants.

Robert C. Loudermilk, Jr.

As you can probably tell we’re quite pleased that our third quarter of 2008 exceeds our revenue and earnings expectations. Even in these difficult recessionary times, customers seek our stores to acquire the basic home furnishing products. As credit tightens further and more Americans experience income challenges, I believe we will continue to see an increase in our business as more and more individuals see the value of the Aaron’s non-credit based monthly pay programs.

Same store revenues in both company operated and franchise stores was once again strong even though as best we can tell over 100 of our system stores were affected by the Hurricanes Gustav and Ike. This is a direct result of the hard work of all of our associates to quickly recover from the devastation and once again provide products and services to our customers in these areas.

Our earnings were negatively impacted in the quarter by at least $0.01 to $0.02 per diluted share by the effect of the hurricanes. These financial results continue to be negatively impacted by the new stores’ startup expenses we call drag we have opened in the last year or so. This new store drag is a price we pay to create new revenues and earnings for future quarters. As we have slowed down our new store growth this year to a 10% to 12% range, this new store drag will return to more normal levels in the future periods.

As announced earlier we are in the process of completing the sale of our Aaron’s Corporate Furnishings division. Again, I want to thank all of our Corporate Furnishing associates for their hard work over the past 50 years. This will allow us to focus on our faster growing large market Aaron’s sale/lease ownership concept. As we’ve always said, be successful in this business and Ken will certainly attest we have found many times we must focus on the renting and renewing from our existing customer base.

Our plans the next several years are to grow an average store base in the rage of 10% to 12% a year. The net store growth this year will be less in 2008 as we consolidate and sell some stores that have not been achieving acceptable profit goals. This slower growth will be a more consistent, predictable and efficient manner and should improve future profit margins and overall financial performance.

We again thank your support in the company and I’ll now turn the call over to Ken.

William K. Butler, Jr.

Good morning. The best description of the quarter is to relate it to a football game and we had a tremendous lead until late in the game and lost our momentum as three hurricanes hit us within a short period, affecting hundreds of stores on the Eastern seaboard to the Gulf Coast of Louisiana and Texas and turned into tropical storms that impacted our business all across the Midwest. In spite of that we remain focused and still won the game.

It should not have been as close as the score indicated. We have quickly recovered from these events as we are having a record month in October in terms of new customer growth. During the quarter we gained 25,747 new customers and that is the largest customer gain in a third quarter going back the last five years.

Our same store sales were at 5.7% and our franchise comps are at 18.4%. During the quarter we initiated a 20% instant rebate program in July to help stimulate our retail sales and we immediately saw a 41% increase over the third quarter of 2007. This is without any advertising or marketing initiatives. We are awaiting the completion of the CORT acquisition of our Corporate Furnishings division and we want to take a moment and thank all those who have been a part of that division. Without them and their support as Robin mentioned, Aaron’s Sales and Lease Ownership would not exist and I know many of you will be going to CORT, Aaron’s or elsewhere and I wish you much success in the future.

CORT is not buying all the merchandise and we have teams waiting in the wing to begin transferring inventory to our stores to offer a great value to our customers. In the spirit of teamwork, many of our franchises are planning on acquiring some of the product. What we cannot place on a lease agreement we will dispose of through clearance sales. We think we can liquidate all of this inventory over the next six months.

Our strengths remain in that we have the right program with the right people, the right products and at the right time. I read an article five days ago about the five towns in the U.S.A. who are the most hardest hit due to national and local economic issues. Four of the five towns we have an Aaron’s store operating. They are Palatka, Florida, Lancaster, South Carolina, Shelby, North Carolina and Zanesville, Ohio. I looked at the performance reports of each of these stores and saw no reason to be alarmed or concerned about their ability to continue operating as their numbers were right solid. I consolidated all their numbers so I could share them with you today.

Last year for the third quarter, their revenue average per month was $104,000. This year in the quarter their average revenue is up to $117,000 per month, representing an 11.7% increase. In 2007, their average profit per month in the third quarter was $7,200 per month per store and this year in 2008 the four stores averaged $15,517 per month. I give you these numbers only so you can examine the strength of our program and what someone from the outside determined were the toughest markets to stimulate growth.

Our customers are telling us that no matter what the circumstances are, that they need our products and they are doing the math to choose where they shop in these tight market conditions. They like our monthly pay program and they love our selection and most importantly they love saving money. We have positioned ourself well for the future and tomorrow and remain focused on continuing to deliver exceptional operating results.

R. Charles Loudermilk, Sr.

I think I want to emphasize what Robin said about the focus and we’re not going to be, as long as I’m around, a check cashing business or a pawn shop or payday loans. We’re going to focus on what we know how to do. After 51 years we have really come up with the right program at the right time; the right business at the right time. And to emphasize that we are selling our rent-to-rent division to CORT. It’s just a matter of closing that; it’s been okayed by everyone, the government and everything.

So the future looks very, very bright; I’m very enthused over particularly our team. We have a team together now that I’m very proud of both in the home office and out in the field: the district manager, regional manager, every general manager of the stores. They really know what they’re doing and how they’re doing it and this is the test of what our training program is doing out in the field. We train people every day on how to come with our program. It’s a different program than anyone else in America has and it’s working extremely well; I’m very pleased to be with the company as the Chairman.

Gilbert L. Danielson

I’ll just highlight some of the results for the third quarter and the first nine months. As we stated we are in process of selling substantially all the assets of the Aaron’s Corporate Furnishing division. We expect the sale to close probably within the week so we’re getting close to having that done.

Beginning with the third quarter results and moving forward, we will no longer include the revenues and expenses of the Aaron’s Corporate Furnishings division on our statement of earnings; just the net earnings of the division are in that one line item from discontinued operations.

Since we didn’t record the revenues of Aaron’s Corporate Furnishings any more, our revenues were less than what was expected but as we add the revenues of the Corporate Furnishings division into our reported revenues we certainly exceeded our revenue projections for the third quarter also and on track for the entire year revenue projection.

For the quarter the company revenues increased 16% to $388.0 million and 15% for the nine months to almost $1.2 billion. The Aaron Sales and Lease Ownership division’s revenues increased 17% in the third quarter and then also 15% for the nine months. We talk a lot about our franchisees; they also had a great quarter and having a great nine months. They increased their revenues in the third quarter to $166 million and $493.7 million for the first nine months. The revenue increase in the third quarter for them was 26% and 19% for the nine months. However, as we stated before revenues of franchisees are their revenues; they’re not revenues of Aaron Rents, Inc.

Same store revenue growth in the third quarter for the Sales and Lease Ownership stores, the company stores was 5.7%. It had accelerated from where it has been in the last few quarters as we predicted it would. For stores that were over two years old, those were for stores that were over 15 months old at 5.7%. For stores over two years old the increase was 3.2% and as Ken mentioned, the same store revenue growth for franchise stores, their growth was up 18.4% for the quarter compared to a year ago.

Net earnings for the quarter were $21.1 million or $0.39 per diluted share compared to $0.29 for this quarter of last year, an increase of 34%. Diluted earnings per share for the first nine months of the year were $1.28 compared to $1.18. If we look at diluted earnings per share from continuing operations which includes Aaron’s Corporate Furnishings division, the earnings per share for the continuing operations increased 42% for the quarter and 12% for the nine month period.

As we mentioned, over 100 of our stores were adversely impacted by Hurricanes Gustav and Ike and we estimate that the hurricanes negatively affected our quarterly earnings by at least $0.01 to $0.02 per diluted share including the loss of merchandise that incurred in our customers’ homes.

The new store drag as Robin mentioned was $0.05 per diluted share for the third quarter compared to $0.06 per diluted share in the third quarter last year. During the quarter the Aaron Sales and Lease Ownership division opened four new company operated stores, 12 new franchise stores and one franchise RIMCO store. We also sold 11 company operated Sales and Lease Ownership stores to three different franchisees and we closed four company stores during the quarter. In addition we acquired one franchise store and purchased the accounts of three third party stores.

Our guidance for the fourth quarter is to expect revenues in excess of $410 million and to achieve earnings per share in the range of $0.32 to $0.37 per share and again for the 2008 year is to have revenues approximately $1.6 billion. The Aaron’s Corporate Furniture division was running about $100 million a year so that would reconcile to our previous forecast of $1.7 billion in revenues. We are raising slightly our diluted earnings per share guidance for ’08 to a range of between $1.60 and $1.55 per share. And our initial guidance for 2008 is to achieve diluted earnings per share of $1.65 to $1.80.

Those are the highlights of the quarter. We will certainly turn it over to any questions that we may have from the participants.

Question-and-Answer-Session

Operator

(Operator Instructions) Your first question comes from Dennis Telzrow – Stephens Inc.

Dennis Telzrow – Stephens Inc.

Two quick questions. In your guidance what’s your assumption of the use of this money that you’re getting from the sale of the Corporate Furnishings? $72 million. Is that to pay debt or buy stock? That’s what I’d think about that.

Gilbert L. Danielson

As money will come in in a week or two I guess our original plan was to pay down our revolving credit facility. As of today we’re drawing down on that about $48 million on our $140 million facility. You may recall that in May we renewed our $140 million facility for another five years with five banks so we’re in good shape in that regards.

We’ll take the cash and pay down revolver. Who knows what we’re going to do? As stock price moves around every day right in front of our eyes it’s hard to say tentatively what we’ll do with the excess cash but we’ll certainly put it good work. And buying shares is not out of the question but we just evaluate that on a day-by-day basis.

R. Charles Loudermilk, Sr.

This is Charlie. We have a board meeting next week and we’ll discuss this next week with the board members. What I’ve been hearing maybe from the board members is we should buy back some shares so we can give you that answer after the board meeting but we’re going to let the board decide that.

Dennis Telzrow – Stephens Inc.

One last question. You mentioned you were moving some inventory from Corporate Furnishings I guess back to the company. Is that a big number or do you have a feel for how much that is?

Gilbert L. Danielson

It’s a pretty good sized number. I don’t have it right in front of me but it’s multiple millions of dollars that we end up, we’re selling the assets of the division to CORT and they’re not taking all the inventory. It’s upholstery, primarily upholstery items and so a lot of the merchandise we’re going to keep and then move it through the Aaron Rents Sales and Lease Ownership.

Operator

Your next question comes from Arvind Bhatia – Sterne, Agee & Leach.

Arvind Bhatia – Sterne, Agee & Leach

First of all I wanted to understand if you could maybe elaborate on where you’re seeing this trend in terms of maybe the income demographics. Is it across the board? Is it more towards the upper end? That’ll be the first question. And then just a couple things. What sort of new store dilution would you be expecting in 2009 given your plans to open stores and the timing of these new stores, how should we think about that?

William K. Butler, Jr.

The first question, it’s like the stress of the customer?

Arvind Bhatia – Sterne, Agee & Leach

No, this trend. Your business is looking strong so you seeing more business towards the upper end of the income demographic or just where are the pockets of this trend?

William K. Butler, Jr.

No, I think I haven’t seen a change in that. Probably the big thing I think, our customers were the benefactors of the stimulus package in the summertime and that helped get us through the summer. When your customer base there is money it’s always a pretty good thing so we had good summer momentum and good customer growth and we continue but I, we haven’t seen a change in that base that I can speak of.

Arvind Bhatia – Sterne, Agee & Leach

The new store dilution in 2009, Gil?

Gilbert L. Danielson

As we bring in the history as you recall, I think it was the fourth quarter a year ago, fourth quarter of ’07 we had $0.11 of new store drag from opening up stores. We are going through a rapid store growth back in ’07. About $0.11, I’m doing this by memory, a little bit by [inaudible], went to $0.09 in the first quarter of this year and then went to $0.06 and I guess it was $0.06 or $0.05 this quarter. So it’s been trending down as we predicted.

Normally, and we usually always have $0.02 or $0.03 of new store drag if we’re opening stores which is our intent, so if you look back, if you go into ’09 I think the new store drag in the fourth quarter, we’ll get a little break on it. It should be a little bit better than the third quarter but I think it’ll get into ’09 and you’ll get more into that $0.03, $0.02 to $0.03 quarterly new store drag.

We’re going to try to do something novel next year to open stores on an even basis. We talk about that a lot but it led us to the fight that we are going to, on a company store basis anyway, that we’re going to try to open our stores up and a little bit smoother than we have been in recent memory and I think that will make it a little bit better to –

R. Charles Loudermilk, Sr.

Let me just to that that Robin just asked me to continue about our relationship with the franchisees and I can tell you that I’ve never seen a happier group of people in the last. We had a meeting with them, 250 attending and there were a lot of smiles in the room. We are doing well. My job now is to encourage them to open more stores.

We talked to you last year about this is the year that profit, the previous year we opened like 250 stores and we have sold what 305 franchise stores that we haven’t opened yet. We’ve sold the rights to open so I will be encouraging them to open franchise stores but I don’t know that our team here has really decided on how many company stores we should open.

I do feel that at the end of last year we had lost our feel for it, our control of all the stores. This year we have really concentrated on operating these stores profitably. We have sold some stores, swapped some stores, unprofitable stores and we’ll probably do the same thing in places, very small towns that really can’t support the revenue that we demand on our program. Our competitors can maybe do that better with their week-to-week pay and go forth but anyway, we really don’t know how many stores we’ll open next year but the emphasis is going to be on getting these franchise stores opened.

Arvind Bhatia – Sterne, Agee & Leach

From a standpoint of dilution in 2009, if I’m doing the math correctly you’re saying that you guys will actually have less dilution and sounds like about a $0.10 pickup in 2009 versus 2008? Does that sound right to you, Gil?

Gilbert L. Danielson

I haven’t added it up but there certainly should be less dilution in ’09 than there was in ’08. We will have some dilution in ’09 because we did sell the Aaron’s Corporate Furnishings division which, they had been making some money through the years and they won’t be around next year so that will be slightly diluted but that’s factored into the guidance that we gave.

Arvind Bhatia – Sterne, Agee & Leach

My last question is on same stores sales expectations for next year. Can you give us some idea of how you’re thinking?

Gilbert L. Danielson

Well, we’re thinking that they’ll be up but we don’t have any definitive number to give you. We’re looking for this quarter and the fourth quarter to be comparable or being slightly higher in the fourth quarter in the same store revenue growth. I would be modeling though, if we can maintain single digit same store revenue growth on a quarterly basis on a consistent manner I think that will serve us well and I wouldn’t anticipate with the slowing down the store openings to have much higher growth than that in the future; hopefully, a little bit but double digit growth I don’t think probably realistic to consider at the moment anyway.

Operator

Your next question comes from John Baugh – Stifel Nicolaus & Company, Inc.

John Baugh – Stifel Nicolaus & Company, Inc.

Two questions. Some commentary on collections and then can we get, Gil, a pro-forma revenue or income statement for rent-to-rent divestiture?

William K. Butler, Jr.

Yes, I guess I can speak to the, we don’t call them collections; we call it renewing because subsequent customers do when they renew the agreement with us but a year ago we were struggling. Our layoffs have gone up somewhat and we made some strategic changes; went back to a manual operating system rather than a sophisticated computer oriented system and we’ve seen very positive results and we’re in much better shape today than we were a year ago.

John Baugh – Stifel Nicolaus & Company, Inc.

Any particular comment in terms of chargeoffs?

Gilbert L. Danielson

Yes, the chargeoff, we’ve talked about the chargeoffs the last few quarters, where they were as a percentage at the store level and I think they were 2.4% as a percentage of revenues in the second quarter. It looks like they’re about 3.1% in the third quarter. Included in that number though was $800,000 of identifiable chargeoffs that came about through that merchandise that was destroyed in our customers’ homes as a result of the hurricane.

So you take that number out; certainly, that is a one-time deal. Chargeoffs came down to about 2.9%. That will clarify as we go through in October and November; we’ll probably still have some bleed from the hurricanes a little bit. But a little bit worse than they have been but I think a lot of it certainly was done through the hurricanes that happened in the quarter.

John Baugh – Stifel Nicolaus & Company, Inc.

Then just the pro-forma numbers?

Gilbert L. Danielson

What pro-forma numbers would you be looking for?

John Baugh – Stifel Nicolaus & Company, Inc.

If we can get the first two quarters of ’08. We stated you can send those to use if you have them. And then I had a question on strategy about company stores and Charlie or Robin or whoever wants to take it. We’re seeing obviously a very challenged retail environment and leasing is going to get a lot less expensive I would think. I’m curious as to how you think about ’09 and ’10 even in terms of opening stores? Do you sit back and wait maybe and let some really attractive options open up to you or you stick to the I guess what, 7%, 8%, 9% corporate store growth rate that’s implied in the 10% to 12% overall?

Robert C. Loudermilk, Jr.

John, this is Robin. I have talked to Paul Doize. He’s our VP in real estate and we certainly realize there’re going to be some great opportunities out there. We’re already starting to see a few for the new store locations both freestanding boxes, we’re starting to see some of those, and endcaps in these strip centers. So we could continue to plan to open at 10%, 12% range but we have re-looked at a lot of the deals that we’re looking at to make sure that they’re priced right in this market.

We’re also looking at all of our renewals to make sure that we’re negotiating fairly on those renewals in some of these centers that we’re in and renewing and there’s opportunities opening up down the street in a lot of cases. So we’ll be much more diligent, not that we weren’t in the past. We’ve gone from hyper growth, just trying to finally take in anything, maybe paying a little too much to now a real slowdown in the macroenvironment to looking at a lot of opportunities out there.

So you’re exactly right; you should see us really re-looking at some of this but we still plan to open a number of stores because frankly the business is there. The customers need our products and services. We do have the franchise stores sold so we need to get those open so I don’t think it’ll slow us down any; I think it’s, on the flip side, is really going to help us in our occupancy cost and our cost of entering these markets so it’s a real positive for us because we’re, I think we’re sitting in a great position especially at the sale of the rent-to-rent, their Corporate Furnishings division.

We’ve got the capital, got the people; we’ve got the team. I think it’s really time for us to make hay.

Operator

Your next question comes from David Magee – Suntrust Robinson Humphrey.

Kris Rapplejay – Suntrust Robinson Humphrey

This is Kris Rapplejay for David. Just first some questions about the Corporate Furnishings. Is it right to assume that the guidance for fourth quarter assumes a similar $0.02 from discontinued ops?

Gilbert L. Danielson

Probably the last activity of any significance will be in the fourth quarter for Corporate Furnishings as we then will close the sale during the quarter but I would think the number would be very small, either on that line and then that will pretty well disappear after that. It’ll be around forever on our reported numbers but the activity will pretty well cease.

We’ll have to look at the, as we liquidate that merchandise we talked about and then we sell some of the obligations of the Corporate Furnishings division, there could be changes in the discontinued operations line moving forward but it won’t really move down much at all.

Kris Rapplejay – Suntrust Robinson Humphrey

You mentioned some dilution next year from exiting that business. Could you make a guess on what, or an estimate on what the guidance range would be if you were still in that business?

Gilbert L. Danielson

I don’t know. It’s hard to do that. It’s certainly, one thing about the business is it’s a very economically sensitive business. Much in [August] as it was two months ago when we decided to sell the division. So you’re really hopeful that it would be profitable and would give, they would make and normally on a EBIT basis $8 million to $10 million a year but certainly no guarantee in ’09 that that would be a significant contributor to our earnings. It should be but won’t have to worry about it anymore.

Kris Rapplejay – Suntrust Robinson Humphrey

During the quarter can you comment at all about mixed performance? You talked about furniture actually being pretty good last quarter and that you were able to hit a lot of good $99 price points. Has that still been able to be maintained?

Gilbert L. Danielson

Yes, I can give you some comparisons on new leases that went out in the third quarter and again, television is leading the pack with, we had an increase of 36% in our LCD business over the third quarter of last year. Computers were up 26%, upholstery was up 14%, bedroom furniture up 17%, bedding was up 17%, dining room furniture up 7%, laundry up 11% and refrigeration up 4%.

Kris Rapplejay – Suntrust Robinson Humphrey

And the pricing of the TVs has still allowed you stay in that $99?

William K. Butler, Jr.

Absolutely. Yes, yes. A year and a half ago we were leasing a 42-inch LCD television for $199 a month for 24 months and today we’re at $99 for 24 so we definitely hit the sweet spot. For years we rode our marketing strategy on a $99 big screen TV and they went away and the new technology obviously was priced higher so it’s finally come down and hit the sweet spot.

We also have a laptop computer now that’s at $99 where a year ago it was at $129 so that’s really bolstered our computer business as well. And about a year and a half ago we were concerned about our furniture business because it had really flatlined on us and we’ve done some things to help the leasing of furniture. One, and they were advertising it a lot more particularly on the cover of our monthly [advo] piece that we sent out and then additionally we changed the terms. We started leasing it on a 24 month basis so our customers could afford the product and then I think both of those strategies are paying dividends right now.

Kris Rapplejay – Suntrust Robinson Humphrey

Just one last question. With the hurricanes I know that sometimes after the fact as people start to get insurance checks, etc. you might actually see a boost from that business and I was wondering if after the rebuilding, with construction workers or product replacement is starting to drive any sort of improvement in that area?

William K. Butler, Jr.

I don’t know if we’re seeing that yet. I will say this: our people particularly in the Houston area that was hit the hardest and the Galveston area have just worked their fannies off to get these stores cleaned up and back to operating. We’re back to where we were before the hurricane and I certainly think we’ll get an uptick as we did from Katrina in New Orleans a few years ago. Of course, this wasn’t near the devastation of what Katrina was.

Operator

Your next question comes from Laura Champine – Morgan Keegan.

Laura Champine – Morgan Keegan

Just wondered if you’re seeing any trends in terms of the change in agreement size, price per unit or even number of units per agreement?

William K. Butler, Jr.

Yes, I think our agreements have come down. If you go back over the last year and a half and it makes sense that they would have. I think we’ve done this at the right time, the right place so obviously television prices have come down. When that happens we pass on the savings to our consumer. I think the average price has come down. What do you show?

Gilbert L. Danielson

About 8% is coming down on new leases written in recently. One thing that’s happening though is that our terms are stretching out and we, as you recall I think we mentioned this last time on the conference call that we have, are putting more merchandise out on 18, 24 month agreements so the terms are stretching out so the actual dollar value agreements is improving slightly.

William K. Butler, Jr.

The terms are stretched out at a higher percentage rate than what the price has been. Reduce the other side of it is, I think we’ve hit the sweet spot of what our customers can afford to pay each month and so consequently our percent of revenue collected each month has improved as well.

R. Charles Loudermilk, Sr.

But we have computers, we have computers at $99 for 12 months if anyone’s doing the math. It’s not the 18 to 24; that make it very reasonable.

Gilbert L. Danielson

Yes, the only thing we do is 12 months on those computers now.

Laura Champine – Morgan Keegan

So if the agreement prices are coming down to that extent but you’re still coming up mid single digits, you must be making it up in volume. Am I looking at that right or is there something I’m missing?

William K. Butler, Jr.

Yes, you’ve got it dead on the money. The thing is, I think our customers are attracting more and more customers every day and our numbers reflect that.

Gilbert L. Danielson

And as we mentioned, probably mention our customers, our overall customers increased 18% this quarter as compared to the quarter a year ago.

Laura Champine – Morgan Keegan

Just lastly, on that office furniture business, I remember you were looking at that business to think about maybe expanding the chain, maybe even making it a national chain. What are your current thoughts on that part of the business?

William K. Butler, Jr.

Well, we want to focus on the model to begin with and we’re really put it on hold when we started negotiating on this CORT acquisition because we didn’t know frankly if they were going to include the office stores and when we found out that they’re not, we’re back with our sleeves rolled up and working on the model. So that’s going to be the key is we’ve got enough stores right now in the bank that we can focus on the model and make it profitable and then we’ll see what happens.

Gilbert L. Danielson

Laura, just for your information. The revenues of the office furniture is not that large. It was $4.8 million in the third quarter and for the nine, $15.5 million for the nine months so it’s not, or I’m sorry $15.1 million for the nine months of this year.

Operator

Your next question comes from Laura Richardson – BB&T Capital Markets.

Laura Richardson – BB&T Capital Markets

Just a couple questions for you or a couple types of questions. First, can you reconcile with what you’ve been saying about pricing and customer count with we’re having gross margin in the quarter and what we expect for that going forward, up or down basically?

Gilbert L. Danielson

Well, margins improved in the third quarter compared to a year ago and normally it happens, revenues were up 15% or whatever and operating expenses increased at a lower rate than the revenue increases so we got better leverage off the operating expenses.

Laura Richardson – BB&T Capital Markets

So it’s not merchandise driven?

Gilbert L. Danielson

Well, we always are looking for improved pricing on our merchandise and we’ve done a lot of that in the last year or so and it’s constantly a thing, what do seriously but primarily this quarter we leveraged a bullet there off the operating expenses.

Laura Richardson – BB&T Capital Markets

In terms of, do sales or the comp sales, I heard what you said about the merchandise category. Did you say something earlier about regions of the country or specific states like Florida and California that are giving everybody problems and also the mature store comp, if you said that I missed it.

Gilbert L. Danielson

The only thing I said, I did say that the stores over two years old were up 3.2% I think. I did do an analysis; I just took out our region which is primary in Florida, took that out of the comp base and if we didn’t have Florida, rather than a 5.7% increase it would have been 6.6% increase so Florida certainly still having an effect on the business. That’s about as far as I went from [inaudible].

Laura Richardson – BB&T Capital Markets

Is that the only outlier? The State of Florida? Do you have any kind of negative outlier?

Gilbert L. Danielson

That’s the big focus anyway, so –

R. Charles Loudermilk, Sr.

Let me also say that we are determined to keep our price advantage over our competitors and that’s what this business has been around. But for 51 years, we want to beat our competitors with price and with service and with the quality of merchandise so that’s what we focus on every day, every hour.

Laura Richardson – BB&T Capital Markets

Well, looking at their numbers yesterday it looks like that’s working.

Gilbert L. Danielson

I would say though I wanted to followup that if you just look at the quarter for Florida on a same store revenue basis, they were up from where they were a year ago. They just weren’t up as much as parts of Texas and the Midwest were up dramatically from a year ago.

Laura Richardson – BB&T Capital Markets

Midwest? That’s the best; that’s the only think I think I’ve heard about their sales in a while. What do you think is going on there?

William K. Butler, Jr.

I think a lot of it has to do with the maturity of the stores too. The Florida stores frankly have been around the longest of any stores we have and you’ve got stores down there doing well over $200,000. They get hit and maybe they’re doing $190,000 or $180,000. In the Midwest/Northern area we haven’t been around as long; maybe a year ago they were doing $80,000. This year they’re doing $95,000 so, somebody once told me you can’t take percentages to the bank.

Laura Richardson – BB&T Capital Markets

The last question I have is that now the shrink, ex to hurricane impact it was 2.9% this quarter, coming up to 2.4% last quarter? What typically happens when the economy gets bad and what do you do to control it?

William K. Butler, Jr.

Well, golly, it is bad. If we could control the economy we’d probably be in the White House by now.

Laura Richardson – BB&T Capital Markets

I can rephrase that. Not control the economy; control the shrink when the economy you can’t control and it sucks.

William K. Butler, Jr.

Well, our business, particularly our business is much more management oriented and as I alluded to earlier we definitely have the right program with the right product and the right people at the right time and so I don’t think, the economy historically has not caused us to ripple very much and so we, I don’t want to say we ignore it because when fuel prices go up we have to find somewhere to save on that to make our numbers. But I think we hunker down and continue to focus on the basic principles of operating the business. No different than a football time; if it goes awry, usually they’re away from fundamentals.

So we’re a renting and renewing business. We remain focused on doing that and I think when you start getting away from the basics and blocking and tackling, you probably drift.

R. Charles Loudermilk, Sr.

Also, in the 51 years I think we’ve seen some recessions and a lot of different economic times and Aaron Rents has made money every year that we’ve been in business so I don’t think we’re going to worry about that. I think maybe this economy is playing in our hands. Time will tell but so far if you look at the numbers and Ken’s saying that you are what your numbers say you are, our numbers say we’re pretty good. And wherever we are in the economic cycle, I think we’re good now and we’ll be good in the future.

Operator

Your next question comes from Jordan Hymowitz – Philadelphia Financial.

Jordan Hymowitz – Philadelphia Financial

My question is on a regulatory side. I know 47 out of 50 states regulate you guys as a non-finance transaction but if Obama wins and Schumer becomes President of the Finance Committee, he’s already introduced a bill in the past to regulate you guys as a finance contract. If that occurs what would be the impact on your business? How low would the rental terms have to go and how would you compensate for that?

William K. Butler, Jr.

I think I heard that question yesterday too and frankly I don’t think that Bill has a prayer, he’s got no sponsors of the bill. Our industry has a bill not he table that’s gaining a lot of steam. We don’t know if it will pass or not but we certainly think it has got a much, much better shot of passing than whatever Schumer can put in. We met with Schumer before and we’ll continue to meet with him and help him understand what our business is all about but we just don’t see the Schumer thing as a threat to the industry at this hour and we’re going with a lot of industry [inaudible] on that as well.

R. Charles Loudermilk, Sr.

I think when the legislature see what our business really is they’ll be for us. We don’t have credit checks and if someone wants a refrigerator and their credit is poor, which won’t hold people from getting with poor credit under this environment, they come to us. I don’t think – and this has to do with all the necessities of life. Fortunately, we’re in the necessities of life business, we’re not in the luxury business.

If someone needs a refrigerator, or a TV, or a bed, we’re the people where they come. We’re in that business and that’s the reason why I think we’re in the right business at the right time.

William K. Butler, Jr.

I’ll add to that, our model, we don’t like to talk interest rates and what not but the state of New Jersey pretty much said you couldn’t do a rent-to-own transaction without conforming to the credit laws. We’re at a 30% interest rate and conformed to the law and we’re operating very successfully there. Our retail prices are very reasonable and or lease rates are very reasonable. We’re not far off mainstream as it sits.

R. Charles Loudermilk, Sr.

That’s very true. I’ve looked at it a number of times and if that happens, if this a rule of credit sale, we can whether that much, much better than any of our competitors. We have looked at the total cost of owning the merchandise from our program versus a credit sale with an interest rate that some retailer might charge and in a lot of cases our prices are lower, total ownership price is lower than if you’re doing business with one of our other retail competitors and put the interest rate on it.

That’s not a big concern for us. We would like to stabilize or have one law on the books, federal, and we’re going to be pushing that and I think most of our representatives in Georgia are behind that and I think they all will in the future. I don’t see that as a big problem. That’s been out there for a lot of years and I’ve studied it a lot of years. We can live through that, I’m convinced of that.

Gilbert L. Danielson

Also as a side note, the federal bill that the industry is supporting is bipartisan, there’s as many democrats supporting that bill as there are republicans so Schumer is an outlier I guess but there is a lot of bipartisan support to have a federal rent-to-own bill that would make it easier for the industry to do business. We’ll see, it’s hard to predict that but we’ll just have to see how it plays out.

Jordan Hymowitz – Philadelphia Financial

If I could just follow up then with two things, one you already regulated as a credit sale in New Jersey, how much more or less profitable is New Jersey than the average state? So, that would be a).

R. Charles Loudermilk, Sr.

I don’t have those numbers to you but we haven’t been impacted since the change on the EBITDA, that way. Our stores have not gone backwards. In fact, in some cases the stores have move forward.

Jordan Hymowitz – Philadelphia Financial

And b), I’m not denying or saying it’s true or not true that the industry bill has more support than Schumer’s but if Schumer’s were to pass, and he will be the committee head under Obama, would be the impact?

R. Charles Loudermilk, Sr.

Well, I think I just answered that. We have compared our total ownership prices with a lot of so called retailers with their interest charges and delivery and everything else and the cost of ownership to the consumer is sometimes less under our program and if we convert to a standard credit sale, we’re going to be all right. I wouldn’t be sleeping tonight if I thought it was a negative. We haven’t been too active in promoting that federal bill because it really wouldn’t affect us that much. I think our competitors would be very much affected. But under our program with our lower price, monthly pay and so forth I don’t think we’d be affected much at all.

Operator

Our next question comes from John Harlowe - Barrow Hanley.

John Harlowe - Barrow Hanley

I’m probably asking something that’s already been answered because I walked in late. Did you tell us what the loss rate was with the hurricanes? And I wanted to get your customer count by company owned and franchised for the quarter.

Gilbert L. Danielson

With the hurricanes included, the write-offs were 3.1% of revenues. If we exclude $800,000 which we had identified as merchandise that was destroyed in our customers’ homes, the write-offs were 2.9% of revenues for the quarter.

William K. Butler, Jr.

I’ve got it right here Gil. The total franchise companies are 1,035,297.

Gilbert L. Danielson

677,000 corporate customers and 359,000 franchise customers. 18% above where it was in September of ’07.

R. Charles Loudermilk, Sr.

Also, let me say that insurance covers the merchandise that’s in our warehouses or in our stores, showrooms and so forth but does not cover merchandise out in the field and that’s the $800,000 that Gil is talking about. If you remember, our customers pay a 10% service charge and that includes delivery, pickup and everything else including coverage of missing and lost merchandise from natural disasters and even I think theft.

John Harlowe - Barrow Hanley

I was thinking about the earlier question that your customers wouldn’t have any renters insurance or anything on your items but are you saying that they actually pay insurance for items in their rental payments?

Gilbert L. Danielson

They pay what we call an air and service plus fee that’s 10% and it would cover them for loss of a hurricane.

R. Charles Loudermilk, Sr.

A lot of things; delivery, pickup and all the services that we give, an extra month and so forth. A long list of things we give for that 10%; not just so-called insurance. We’re not in the insurance business.

Operator

Our next question comes from Joel K. Havard - Hilliard Lyons.

Joel K. Havard - Hilliard Lyons

Ken, would you be kind enough to add one more layer of detail to the customer metrics and that was the number of agreements. If you said that earlier, I apologize but if you didn’t and could give us a sense of company and franchise at the end of Q3?

William K. Butler, Jr.

At the end of the quarter we had 910,409 corporate agreements; 481 franchise agreements. Almost 1.391 million.

Joel K. Havard - Hilliard Lyons

What was the gain for the year?

William K. Butler, Jr.

27,700 new customers. A year ago this quarter we had 1.176 million so close to 20%.

Joel K. Havard - Hilliard Lyons

That goes back to your earlier comment. I think you said 27,500-ish was the biggest customer gain you all had experienced. Did I hear that right?

William K. Butler, Jr.

That’s correct. In the third quarter. I went back five years. We gained 13,000 last year and 15,000 in ’06 and 14,000 in ’05 and 9,000 in ’04.

Joel K. Havard - Hilliard Lyons

I missed this in the earlier part of your commentary or the earlier questions about where you were seeing that?

William K. Butler, Jr.

It’s pretty much across the board.

Joel K. Havard - Hilliard Lyons

So there’s no particular demographic or geographic highlight to that.

William K. Butler, Jr.

No.

Joel K. Havard - Hilliard Lyons

Gil, what did you say the revolver balance was at the end of Q3?

Gilbert L. Danielson

It’s in the earnings release under bank debt. That was $48 million today. The bank debt was $72 million at the end of September so you can see from September 30 to today, which is October 29, it’s gone down almost $25 million.

R. Charles Loudermilk, Sr.

You sold some real estate that brought that down.

Gilbert L. Danielson

I believe that sale was done in the third quarter.

R. Charles Loudermilk, Sr.

Sale leasebacks.

Gilbert L. Danielson

That was done in the third quarter. We had about $100 million outstanding on the revolver and then we did do a sale leaseback a couple months ago which brought in $31 million so we paid the revolver down on that and it’s down today to about $48 million.

Joel K. Havard - Hilliard Lyons

Do I recall you had some low number of 20s of these properties that were sort of in that bucket?

William K. Butler, Jr.

That were sold, right.

Gilbert L. Danielson

It was 25 to 27 or something like that.

Joel K. Havard - Hilliard Lyons

Are those done then?

William K. Butler, Jr.

Yes. The money’s in.

Gilbert L. Danielson

They’re done and we got pretty good cap rate, 7% or 7.5%, and then we’ve got another bucket of them that we’re looking to sell but as you probably understand the market’s not right so we’re going to hold them and probably look to sell them a little bit later, maybe next year if we can find some money to buy them. But they’re good stores.

Operator

Our next question comes from [Mike Smith - Kansas City Capital].

[Mike Smith - Kansas City Capital]

I think you’ve gone over this but it sounds like me that with your comp store sales being +5.7% in the quarter and your average lease being lower than it was, is a better number of how well your business is doing is the growth in the number of customers per store?

William K. Butler, Jr.

I think so. I mean that’s what we focus on every day. I literally tell our store managers a way they get voted into office each year, they’re the mayor of their town and their customer base votes them in or out on whether they’re doing a good job. I think the sign of a healthy business is a sign of a business that’s gaining customers. So that’s our number one focus that we have.

[Mike Smith - Kansas City Capital]

Is the customer count then going up in the double-digit range on a same-store sales sort of thing?

William K. Butler, Jr.

It’s up 18% to 19%.

Gilbert L. Danielson

Total customers are up about 18% from where they were a year ago.

William K. Butler, Jr.

The comps, I don’t have that number. Do you have that Gil?

Gilbert L. Danielson

I don’t have that.

R. Charles Loudermilk, Sr.

I think you’re exactly right. The way I look at the business, every Monday morning I look forward to coming in and seeing how we did last week, and I look at customer count. That’s the number one number that I look at and we’ve been doing well. 3,000 and 5,000 a week gain in customers and it’s pretty consistent. That’s the reason I feel that we’re very strong, we’re very healthy because we’re gaining customers. If we gain customers, this company is in good shape.

[Mike Smith - Kansas City Capital]

This comes up with the rental center. They indicate that they see the quality of their customer improving albeit not as quickly as they’re losing people off the bottom end but are you seeing the same thing?

William K. Butler, Jr.

Yes. I think we’ve strategically made a lot of changes over the last 15 to 20 years to bring a different customer to our store. We used to be called Aaron’s Rent-to-Own and we evolved to Aaron’s Sales and Lease Ownership. Today we’re called predominantly Aaron’s. The reason why is when we had that Rent-to-Own rental thing on the side of a truck, literally we had customers that asked us not to park the truck in the front of their house because they didn’t want their neighbor to know they were doing a rent-to-own.

For some reason socially acceptable is leasing versus rent-to-own. If you tell someone you’re rent-to-owning your car, you will probably get some pretty crazy looks. If you say you’re leasing your car, that’s socially acceptable. So we’ve played right into the hands more and tried to cater our program to the lower 50% and not the bottom. We’ve prepared ourselves for this, our retail prices are very legitimate and our lease rates are very legitimate and consequently we have a very attractive program to the masses.

Operator

I’m showing that we have no further questions.

R. Charles Loudermilk, Sr.

Thank you all.

Operator

Thank you Ladies and Gentlemen. This concludes today’s conference. Thank you for participating. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts