Aaron's, Inc. (AAN) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: Aaron's Inc. (AAN)

Aaron's, Inc. (NYSE:AAN)

Q2 2013 Earnings Call

July 25, 2013 10:00 am ET

Executives

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

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

David L. Buck - Chief Operating Officer

Analysts

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

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

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

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

Laura A. Champine - Canaccord Genuity, Research Division

Charles Ruff

James Ellman

Robert D. Strauss - Gilford Securities Inc., Research Division

Operator

Good morning, and welcome to the Aaron's, Inc. second quarter earning conference call. [Operator Instructions] At this time, I would like to introduce your host, Gil Danielson with Aaron's, Inc. Thank you, and enjoy your conference. You may proceed, Mr. Danielson.

Gilbert L. Danielson

Well, thank you. Thank you, all, for joining us today. With us today is Ron Allen, our CEO; Dave Buck, Chief Operating Officer; and myself, the CFO. I'm going to turn it back real quickly to the operator who's going to read our standard Safe Harbor statement. And after that's done, we'll start. We'll have a few prepared comments, probably won't take too long, 5 or 10 minutes, and then we'll open it up to any Q&A that may come up. So operator?

Operator

Certainly. The company's earning release issued last night and the related Form 8-K are available on the company's website www.aaronsinc.com in the Investor Relations section, and this webcast will be archived for a replay there as well.

Before the results are discussed, 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 regulatory investigations and other issues that could cause actual results to differ materially from such statements, including the risk and uncertainties discussed on the risk factors in the company's 2012 annual report on Form 10-K. Forward-looking statements include, without limitation, statements about the company's future revenues, earnings, store openings, store acquisitions, disposition and accruals for legal and regulatory loss contingencies.

I will now turn the call over to Mr. Allen.

Ronald W. Allen

Thank you very much, Rochelle, and good morning, ladies and gentlemen, and thank you for joining us today. Aaron's continued to grow in the second quarter, although certainly less than what we were expecting. During the quarter, total revenues, same-store revenues and customer accounts were all up, and we did see a small uptick in the average -- the amount of average monthly payments. But revenues were again negatively affected by a decrease in non-retail sales to our franchisees. Now this certainly is a reflection of the slower business and corresponding less demand for products from our franchisees.

But earnings, excluding charges, were within guidance. Our new store opening plans were on track for the year, and at this time, we anticipate continued new store growth into 2014. We do expect record revenues for the year 2013 and an increase in non-GAAP net earnings. As we face the last 6 months of this year, we are working very hard on adding new business during the remainder of the year and have several new promotions planned over the next several months to stimulate demand and to grow both revenues and customers.

Our HomeSmart division results did not meet our expectations during the quarter. HomeSmart customers had experienced the same economic stresses of our Aaron's customers. But several management changes during the quarter, including the departure of the gentleman running the division, negatively affected its performance.

Now to put a proper emphasis on the development of HomeSmart and add a higher level of management attention and capability, Tristan Montanero, our Senior Vice President of Operations, is now devoting 100% of his time in the leadership of HomeSmart. We have also added 2 industry veterans as directors to assist Tristan with strengthening and growing the division. We remain strongly committed to HomeSmart, and we plan to open an additional 5 stores before the end of this calendar year. And we do anticipate opening a significant number of stores in 2014 and beyond, and we will be announcing those plans later on in the year.

As discussed in the earnings release, the earnings for the quarter were affected by several special charges. We've had a pending regulatory investigation by the California Attorney General for a number of months now relating to Aaron's leasing, marketing and privacy practices. We're continuing to cooperate in the investigation, and while its outcome is uncertain, we anticipate achieving a comprehensive resolution without litigation.

Now most of you know that during the first 6 months of the year, we have experienced quite a few management changes in the company. But in every case, I feel our team has been strengthened by the experienced people who've been promoted to their new position. In addition, we have brought in experienced talent from outside of Aaron's when necessary to fill critical roles.

One example of this is Robbie Kamerschen who joined Aaron's in June as Senior Vice President and General Counsel. Robbie has had a lengthy career in corporate legal counsel and corporate governance, especially in regulatory matters similar to those in our industry. He's an outstanding addition to the management team.

Without a doubt, our leadership group is more unified today as a team, working toward our goals of growing our customers and revenues and producing solid sustainable financial performance for our shareholders. Again, I thank you for your interest in Aaron's, and now I'll turn the call over to our Chief Operating Officer, Mr. Dave Buck. Dave?

David L. Buck

Thank you, Ron. As I wrap up my first 3 months as Chief Operating Officer, I have to say how proud I am to work the work that our 12,000 associates have been doing. I've received a great deal of support. I'm excited as ever about what we have and what we can accomplish. Although I am new in the position, I have been in the industry for 30 years, with Aaron's for over 24 years. And during that time at Aaron's, I've developed an excellent and closer relationship with our operational management team.

In particular, we have an amazing divisional vice presidents as a group, representing over 150 years of industry experience. This management team knows how to execute in growing Aaron's and have proven this many times over, as demonstrated by the company's superior operating financial performance through the years.

I am pleased that our Senior Vice President, Tristan Montanero, has taken the challenge of leading our important HomeSmart division. HomeSmart is in good hands with Tristan. I stand ready to call on my many years of experience in the weekly rental industry to support Tristan and his team in any way I can.

I'm excited to announce the promotion of Martin Fontella [ph] to the newly created New York, New Jersey expansion market. Martin was our Regional Manager of the Year for 2012. I am confident that he will make an immediate impact in this important growth area for the company. We believe New York, New Jersey will be an excellent market for us, and we have just begun to tap a very large potential.

I'm encouraged by the customer activity that we've experienced in our stores as evident by our increased deliveries. And the fact that during the second quarter, our company-operated and franchise stores together gained 26,952 customers. We expect these trends to continue in the third quarter and the balance of the year.

Over the coming months, I'm looking forward to getting out and traveling with our operational leaders, visiting stores in many areas of the company. Although our customers continue to face economic challenges, we are making every effort to ensure we remain the first choice when they are in need of household furnishing, electronics, appliances and computers.

Thank you. At this time, I'd like to turn the call over to Gil.

Gilbert L. Danielson

Thank you, Dave. I'll briefly touch on some of the financial highlights of the second quarter.

Company revenues increased 2% for the quarter to $552.1 million and 2% for the 6 months to $1.147 billion. In addition, our franchisees collectively increased their revenues 4% for the second quarter and 3% for the 6 months. The revenue at the end of 6 months was $518 million. Revenues of franchisees, however, are not revenues of Aaron's, Inc.

Lease revenues and fees were again up. They were up 5% for the second quarter for the company and 6% for the year. Our non-retail sales, which are primarily sales of new merchandise to our franchisees were again down in the quarter. They were down 10% in the quarter and 15% for the year. Again, we're seeing less shipments to our franchisees, primarily mainly because of less demand for the products by the franchisees.

The same-store revenue growth in the second quarter for our company-operated stores was 1.9%, and it was 0.6% for the stores over 2 years old. For the stores over 5 years old, it was basically flat, and it was down about 0.3%. The customer count on a same-store basis for the company-operated stores was up 1.6% in the second quarter compared to the same quarter last year. Same-store revenues for franchised stores were up for the quarter 1.7% comparable to our company-operated stores, and the customer count was up 3.3%. The company had 1,128,000 company-operated store customers at the end of June and 599,000 franchised customers. This is a 5% increase in total customers for the same number of customers we had at the end of the second quarter of 2012.

Our net earnings -- our GAAP net earnings for the quarter were down to $25.9 million versus $36.2 million last year, and again, the GAAP earnings for the 6 months were down to $76.9 million compared to $107.5 million a year ago. EPS -- GAAP EPS for the quarter was $0.34 compared to $0.47 last year same quarter, and for the 6 months, our GAAP earnings per share is $1 compared to $1.40.

As was explained in the earnings release, during the second quarter, we recorded an expense of $15 million relating to a regulatory investigation that's been ongoing for a while. And we also, as we've previously announced in our guidance at the end of the first quarter, we had about $4.9 million or $0.04 diluted shares charge in this quarter related to some retirement and vacation-related expenses. And again, looking at the non-GAAP net reconciliation, which is in our earnings release, a year ago, we had an extraordinary item, also a reversal of a lawsuit that happened during the first 6 months of 2012.

So excluding those adjustments, diluted earnings per share on a non-GAAP basis would have increased to $0.50 a share from $0.47 a year ago and be up 6% over the same period last year. And net earnings would have increased to $38.6 million compared to $36.2 million a year ago for the 6 months. That'd be a 7% decrease. Again, on a non-GAAP basis, EPS was $1.17 versus $1.11 for the 6 months ended -- period of end of June and net earnings would've been up 5% for the 6 months for the same period.

Revenues of the HomeSmart division were up 16% for the quarter compared to a year ago to about $15.8 million, and HomeSmart revenues for the first 6 months were $32.7 million versus $26.2 million a year ago.

During the second quarter of 2013, we opened 5 company-operated Aaron's Sales & Lease Ownership stores, 12 franchised stores and 2 RIMCO stores. We've also acquired 2 franchised stores, and 2 company-operated and 2 franchised stores were closed during the quarter.

At the end of June, we had 1,235 company-operated Aaron's stores, 756 franchised Aaron's stores, 78 HomeSmart stores, 1 franchised HomeSmart store, 22 RIMCO stores and 6 franchised RIMCO stores opened. Total number of stores opened at the end of June was 2,098. So certainly, as we sit here today, we've gone over the 2,100 mark in new store openings.

During the 3 and 6 months ended June, we awarded area development agreements to open 9 and 12 additional franchised stores. Our backlog of franchised stores, they have been sold, and we received money down and deposit to open in future periods is 168 franchised stores at the end of June.

Our guidance for the third quarter is expect revenues of approximately $550 million and the diluted earnings per share in the range of $0.48 to $0.52 per share. Our fiscal year guidance on revenues reduced just slightly to $2.3 billion over the previous guidance of last quarter of $2.35 billion. We now expect GAAP diluted earnings per share in the range of $1.98 to $2.06 for the year, and our non-GAAP diluted earnings per share was taking into consideration the adjustments we talked about of being $2.15 to $2.23.

Those are the noteworthy financial highlights for the quarter. We'll certainly call open to any questions anybody might have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David Magee with SunTrust.

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

Just had a couple of questions. One is with regard to the same-store revenues in the quarter, did you see much variation across the country by region?

Gilbert L. Danielson

Not really. I mean, if you look across the country, it was pretty consistent. We always have better areas of the country in this business. Certainly, business is strong in Texas and places like that. It has been strong there for quite some time. Deployment's good for our customers. But overall, there wasn't really any noteworthy area, David, that I can recall that would stood out, either positive or negative, or that had changed in the past.

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

And then I guess related to that, are you seeing anything different with regard to the mix of the business or the merchandise that you're renting in the stores?

Gilbert L. Danielson

Just as trends continue, furniture has always been a good product for us. I mean, I think that would be your stronger market. It's certainly the trends in the quarter's kind of similar to the trends last quarter. But again, our product mix remains pretty constant through the years, so nothing dramatically changed, I guess. Certainly, televisions and computers have been lighter in than last few periods of times. Furniture's been a little stronger.

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

And just lastly, on the HomeSmart stores, you mentioned opening more stores next year. Is that -- I guess I'm curious at the probability of that. Are we at a point now where we say this is definitely a second growth vehicle for the company? Or are we still a little bit restrained and maybe somewhat still in a test mode?

Ronald W. Allen

Dave, we're still in somewhat of a test mode. Tristan Montanero just took over a few weeks back, and we're just doing a lot of internal work to be sure we have the model right where we're comfortable before we announce the substantial growth. But we are pretty confident at this time.

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

Is there a certain metric that gives you confidence that that's the way to go? Is there -- the keep rate or something that's...

Gilbert L. Danielson

Well, I mean, we've still got -- we haven't made any money on HomeSmart yet. That would be a key factor for us. But we're still -- stores are still-- our organic stores are still maturing. So we're going to watch that very carefully because we want to make sure that the model works and the financial returns are on the model. And we can at least, I mean, get financial returns that are at least is what we would expect from an Aaron's store. And so that would take some time, David, as you know, to really work on the model, especially when you have a model that you're tinkering with quite a bit. It's kind of the case, a lot longer to be really grasp by handle on where you think it's going to go in the future. We certainly -- we feel confident enough to open 5 more stores this year. That's our plan before we dramatically open a whole lot more stores in that, though I think we're just going to have to be a little bit more certain. But we're very optimistic and very positive that we'll see some more growth in the HomeSmart tester.

Ronald W. Allen

And Dave, we have what I'd call a backroom work to do, infrastructure and the like, just to be sure we have the systems established to support HomeSmart as a separate division. So that's another discipline we're putting in place to be sure before we really announce the kind of the grand plan that we have all that lined up.

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 actually TJ McConville filling in for Budd. So to follow up a little bit on Dave's question about HomeSmart, what was the operating loss in the quarter from that division, Gil, if you have that?

Gilbert L. Danielson

Yes, our pretax loss for the quarter was $606,000. We -- that's less than expected. I mean, our goal is we -- we hope that we reach breakeven for the year. As you recall, we lost $7 million last year -- last couple of years from HomeSmart. Hopefully, we were planning that we'd probably -- maybe we'd lose maybe a little bit of money in the quarter. It was a little bit more than that, and there's some reasoning. The growth's been slower -- kind of the growth in our core business has been a little slower. I think that kind of -- all through -- HomeSmart has some of the same dynamics that Aaron's stores would see in customers and stuff. So -- but I -- I think we'll end -- so I mean, we will -- looks like we weren't -- we're not going to reach our breakeven this year in HomeSmart. I think we'll work very, very hard to get closer and closer to breakeven. But I would expect probably that we'll be in the red. I even hate to put through a number out there, but I would say probably $1 million or $2 million at this stage.

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

Okay. That's fair enough, and that seems to be about the number. And if I look at the math, it looks like on a per box basis, that breakeven number is somewhere between $900,000 and $1 million a year in revenue. Is that in the ballpark, or is that a little too high?

Gilbert L. Danielson

I would hope that we would certainly would make money. No question that at $60,000, $70,000 a month, you will be profitable and if you do it right in the weekly business. We just -- I don't suppose -- I hesitate to say exactly. We're still working on it.

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

Okay. Fair enough. But that number you gave me is sort of consistent with the last couple of quarters. If we move over to the -- into that pesky non-retail sales line, I know that's a tough one to predict all the time. But is there any impact, Gil or Ron, from changes in the terms of the franchise agreements or the keep rate? I'm just trying to square the revenues in the franchise as still being higher, but that number swinging down so much. Is it they're renting more used stuff, or is it anything to do with that?

Gilbert L. Danielson

I think it's just a combination of a lot of things that we've talked about before. We just can't pinpoint one thing. As we've said in the past, our franchisees, they're going to order product when they want to order product. And they certainly -- I think they have all had -- there's been a lot of uncertainty out there with our customers, and they have the same customers that we have. A lot of uncertainty in the environment, tax environment, the business environment. I think people have just become very cautious in a lot of respects. And the franchisees have the option to, in general, not all of them, but most -- the more successful ones in many cases, order more merchandise than they need because you need merchandise to build customers and build your revenue streams. Others are a little bit more tight on their inventory and watch it a little bit more carefully. So they all have different -- little bit different ways they see the business and how they see the future in the current conditions. So I think those non-retail sales, the way they're trending, we're guiding that those will be somewhat flat in the third quarter compared to the third quarter a year ago and show a little bit increase. I mean, sooner or later, franchisees -- about 99% of the franchise inventory is bought from our distribution centers. So we guarantee it. Sooner or later, they're going to have to start buying some merchandise or going to run out of merchandise. So I would think that we'll see some uptick in the third quarter. It did flat with last year and see some positive increases in the fourth quarter. At this stage though, it will be down for the year. Even if we had -- even if it's flat for the third quarter and up in the fourth a little bit, it's going to be down, I don't know, somewhere in the range of probably 5% for the year or something like that.

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

Okay. That's helpful. And lastly for me, great news to hear on the average monthly payment ticking up. Anything to talk to that's driving that specifically, or is it a few more units per agreement, anything...

Gilbert L. Danielson

Dave will speak to that. I'll just throw out a stick [ph]. It is -- I mean, it was $131.20 at the end of June. That's up about $1.15 from the end of the month.

David L. Buck

Yes, we started the year out with an initiative to increase the number of accounts our customer had, and it seems to be working. And that's basically it. We had an initiative. We're pushing forward on it, and it's being implemented properly. So therefore, I'm happy with it rising where it is and expect it to continue.

Operator

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

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

First, just a big picture question about your customer and your sales trends. There's -- obviously, Aaron's is the fastest-growing of the traditional rent-to-own boxes, and that's been a big driver of your growth and big opportunity still for you. But we're seeing more and more of these nontraditional kiosks and even just partners of traditional retailers offering lease options. As you look at your last couple of quarter's results where the comps have been a little softer than what you'd seen in 2012, how much of it do you think is just the softness in your customer spending versus some of this competition?

Ronald W. Allen

It's really hard to predict. As we look at it, we certainly are very much aware of the competitive environment around us. But we feel we still have so much growth left in the Aaron's model and obviously with the HomeSmart model. We're sticking to our knitting in that regard, but paying a lot of attention to competition. But I can't say that our weaker business in the first 6 months was due to that particular factor. Gil?

Gilbert L. Danielson

I would say -- I mean, and obviously, probably they hadn't helped at all, and there might be some hazard business a little bit, can't quantify. I wouldn't have any idea how to quantify it. But it's certainly gotten our attention obviously. Everybody, all the retailers are doing it across the country. So we're going to -- we'll continue to kind of observe it and look at it, and I'm not sure exactly what we're going to do. But it's not going unnoticed anyway.

Ronald W. Allen

Brad, one of the most important differences that Aaron's has is the relationships we build with our customers, and we have customers who come back and shop with us over and over and over. And that's one thing Dave Buck is emphasizing with all of our team in the field, to keep building that and reaching out and being sure we have the products our customers want and treating them better than any other competitor can.

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

And I know you guys get asked this question probably on every call, but with respect to a kiosk business like RAC acceptance, that as we've watched over the last few years, Rent-a-Centers seem to have a pretty good rate of success. Is there any change in your view on maybe pioneering a test of a similar kiosk business?

Ronald W. Allen

I think about it -- we think about it all the time, not all the time, a couple -- a little bit. Again, I think we're aware of it, very much aware. We hear the comments. We have a lot of these virtual providers. They're -- we hear from them. Occasionally, we have people coming in and wanting us to do similar type ventures. So we're just not going to do [indiscernible] out of hand. We haven't had to do it up to this date. Our core business has been strong. It certainly has worked out well for RAC, and it seems like it's working out well for many retailers. So we're going to keep it very close to our mind and keep evaluating and then decide if we want to do something different than we're doing now.

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

All right. If I could just ask one last question then on the POS rollout. I think last quarter, it was in about all of the HomeSmart stores, and your old system is, what, over 20 years old. Can you just give us an update on how the POS rollout is going?

Ronald W. Allen

Yes, it's actually going very well. I think we're up 264 stores or so at this point in time, and we're rolling them out in larger numbers every week at this point. And we still hope to have all of our stores online with the new POS by the end of the year. We've not run into any major problems. We've been very methodical in the way it's been rolled out, but I've been in many stores now where the new system is working and working quite well.

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

And is there any opportunity to start capitalizing on that POS either through more efficient labor or perhaps better analyzing some of the customer data for marketing opportunities? Any opportunity to capitalize on that POS this year?

Ronald W. Allen

It's going to be before the end -- after the end of the year before we really start realizing the benefits until we have all the stores converted. But some of the most value we'll get out of that is more knowledge about our customer base and the products they're wanting and the like; and two is the ability to serve our customers more efficiently in our largest stores, which will allow us to continue to grow those particular stores.

Operator

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

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

This is John, not Shawn. I wanted to ask you first on the California issue. Is -- and I'm not going to ask you to predict the outcome of any settlement. But are you going to have to change anything you do there? Was there some technicality of -- that you just need to correct? Or is it going to be harder to do business in California -- and it's always hard to do business there -- going forward?

Ronald W. Allen

John, it's best we not get into any details on that at this point in time. I think we're still in the discussion, as you know. We certainly have to make some changes, but the issues are getting careful consideration internally, and we're still certainly optimistic about the growth in California.

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

How many stores do you have there?

Ronald W. Allen

About 78...

Gilbert L. Danielson

We've got about, I think, 78 stores, about half franchised and half company-owned. California is a huge market, as you know. I mean, we certainly could have 150, 200 stores down the road in the future. So -- and kind of look forward to doing it. But we just have to make sure that everything's -- we got the game plan right and make sure that the state -- the regulatory requirements are in place. And as we get that done and we get it all settled, I think it could end up being a positive for the company moving forward.

Ronald W. Allen

Yes, we were very encouraged about where we are, John, without getting into more detail in that. But certainly, we'd love to grow in California.

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

Okay. So the bottom line is you think you can operate there going forward. Obviously, you can't commit to that statement, but that's the hope or expectation?

Ronald W. Allen

That's certainly our intent with the discussions we're having to be sure that we can run the business in compliance with all the regulations in California, yes.

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

Okay. And then on the promotions you mentioned -- again, public call. I don't know if you want to get into details with competitors maybe listening, but help us think about what you're going to be doing. Is it term, is it rate, increased advertising? Any color there?

David L. Buck

We have -- this is Dave. We have some major promotions coming up for the rest of the year and working closely with our new marketing of -- marketing vice president. We have some -- she and I are working very closely together with some major promotions for the rest of the year. Obviously, like you said, we can't go into the details, but we do have them and I'm very excited about them and I'm looking forward to capitalizing on those.

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

Do they influence -- how do we think about modeling any impact? Will we see a little pressure on the depreciation rate versus fee rental because we're going to give them a week or month or so of free rent or something?

Gilbert L. Danielson

I don't think that much early on. I mean, the promotions will -- I mean, there will be some price reductions. But again, I think that will be something you'll see more over time. We'll do a little bit more advertising. We got some -- some of these promotions will cost us some money, and so you'll see advertising tick up a little bit, maybe $1 million or $2 million from what we're spending now in the third quarter into the fourth quarter, I guess. So that would be on the operating expense line, but hopefully, that will be more than offset by getting a little bit more revenue generated through the system.

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

Okay. And then...

Ronald W. Allen

We got a pretty careful coordination between operations and marketing and looking at the effects of these promotions, I think, in probably more detail than ever. So I think it will be a very positive move for the company.

Gilbert L. Danielson

The whole goal, John, as you know, is get revenue going up a little bit, gain customers and get our revenues growing back to higher than it is now. So there will be some expenses involved. There might be a little margin deterioration because of price cuts, but the whole plan in the end will come out better, so...

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

Okay. And I presume that's embedded in your revised guidance?

Gilbert L. Danielson

Yes.

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

All right. And then finally, I guess maybe directing this to you, Ron, we've got now a third leader of HomeSmart since Ken was over it. And I don't know Tristan's background, but it sounds like he's been with the company, which means he's had the monthly background. Can you help us, what is this particular skill set to deal with weekly? And it sounds like you're expecting to move forward with opening stores. So even though the results weren't good in the quarter, it sounds like with this management change and/or other things that are going on there, you're much more positive going forward. I'm just wondering what color you can give the investor to have confidence in them.

Ronald W. Allen

John, thank you. Well, first of all, Tristan is an outstanding leader, and his career primarily has been with Aaron's, as you know. But the 2 individuals that he's promoted to director, one east, one west division, both grew up in the week-to-week business. Dave Buck, as he said, grew up in the week-to-week business. Dave and our team is working together in that regard. And one of the disciplines we have put in place here is you've got to really solely think weekly, and you've got to build this model to be a weekly model. And what I mentioned earlier, some of the infrastructure we're having to adjust, that has to do with the pricing capabilities and the like to be sure that we have that flexibility for that weekly model. And that's some of the work we're doing behind the scenes, and Tristan is leading that work. So he's well qualified, and he recognizes that the talent he's brought in, one, I would say, promotion from a regional manager position in the HomeSmart division and one was a promotion from a regional manager position at Aaron's. But both of these 2 gentlemen came from the weekly model. Most of their careers have been in the weekly. So we've learned the lessons. We learned a lot of lessons because it was somewhat muddled before as we try to kind of Aaronize it as we said. But that's all changed, and it's going to a pure weekly business.

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

And Ron, all the -- go ahead.

Ronald W. Allen

There will be some monthly customers obviously, but our focus is really getting the weekly model right.

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

Okay. And then I know the acquired weekly stores at least initially didn't do as well as some of the organics. Is that still the case? And are the organics -- yes, you were just more comfortable with where -- you're not there yet obviously, but you're more comfortable that, that model is closer to being right and therefore confident about growing new stores?

Gilbert L. Danielson

Yes. I mean, that's the key, the organic stores. We are -- I mean, we still got some work to do. If we were extremely confident, we will open a lot more stores in HomeSmart. So we're still in this trial period. The older stores that you mentioned that we acquired, which are about half the stores, I mean, they're doing okay. I mean, they were your independent, weekly rent-to-own guy. We've had a lot of problems converting them and developing the new concept at the same time. So don't look for us to acquire independent or anybody in weekly to convert to HomeSmart. The way to go is develop them organically, and we're not quite there to be comfortable to really go full blast. But it's making progress, John.

Ronald W. Allen

And some of these stores, John, as you know, the real estate didn't quite fit the model. This real estate's too expensive, that type of thing. So we're dealing with all of those. But as Gil said, the organic stores have outperformed. We've got to make several personnel changes in the stores we've acquired. Most of that's been done. So stores are coming in line, but the best performing stores are still those that we opened organically.

Operator

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

Laura A. Champine - Canaccord Genuity, Research Division

Just with Mitch Paull leaving the firm at the end of the week, what does Aaron's plan to do on an interim basis and then on a longer-term basis, whether it's looking internally or outside to replace that role?

Ronald W. Allen

Good question, Laura, and we certainly hate to lose Mitch, but he has a really good opportunity and we wish him well in his new career. He's done a good job for Aaron's, and he's working with us through this week in a transition. Gil Danielson will be paying a lot of attention to that going forward. And Steve Michaels, our VP of Finance, who works directly with Gil, will be kind of the interim leader working with Gil in that regard. We have 2 individuals that are serving. One on the purchasing merchandising side and one on the logistics side that are veterans in that department, leading those 2 areas for us. And going forward, we'll both be looking within and without to see exactly how we want to structure that going forward.

Operator

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

Charles Ruff

Aaron's stock price is about unchanged from where it was back in April, May of 2011, so more than 2 years. Meanwhile, of course, the market is up very nicely. I'm wondering if -- interested in what your thoughts are why that is.

Gilbert L. Danielson

Well, I don't know. You guys are in the business. Certainly, I -- I mean, everybody has as opinion why stocks go up and stocks go down obviously. Certainly, we are in a business segment that customers are lower to middle income consumers and customers, and everybody knows how stressed they've been in all the headwinds they've had with payroll tax increases and high unemployment -- or unemployment is very high for our customers. So we're in that same kind of group and certainly, we have not participated going up. We've kind of flatlined as you said with the overall margin. I think that -- that's my opinion. But everybody else would have another opinion.

Ronald W. Allen

Sure. Let me just add to that. The company has gone through quite a transition in the last 12 months, and there's a new management in place and I think that creates some uncertainty. And I've now been in the CEO position for over 18 months and I can tell you this. I've never been more confident of a management team leading the company than I am of this one. Working together as a team, as I've said, with a single focus and really dealing with issues in the business. And one of -- part of the transition we've had is to help build the infrastructure to support where we are today and our growth for the future. And that doesn't necessarily drive the stock price in the interim basis. But going forward, I think that the moves that we are making now with our management team and the infrastructure certainly bode well for our future performance.

Charles Ruff

I appreciate your thoughts. And the fourth quarter -- on a different question. On the fourth quarter call, you said share repurchase looks attractive right now. On the first quarter call, I believe you said that you expect to buy shares in the second quarter. Why did you change your mind?

Gilbert L. Danielson

Well, as we've talked about before, it is kind of a day-by-day, week-by-week decision, certainly, we -- how we're looking at the business, been a little bit slower. Stock price has been what it is. There's a variety of reasons that we just have decided that not to purchase stock. We certainly have the capability. As you know, we got $300 million of cash on hand. I do believe, though, if we continue now to grow customers like that we've done in the second quarter and that continues, and if business picks up here a little bit, I believe that we'll probably -- you'll see some stock repurchases for us in the next very short period of time so.

Charles Ruff

Okay. Can you see how those comments are misleading? I mean, those kind of comments, I would expect there to be some share repurchase, and there's absolutely 0. I'm just wondering if you understand how that comes across on this side of the phone.

Gilbert L. Danielson

Well, they're certainly not misleading, to say the least. I mean, that's that thought process that we evaluate every day. We look at our alternatives, our future plans, our customer growth, revenue growth, how we feel about the business, how we feel about inventory levels, franchisees, purchasing inventories, have a look into the whole picture and then we make our decision, best, by that way.

Charles Ruff

Okay. And lastly, could you give us an update on Perfect Home? How are things going there? Do you -- when do you expect to make a decision? Would you accept dilution with an acquisition?

Gilbert L. Danielson

Well, we're still working on that also. And Perfect Home, we do have an option to purchase the entire company by the end of this year. That's -- we've got a great relationship with them. We talk to them every -- not every week, but quite a bit, and we're moving forward. It's very positive. We certainly would -- our intent right now would be to follow through and purchase the company. But again, things have to happen. You have to come up with a mutual agreement with both parties, mutually agreement price, and so it's still a work in process.

Ronald W. Allen

We're certainly impressed by their management team, and the job they're doing is very encouraging from that point of view.

Operator

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

James Ellman

Can you just give us a little bit of detail in terms of the investigation in California in terms of what is it that they are questioning? Would it potentially lead to any sort of impact on your cost structure for doing business in the state or your revenues?

Gilbert L. Danielson

Well, I mean, again, we hate to comment on that, on the costs we're having right now and hopefully, they'll clarify here pretty soon in the next short period of time. You never know, and these situations could go on for longer than we anticipate. But yes, I mean, it's a situation that in California, there are certain state statutes on how to conduct the rental obligation in the transaction. And so that's what we're talking with them about. And in the end, we'll have to modify our procedures to make sure we're in compliance with the State of California laws, which are different than other states. And so we have to make sure and I'm -- we're optimistic that we'll be able to use the California law as it is now and build our model and continue to grow in the state.

James Ellman

Okay. And since many trends begin in California, for better or worse, and spread across the country, if what California is asking for in this investigation were to be applied across the Aaron's store base, would it have a significant impact on your earnings power?

Gilbert L. Danielson

I mean, California is -- I don't know. I mean, it just is a California-specific deal, and it's something that we can certainly operate in. If we could operate in other states that way, too, I guess we had to come out to it. But I just don't -- I think we'll be able to reach a situation where we just kind of get California straight and move forward.

James Ellman

All right. Just in terms of the -- there's been some buzz among the analyst community that Aaron's is about to embark on a kiosk strategy. Is a kiosk strategy, to a certain extent, precluded because you have a franchisee base and it would lead to competition in many areas where your contracts with franchisees would preclude competition?

Gilbert L. Danielson

That would not be the overriding issue on it. Franchisees do have protected territories. You'd have to work around that in some respect [ph]. But that's not an overriding issue on this situation.

James Ellman

Okay. And one last question is just, noticed that your newer stores seem to be having same-store sales growth that's better than your slightly more mature stores, which are faster than your more mature -- your most mature stores. Aren't we supposed to expect to see better same-store sales growth coming out of your most mature stores as you build up a larger client base?

Gilbert L. Danielson

No. Your best same-store growth comes out of your newer stores because [indiscernible] stores to ramp up, and it takes a long time to ramp up your annuity base, your revenue base. So the new stores give you the same sort of revenue boost. And as long as we have a lot of new stores in the system, our same-store revenues will be good. I kind of like to look at that metric that we talk about on the earnings call, that stores over 5 years old, how are they doing. Now they're -- I'm not saying they're maturer, but they're 5 years old. And historically, they have comped between 0 and maybe 3%, and then taking that into -- which is good for older stores, 5 years and older. They sit basically flat in this quarter. And then having the younger stores in the system keeps the positive revenues going. So -- but as the stores get older and they get bigger, you get -- you eventually get to a point -- it's not always the case, but you get to a point where the stores just maxed out. There's only so many customers that they can serve and deliver and collect from, so they do -- they flatten out as they get older.

Ronald W. Allen

And the new point-of-sale system may be of help in that regard with, again, I mentioned earlier with some of our larger mature stores just processing customer payments and that thing and much more rapidly will help our associates serve more customers. So that should help our mature stores grow beyond where they are today.

James Ellman

All right. And finally, there there's been some talk that potentially, the same-store sales growth has been slowing due to the kiosk strategy from some of your competitors, leading to a loss of some of your clients. Has that been happening to any extent? And just -- in that you would offer a relatively similar product to Congs [ph] or an hhgregg, et cetera, for many products. And if your client base, your monthly client, can get a similar product with more selection, more service at a bigger box store, that they might be moving or migrating with their feet over to those larger, more established national brands?

Gilbert L. Danielson

Yes. I mean, we touched on that a little bit earlier in the call. And as we said, we don't have any statistics or anything else to back it up. I mean, it certainly is probably maybe how much it's doing. I don't know. I mean, we unfortunately -- we haven't been too concerned with it through the years because our core business had been so strong. Core business is lightening up here a little bit. So as we said, never say never. Not saying we're going to do it. We're certainly very, very well aware of it. There might be an opportunity for us, but it's something we haven't decided on yet.

Operator

Our next question comes from the line of Rob Strauss with Gilford Securities.

Robert D. Strauss - Gilford Securities Inc., Research Division

I just have one real quick question, which is more big picture than anything else. I was wondering if you can talk about some of your future thoughts or assumptions on factors that are broadly impacting the low income household. So how are you planning your business as it relates to your future thoughts on the economy, employment, even other costs that might be playing a role in the life of the low-income household? And one thing that comes to mind, of course, sometime in the future will be the new health care law. So if you can touch on that kind of conversation, I would appreciate it.

Gilbert L. Danielson

Well, Rob, I mean, yes, it's -- and certainly we've -- our revenues have been light here in the last couple of quarters. We reduced our revenue guidance moving forward. I mean, these customers are having a lot of stress out there and you name it. It's the same high gas prices, and Obamacare coming up and unemployment is the big issue on it. So we have tempered our forecast looking forward a little bit on that, but those are the conditions we are in, in the country today. I do think that if employment would improve for our customer, which our customer probably has certainly double-digit unemployment because our customers are the service workers, the hourly workers, construction workers, which they've been really struggling in the last 3 or 4 years. Signs of encouragement, if housing and resident -- or commercial construction picks up, that's good for our business. That employee's construction workers. As we talked about. Taxes being strong with the oil business and stuff. But yes, it's been a tough environment. I think the biggest thing that could change the economic condition, though in my opinion, is that employment would improve for our customers. And they would have income, and they come in and get more product and get more dollar amount at the same price.

Ronald W. Allen

Rob, we need to be concerned about those major trends you're reflecting on. But the way we run this business is, again, it's very unique. You go into our stores and you see our management team, our associates working with that customer. And when they have problems, we work with them and give them as much flexibility as we can with their payment schedules and the like. And I think that's pretty unique in the retail industry today and in our industry. So I think we deal with those major trends by working with those individual customers and deal with their specific problems and try to keep the product with them and help them with their payment plans, I think, probably better than anyone else. And that's probably the best way we can deal with those major trends.

Operator

Our next question comes from the line of Jay Chen [ph] with Putnam Investments.

Unknown Analyst

I was just hoping to get some guidance for the tax rate for upcoming quarters. I noticed you had a 36% tax rate in Q2 as opposed to 37.5%. Most of the street was modeling as per past guidance, leading to about a $0.02 benefit to EPS?

Gilbert L. Danielson

I guess it was $0.02. I think 37.5% is a good rate to model for the next 2 quarters. We had some tax credits that came through in the second quarter that affected the rate. But I don't anticipate that continuing the rest of the year. So I'd use 37.5%, Jay.

Operator

Our next question is a follow-up question from the line of James Ellman with Ascend.

James Ellman

Just in terms of the follow-up on thoughts about Obamacare, ECA. As the exchanges open later in the year and some cash flow from your consumer base -- your customer base is directed towards health care spending when in the past it has not been, do you see that as having any impact on their consumption patterns and impact on your business?

Gilbert L. Danielson

I don't know. I couldn't even speculate. Again, it's not a positive, but I don't know. I mean, it's going to be one of those things like everything else, gas prices go up and down, crude prices go up and down. Who knows? I'm not even real familiar with all that's going to happen on Obamacare other than it's probably going to be negative. So I couldn't even speculate on it.

James Ellman

All right. Well, I mean, we know that -- do you have any data on your customer base on to what extent that they currently have health care or do not have health care, and will be forced to either spend money on health care or have to pay taxes for not buying it?

Gilbert L. Danielson

Yes. We just don't have that data on their health care or on their personal things like that.

Operator

There are currently no additional questions waiting from the phone lines.

Ronald W. Allen

Okay. Well, thank you, again for your interest and support of our company. And we will continue to strengthen our team to serve our customers and enhance the Aaron's brand in order for us to deliver superior financial returns. We look forward to speaking with you at our next quarterly call. Thank you very much.

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