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Aaron's (NYSE:AAN)

Q1 2013 Earnings Call

April 26, 2013 10:00 am ET

Executives

Gilbert L. Danielson - Chief Financial Officer, Executive Vice President and Director

Lee Wilder

Ronald W. Allen - Chairman, Chief Executive Officer, President and Member of Special Committee

David Buck

Analysts

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Charles Ruff

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

John P. Harloe - Barrow, Hanley, Mewhinney & Strauss, Inc.

James Ellman

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Laura A. Champine - Canaccord Genuity, Research Division

John J. Rowan - Sidoti & Company, LLC

Operator

Good morning, and welcome to the Aaron's first quarter earnings release conference call. [Operator Instructions] I would like to introduce your host, Mr. Gil Danielson, CFO of Aaron's. Thank you, and enjoy your call. You may proceed, Mr. Danielson.

Gilbert L. Danielson

Okay, well, thank you, everybody, for joining us this morning. As is our normal procedure, I'll turn the call over to Lee Wilder, who will read our Safe Harbor statement. Then, we'll have some prepared comments and we'll answer any questions you may have.

Lee Wilder

Good morning. My name is Lee Wilder, and I assist in Investor Relations for Aaron's. The company's earnings release issued last night and the related Form 8-K are available on our website, www.aaronsinc.com in the Investor Relations section. This webcast will be archived for replay there as well. With us today: Ron Allen, CEO; Dave Buck, COO; and Gil Danielson, CFO.

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, 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 2012 Annual Report on Form 10-K, including, without limitation, the company's projected revenues, earnings and store openings, as well as store acquisitions and disposition activities for future periods.

Ron will start with a few comments, and then Gil will follow with additional information. Ron?

Ronald W. Allen

Lee, thank you very much and, good morning, ladies and gentlemen. Thank you for joining us today. As Lee stated, with Gil and myself is Dave Buck, who is our new Chief Operating Officer. Dave is a 24-year veteran of Aaron's and has been 35-plus years in the rent-to-own industry. He moved to Atlanta from Houston in January when he was promoted to Senior Vice President of Operations. Dave's region and stores in Texas over the years have consistently delivered outstanding results, with numerous performance awards and recognitions. I've certainly enjoyed getting to know Dave during my tenure as CEO and greatly respect his abilities. With his operating experience and knowledge of Aaron's and the industry, I'm quite confident that we are in very good hands. Dave will be supported and aided by our long-tenured and very experienced management team throughout all the ranks of the company, especially on the operating side. Dave, it's a pleasure to welcome you as our new Chief Operating Officer.

I would also like to extend our best wishes to Ken Butler as he moves on to the next phase of his life. As all of you know, Charlie Loudermilk and Ken Butler led the Aaron's team in developing the Aaron's Sales & Lease Ownership model that has been so successful for over 2 decades. Aaron's has had dramatic growth over the years, providing our customers with high-quality, basic home furnishings, on payment terms, that they can't afford and many times could not obtain at other retailers. The company has delivered superior financial returns to our shareholders, has had great relationships with our franchisees and our business partners, as well as providing employment to our thousands of associates. All of us thank Ken for his 39 years that he's given to the company, and we all certainly wish him well in his well-deserved retirement.

Now during the first quarter, we again received -- we've achieved record revenues. However, these revenues did not meet our growth expectations. However, we must keep in mind that same-store revenue growth of 3.4% is very good in the current economic environment. And although customer traffic was lower than our expectations in both our operating and franchised stores, it still remains robust, considering all the headwinds and the strains on our customer base. Some very positive news in the quarter was achieved in our HomeSmart division. During the first quarter, we were very encouraged by the fact that our performance was above plans and expectations. We currently have 78 company-operated stores and 1 franchised store open. As we said before, we do not anticipate opening any new stores until the latter half of the current year. But as we noted in the earnings release, if current trends and expectations remain positive, we can anticipate adding a significant number of new stores in 2014 and beyond.

And by the end of April, we will have our new store operating system installed in all of our HomeSmart stores, and we anticipate this will greatly improve operating performance. And we're still on schedule to have the new store operating system installed in all stores by the end of this year.

Again, I thank you for your interest in Aaron's and it's a pleasure now to turn the call over to Dave Buck. Dave?

David Buck

Thank you, Ron. I just want to say that I'm very happy to be named Chief Operating Officer. I've been with Aaron's Sales & Leasing at the beginning, when we had 24 stores. I operated #16 for a couple of years before moving up into multi-store management. I was also fortunate in helping develop the system with Ken over the last 23 years. I've worked very closely with most of the Divisional Vice Presidents over the last 15 years. Five of the existing Vice Presidents, Operational Vice Presidents, rather, have worked for me prior to them getting promoted. Last night, we had a dinner and flew in all the Operational VPs, had a meeting, and had a very good time.

And thank you very much. Gil?

Gilbert L. Danielson

Thanks, Dave. I will just touch on a few of the highlights, financial highlights of the first quarter. Our company revenues increased 2% to the quarter, and it was a record quarter for us in revenues of $595.1 million. In additionally -- additional, our franchisees collectively increased their revenues to $269.5 million for the first quarter, that was also a 2% increase over the same period last year.

Our basic lease revenues, which is the core of our business, were up 8% in the first quarter compared to the same period last year, a little bit less than anticipated, but very good. Our revenue guidance for the quarter, though, included much more of non-retail sales. If you all recall, non-retail sales are sales of new products to our franchisees. Those non-retail sales, which are very hard to predict for us, were down 21% for the quarter compared with the quarter a year ago. If the non-retail sales had been up at the same rate as the lease revenues, not only would we have had to help our earnings, but we've come pretty close to the $630 million of revenues that we had guided to.

Same-store revenue growth in the first quarter for company-operated stores was 3.4%, and it was 1.8% up for stores that are over 2 years old. For stores over 5 years old, which is a metric that the stores certainly, have been around a long period of time, we've had positive same-store revenue growth in those stores of 1.1%. The same-store revenue growth for our franchised stores were up 2.6%, and the customer count was up 6.6% for the quarter. As you all know, revenues and customers of franchisees, however, are not our revenues and customers.

As far as the total customer growth was concerned, at the end March, we had just over 1 million, 1.1 million company-operated store customers and 592,000 franchised customers, a 6% increase over the total customers over the same period last year. The customer count, on a same-store basis for company-operated stores, was up 4.1% in the first quarter compared to the quarter last year.

Net earnings for the quarter were $51 million versus $71.2 million in last year's first quarter, and EPS for the first quarter -- diluted EPS for the first quarter was $0.67 compared to $0.92 last year.

Last year, in the first quarter, we did record into -- income of $35.5 million amount or about $0.28 per diluted share, related to the settlement of a lawsuit. Excluding that income and that reversal of that lawsuit related to accrual, on a non-GAAP basis, our EPS would have increased this year from $0.64 to $0.67, a 5% increase in EPS over the same period last year. And net earnings for the quarter, again, on a non-GAAP basis, would have been up 4% for the quarter as compared to last year.

As Ron mentioned, the HomeSmart segment has been encouraged -- very encouraging. Our revenues for the quarter were almost $17 million, and we had a small loss for the quarter, below $200,000. We had actually anticipated in our planning that HomeSmart would have lost around $1 million in the quarter, but it did certainly much better. As we look forward, trends are very encouraging in HomeSmart. We felt -- by the end of this year that if we could just collectively break even for the year in HomeSmart, that would be our plan. I think we're certainly on track to get there and maybe exceed that a little bit, so that's very encouraging in that regard.

Our franchise revenues, our royalty revenues from our franchisees were up 4% in the quarter compared to the same quarter last year. Just from a store activity, during the quarter, we opened 4 company-operated Aaron's stores. We opened 7 franchised stores and 1 RIMCO stores. We also acquired a franchised store and closed a couple Aaron's Sales & Lease Ownership stores.

At March 31, the end of this quarter, we had 1,230 company-operated Aaron's Sales & Lease Ownership stores, 748 Aaron's Sales & Lease Ownership franchised stores, 78 HomeSmart stores, 1 franchised HomeSmart store and the 20 company RIMCO stores and 6 franchised RIMCO stores. The total number of stores at the end of March, as we outlined in the earnings release, was almost 2,100 stores, it's 2,083 stores.

Through these 3 months ended March, we did award area development agreements to open 4 additional franchised stores. At the end of March, area development agreements were outstanding for the opening of 176 franchised stores. Those are stores that have been sold to franchisees that are scheduled to open over the next several years.

We did revise our guidance for the year. And our guidance for the second quarter, which we didn't have guidance for the second quarter, it would be new guidance. We do expect revenues of approximately $555 million and diluted earnings per share in the range of $0.45 to $0.49 per share. That range includes, approximately, an expected $0.04 per share in onetime charges that will be recorded in the second quarter related to retirement of our COO and a change in the company's vacation policies.

For the fiscal year, again, changing that guidance due to the $0.04 per share charge that we anticipate in the second quarter, we now expect diluted earnings per share for the year to be in a range of $2.11 to $2.23. The EPS guidance for the second quarter in the year does not assume any significant repurchases of the company's common stock.

Our new store growth plan for 2013 remains unchanged, and we still expect to add stores, new stores in the range of 4% to 6% increase over the store count we had at the end of 2012, for the most part, an equal mix between the company-operated and franchised stores. And we still don't have a firm decision on maybe a handful of HomeSmart stores. We're looking at that and by the next quarter, hopefully, that will clarify what our HomeSmart store opening plans will be if -- this year, if any, and how we kind of see the future on that.

We did generate almost $104 million in cash flow from operations during the quarter, and we continue, as we kind of say every quarter, that we continue to have positive same-store revenue growth in some of the highest employment areas in the country and just about every state. We've had positive same-store revenue growth since -- including some of the states that have the toughest economic challenges. So that remains very, very positive moving forward.

One thing that we did record in the second quarter that, certainly, depressed our earnings a little bit, we've had some assets that had been held for sale for a number years, these are vacant properties and land that we have decided, for a variety of reasons, not to continue to build stores on the properties. And we wrote down those assets during the quarter, we've been writing those assets down periodically for the last 3 or 4 years. We did write down the assets held for sale for about $2 million during the quarter. That went through operating expenses. Obviously, that affected margin during the quarter. And also, affecting the earnings were the decline in non-retail sales. Those are low margin non-retail sales, but we do make money on those sales and that certainly not only had a revenue effect, but it had an earnings effect in the quarter.

Those are pretty much the highlights. We'll certainly take any questions anybody may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brad Thomas with KeyBanc.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

I wanted to ask about the non-retail sales. As you've mentioned, Gil, these are difficult to predict. But could you talk a little bit about what you're hearing now from your franchised stores in terms of those new merchandise sales and why they underperform so much?

Gilbert L. Danielson

One of the advantages of our franchise program is that we do provide merchandise to our franchisees, and we -- pretty much whenever they want it, they can get it. There's no waiting period for it, they can order pretty much today and they'll get it tomorrow. So it's -- as a franchisee, you know that's a great advantage, versus if he just had to buy it from a normal vendor or through a normal distribution channel. And it has fluctuated around. If you look back in our results, it's been up and down and here and there. It's never been down this much, and it certainly -- the business was less than anticipated in the first quarter for our company stores and franchised stores for the things that we mentioned. And I think the franchisees, they come off -- business being off a little bit, they're still -- have some concern on where it's going. They know they can get their merchandise whenever they want it, so they get a little bit hesitant to order in advance. So we'll have to see how that goes. In our guidance for the second quarter, we're still anticipating that those franchised non-retail sales might be down, up to 10%. It's kind of running that trend at the moment. We're hopeful that, that will not be that much. And is it an indication of how the franchisees see the business? Perhaps, it could be. But every franchisee is different from his growth plans, from his cash-ability plans, from what he wants to do or where his customers are at. So it's something that you just can't draw a complete conclusion to.

Ronald W. Allen

I might just add to that, Brad, as Gil said, I think our franchisees are being a little conservative right now and as well they should be. But I was at our manufacturing facility 2 weeks ago, and our leader down there, Mike Jarnagin, and he was explaining -- he's doing some direct shipments now to franchisees to fill some of the immediate demands, and that's one of the beauties of our system. As Gil said, we can respond to their needs pretty quickly and these were some new products that we had in the furniture line that [indiscernible] at our National Manager Meeting and had a need and demand for them, so Mike was shipping several truckloads to the several franchisees direct.

Gilbert L. Danielson

We're seeing as many retailers -- as you know, the furniture is picking up a little bit. Demand for furniture is still -- is really the main item now. And as you know, many electronic retailers are kind of trending that way a little bit. So the great advantage we have, we have our own manufacturing plants. Almost 1/3 of our business is furniture, it's a higher margin business. People still need furniture. Of all the product categories, that's been the best that we have.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Great. And if I can just ask one question on HomeSmart. Ron, I think your word choice was you have potential for significant growth next year that continues to ramp up as expected or better than expected. What would be significant growth? And how quickly could you ramp this to being a significant portion of your business?

Ronald W. Allen

That's a good question. We're not ready to put that number out there yet. We've got a lot of good internal discussion going on right now. And Roger Estep, he's the -- he's chomping at the bit to grow it, I can assure you. We are just looking at the demographics now, Brad, to see exactly what is the best plan for growth with that model. Our stores are spread out somewhat now, so we may fill in some of the volumes between current stores and the like. But just not quite ready to put a number out there. But it -- from our standpoint, when you look at 78 stores, we could -- I could see us doubling that over a relatively short period of time.

Gilbert L. Danielson

It'd be a high percentage growth rate because you haven't yet opened any stores for a couple of quarters. But I got to tell you, though, and I'll speak for Roger, that coming off this quarter they had in the first quarter, I do believe that the morale is sky-high in the HomeSmart division. And they're very optimistic about the future prospects of it.

Ronald W. Allen

Yes, and as we said, we decided to put the new point-of-sale system -- go ahead and finish all the HomeSmart stores, and we will have that done by the end of this month. Actually, John Trainor from -- in IT will be out in 1 franchised store -- which is a top producer for us in HomeSmart, next Monday, finishing that installation. So I mean, it just gives, I think, a positive response for our folks in HomeSmart. We worked hard to get the model right and put the discipline in the model, and that's really happening.

Operator

Our next question comes from the line of Chuck Ruff with Insight Investments.

Charles Ruff

Your lease merchandise inventory is up a little over $100 million from where it was a year ago. In light of the weaker demand, can you address that at all?

Ronald W. Allen

Well, a lot of it's in the -- in -- certainly, in our distribution centers. We are unique in our rental business that we have our own distribution centers, and we've talked a lot about that. And so yes, business is off a little bit, and our inventory is up about $90 million from a year ago. We're in good shape as far as inventory. I mean, in our business, we'll certainly work that down as the months go down. But that has been an issue on our distribution centers, we're full at the end of March. But it -- again, our product, we can control it going out, both to our company stores and franchised stores, again, a lot of it is furniture. So we'll work it off as we go through the year.

Charles Ruff

Where do you need to work it down to?

Gilbert L. Danielson

Historically, on our distribution centers, we have maybe $150 million of product at any given point in time. We got $220 million in our distribution centers now. So it's probably about $70 million, $80 million higher than historical lows, so...

Charles Ruff

Okay. And can you tell us where you expect CapEx to come in for the year and also, the tax rate for the year?

Gilbert L. Danielson

Yes. I mean, the CapEx will probably come in around $80 million for the year. The CapEx for the first quarter -- let me look here, was -- our additions to PP&E was about $17 million in the first quarter. So I anticipate this is our CapEx, which is basically the standard CapEx, as you'd be used to be running $80 million or so. And the tax rate for the first quarter was 37.1%. It was low. We had some tax credits that we realized in the first quarter, which will not be repeating in the second. So I would use -- the next 3 quarters, I would use a tax rate of about 37.7% if you're forecasting ahead.

Charles Ruff

Okay. So about 37.5% for the year? Okay. And lastly, I think at the end of the last conference call, Ron, you said something along the lines of share repurchase looks attractive right now with the deferred tax payment pushed out again. Obviously, you didn't buy any. Can you talk about why not? And what you think going forward?

Ronald W. Allen

Well, we do have a plain cash on hand, as you -- we got close to $300 million of cash on our balance sheet. Certainly, share repurchases of anything that we could return to our shareholders, that would probably be something that you would consider on the first items. I would expect, and we'll see how we continue to do in market conditions. But I would suspect that we'll be buying some shares back here in the near-term. How many is kind of a day-by-day thing and then, evaluated.

Operator

Our next question comes from the line of David Magee with SunTrust.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Just a couple of questions. What have you done at the HomeSmart concept in the last couple of quarters to tweak it to make it perform better, do you think?

Ronald W. Allen

Well, it's been a variety of things. A lot of trainings going on. I sat through one of our general manager meetings 2 weeks ago with Roger. Again, just helping these folks really focus on the discipline needed to lead and manage a week model, which is different than the Aaron's model. We ensure we have the model right. There are still some issues with some of the older acquisitions we made with real estate costs and the like, and our ideal model has a certain real estate cost factored in, trying to do what we can with some of these older stores, looking at some that we might even close at some point in time. But just blocking and tackling, basically, and helping our people become better acquainted and disciplined in running that type of model.

Gilbert L. Danielson

Dave, and as you know, too, we haven't opened any HomeSmart stores now for probably 6 months or so. So just the nature of the business you do, when you open new stores, you have new store's drag and ramp up and that's your bottom line. So we don't have that much now in the HomeSmart stores. When and if we make a decision to move forward on HomeSmart, you will -- that new store drag phenomena, those store offering, all of this will continue. That's -- will start anyway, that's, obviously, the bad news, but the good news, we'll be opening stores and building revenue and moving forward with the concept.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

I sort of recall the -- maybe the issue had to do with the retention rate and/or sort of the pricing, too. Have there been some tweaks or differences in those numbers?

Gilbert L. Danielson

Yes. I mean we have been tweaking on the margins, I guess, quite a bit in the concept and on the pricing. And it's still evolving somewhat, but they're doing a lot of work to standardize it. It's still evolving, though, a little bit there.

Ronald W. Allen

We reduced some of the payout periods. And collections are different for a week-to-week model as well, and then, that's part -- what I keep saying, the discipline -- you've got to be very disciplined in how you go about, being sure that you're staying close to the customer on a week-to-week model.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Okay. The other question I had to do with the traffic pattern. I was curious what the months looked like in the first quarter and what might be a reasonable proxy for the second quarter?

Gilbert L. Danielson

Well, I mean, the business obviously improved as we got near the end of the quarter and in the middle, as March kind of got going -- the middle March and it has improved somewhat. It's improving somewhat -- Dave might want to speak a little bit to this. But it's still -- it's still early in the second quarter. I mean, it's a little bit better, but it can't really draw any great conclusions that it's ready to just take off yet. We will see how it comes out.

Ronald W. Allen

Dave, you met with Divisional VPs yesterday and I think you described they were somewhat shocked by some of the first quarter results but...

David Buck

Well, we were shocked at January and February, but it seems like things are coming back stronger. We're having a good month this month. We had a -- the third month of the quarter we had, we finished good. It seems like our customers are adjusting from the tax increase and the tax return. That was a bit shocking to them at the beginning of the year and to us. But I think they've kind of adjusted their possible finances. And it's looking positive right now as far as our growth, and our growth right now is good.

Gilbert L. Danielson

I think, Dave, that the tax refunds really had an effect on our customers because they were, I guess, about 3 months -- 3 weeks later than last year. And our customers every year in the business rely so much on getting that money in. And when the money didn't come in as anticipated, well then, they kind of got behind on their other bills and they started saying, "Man, when the refund finally came in, I got some other obligations that I got to pay," utility bills or whatever, and so they used that cash differently this year. They used the cash, they reallocated to their other needs because it came in 3 weeks later. And then, when you couple that also with the paycheck being a couple percent less, that was the kind of a shock that they went into, and gas prices weren't good either during the first couple of months of the quarter. I think that's -- I think the customers -- and I'll speak for Dave, I think the customers' behavior changed in the first quarter mainly because of those 2 things.

David Buck

I agree.

Operator

Our next question comes from the line of John Harloe with Barrow, Hanley and Company.

John P. Harloe - Barrow, Hanley, Mewhinney & Strauss, Inc.

I think some of the stuff I'm going to probably do it off-line. Tell me what the average monthly payment was for this quarter?

Gilbert L. Danielson

It was pretty much the same as it has been. It was around $130 a month. It's kind of where it's been over the last 3 or 4 quarters. So that's very encouraging, that it hasn't been -- that it hasn't significantly changed over the last 3 or 4 quarters.

John P. Harloe - Barrow, Hanley, Mewhinney & Strauss, Inc.

And a follow-up, this November deal that you made, help me understand what revenues that contributed into this quarter and were the contracts for those recorded in the fourth quarter of last year, are they recorded in this quarter?

Gilbert L. Danielson

We didn't get any revenue from the fourth quarter of last year. And we got the revenue from the -- in the first quarter this year. And so it was successful, the promotion. I mean, you could think of that as just saying that -- just isolate that by itself, if we hadn't done the Black Friday promotions and hadn't gotten new customers, maybe the quarter would have been worse than it was or been less growth than it was.

John P. Harloe - Barrow, Hanley, Mewhinney & Strauss, Inc.

Right -- again, what were the revenues this quarter?

Gilbert L. Danielson

We deferred -- I mean, I'll have to get back to you on that, John. It cost us about $3 million in revenues in the fourth quarter. So I'm not sure that would be the positive on the first or not. It may not be substantial, but if you don't mind, I'll just get back to you on that, but it's positive.

Ronald W. Allen

It generated about 12,000 new agreements in -- from new customers, which is encouraging. And we still have a keep rate of about 60%. So overall, it was -- it's certainly been a positive.

John P. Harloe - Barrow, Hanley, Mewhinney & Strauss, Inc.

But those agreements, let me call it customer counts, that's shows up in the fourth quarter's numbers, not in the first quarter, is that right?

Gilbert L. Danielson

Yes. They would be customers in the fourth. They just weren't paying.

Operator

Our next question comes from the line of James Ellman with Ascend Capital.

James Ellman

A couple of quick questions. First of all, in terms of the military sequester and your stores that are relatively close to ring -- military base areas, have you seen any impact from the sequester yet? And do you expect that you will later this year?

David Buck

This is Dave. No, we haven't. I was in touch with our Killeen store at Killeen, Texas, that's Fort Hood, that's the largest base in the free world, and it's having a good month. So it really hasn't hurt us. We haven't felt it as far as I was concerned. I typically use that as -- I know that manager and I contact him very -- probably weekly to get a feel for the military business during this time, and we are having a good month there also. So it hasn't -- we haven't felt anything in that area.

James Ellman

Okay. And then, just in terms of the -- a bit of weakness you have been seeing in customer activity, could you comment on why it's not because of Rent-a-Center's rack acceptance business in stores that compete against your stores in terms of product that have a better range of product, with the rack offering being relatively similar in pricing to yours?

Gilbert L. Danielson

Well, I mean, [indiscernible] a little bit, but we constantly talk to our field people and they cannot see that having a direct effect on our business. Rack acceptance, certainly, it could have an effect, but it's kind of hard, certainly, to measure. But it seems like it's working well for Rent-a-Center to do that. We haven't gone in that, basically, because our core business has been so strong. I mean, we've had positive same-store revenues for quarter after quarter, and in fact, we've never had -- knock on wood -- negative same-store revenues because we've been growing our core business. And it's a focus business. We focus on what we do well, and it's worked out well for us. So it's just hard to see, basically, how -- what the effect is. And perhaps, there is some effect, but it hasn't really been an item of concern from the field.

Ronald W. Allen

We're also continuing to track our product line in offering new models -- we talked about the furniture line, and that type of thing, just to try to stay abreast and certainly be very competitive in that regard.

Gilbert L. Danielson

I do believe we get some of those customers, because it is so hard to get credit for them -- the middle- to low-income customer, and they already got turned down for credit quite a bit. Certainly, this would be an advantage to be right in the store to do it, but I do think that, that tight credit environment has helped our business through the most recent couple of years, periods also.

James Ellman

Okay. But as the Flexi Compras and rack acceptance roll out to most stores that sell lower and middle end furniture and electronics and increasing -- those stores, of course, have much larger footprints than your stores, and you can go in and get rent-to-own on a monthly basis at any one of those stores, why wouldn't you see cannibalization of your customer base moving to those stores with the larger footprints and more selection?

Gilbert L. Danielson

Well, we don't have any evidence of that yet. I guess it's always possible, and we'll just have to watch it and if we feel that's the case, then maybe we'll do something different.

James Ellman

All right. Last quick question, just another 10% expected decline in non-retail sales to franchisees in the second quarter. What happened that led to such an over-buying by the franchisees in the fourth quarter that they already have full inventory and don't need to buy more right now?

Gilbert L. Danielson

Well, I mean, they're still going to buy probably $90 million or more product from us in the second quarter. Again, it's just a very conservative -- and as they have different motives of getting merchandise, and if your business is down a little bit from historical growth plans, you can always lease -- pre-lease merchandise. New -- we're shipping new merchandise, but there's also merchandise that comes back and the franchisees manage their inventory a little tighter than we do and I think that's one thing. And then, there's the reflection of going into summer months when the demand is usually less.

Operator

Our next question comes from the line of John Baugh with Stifel, Nicolaus.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Maybe a question for Dave. Can you see any markets where -- I mean, economy is terrible and particularly for this consumer. It was awful for January and February. It seems they, as you pointed, are getting over their shock. But I'm curious, the one part of the economy is good, is construction of homes again. I'm curious whether you can see labor in any particular store or market area that's housing construction-sensitive, where you're starting to see maybe a pickup of business?

David Buck

I really don't know about that. I don't have a feel for that. I haven't -- business is pretty well. Like Gil said, it's good all across the states right now. So I really don't have any answer to that.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And could you comment on early payouts, that's sort of the trend in the quarter, year-over-year, and whether the whole timing of tax refunds shifted that at all in timing or amount?

Gilbert L. Danielson

It certainly slowed down the growth of it. I was just looking on a same-store basis, our early payouts this quarter versus quarter last year, were down 2%. If you look back a year ago in the first quarter on a same-store basis, they were up 9%. So that's a big swing. And I think that again is a reflection of those late tax refunds coming in, the money being a little bit -- once they got in here, there was other demands for that money. Looking at April, I don't know. The early payouts might be up a little bit so far in April versus a year ago but not significantly. And so I think the tax refund thing is pretty much done now and there's just a window that we missed this year because of the delay in the refunds.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

My last question was on HomeSmart. I think you have and we all have been worried about cannibalization to the monthly concept, and you've been watching that closely and I know testing in various ways with stores very close to an Aaron's store or what have you. Are you getting increasingly comfortable about the cannibalization rate? Is it measurable? Is it stable? And are you comfortable where that is?

Ronald W. Allen

John, this is Ron. I'm getting much more comfortable with that. We've got a real pro with Roger Estep, who has a lot experience with the week-to-week business, as well as Aaron's business. And he defines this as a truly different customer. There may be some overlap there, but we're not having any real concern at all over cannibalization.

Operator

Our next question comes from the line of Budd Bugatch with Raymond James.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

It's TJ McConville filling in for Budd. Before I get to my questions, let us pass along our congrats to Ken on his retirement. Gil, you talked about what was baked into the guidance from the non-retail sales part of the business, can you give us some insight on maybe what you're planning for the royalties and fees number? I'm just trying to get a sense for whether or not the franchisees are seeing that level of slowdown in the business, where the higher-margin revenue could get impacted.

Gilbert L. Danielson

Yes. I mean, well, our franchise revenues were up about 4% in the first quarter compared to a year ago. We're kind of looking at that 4% or 5% range for the rest of the year. I mean, they're still going to open some stores and stuff, so just new stores will move that up -- the royalty fee up. But a pretty tepid forecast moving forward, so we'll see how it works.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Okay. That's fair enough. On to my HomeSmart question. Kind of a follow-up to some of the others. Just a couple. First, can you maybe disclose or tell us what your average turn is on the pricing in that business or what you're targeting right now?

Gilbert L. Danielson

Yes, I mean we have raised prices in the business for a variety of reasons. And so it's -- the pricing is getting more competitive with the typical weekly pricing models out there in the industry. So it's not as dramatically lower than maybe the initial thought would be a couple of years ago.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Okay. And I think I remember reading in the K that there's almost 40% of the agreements in that business that are monthly. Talk about what you hope that number becomes or what recent trends have been? I presume you want that number to go down in the weekly measure to get...

Gilbert L. Danielson

Yes we do. I mean, it's too high, and you're always going to have monthly customers. But some of the stores we had started out with much higher than -- well, they didn't start out, they just kind of ended up with more higher monthly payments. But I would think you're going to have probably 20%, 30% monthly payments in the store and probably, that's pretty typical for a weekly store, just happens and no matter who the operator is.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Okay. And last one for me, guys, we haven't talked about PerfectHome in a while and I know the decision is kind of -- it has to be made towards the end of the year as it currently stands. Any comments you can offer there?

Gilbert L. Danielson

Not -- we're, certainly, we -- our relationship with them has been great. PerfectHome, we've had a great change in sharing information and operations and other things. So it's been an outstanding relationship. But we are getting to the point now as we get here in the latter months of the year, we're going to have to decide and evaluate what we're going to do and how it's going to proceed. But nothing new has changed during the quarter.

Operator

Our next question comes from the line of Laura Champine with Canaccord.

Laura A. Champine - Canaccord Genuity, Research Division

On the non-retail sales, the sales of the franchisees, which are down, worse than we've seen in the past. Is there anything interesting going on in terms of mix? Did the franchisees get overloaded with televisions or furniture? Is there any category in particular that is seeing a decline in sales to those guys?

Gilbert L. Danielson

Not that I know of, Laura. I mean, I think it's pretty equally across the board. I mean, I don't have exact facts in front of me, but I'd certainly get back to you with a bit more details if you'd like. But my feel is it's pretty much across the board.

Laura A. Champine - Canaccord Genuity, Research Division

It looks like their new customer count is not down nearly as much as their orders are down. I mean, can you tell how much inventory they're getting cleared out of the system and will this eventually, maybe in the back half, mean they'll have to ramp orders back up?

Gilbert L. Danielson

Well, we'd hope so. We haven't done a lot of analysis related to that question. But they do have -- and their inventory levels are high now. So hopefully, they will start clearing out their inventory and going forward. But again, it's hard -- we can't -- it's hard for us to drive business for the franchisees. They make their own decisions, so...

Operator

Our next question comes from the line of John Rowan with Sidoti.

John J. Rowan - Sidoti & Company, LLC

I'm not sure if you've said this already, but can you tell me what the keep rate is on items through HomeSmart?

Gilbert L. Danielson

It's really hard on HomeSmart because we haven't been in there long enough to give you a valid keep rate. I mean, the history in the industry in the weekly rent-to-own is around 20%, 25%. We went into it hoping that our keep rate would be higher than that for a variety of reasons. Haven't really seen that trend being dramatically higher, but it's still early in the game. Just think about it, it probably has to go all the way from the start to the finish to own it until you really come up with a keep rate.

John J. Rowan - Sidoti & Company, LLC

Okay. I was just trying to understand if the keep rate was closer to your 50% rate or the weekly averages of 25%?

Gilbert L. Danielson

It'll likely be closer to ours of 50%, but I'm not sure that we've achieved that yet.

Ronald W. Allen

It will be somewhere between, we would expect. One thing we do, even with our weekly customers, we want to work with them, we want them to keep their product, and Aaron's has set up a relationship business with our customers and we want to use that same approach with our weekly customers even though there are many different type customers out there with weekly needs.

Operator

There are currently no additional questions.

Gilbert L. Danielson

Okay. Well, thank you, everybody, for joining us today.

Operator

Thank you, ladies and gentlemen, for attending the Aaron's first quarter earnings release conference call. This will now conclude the conference. Please enjoy the rest of your day.

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