Aaron's Management Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Aaron's Inc. (AAN)
by: SA Transcripts

Aaron's (NYSE:AAN)

Q3 2013 Earnings Call

October 25, 2013 10:00 am ET

Executives

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

Garet Hayes

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

David L. Buck - Chief Operating Officer

Analysts

Charles Ruff

Laura A. Champine - Canaccord Genuity, Research Division

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

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

Dillard Watt - Stifel, Nicolaus & Co., Inc., Research Division

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

Operator

Good morning, and welcome to the Aaron's, Inc. Third Quarter Earnings Release 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

Okay. Well, thank you, everybody, for joining us today. With me today is Ron Allen, our CEO, and Dave Buck, Chief Operating Officer. Before we get started, I'm going to turn it over to Garet Hayes, who works for Aaron's, and she's going to read our standard Safe Harbor statement and then Ron will have some comments and Dave and then I'll follow up with some -- with the financial information. So Garet?

Garet Hayes

The company's earnings 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 website (sic) [webcast] will be archived for 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 risks and uncertainties discussed under Risk Factors in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Forward-looking statements include, without limitation, Aaron's projected revenues, earnings and store openings for future periods and other statements under the heading Fourth Quarter and Full Year 2013 Outlook. Statements regarding planned share repurchases and statements regarding legal and regulatory accruals for loss contingencies.

I will now turn the call over to Mr. Allen, Ron will have a few comments, and Dave and Gil will add some further information.

Ronald W. Allen

Thank you, Garet, and good morning, ladies and gentlemen, and I thank you again for joining us today. As we advised you in our October 4 release, we are certainly disappointed with the quarter's results. Our same-store revenue and customer growth in the company-operated stores were basically flat for the quarter and shipments to our franchisees were below the same period last year. While traffic does remain good in most of our stores, we did have a higher percentage of write-offs in this quarter which indicates that our customers continue to struggle in this current economic environment. We've initiated some new promotions in the past several weeks and we feel that these will generate more customers and revenue growth during this quarter and into 2014.

Gil will discuss the financial results in more detail, but I would like to reflect on the year-to-date and our confidence in the future. We continue to have strong faith in our business model. This confidence is certainly reinforced by our Board of Directors' recent authorization to purchase up to a total of 15 million of our common shares and we will begin this program at the very near future.

And as I reflect on the past 9 months, it truly has been a rebuilding year for the company. It's a year that has had many distractions, along with significant management changes. These distractions include various legal and regulatory matters. However, we've made substantial progress in all of these areas of concern.

You probably have seen an article covering a settlement with the Federal Trade Commission over security and privacy issues. I'm pleased that we were able to reach this agreement with no financial penalty to the company. We also have made substantial progress in our discussions with the Office of the California Attorney General. As you know, we have accrued an additional $13.4 million for this investigation this quarter and we continue to cooperate in these discussions and we do not feel additional accruals will be necessary.

Our management team continues to be strengthened. We're adding new leadership in the training and the development of our associates. And during the quarter, we added talent to our marketing and to our legal teams to provide support for the growth of our operations. But most importantly, Dave Buck, our Chief Operating Officer, continues to build and enhance our operating team with the addition of experienced -- and Aaron's management, including Neil Salvador, our Director of Sales; Wayne Hopper, Director of Operations and Analytics; and Justin Hafer, Director of Customer Accounts Management. These 3 individuals have a total of 35 years experience with Aaron's.

And I'm particularly proud of Tristan Montanero and the team he's building in our HomeSmart division. He's perfecting the model, refining the product line and the infrastructure for pricing flexibility, which is needed to solidify this growth platform for our company.

Finally, our new point-of-sale system is employed in now some almost 750 stores and certainly will be a boost to our efficiency in serving our customers and providing valuable information about our sales and marketing efforts.

In summary, while this has been a challenging year for our company, I'm very optimistic about our future as we continue to resolve these regulatory and legal issues and build on a platform of strength and infrastructure and, most importantly, a solid management team and our dedicated and professional associates.

Now I'll turn the call over to Dave Buck, our Chief Operating Officer. Dave?

David L. Buck

Ron, thank you very much. As Ron said, we're not very happy with our -- this quarter's results. That being said, I just had a great 3-day meeting with our divisional vice presidents and my staff, and we are totally focused on getting back to the basics, which in this industry means renting and collecting. I think all of our distractions from the past year are behind us, I'm looking forward to the fourth quarter and 2014.

As indicated in the earnings release, the franchised stores had better results, and that tells us that the customer opportunities are there. We are all in agreement. I'm very proud of my divisional staff, my divisional vice presidents, my new staff that I've put together to support them, and we will definitely make the most positive impact.

Thank you. Ron, Gil?

Gilbert L. Danielson

Thanks, Dave. I'll go over some of the financial highlights of the third quarter. Company revenues increased 2% for the quarter to $539.5 million and 2% for the 9 months to $1,687,000,000. In addition, our franchisees collectively increased their revenues 6% in the quarter over the same period last year and 4% for the 9 months. The revenues of the franchisees for the 9 months were $763.3 million.

As we know, the revenues of franchisees are not, however, revenues of Aaron's, Inc.

Lease revenues and fees were up 3% for the third quarter compared to the same period last year and up 5% for the year compared to the same period in 2012.

Non-retail sales, which are primarily sales of lease merchandise in Aaron's franchisees decreased 3% for the quarter and 12% for the year compared to the same period last year.

On a same-store revenue growth for the company-operated stores, they were -- it was basically flat for the quarter. It was up 0.5% for stores over 15-months old and it was slightly down to 0.8% for 2-year old stores. For stores over 5-years old, the same-store revenue growth was down 1.5%. So certainly, our same-store revenue growth was disappointing in the quarter, much less than it has been in previous quarters through the years and is really just a reflection that revenue and customer growth has been weak in this quarter.

But customer count on a same-store basis for company-operated stores was up 0.3% in the third quarter compared to the quarter last year, again much less than it has been in previous quarters through the years.

However, same-store revenues for franchised stores were up 2.2% and customer count was up 2.5% for the quarter. I think that's certainly a positive sign that in the franchised stores are doing better both in revenue and customer growth than we are at the moment from a corporate standpoint. It certainly means they have the same customers that we have and in different spots of the country, but they are the same customers. And I think that's positive that customers are still out there and wanting our product and need our product, we just have to do a better job on the corporate side, I think, to execute and capture those products -- those customers.

The company, at the end of September, had 1,114,000 of customers -- company-operated customers and 597,000 franchised customers, and that was a 3% increase at the end of the quarter over the same number at the end of the third percent -- third quarter in 2012.

Net earnings for the quarter were down 27% to $21.1 million versus $28.9 million last year. These are our GAAP net earnings. Net earnings for the 9 months were down 28% to $98 million versus $136.4 million same period last year.

And again, on the GAAP EPS, the GAAP EPS was $0.28 during the quarter compared to $0.38 last year and for the 9 months, $1.28 versus $1.77.

As you all know, in the last couple of years, we've had 3 or 4 kind of special charges that have run through the income statement and we've presented the numbers on a non-GAAP basis. During the third quarter, we recorded a $13.4 million, or $0.13 per diluted share, additional accrual regulated -- related to the California regulatory investigation. We also had accrued $15 million for that proceeding in the second quarter. So the total amount accrued in 2013 for the California investigation is $28.4 million. It is ongoing and has not reached our final settlement yet, but we're quite confident that as far as the financial perspective and most of the work that, that's behind us in that regard and we don't expect to see any other further accruals regarding California in the future.

In addition, as we've mentioned before, during the second quarter of 2013, we recorded $4.9 million of charges related to retirement spends and a change in our vacation policies. Last year, in the third quarter, we had a $10.4 million charge relating to retirement. And in the first quarter of 2012, we've actually had a credit of commercial entity [ph] income on the settlement of a lawsuit of $35.5 million.

Excluding all that above, which I just said, diluted earnings per share for the third quarter on a non-GAAP basis would have decreased to $0.40 per share from $0.46, a 13% decrease. And net earnings would've decreased to $30.8 million from $35.5 million, also down 13% over the same period in 2012.

For the 9 months, diluted earning per shares for the 9 months in 2013 would have been $1.50, so that's versus $1.57 last year, basically flat, and net earnings would have slightly decreased about 1% down to $119.6 million.

Revenues of HomeSmart during the quarter were $14.8 million, which is 5% over $14.2 million that we recorded last year in the third quarter. And then net revenues for the first 9 months for HomeSmart, $47.6 million versus $40.4 million.

We did lose money, again, in HomeSmart, this quarter. Actually, we entered the quarter, we're planning to lose some money in the third quarter, but we've lost about $1 million more than planned to be around $1.6 million, really a reflection that the revenues have been flat or actually slightly declining in HomeSmart over the last year. So -- and we'll talk a little bit about HomeSmart and answer some questions on that a little bit later.

During the third quarter of 2013, we opened -- the company opened 5 company-operated Aaron's stores, 8 franchised stores, 2 franchised HomeSmart stores and 1 RIMCO store. We also acquired 6 franchised stores and 2 -- and sold 2 stores to a franchisee during the quarter. We also closed a couple of company-operated stores and 1 franchised RIMCO store.

So at the end of September, we had exactly 2,111 stores open and the combination of Aaron's stores -- company stores of 1,242, our franchised Aaron's stores of 760 stores open. We had the 78 HomeSmart stores. We did have the 3 franchised stores, we did add 2 franchised stores to the HomeSmart stores during the third quarter, 23 company-operated RIMCO stores and 5 franchised RIMCO stores.

As far as awarding new area development agreements for our franchise operations during the 3 months, we opened -- we entered into 12 more agreements and will open 25 agreements -- entered into 25 agreements during the year of 2013.

At the end of September 2013, area development agreements were outstanding for the opening of 167 franchised stores over the next several years.

We did change our guidance. Our guidance for the fourth quarter here in 2013 is to expect revenues of approximately $575 million and diluted earnings per share in the range of $0.38 to $0.42 per share. We slightly reduced our fiscal year revenue forecast to recording approximately $2.26 billion.

GAAP EPS for the year, we now expect to be $1.67 to $1.71. And the non-GAAP EPS guidance for the year of $1.95 to $1.99. The EPS guidance does not assume any significant repurchases of the company stock. However, as we have mentioned, it is our intention -- we have not repurchased any shares this year. But it is our intention, moving forward now, to resume our share repurchase program in the fourth quarter here this year and beyond. And so, there will be some changes in EPS as we move forward.

As far as guidance for 2014, what we're going to do a little bit differently, we're going to come out prior to the end of the year, we're going to talk about our guidance for 2014, both our revenue and our earnings guidance, and also, our outlook for HomeSmart, where we really see where we -- how many stores we're going to open in HomeSmart, as well as overall store count growth.

I do believe, certainly, in 2014, our new store growth this year, we should have about 2,150 stores opened by the end of this year, which should be around a 4% store opening growth. We will talk about this later when we give the guidance for 2014. But I do expect the store opening growth for next year will be consistent with what it has been for last few years and probably around 4% to 5% growth [indiscernible] in 2014 over the number of -- that we'll have here at the end of the year.

Those are pretty much the highlights, the financial highlights of the quarter, but we'll certainly answer any questions anybody may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Chuck Ruff with Insight Investments.

Charles Ruff

Can you talk about why you're optimistic regarding HomeSmart? It sounds like they, again, were under expectations in the quarter? It's obviously a mature industry, but you're seeing something that makes you excited to grow it?

Ronald W. Allen

Chuck, it's Ron. Sure. First of all, it's a customer base that we're not necessarily getting to. There is a large customer base that certainly prefers and needs a week-to-week model, so we think the customers are there. We've struggled with this, as you know. We just haven't had the model right and we now have a team under Tristan Montanero, our Senior Vice President of Operations, who has -- he's built a team of individuals who have a lot of week-to-week experience. And we've got still some issues to deal with pricing flexibility, that's an IT issue we've got internal we're working on that we need to accomplish. The real estate issue is one where we've got to be sure that we've spent too much on some of the stores we have in place and we've got a model now that streamlines that and with the team and the opportunity we see and the need in the marketplace, we have a lot of confidence that this can be a growth vehicle for us.

Charles Ruff

Why wouldn't you let this team prove itself before expanding it so much? In other words, I know you're thinking you have the right team, but the results to date aren't showing any -- at least from where I sit, they aren't showing anything to get me excited, so why wouldn't you let this team kind of prove themselves and produce some better-than-expected revenues and profits for a change before you really grow it?

Ronald W. Allen

Well, they are proving themselves. The results are not there yet, because we've had high number of write-offs and the like and our customer account has been down because we've been distracted, dealing with all the infrastructure problems. But I don't disagree with you, Chuck. They are in the process of doing that and once we are confident that the numbers can be positive then we will announce our growth plan.

Gilbert L. Danielson

Hey, Chuck, let me add a few comments. They did lose money in the third quarter. We expect that they'll continue to lose money in the fourth quarter, probably about $0.5 million to $1.6 million that was recorded in the third. One of the reasons that we're not -- we're going to delay a couple of months to give guidance for 2014, especially HomeSmart, what we're going to do in opening it, that will give us another couple of months to see some positive trends in the business moving forward. I mean, you're right, we haven't actually performed for a couple of years in HomeSmart. We're getting better, but this is not acceptable. But as we've talked many times, lots of changes have happened here in the last year and lots of false starts and restarts and things like that. But as Ron said, we feel good about the management team that is experienced, a lot of things are happening, hopefully in the next couple of months, we can see some good positive trends. And then what we see in the next couple of months will really determine really what those store -- new store opening plans will be in '14 and beyond.

Ronald W. Allen

And Chuck, they're going through a store-by-store analysis. Do we need to close any of the stores we have and that type of thing, looking at -- do we need to try to address the real estate costs of some of our current stores. So they're really getting into the weeds to again be sure we have the core business correct before we grow.

Gilbert L. Danielson

But we're still very optimistic on the Aaron's concept, I mean, we talk a lot about HomeSmart. There's still some good growth we feel on the company and franchise front on the Aaron stores. So our intent, open 4% or 5% new stores in '14 or wherever that will be when we finalize it, that will include all the Aaron's stores.

Charles Ruff

So if the HomeSmart concept does not do well in the next few months, you may not grow it a lot in 2014?

Gilbert L. Danielson

Well it's all definition of what's a lot. But still, how many stores we would be opening in '14, we still got to determine, I mean, but it would be in the 10s rather than 100s for sure. I mean, it would -- you just couldn't pull it off anyway from a management's standpoint and execution's standpoint, I think. So how many stores for next year, I don't know. But somewhere maybe between 20 and 40, if we really are confident that that's the way to go.

Ronald W. Allen

We can actually fill feel a lot of gaps, too, Chuck, where we have stores spread apart today. We can fill in the gaps between those stores without adding a lot of overhead, which will increase the efficiency of the operation.

Charles Ruff

Okay. But the growth next year is dependent on how the next few months go?

David L. Buck

Well, I mean, if that's going to be a critical data point to look at, obviously, and -- so we're watching it very carefully.

Charles Ruff

Okay. And on a different subject, can you address PerfectHome, what's the likely outcome there?

Ronald W. Allen

We had a certainly good experience with PerfectHome. We had the option, as you know, to buy the company by the end of the year. We're in the process of continuing discussions and we will obviously have something teed up by the end of the year. It's been an excellent experience for us so far and I think for the folks at PerfectHome. We've learned a lot from them, they've learned a lot from us, and we think it could be an additional growth platform for us.

Charles Ruff

One of the reasons given for the weak quarter you just completed was distractions and lack of execution. It looks like you've got your hands full running Aaron's, why would you want to tackle PerfectHome? It seems like that would be one big fat distraction?

Ronald W. Allen

Well, first of all, you got to establish management team in place running PerfectHome and it's not a case where we would have to go over and take over that operation. We obviously would not want to do that. This team is experienced and they've got capable backups to the lead team there. So they're running their operation right now, doing an excellent job. Don't [indiscernible] a lot of distractions we've had this year, Chuck, it's centered around the security and privacy issues. We've had a team in place dealing with this over about the last 18 months. All of our associates have had to go through privacy and security training. And Many distractions like that, along with the -- of the management changes have taken place. But as I said, we've got a solid management team in place right now and a team that's working together, I think, more effectively than ever before.

Charles Ruff

Okay. Is it likely or unlikely that you purchase PerfectHome? I understand there's no decision at this point, but can you give us a better idea of whether we should expect it or not?

Ronald W. Allen

Well, I mean, it's for sure it doesn't have to be done by the end of this year. I mean, there's no magic. There is -- we have an option to buy the company at the end of the year, but in life, everything is subject to change and -- so I would say, if I was [indiscernible] my personal opinion, maybe it's a 50-50 chance, but we will just have to see how it works out, too.

Operator

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

Laura A. Champine - Canaccord Genuity, Research Division

Gil, a couple of numbers I'm hoping to get, what was the charge-off rate in the quarter and what was the progress on average ticket or average customer agreement size?

Gilbert L. Danielson

Yes, for the quarter, the charge-offs were high. I mean, it's probably the highest level that I have seen in maybe ever in recent times. But on a -- as a percentage of the store level revenues, it was 3.94% now. The third quarter is always higher in this industry just because of the economic situation of the customers in the third quarter. But more typically, you would expect 3.5%. Normally, the charge-offs in the other quarters like the first quarter of the year are down in the 2%, 2.5%. People have more money in the fourth and first quarter. But if you just get a historical -- why are write-offs up, I mean, I think it's just a reflection of the struggling business, collecting from customers and where we're at and customer growth and things like that so, but -- I mean, that really added to our operating expense. If you look at our operating expense people say, well, what happened to operation expenses, it seems like it's really high. Well, one thing that -- if you kind of look at our lease revenues, our lease revenues were up for the quarter for 3%. I mean in the second quarter, they were up 5%. Historically, our lease revenues, our model, is that you want your lease revenues up 8% to 10%, of course that is not how it works. But we were flat on same-store revenues. Lease revenues were up 3%. We kind of looked into the quarter and said, well, our plan was to have lease revenues up 5% for the quarter over the quarter a year ago, still not at historical levels, but 5%. We didn't do that. So we came up $10 million short, roughly, on lease revenues. And of that $10 million, I mean, probably 60% or so would flow right to the bottom line. So that was a big part of the earnings shortfall was the lack of the revenue growth that had been 5% or 6%, we wouldn't really -- operating expenses wouldn't been much of an issue. And then on top of that revenue shortfall, about $1.3 million or so of additional inventory write-offs that would be at the more normalized level. And we also went in our fulfillment centers. As you know, our fulfillment centers this year have been overloaded a little bit with product because again, because business has been slow and we've had some inventory that's gotten a little old on. But we wrote off about $800,000 in our fulfillment centers. We didn't write it off, we just wrote down some product down to -- on margin. So basically, what went through operating expenses are about $2.1 million of additional inventory-related short charges. So again, revenue being short, that flowed to the bottom line, employee write-offs being down. Our average customer that -- what he was paying was again pretty flat, it's about $131 a month, it might have been up just a little bit from what it had been -- it was $131.78 in June, it's $131.20. So what's happened the last 4, 5 quarters, our average ticket has been remained constant, they've gone up a little bit. And so, that certainly is positive. We've been able to keep the average ticket up, doing some bundling of product and some other things we've done. But what's happened is the same-store customer growth and the total customer growth has slowed down, and that's caused the revenues to also slow down and be short. And then also we talked about HomeSmart kind of coming in the $1 million more than anticipated. So that kind of all -- those are the big picture items that kind of bring you down to the revenue shortfall, the write-offs and it came down to where number was at. So that's kind of a long answer to your question.

Ronald W. Allen

Dave, maybe you may want to add something on the write-off number. One of the individuals I mentioned that he's brought into management team is Justin Hafer, who is Director of Customer Accounts Management and he put more emphasis on this at a across-the-board strategic level than ever before.

David L. Buck

Yes. Justin will be focused on the nonce [ph] issue from a corporate level and he'll be in contact with the people that -- with the divisional VPs and watching that much closer and having conversations with them and finding out reasons why we charge them off. And I think through training, that we will limit that in the future.

Laura A. Champine - Canaccord Genuity, Research Division

Is it possible, Dave, that the reason the charge-off rate is up is that you guys have gotten more promotional to try to drive more contract and perhaps that's attracting some customers who can't really afford the transaction?

David L. Buck

That's possible. I had -- like I said, I had a 3-day meeting with my people, and they brought that up. But we still process the agreement. We still -- before we deliver it. Could it bring that individual in because of that? That is possible. Do I have any way of measuring that, exactly? No, I don't, but it is possible.

Operator

Our next question comes from the line of Jordon Hymowitz with Philadelphia Financial.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

You mentioned the losses in the quarter were 3.94%. I assume that's overall. Can you say what the loss were in just the HomeSmart division?

Gilbert L. Danielson

Are you talking about inventory losses or just loss?

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

Charge-offs overall, though on a comparable basis would have been 3.94%, which defined as [ph].

Ronald W. Allen

Yes, much higher, and that's one of our problems in HomeSmart, for sure. They were up, at this point, 2% for the quarter, now that's high. But it's been higher than that in previous quarters, so I think we're gaining on it anyway. But that's one of the reasons HomeSmart has not performed. They've had revenues, not enough revenues, but they've had revenues, but a lot of those revenues came about because they had a lot of charge-offs and I think that's just a reflection of just kind of the change we've made in the HomeSmart offering through all these months and the change in management and the focus and everything else.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

The quarter would be 8% annualized. Is that right on an apples-to-apples basis?

Ronald W. Allen

No, it varies from -- again, the third quarter is going to be your higher quarter. I mean, it was like 5.4% in the second quarter and 4.3% in the first. The first quarter is going to be less, because people will have more money, whether it's on a weekly business or the monthly business. But you ask -- I mean, why do we feel confident about HomeSmart moving forward. HomeSmart's write-offs should be no higher than Aaron's. They should be 3.5%, 3%, 2.5%, so they're much higher. And again, if we can just get the management and the focus under control. That's going to improve your profitability in HomeSmart regardless where the revenues go.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

And then my other question relates to -- there's been a number of retailers targeting aggressive financing, targeting your guys' customers, so to speak. Do you think some of the slowness in same-store sales is the result of the expansion of those chains? And do you think that they -- do you -- have you thought about incentive offering rent-to-own weekly model that you would offer financing model and is that a better -- the way you look at it one way or the other? Do you know what I'm saying?

David L. Buck

Yes. This is Dave. I think -- I have no way of obviously gauging that exactly what kind of impact that's having. I think it probably is. I think some of our customers are going that channel. I don't have access to HomeSmart's number, so the other people at home, I mean, rack acceptance, I don't have access to that nor do I have access to the others. Is that a possibility? I'm sure it is. But I still have a lot of confidence in our business. I think we are remodeling our stores. We're going to have a new look. And I think we'll continue to attract that business. I think if we were going in that direction, we would kind of be competing against ourselves.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

Let me throw a little question a different way, instead of the HomeSmart being a weekly rent-to-own model, have you thought about it being just a financing model where you finance the contracts at a lower rate, let's call it 20%, 21% instead of a rent-to-own model. Do you think that would be a better growth driver because some of the teams with that business model seem to be growing 30%, 40%, and which is much faster than you guys are at?

David L. Buck

Right. No, we have not considered that. And we talk about it, the 3 of us talk about that issue, but we have not really considered that. We talked about the possibilities, but have not considered it.

Operator

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

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

Just a follow-up on the HomeSmart opportunity. I mean, I think you all are annualizing maybe around $800,000 in revenue per store. I think your main competitor was closer to $900,000 at least a year or 2 ago and that's come down some, but obviously, Rent-a-Center makes a lot of money in that segment. As you look at the model today, with the revenue that's doing right now, do you feel like it could be a nice profitable opportunity as you scale it up? Or is there still more tinkering that you really feel like you need to do on kind of a 4-wall basis?

Gilbert L. Danielson

Well, I mean, we feel our store still need to grow in revenues, but the general feeling that we can have a nice business in HomeSmart is the revenues can get to $80,000, $85,000 a month, kind of look at that business. That is the weekly business. I think one of the misconceptions we had when we started HomeSmart a year ago that we thought we could have much larger volume stores, kind of the Aaron's model. But we have found out that in the weekly business, because of all the maintenance and the high customer service that you have to do, that you're kind of limited on how big those stores can be and how many customers you can have in a store. So we've got a little bit more to grow in revenues. I think, certainly, our breakeven point in there can be between $50 million, $60 million -- or $60,000 a month, sorry, $50,000 to $60,000 a month. You get to $80,000 or so, $85,000 is a good profitable operation. So we still got a ways to go, and that's why we're still watching the ramp-up in the revenue growth, but that kind of the models as we see. I mean, as far as percentage returns and profitability and everything, HomeSmart should certainly be as profitable as others in the business. And I think just our ability to prove that we can outperform competitors in many cases, that we can add a lot of value in the margins and improve the weekly concept and have a good return there.

Ronald W. Allen

Tristan has found a lot of areas that needed to be changed as you would expect and then he is in the process by changing those. One of those is the product mix that we -- we've had too many large TVs and that type of thing in some of our week-to-week stores. And as I said, he's really refining the product line now to really before that week-to-week customer. And remember, one of the unique things about Aaron's, the relationships we have with our customers has been really one of the key drivers of our success, and we think we can do that even in a week-to-week model just the way our associates are trained and the way they treat the customer.

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

Great. And then, I was hoping that you all could just talk about how you're thinking about just capital priorities in general. There's obviously a new share repurchase program. There is an opportunity to make an investment in PerfectHome. There still seemed to be very exciting organic growth opportunities for core Aaron's and for HomeSmart. And then there will be some cash need to pay off taxes in the coming years. Gil and Ron, can you just give us a sense of how you guys are thinking about those capital priorities?

Gilbert L. Danielson

Well, we know we're very fortunate that our balance sheet is strong. We have the financial resources to do a lot of things in the company. And you can actually just kind of went through the opportunities that we have, whether it be HomeSmart, PerfectHome or grow the existing business. So what's happened is with our growth slowing down year -- this is -- we can still grow the business and at historical rates and we can add the stores and we can continue building revenues and still have plenty of cash left over, or financial ability, or resources leftover after doing that. So kind of reach -- kind of delayed here a little bit on doing the share repurchases this year, but I think we've certainly reached the point now and -- that we need to do that moving forward, because that would be the most logical choice that we can do to return of value to our shareholders at this time. Certainly, just having cash on hand earning very little is not a good long-term strategy. So that's why the share repurchase -- we're also looking to dividend a little bit, Brad, but are -- and we can increase dividends, but our dividend has been pretty low through the years and, I mean, that's just the historical situation of the company because we've been a growth company for so many years, that a dividend -- giving a dividend wasn't really the top of mind, but we're at today and we will feel that -- I never say never, anything could happen any day, but I think doing the share repurchase will be the best alternative for us.

Ronald W. Allen

It's certainly a balancing act, if you will, between those issues you brought up. And we're very fortunate to be in the position we are as you know, but we continue to feel there's a tremendous amount opportunity for our model, both the Aaron's model and the HomeSmart model, once we get that just right. Those are the type of issues we're spending a lot of time on right now.

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

And then do you feel like the current leverage ratio is where it should be? Again, I know you do have, I think, the number last quarter at least was over $300 million in tax liabilities that you could have in the coming years. Is there a willingness to maybe take on some debt to take advantage of more share repurchase opportunities? Or is it more of a case where you're going to be using excess cash to be buying back stock?

Ronald W. Allen

Well, there's a willingness. Certainly, we've been highly -- more highly leveraged in the past than we are today and we're very low leverage due to many factors we talked about before. We certainly don't have to go out and raise money to do anymore repurchases than what we probably could do over the next year or so, but I mean, our debt-to-equity ratio has been higher in the past, much higher, and so that's not to say we wouldn't go up and lever up, maybe a little conservative, kept it and it has served us well, I think, through the years. But our balance sheet has served us well, but we wouldn't discount that and we wouldn't do more than you what you would typically think we might do.

Operator

Our next question comes from the line of Dillard Watt with Stifel.

Dillard Watt - Stifel, Nicolaus & Co., Inc., Research Division

Gil, question for you is can you give us a walk-through on in terms of the fairly substantial increase in the cash balance from the second to the third quarter?

Gilbert L. Danielson

Yes. It went up $80 million or $90 million. We did generate quite a bit of cash in the third quarter. And why is that? Our purchases from our vendors are basically our inventory merchandise. Our vendor purchases are down about $100 million this year versus where it was last year. So what's happened is that our FCs had -- we've had a lot of merchandise in our FCs, started the year with a lot of merchandise in our FCs, we did a lot of purchases last year. We've whittled that down now. I mean, our FC inventory levels at the end of September, I believe, are like $40 million less than they were at the end of June. So we've really concentrated in moving product out of the FC, so that means we haven't had to buy so much this into quarter, in fact this year, in its entirety, so that has generated the cash. And we will still generate some cash here in the fourth quarter. We probably, in our FCs have maybe $20 million more cost of merchandise on hand than we would typically have at this time. So I do believe that we'll buy some more stuff here as we end up moving into the quarter. But again, with the growth slowing down, I think you'll see some more cash generated this year. And that's the other thing why we're really thinking seriously about doing some more share repurchase, because I see cash building slightly a little bit more as we ended in the fourth quarter. We'll see, that's not certainty, but I would imagine that a lot of it depends on how business is, how that comes about.

Dillard Watt - Stifel, Nicolaus & Co., Inc., Research Division

Is any of that from a difference between cash versus booked taxes and deferred taxes?

Gilbert L. Danielson

We -- taxes we paid this year are -- yes, I mean, we paid about -- I think our forecast is to pay about $60 million in cash taxes this year. Our provision this year is higher than that, as you know. So that is part of the difference. Now that will all turn around in '14 as we -- while we still plan to pay about $170 million, $180 million in cash taxes in '14 as the bonus depreciation rules turn around.

Operator

Our next question is a follow-up question from the line of Chuck Ruff, Insight Investments.

Charles Ruff

You mentioned the -- all the privacy training that you had to put your employees through, et cetera. Do the franchisees have to do that too?

Ronald W. Allen

Yes, they meet the same requirements. Chuck, along that line, what we're preaching right now is protecting the brand, and that goes for everyone, so all of our programs are designed to do just that.

Charles Ruff

Okay. So they obviously performed better even with that same big distraction, right?

Ronald W. Allen

That's right.

Charles Ruff

Okay. I guess what I'm not understanding is why things will get better? You talked about distractions, et cetera, that caused you to disappoint here this past quarter. But I'm not clear as far as why we should expect things to get better?

David L. Buck

Yes, this is Dave. I truly believe that after management changes in the beginning of the year and some of the distractions going like you're talking about, we -- not only the privacy, we had a couple of new issues that definitely needed to be implemented, I think it's pretty much over. Like I said earlier, we had a meeting with our VPs and we talked about it and we're going to refocus on what's -- what we need to in the business and kind of a refocus, and that's why I believe that things will get better.

Charles Ruff

Okay. How long will that take? Obviously, the fourth quarter doesn't look very good. So what kind of time frame are you talking about before Aaron's is back to the way it used to run.

Ronald W. Allen

We certainly hope to see some improvement in this quarter, Chuck, and I sat through part of Dave's meeting with his divisional VPs and it's just -- it's so much more spirit of cooperation moving forward together setting higher goals. That's why Dave has brought in these 3 individuals, which I indicated, setting sales goals that will help people account for that type of thing. It's a little different way of leading the company going forward and I was really pleased that Dave, I know you were with the -- it's certainly the buy end. You got...

David L. Buck

Certainly were.

Ronald W. Allen

From your regional vice presidents, and that's -- those are the revenue drivers, and they've got to be motivated and supported. The distraction we've had with these are always legal cases. We now recognize that our legal division has to be a part of the operating division of the company, so that what we're doing in our promotions and the like are producing sustainable results. We can't have promotions that go out that certainly do not comply with various state regulations and the like. And so, I'm excited about that aspect and also our marketing team, Andrea Freeman is a top professional. She's worked very closely with our operating divisions, she's really built up our marketing team to focus on local promotions, regional promotions, as well as overall brand building for the company. So it's just a confidence I have in this platform and I can that platform as a management team and some of the infrastructure changes we have made. I realize we've got to prove ourselves to you, and that's what we're about to do.

Operator

Our next question is a follow-up question from the line of Jordon Hymowitz from Philadelphia Financial.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

On the charge-off number, first of all, does that include skips and stall-ins or is that just a pure consumer charge-off number?

Ronald W. Allen

What that is, is net charge-offs, which is our total write-offs. It's mainly at the customer level, but it could include also any -- it's consistent with what we've always done through the years. It's the net charge-off net of recoveries that's incurred during the quarter.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

Would it include any pilferage by employees and things of that nature?

Gilbert L. Danielson

Yes, it's basically customer related.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

Okay. And then the second question is, how long is your time until charge-off?

Gilbert L. Danielson

Yes, 60 days, 2 months, 60 days. Everything is automatically charged off, whether we feel good about it or not it's charged off every 60 days. Now you'll still try to collect and you do, that's why you have recoveries, but that's consistent also toward [indiscernible].

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

But the recoveries come through a separate line item, correct?

Gilbert L. Danielson

The numbers I gave you are the net numbers.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

So when you charge off after 60 days and then you recover something, it's a reduction in G&A, is it not? It doesn't go net through the charge-off number, does it?

Gilbert L. Danielson

It's net of the charge-off number.

Operator

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

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

Just a few questions. First of all, can you make any comments about the regional performance? Any difference per region that you saw this quarter?

David L. Buck

Not really. It was pretty consistent. We tend to do -- in the past we tend to do probably a little bit better either for whatever reason in the South, Southeast and the West. Some of our North Eastern -- well, we're having a lot of success in New York right now. In the Northeast, we're having some success. It pretty much goes, it's pretty much divided by division. But our Texas market is still strong. Our Florida market is still strong. So I don't know if that answers your question or not, but overall, I think it's pretty even.

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

Okay. And then, just touching on the difference in performance between franchises and company-owned stores, it's not uncommon that franchises have had slightly better comps on an ongoing basis. Is there anything that you're doing to learn what the franchises are doing that might be different than company-owned? Or do you think there are other factors involved for that difference in performance?

David L. Buck

No, I think you're right. I think -- we had an AFA meeting in Tucson about a month ago, and I spent -- in franchise, I'm sorry, a franchise meeting in Tucson and I spent a long time talking to the operators and principals of the better operating franchises, and they were probably practicing better than best practices and back to basics. They have a tendency to -- they have typically a smaller number stores, a little bit more intensity on their store operations and maybe we do as corporate. And I spent a lot of time with those people trying to find out if they're having the same issues that we are, and if they are, how they are coping with them. And in fact in my meeting, we discussed some of the franchisees that are doing rather well and we definitely brought them to our divisional vice presidents and talked to them and talk to them about what they're doing to get better results than we are.

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

Have there been any changes in compensation for company-owned store employees in recent quarters or years?

David L. Buck

No, sir.

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

Okay. Gil, just one number. You had given us the write-off for the third quarter '13 of 3.94%, what was that number in the third quarter of '12 in the year-ago period?

Gilbert L. Danielson

It was 3.71%.

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

Okay. And then last question, when you think about the promotions that you have implemented and maybe new ones that you intend to implement, what is the philosophy of the company as you consider promotions compared to driving shareholder profits?

Ronald W. Allen

Well, I don't know if I understand that question.

Gilbert L. Danielson

We hope every promotion will drive shareholder profit.

Ronald W. Allen

We wouldn't do a promotion unless, I mean, we wouldn't intentionally do a promotion unless we thought that we would generate enough revenues even the bottom line would be a positive for the company.

Gilbert L. Danielson

Robert, are you referencing any particular promotion like Black Friday of 2012?

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

No, the thought process though is that if promotions help to offset weak customer traffic and help to build a rental agreement portfolio, that may take some money out of the market structure of the company and there's a point where you can certainly push a lot of promotions through to achieve those end goals, but that may not necessarily be the best thing for the profitability of the firm at that time. So you may look at promotions on a longer-term basis, but I just wanted to ask the question, and we can handle the topic off-line as well.

Ronald W. Allen

Let me just say this. With Andrea Freeman and the marketing team working closely with operations, we're being much more analytical as we look at promotions, what we think the potential of that promotion, what's the downside of that promotion and one example is our very successful Black Friday we had in 2012, that was free till January. We learned a lot from that. We had a lot of product returned and it really -- our January revenues took a hit, as well as our December revenues, because we had the depreciation on those products without the revenue stream beginning until January. On the other hand, we did gain a large customer base from that promotion. So you learn from each one of those and I can assure you, we are learning quite a bit with the good leadership we have in place in marketing and operation.

Operator

[Operator Instructions] And there are no additional questions waiting from the phone lines.

Ronald W. Allen

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

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