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

Aaron’s, Inc. (NYSE:AAN)

Q4 2012 Results Earnings Call

February 7, 2013 5:00 PM ET

Executives

Lee Wilder - Investor Relations

Ron Allen - Chief Executive Officer

Ken Butler - Chief Operating Officer

Gilbert Danielson - Chief Financial Officer

Analysts

Brad Thomas - KeyBanc Capital Markets

TJ McConville - Raymond James

John Baugh - Stifel Nicolaus

James Ellman - Ascend

Laura Champine - Canaccord

Chuck Ruff - Insight Investments

Operator

Good afternoon. Welcome to the Aaron’s, Inc. Fourth Quarter and Year End Conference Call. Just let you know all lines will be muted during the presentation portion of the call, there is an opportunity for questions-and-answers at the end.

At this time, I’d like to introduce your host, Mr. Gilbert Danielson picking up with conference. You may proceed Mr. Danielson.

Gilbert Danielson

Okay. Well, thank you all for joining us today. As usual, I’m going to turn the call over to Lee Wilder who does Investor Relations for Aaron’s. She’ll read our standard introduction and Safe Harbor and then she’ll return over to management team for comments and then after that we’ll certainly take any questions that you may have, so Lee?

Lee Wilder

Good afternoon. My name is Lee Wilder and I assist the Investor Relations for Aaron’s. The company’s earnings released issued today and the related Form 8-K are available on our website www.aaronsinc.com in the Investor Relations section, and this webcast will be archived for replay there as well. On the call today, Ron Allen, CEO; and Ken Butler, COO; and Gil Danielson, CFO.

Before we discuss 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, litigation, 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 2011 annual report on Form 10-K, including without limitation, the company’s projected revenues, earnings and store openings, and store acquisitions and disposition activities for future periods.

Ron and Ken will have a few comments, and then Gil will conclude with his remarks and we will follow with the Q&A. Ron?

Ron Allen

Thank you, Lee, and good afternoon, ladies and gentlemen, and again, thank you for joining us today. We completed another outstanding year at Aaron’s with record results for both the fourth quarter and year end.

Company revenues for 2012 exceeded $2.2 billion and net earnings were $173 million. The best results in the company’s history and at the high end of our expectations when the year started.

We met our store opening goals for 2012 adding a combined net of 128 company-operated and franchised stores. This is a 6.6% increase in total store count. We had strong same store revenue and customer growth throughout the year as well.

Our balance sheet has never been more solid with over $200 million of cash and liquid investments on hand and very little debt. Aaron’s is certainly well-positioned and ready to continue our growth plans, and we expect to achieve more record numbers in 2013.

Our customer base is large and we have consistently said for quite some time, we believe the current tight consumer credit environment has been good for our business. But our customers continue to be stressed with unemployment levels much higher than the national average.

However, the strength of our business model which provides customers high quality basic home furnishings with no credit check, flexible payment plans and highly personalized service has enabled Aaron’s to weather all types of economic cycles.

Our business is very much a customer relationship business and the success of the company throughout the years have tested a superior customer service and the value proposition offered to our customers.

As we noted in our earnings release, during the fourth quarter we offered a Black Friday promotion that was extremely successful in gaining agreements and customers. The promotion gave customers the option of immediate delivery of products with no payments until January.

We had an excellent response to this promotion and we delivered a record number of agreements during that time period. The results far exceeded our expectations and did cause a deferral of more revenue than anticipated until 2013 when customers began to pay for their merchandise. Although, this revenue was not recognized in 2012, we did record expenses in the quarter associated with executing this promotion.

I’m extremely pleased that in January, Andrea Freeman joined Aaron’s as our new Vice President of Marketing. Andrea brings extensive experience, knowledge and new ideas to Aaron’s marketing promotions and initiatives. And she will be a great asset to us as we refine and further develop our strategies.

Also during the fourth quarter, we selected new leadership for our HomeSmart division. Roger Estep, a 25-year veteran of the weekly rental pay industry and Aaron’s associate for over nine years most recently as a senior regional manager was promoted to Vice President of the HomeSmart division. And he is bringing a fresh perspective and disciplined management leadership to this weekly concept.

The performance of the HomeSmart stores has been encouraging in revenue and customer gains, but we still have ways to go until we achieve the financial performance needed and expected from this venture.

We currently have 78 company-operated stores and one franchise store open. As we have said before, we do not anticipate opening any significant number of new stores and will not plan to open any until possibly the latter half of this year.

We do expect the HomeSmart stores to continue to improve in 2013, especially since there will be reduced start-up expenses as the existing stores continue to mature and only few stores will be added toward the end of this year.

In closing my comments, I’d like to reflect on my first year as CEO here at Aaron’s. It has been extremely rewarding and made great progress in the company, including the achievement of the outstanding financial results and the strengthening of our management team.

In my visit to stores across the country, I continue to be impressed with our associates and realize how important it is to maintain a strong relationship with our customers. The ongoing development, training and recruitment of skilled personnel are major components in achieving Aaron’s future success.

This past year we focused in building our corporate infrastructure and standards, and significant improvements have been made throughout the organization. Our corporate planning process has been greatly enhanced and we now have an outstanding human resource function.

There are other opportunities and improvements such as in information technology that we will continue to work on that will assist our store personnel to better serve our customers in a more efficient, cost effective and customer-friendly fashion.

I look forward to this year as we continue this journey and see the benefits of all the corporate supporting issues that begin to have a larger impact on the success of the company.

Again, thank you for your interesting in Aaron’s and I’ll now turn the call over to Ken. Ken?

Ken Butler

Yeah. Thank you, Ron, and good evening, everyone. Once again we had another great year and another strong quarter for customer growth. Our company and franchise core business remained strong as we gained more than 75,000 new customers for the quarter, which represents an 11% increase in our customer count above last year.

This resulted in another successful quarter of positive same store comps with an increase of 4.6% for the company’s stores. Our franchise stores have rebounded nicely -- nicely landing at 6.5% in same store comps.

We had a very active quarter with new store openings as we opened 37 new Aaron’s company-operated stores, 25 new franchise stores, two RIMCO stores and one HomeSmart store for a total of 66 new stores which is at or near a record setting pace.

As Ron mentioned, we promoted Roger Estep, VP of HomeSmart, and he and his team are working diligently to make HomeSmart a brand that we will be proud of and a brand that can follow the same pathway we already put in place with Aaron’s with new company-operated stores and a new franchise concept as well.

We have no new stores on the horizon at this hour as our mission is to stabilize the management team, focus on the business fundamentals of the model and bring the system to profitability this year. We continue to see no signs of cannibalization to the nearest Aaron’s store with the model.

None of our initiatives this year and in the past has been to stabilize and begin increasing our average income per customer which we refer to as AIC. We are beginning to see favorable signs that would indicate we are on the right track.

Our AIC in December of this year actually matched that of December of 2011, and our average number of agreements per customer eclipsed 1.5 agreements for the first time in our history.

These past few years, our customers have been challenged economically and I’m proud and thankful for their loyalty and to all the challenges our associates meet each and every day, I thank them all for their hard work and their dedication.

I think it should be noted with our 2012 total revenues of more than $2.2 billion and adding in the revenues that our franchise stores do, they attained $975 million, not only do we exceed $3 billion in revenues, but we also would exceed any other operators in our industry.

So, at this point, Gil, I have to turn to you.

Gilbert Danielson

Thanks, Ken. I’ll just go through some of the highlights of the fourth quarter and the fiscal year that were outlined in the earnings release. Company revenues increased 9% for the quarter to $568.5 million and 10% for the 12 months to $2.22 billion.

In addition, our franchise lease collectively increased revenues as Ken talked about a little bit to $242 million for the fourth quarter and up toward for the year to $975 million. That was a 7% increase for the quarter and also for the year.

Same store revenue growth in the fourth quarter for our company-operated stores was 4.6% and for those stores that were over two years old it was 3.1%. Just as an aside, for stores that were over five years old during the fourth quarter, the same store revenue growth was 1.9%.

Same store revenues for franchise stores for the quarter were up 6.5% and the customer count was up 9.6% for the quarter. Revenues and customers of franchisees, however, are not revenues and customers of Aaron’s, Inc.

At the end of the year we had 1,134,000 company-operated store customers and 604,000 franchise stores. That is an 11% increase in total customers over the number at the end of the fourth quarter of last year. The customer count on the same store basis for the company-operated stores was up 7.8% for the quarter.

Net earnings for the quarter were up 20% to $36.6 million versus $30.5 million in 2011. Net earnings for the 12 months were up to $173 million, which is $103.8 million last year.

For the fourth quarter, diluted earnings per share were $0.48 per share, compared to $0.40 last year and for the 12 months diluted earnings per share were $200 -- $2.25, compared to $1.43 in 2011.

As you know, last few quarters we’ve had a couple of special charges in the financials and a reversal of the charge we’ve made a year ago. If we exclude the charges that we’ve had over the last couple of years, on a non-GAAP basis for the fourth quarter, net earnings would have been $36.6 million, compared to $32.7 million for the same period of 2011, and diluted earnings per share would have been $0.48 versus $0.43, a 12% increase for the quarter.

Again on a non-GAAP basis, net earnings for the 12 months of 2012 would have been $157.4 million, compared to $138.6 million last year and diluted earnings per share have been $2.04 versus $1.75, which would be up 17% increase for the year in diluted earnings per share excluding the special charges and reversals.

The revenues of the HomeSmart division were $14.8 million for the quarter, compared to $8.9 million for the quarter a year ago. The division did record a pre-tax loss of $1.7 million this quarter versus $3.1 million in the fourth quarter of last year.

For 12-month -- 12 months revenues of the division were $55.2 million, compared to $15.6 million for the same period of last year. The HomeSmart division just made a little improvement, I guess, but we still lost $7 million this year which was versus $7.3 million last year. So it is certainly some improvement in HomeSmart and we’ll certainly answer any questions on that.

Franchise revenues were up 7% for the fourth quarter, the revenues that we recognize on our income statement compared to the same quarter last year and for the 12 months the franchise revenues were up 5%.

Ken talked a little bit about it but for the fourth quarter of 2012, we did open 37 company-operated Aaron’s Sales & Lease Ownership stores, 26 franchised stores, two company-operated RIMCO stores and one company-operated HomeSmart store. We also had a few other smaller transactions during the quarter.

At the end of December of 2012, we had 1,227 company-operated Aaron’s Sales and Lease Ownership stores, 742 Aaron’s franchise stores, 78 HomeSmart stores, one franchised HomeSmart store, 19 company-operated RIMCO stores and six franchised RIMCO stores. Total store count, obviously a record over the 2,000 mark. At the end of December, we had 2,073 stores.

During the three months and 12 months, we continued to award area development agreements to new and existing franchisees. We awarded nine area development agreements in the quarter and 45 additional franchised stores. At the end of December of 2012, the area development agreement outstanding was the opening in the future in the next several years of 180 franchised stores.

Our guidance for the first quarter of 2013 is just about revenues of approximately $630 million, and diluted earnings per share in the range of $0.70 to $0.74 per share. Our earnings guidance for the fiscal year of 2013 is unchanged, and we expect to achieve diluted earnings per share in the range of $2.25 to $2.41.

We continue to expect our overall new store growth in 2013 to be in a range of 4% to 6% over our store base in 2012. Again, for the most part an equal mix between company-operated and franchised stores and perhaps including a handful of HomeSmart stores.

Those are our comments and we will certainly answer any questions that anybody may have.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed.

Brad Thomas - KeyBanc Capital Markets

Hey, guys. Good afternoon.

Gilbert Danielson

Hey, Brad.

Brad Thomas - KeyBanc Capital Markets

First, a question on the fourth quarter. You called out a promotion that you ran towards the end of the quarter and that you recognized the expense for it, but haven’t seen any revenues yet. How much do you think that weighed on expenses in the quarter or would it have been material?

Gilbert Danielson

Well, it is not a small amount. I mean, basically what we did we wrote a lot of agreements at the end of November around the Black Friday promotion. And we didn’t recognized any of that revenue, didn’t begin to start recognizing that revenue until January of 2013.

So in the fourth quarter, we did have the depreciation expense that would -- that goes with those agreements. They were delivered to the customer, so they were using it. And that depreciation expense was approximately $1 million, but we also would have delivery expense, selling expense, et cetera. So it’s somewhat over a $1 million or so of expenses that we recognized in the fourth quarter with no revenue attached.

But I think even more importantly though, the revenue attached with those agreements that we wrote, again, not recognizing the revenue until those customers started paying in January. That was roughly approximately about $3.5 million in that area of revenue that normally if we had done our normal routine that revenue would have been collected in December, and that would have been run through our income statement. So that is a big deal and that’s lease revenue. So that certainly affected the profitability of the fourth quarter.

Now it does -- situation, we very feel real good about the promotion. Those customers are paying for the merchandise now and what will happen, hopefully, and we think it probably will. It certainly, as we get into 2013, especially in the first half of the year and beyond, as the customers begin we have a big agreement base with a lot of agreements. We will start seeing some revenue coming in on that and then, of course expenses will be somewhat smaller in those transactions than normal.

Brad Thomas - KeyBanc Capital Markets

That’s very helpful. Thank you, Gil. And if I could just ask a couple questions on a HomeSmart. You all mentioned that the change in leadership at HomeSmart, it sounds like there’s still some tinkering that you are doing with the operations. How long do you think it might be before you felt like you had things right and you’re ready to accelerate the business?

Gilbert Danielson

I would say, Brad, it is going to be at least through June of this year before we get comfortable and take a look at and see if we want to grow any more stores this particular year. But we are really pleased with the leadership, Ron is providing and he is really getting into the basics. And a lot of it has to do with refocusing our people on the weekly model to train them properly in the weekly model and put that discipline in place. And that’s what he is about.

Brad Thomas - KeyBanc Capital Markets

Got it. And so if you look at the revenues per store if my math is right, it’s maybe around $190,000 in revenue per store in the fourth quarter. Is that a level that you are happy with, and is it just tinkering kind of the operations or are there other elements you feel like you have to work on?

Gilbert Danielson

There is a lot of opportunity and we look at lot of different things, but we didn’t think we would have enough revenue that, even at this hour, if we focus on the basic fundamentals of blocking and tackling, we call it renting and renewing, that we can be profitable. So there’s different ways to go. If we keep operating the way, we currently operate we need to add some more revenue, but I think we need to really focus just on the basic fundamentals of what model is about.

Ron Allen

Yeah. Certainly the revenue in the customer again has been good. There hasn’t been any problem getting revenue. I mean, we always can use more and for sure. It’s just the internal workings we need to work on that to make sure we can get the returns we need.

Brad Thomas - KeyBanc Capital Markets

Okay. And as a housekeeping item, HomeSmart was about a $0.06 drag on earnings in 2012. At this point, what should we expect for 2013?

Ron Allen

Something better than that. We hope it will be a lot better than that, Brad. We are working hard. We are working hard.

Brad Thomas - KeyBanc Capital Markets

Fair enough.

Ron Allen

One thing, Brad, that will help in ‘13, we aren’t going to open any new stores. We haven’t decided what we are -- we are certainly not going to open any new stores in the first part of the year and we’ll see how it goes. But we will not have the new store drag that we have had. If we don’t open stores, that’s going to help profitability regardless.

Brad Thomas - KeyBanc Capital Markets

Sounds great. Thanks, guys.

Operator

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

TJ McConville - Raymond James

Good afternoon, Ron, Ken, Gil. It’s TJ McConville filling in for Budd. Congratulations on the quarter and thanks for taking the questions.

Ron Allen

Great. Thank you.

TJ McConville - Raymond James

Guys, my question on the Black Friday promotion, I realized that we had done that -- that it was planned going into the end of the year. Have you seen any issues with collection concerns on maybe some of those agreements you wrote given the expiration of the payroll tax holiday, or anything that happened over the holiday periods just early goings here?

Ron Allen

We were watching this every week, I’m sorry. But over 82% of the customers have paid us. So we feel pretty good about that. Actually, 82% of the agreements are still active. So we have had a good span average of customer retention so far. We offered some special products with special values and I think the customers see that value and they are going to keep it.

Gilbert Danielson

I think I mean, just the customer is -- his behavior is very similar to our other customers. As Ken said, the 82% are still active. That is kind of pretty much the norm of a typical transaction we had done back in March of last year or whatever.

So far it is pretty good. Certainly, we will not be able to completely evaluate it till it runs a few months and see how the customers continue with the promotion. The real good positive sign that other promotion, 28% of the customers in that promotion were new customers.

Ron Allen

There is about 10,000 new customers for us that we are certainly pleased about and over 80% of them still have their agreements in place.

Gilbert Danielson

It also helped our initiatives.

Ron Allen

Very good numbers we think.

Gilbert Danielson

It helps our initiative with adding on some agreements with our current customers as well.

Ron Allen

So it all looks good, we got a lot of agreements. We wrote 38,000 agreements during that three-day period, 28% new customers. So far it is February 7th and the customers are paying and acting as typical customers do. So we are very encouraged that it gives us a good start to 2013.

Gilbert Danielson

As you said, it really did far exceed our expectations, Gil and I would add three or four stores on Black Friday and there was a lot of enthusiasm at our stores. We didn’t know how successful it would be, but it was more successful than we thought. But you learn from each one of these promotions and we do it next year we will be a little more intelligent with our projection.

TJ McConville - Raymond James

Okay. That’s very helpful, guys. You have to come up with a Valentine’s Day promotion just like it or something like that. The new store add in the quarter was a bit more than we were looking for here. Any reason for that jump and, Gil, can you give me what the new store drag was overall?

Gilbert Danielson

Yeah. I mean the new stores came on, seems like it tends to do that every year a little bit to catch up. You probably need to really get all your spring on. Our goal this year, we met our goal. Our goal was to open around 6% new stores at a range of 5 to 7 and we came in but they are kind of a little bit of rush to finish to get them out, but…

Ron Allen

TJ, our real estate department has the same goals as we all have, so they were in a big push. We get a lot of stores open and as Gil said, I don’t know why. It always seems that waivers moved more and more get pushed to the fourth quarter. We would like to open them and take a whole year up and open them very evenly, but it doesn’t seem to always work out that way.

Gilbert Danielson

They work hard to achieve that goal. They obviously took a while to get some of those leases in place but they did it and that’s good. The new store drag for the Aaron’s stores was $0.04 in the quarter, TJ, in 2012. That’s the -- and for the year the new store drag for the Aaron’s stores was approximately $0.14.

Those are comparable amounts to what they were a year ago. I think a year ago in the fourth quarter the new store drag was $0.03. And then calculating the same way, the new store drag in the HomeSmart stores for the quarter was roughly $0.03.

TJ McConville - Raymond James

Okay. That’s helpful. And then lastly for me on the HomeSmart concept, can you talk about -- maybe Ken or anybody who wants to take a stab at it -- what you are realizing in terms of pricing? What kind of turn are you operating on there? Is it about what you expected? Are you still between your core store and the rental center store or is that something that is part of the blocking and tackling that you need to address down the road?

Ron Allen

Well, it’s always part of the equation and we had a longer-term. We had a 60, 90, and 120 week program and we realized that more of the customers were going with 120 week program and it cost less per week to do that. And consequently if they return the product we put less dollars in the bank.

So we’ve made some adjustments to our marketing to shorten the term and maybe looked at -- if we feel like we can increase our ownership proposition to those customers. If we do, it will be a win-win for us and it will be a win-win for the customer as well.

Gilbert Danielson

That is where Rogers expertise and his background really is helping us go through the analysis of that.

TJ McConville - Raymond James

All right guys. That does it for me. Thanks for taking the questions and best of luck in 2013.

Ron Allen

Thank you.

Gilbert Danielson

Thank you.

Operator

The next question comes from the line of John Baugh with Stifel Nicolaus. Please proceed.

John Baugh - Stifel Nicolaus

Good evening. Great year, Ron, Gil, Ken, Congratulations. Let’s see, first, any thoughts on the delayed tax refund season or do we capture all that within the quarter and it doesn’t matter?

Ron Allen

Well, it is definitely coming in a little bit later than before but we are starting to see dribbles of it coming in this week. I think it will. Our customer wants to get their money quick. So they were delayed by not being able to file until February 1st, but I think they are still going to be the first ones to file and get their money back. So I think it will come, it’s just going to come a little bit later.

Gilbert Danielson

I think it’s too early, John, as you know usually by roughly the end of February, 1st of March, it’s all done. So it might be a couple of weeks later now but it should all be captured in the quarter.

John Baugh - Stifel Nicolaus

Okay.

Gilbert Danielson

Definitely in the quarter.

John Baugh - Stifel Nicolaus

And then I’m wondering if maybe this is for you, Ken, but you commented that your, I think, customer or agreements to customer, I think, breached 1.5 and that has been ticking up for a while now, and yet I believe the revenue per customer is actually been tracking down a little bit.

So curious basically, are there signs in revenue per customer that your customer is bottoming out and getting less stressed? Because you can add agreements but if the TV is a lot lower then you are just adding a DVD player, your revenue still might be lower. So I’m just curious what you are seeing your revenue per customer?

Ken Butler

I can just throw a few numbers at. I mean our average monthly customer payment at December was $130.08. It was $130.32 in September and just looking back, I think this year it has been around $130 a month every quarter this year. This is the first year I would say in at least four years where it has not been declining. As you recall three or four years ago, it was $155, $160 a month.

So it has leveled out and I think that’s a very positive sign moving forward and we would expect that it will level out. Now we are doing a lot of initiatives to try to -- we’re doing some initiatives to try to build that up and that is a goal for ‘12.

Ron Allen

Yeah. We feel like we are definitely not going backwards anymore and our mission this year, our goal internally here is that to raise it. And we think this is the year we can do it and feel pretty confident that we will do that.

John Baugh - Stifel Nicolaus

And obviously your numbers are trailing numbers so they’re capturing things you wrote a while ago. Is there evidence that in the quarter just ended, this metric ought to go up or albeit maybe slightly?

Gilbert Danielson

I don’t have those numbers in front of me, but I think it was pretty stabilized this quarter. I mean, we’re trying hard to get it up and I think you might see a little improvement. I would be disappointed if we don’t get a little bit improvement. But it takes a long time as you know, since it is an annuity basis to build that number up overtime.

John Baugh - Stifel Nicolaus

And then can you just update us, Gil, on cash taxes in ‘13? Thank you.

Gilbert Danielson

Yeah. I mean, obviously, the bonus depreciation, the 50% bonus depreciation is now we use that for 2013. It was also in effect for 2012. And we will right now somewhat complicated obviously but we do feel that for our -- for ‘13 for cash tax payments, we will pay about $87 million. The big number will come in ‘14 about $225 million and in ‘15 about $172 million. Now these are just estimates based on projections so they could be off a little bit. But that certainly will be the trend unless something has changed.

John Baugh - Stifel Nicolaus

I’m sorry. That was $87 million in ‘13?

Gilbert Danielson

$87 million, $225 million and 172 million.

John Baugh - Stifel Nicolaus

Great. Thank you. Good luck.

Ron Allen

John.

Operator

The next question comes from the line of James Ellman with Ascend. Please proceed.

James Ellman - Ascend

Yeah. Thank you for taking my question. Just trying to understand in terms of expectations for the first quarter, if you would not had the Black Friday sale would you expected that the profits for the first quarter would have been approximately the amount less of what the profits you’re expecting for the quarter or would something else have resulted in you earning the same amount?

Ron Allen

That’s a good question. I’m talking 3 million…

James Ellman - Ascend

That’s a million dollar question.

Ron Allen

…3 million lease revenue out of a projected over 400 million of lease revenue. So it’s somewhat small for the whole quarter. I mean, everything counts for sure, but there’s just, I don’t know, I think our first quarter has possibilities to be a little bit better. But it’s in our guidance anyway, so that’s it. I don’t know.

It’s the guidance based on what we think we can do in the quarter and with same store revenues in the mid-single digits which would mean somewhere 4% or 5% for the quarter.

James Ellman - Ascend

All right. And just in terms of the general economic environment for your customer base with gasoline prices up significantly from a year ago and this winter shaping up to be a bit colder than last winter for heating and the 2% hit to payrolls that people are seeing. Do you think that will have any effect on your top line or is it something that your consumable will just be able to shrug off?

Ron Allen

Well, I will speak -- two years ago when everybody got the benefit, we had a hard time for us to see the benefit and two years later now the payroll tax, they get to negative. Things move up and down. Gas prices up and down and things happen, but as our -- historically our customer has been very good at navigating through the times and prioritizing these payments.

Ken Butler

And we work well with the customers as well and try to stay in tune with where they are at financially and do what we need to do to help get them to ownership. So I haven’t seen that, but it’s definitely a challenge. I mean, the whole last five years has been a challenge for our people and we manage to work through it and maneuver through it.

I had rather the economy be always better if I had a choice. But at the end of the day that’s what we are here to do is to help a distressed customer. We work with that day in, day out and have been doing it for years.

Gilbert Danielson

Yeah. And we have always said if the economy would pick up and employment for our customers which, as Ron mentioned has higher unemployment levels than 8%. That would be positive for our business. So, we’re hopeful the economy picks a little bit and I think that would be positive.

James Ellman - Ascend

And I’m sorry, finally, last question would be just in terms of a military sequester we might be seeing. Can you give us any sort of idea of the -- just roughly, how much of your business is even near or might be influenced by military bases having to cut back a bit back and or for our contractors?

Gilbert Danielson

I don’t have as that percentage, but certainly we can get one if you call back. But military is important to our business, some of our biggest stores are in the military. So we will have to watch that pretty carefully depending on what happens.

James Ellman - Ascend

Okay. Thank you very much for the time. I appreciate it.

Operator

The next question comes from the line of Laura Champine with Canaccord. Please proceed.

Laura Champine - Canaccord

Good afternoon. My question is on the competitive environment. I generally think of this sector as consolidated and of Aaron’s as unique, but are there any changes there? I know that you have a competitor launching a lot of kiosks. Does that make it -- do you see a difference in the competitive environment that might impact you this year?

Ron Allen

No. They have been doing that for quite some time. And we haven’t felt that our people in the field, I’ve just never had any feedback from an associate of ours that has felt that presence of that kiosk in the marketplace. So, sure, I mean they are grabbing customers just like our HomeSmart concept is and our HomeSmart concept that we put in hasn’t impacted Aaron’s either so that kind of tells you the size of the market out there of an underserved customer base.

Laura Champine - Canaccord

Got it. Thank you.

Ken Butler

And then Laura, we are still growing our business. We are still growing our core business. I think it is quite a unique difference that we have and we are still very optimistic about continued growth in our core business.

Laura Champine - Canaccord

It looks like the franchise program has fewer new locations signing on. Is that franchise program maturing as you build out many more territories in a few years ago?

Ron Allen

Yeah. It’s supply and demand. You have more products to sell, you are going to sell more franchises. So at the end of the day that’s one of the reasons why we created the HomeSmart model that would give us another whole group of stores we can franchise and open corporately as well.

We have got lots of other opportunities in franchising beyond just the borders of the United States, too, that we are going to be looking at in the future and before that rides with the investment we have in the U.K. We are certainly watching what’s happening with some of our competitors that have opened stores in Mexico. And there’s lots of other places to go too. So we are not thinking -- I mean, we are not thinking beyond just the U.S. of A.

Gilbert Danielson

I think too, Laura, that’s the reason why the HomeSmart initiative is so important for us also that if we can have another concept HomeSmart that can successfully do business with some competitors and even our Aaron’s stores around, it gives us another franchising vehicle down the road, big franchising vehicle. And certainly a lot of our franchisees are very interested in how we are coming on HomeSmart. So we are hopeful that will be a boost for is in future years.

Laura Champine - Canaccord

Got it. Thank you.

Operator

The next question comes from the line of Chuck Ruff with Insight Investments. Please proceed.

Chuck Ruff - Insight Investments

Hi. When do you expect to make a decision on Perfect Home whether you are going to buy more or exit or do what?

Ron Allen

It will be this year. We will start doing a lot of work on it in the spring and in the summer. And we expect to reach certainly a decision as we get near probably the fall of this year.

Chuck Ruff - Insight Investments

Really. You are not going to make a decision until then? For some reason, I thought it would come sooner but…

Gilbert Danielson

Well, we’re thinking a lot about it. We will be making some decisions, but we -- really no action we’ve done until actually until near the end of this year.

Chuck Ruff - Insight Investments

Okay. And I believe in the past you’ve said you don’t weigh acquisitions versus buying back your own stock. I’ve never understood that. Can you explain that a little why you would measure one versus the other?

Gilbert Danielson

Did I say that? No. I mean, the real reason there isn’t many acquisitions out there. I mean, what we’re going to use to do it when we got the Perfect Home which would be a major, biggest acquisition we probably would have ever made in England. But there are really not many acquisitions out there that will make a significant difference to us now. Besides we are in the market out there.

So, we are generating some cash, not paying taxes again to some degree. And I think this basically unless something really changes from where it’s at, the best use of our cash would probably be the share buyback area versus any other vehicle that we would have.

Ken Butler

And we are very aggressive towards acquisitions. It is just like Gil said there’s not a lot that we had. And we reacquired a number of franchisees back this year of more than we actually expected to. So…

Gilbert Danielson

But they are just a dollar amount pretty low in the scheme of things.

Chuck Ruff - Insight Investments

Okay. And I noticed that you changed all your debt agreements to give you more leeway in the debt-to-equity covenants. Can you help us understand the thinking behind that?

Gilbert Danielson

Well, I mean it is just the market conditions. Our revolving credit facility was a five-year agreement that we had put in place four and a half years ago. So as you know, the interest rates are low and we don’t -- we didn’t need the money at all, but we renewed the credit agreements for another five years and just the market conditions we were able to lighten up on some of the covenants.

Chuck Ruff - Insight Investments

Okay. Thank you.

Operator

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

Ron Allen

Okay. Well, everybody thank you for joining us today and we appreciate your interest in Aaron’s.

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!

Source: Aaron's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts