Aaron's Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 7.14 | About: Aaron's Inc. (AAN)

Aaron's (NYSE:AAN)

Q4 2013 Earnings Call

February 07, 2014 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

Matthew Schon McCall - BB&T Capital Markets, Research Division

James Ellman

Andrew R. Jones - North Star Partners, L.P.

David G. Magee - SunTrust Robinson Humphrey, 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

John J. Rowan - Sidoti & Company, LLC

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Operator

Good morning, and welcome to the Aaron's Inc. Fourth Quarter 2013 Fiscal Year Earnings Conference Call. [Operator Instructions] At this time I would like to introduce your host, Gil Danielson with Aaron's. Thank you, and enjoy your conference. You may proceed Mr. Danielson.

Gilbert L. Danielson

Well, thank you. And thank you, everybody, for joining us today. Before we get started, I'm going to turn the call over to Garet Hayes. He's going to read our Safe Harbor statement. And then Ron and Dave and myself will have some comments. Garet?

Garet Hayes

My name is Garet Hayes, and I assist the Investor Relations for Aaron's. The company's earnings release issued today and the related Form 8-K are available on our website, www.aaronsinc.com in the Investor Relations section, and this webcast will be archived for replay there as well.

With us today is Ron Allen, CEO; Dave Buck, COO; and Gil Danielson, CFO.

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 first quarter and full year 2014 outlook, statements regarding planned share repurchases and statements regarding legal and regulatory accruals for loss contingencies.

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

Ronald W. Allen

Thank you, Garet, and good morning, ladies and gentlemen. Thank you again for joining us today.

While 2013 was a challenging year in terms of revenue and profits for the company, it also has been a year of transition and transformation for Aaron's. The company's revenues were down 2% for the fourth quarter but up 1% for the year. Our growth in overall lease revenues, same-store revenues and customer accounts were much less than planned or expected when we started the year. The life of expected revenue growth resulted in profitability being down both for the fourth quarter and the year compared to the previous year periods.

Many factors here in 2013 have caused us less than historical operational and financial performance, both external and internal. There's no doubt that our customers are under stress due to the difficult economic conditions most low to middle-income consumers are currently facing. We've also had change and distractions internally in 2013, which have affected our financial performance.

And although we're not expecting the economic environment for our customers to significantly improve anytime soon, I feel that most of the internal issues are now behind us, and we're positioned for better execution in all levels of the organization to return to more formal -- more normal financial results.

Gil will discuss the financial results in detail, but I'd like to reflect on the accomplishments for 2013 and our confidence in our plans for 2014. We've made quite a few changes that position the company for sustainable growth into the future.

During the past year, we continued to strengthen the company's infrastructure to build a more solid platform to support the company's current business as well as future growth. We've made several key management changes during 2013 in operations, marketing, legal, strategic planning and learning and development. We named the new Chief Operating Officer, Dave Buck. Tristan Montanero, our Senior Vice President of Operations, was also appointed the Head of our HomeSmart division. We hired a new Vice President of Marketing, Andrea Freeman. We hired a new Senior Vice President of General Counsel and Corporate Secretary, Robbie Kamerschen. Steve Michaels, a veteran of Aaron's, was promoted to Vice President of Strategic Planning and Business Development. And Kim Rivera has joined us as our new Vice President of Learning and Development.

Along with these leadership changes, we have more open communication channels between merchandising, marketing and operations, which should result in much better decisions of which products are in most demand by our customers.

And most importantly, in 2013, we had reached a settlement in 2 cases which were a major distraction to our businesses. First, was the settlement with the Federal Trade Commission. We reached an agreement in principle with that FTC that involved no financial penalty to the company. The FTC's approval process with respect to that agreement is underway. We've established strong security and proxy policies that will help protect our company and our customers going forward.

Second, we have reached a settlement agreement in principle with the California Attorney General that does not require any additional reserves to be approved. We are pleased that we can now grow our business in California.

Also, the Legal Division under Robbie Kamerschen's leadership is now recognized as a key part of our operating team. This will help all of our operations leadership make better informed decisions in our business practices in every state.

Additional noteworthy items in 2013 include the Board of Directors' authorization to purchase up to a total of $15 million of our common shares. And in December, we began an accelerated share repurchase program. That program was completed this month with a total of 4.5 million shares being acquired.

Our new store operation system is now in over 75% of our stores, increasing our customer service efficiency and providing valuable information about our sales and marketing efforts.

Under Tristan Montanero's leadership, the HomeSmart division has shown much improved results in 2013. And Andrea Freeman has brought new leadership to marketing, and we've established new marketing initiatives and promotions that will be aimed at improving customer acquisition.

Our partnership with PerfectHome, the U.K. rent-to-own retailer, in which we have an 11.5% ownership interest, remains very positive. Even though the option to purchase the entire company expired at the end of 2013, we are in the process of extending our relationship into 2015.

And finally, in January we disposed of the assets of our RIMCO operations. RIMCO was a small part of our business with growth opportunities much less than our Aaron's and HomeSmart stores.

In summary, while 2013 has been a challenging year for our company, I'm very optimistic about our future. 2013 has been a year with key changes in our infrastructure and the resolution of legal and regulatory issues that placed us in a much stronger position to grow our business. With a solid management team and the dedicated associates on board, I'm very confident as we begin 2014 that we'll remain focused on continued growth and delivering strong results.

And now, I'll turn the call over to Dave Buck. Dave?

David L. Buck

Yes, thank you, Ron. For the fourth quarter, we grew 40,000 customers in the fourth quarter, total with franchise included. With the gain in customers for the fourth quarter, we're starting to build upon our base of 1.7 million customers.

Our operational focus for 2014 is to capitalize on customer opportunities in our stores. We are going to operate at a higher level of customer service and relationship building. And we will be working closely with marketing on promotions. Our Woodhaven, our furniture manufacturer, is working on a new line of contemporary furniture, which should attract new customers.

Our focus to increase communication visibility in the field, I will be traveling more, touching the field and interacting with our customers and our associates to find out what's happening in the field and make things executed better.

I want to thank our 12,000 Aaron's associates for their dedication and hard work in growing our business for the fourth quarter.

Thank you.

Gilbert L. Danielson

Well, thank you, Dave. I'll touch on a few of the financial results for the quarter. Revenues for the fourth quarter were $553.9 million, a 2% decline from the $565.4 million for the fourth quarter last year. For the 12 months, revenues increased 1% to $2.235 billion in 2013 compared to $2.213 billion in the prior year. In addition, our franchisees collectively increased their revenues, $247.8 million for the fourth quarter, a 2% increase over the same period last year and 4% for the 12 months to $1.0 billion. Revenues of franchisees are not, however, revenues of Aaron's, Inc.

Lease revenues and fees were up 2% for the fourth quarter compared to a year ago and 4% for the year. Non-retail sales, which are primarily sales of lease merchandise to Aaron's franchisees, decreased 14% for the quarter and 13% for the year.

The same-store revenues in the fourth quarter for Aaron's company stores were down 0.9% and down 1.9% for stores that are over 2 years old. For stores over 5 years old, the same-store revenues were down 2.8%. In addition, the customer count for the company stores in the fourth quarter were down 1.4%.

Franchised stores did a little better. The same-store revenues for franchised stores were up 0.5% and the customer count for the quarter for the franchisees were up 0.7%.

Net earnings for the quarter were $22.7 million versus $36.6 million in 2012, and net earnings for the 12 months of this year were $120.7 million compared to $173 million for the same period last year in 2012.

For the fourth quarter, diluted earnings per share were $0.30 per share this year compared to $0.48 from the fourth quarter of 2012. For the 12 months, diluted earnings per share were $1.58 compared to $2.25 last year.

On a non-GAAP basis, and which will exclude from both 2013 and 2012 various regulatory and legal accruals, retirement expenses, vacation-related expenses, net earnings for the 12 months of 2013 would have been, on a non-GAAP basis, $142.4 million compared to $157.4 million in 2012. And earnings per share, assuming dilution would've been $1.86 versus $2.04 last year.

At the end of December, the company had 1,138,000 company-operated store customers, and there were 613,000 franchise customers at the end of the fourth quarter. That would be a 1% increase in total customers at the end of the year versus the same year in 2012.

Revenues of HomeSmart for the quarter were $15.2 million. That's 2% up over the fourth quarter of 2012. And for the year, for 2013, revenues were $62.7 million versus $55.2 million for the same period a year ago, which will be a 14% increase.

We did lose money in the fourth quarter as we had projected. We lost $1.4 million in the fourth quarter, and for the year the division lost roughly $3.5 million. But compared to $7.2 million lost in 2012, it's certainly an improvement.

During the fourth quarter of 2013, the company opened 19 company-operated Aaron's sales and lease ownership stores; 16 franchised stores were opened during the quarter; 4 RIMCO stores and 3 company-operated HomeSmart stores. The company also acquired 1 Aaron's franchise store and 2 franchise stores were closed.

At the end of December 2013, we had 1,262 company-operated Aaron's stores, 773 Aaron's franchised stores, 81 HomeSmart stores, there were 3 franchised HomeSmart stores, 27 RIMCO stores and 5 franchised RIMCO stores. Total number of stores at the end of 2013 was 2,151. And that was the -- the store growth for the year in 2013 compared to 2012 was just under 4%.

As we have announced -- previously announced, subsequent to December 2013, we did sell the 27 company-operated and the rights to the 5 franchise stores, and that transaction was closed in January.

Through the 3 and 12 month ended December 31, 2013, the company awarded areas development agreements to open 14 and 39 additional franchise stores, respectively. And we had area development agreements at the end of December 2013 to open 159 franchise stores in future periods.

Our guidance for the first quarter of 2014 is to expect revenues of approximately $600 million and diluted earnings per share in the range of $0.57 to $0.62 per share. The guidance for 2014 revenues are the same, being approximately $2.3 billion. And also our guidance for the year is unchanged, the most recent announcement that our GAAP diluted earnings per share is expected to be in $1.80 to $2 a share.

Our new store growth of approximately 1% to 2% over the store base at the end of 2013, again, mainly an equal mix between company-operated and franchise stores and including a small number of HomeSmart stores.

We did generate cash flow from operations in the fourth quarter, about $62.6 million, and over $300 million in cash flow for the year ended December 2013. As we had previously announced, we had an accelerated share buyback program. We announced that in December, and we have completed that, actually just completed this week, over a couple of month period. We have acquired to that program 4.5 million shares of common stock, and we still have board authorization to purchase another 11.5 million shares if warranted or deemed necessary.

Those are pretty much the comments on the financial results for the quarter. We'll certainly turn it open to anybody who has any questions.

Question-and-Answer Session

Operator

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

Charles Ruff

I just had some modeling questions real quick. What kind of tax rate should you expect in 2014?

Gilbert L. Danielson

Yes. I think if you're modeling for 2014, our rate should be between 36.5% and 37%. I would use that, Chuck.

Charles Ruff

Okay. And how about cash taxes in '14 and 2015?

Gilbert L. Danielson

Yes. We paid just during the 12 months of 2013, just for your reference, we paid $54 million of cash taxes. And we anticipate in '14 to pay $183 million, and in 2015 $109 million. Of course, those are all based on projections of earnings, et cetera, but that's our best shot at the moment.

Charles Ruff

Okay. And the press release mentions the effort -- all the effort you put in to strengthen the management team, and you feel you have the infrastructure now in place for solid performance. If I remember right, you said pretty much the same thing on the July call, right before a very poor second half. Can you tell us why you're so confident and why we can be confident?

David L. Buck

Well. This is Dave Buck. We've made some changes in the field in addition to that. We've made some changes in our lower-performing operations. And we've -- that's what we're talking about as far as improving the management. We've strengthened the management team in the field and we think that will improve -- that will definitely improve our field operation and performance.

Charles Ruff

And when were these changes put in?

David L. Buck

In the last 30 days.

Charles Ruff

Okay. But if I'm remembering right, in July I think you expressed all sorts of confidence regarding the management team you had then and distractions were behind you and everybody was buying into the renewed focus on execution and all that kind of good stuff. So in July, you were all sorts of confident with the management team. Why can we be confident today?

Ronald W. Allen

Chuck, let me respond. That management team we talked about in July is now maturing. Tristan Montanero, as I told you, is taking over HomeSmart. He has a solid team in place, running HomeSmart. It's taken a few months to get that in place. Dave Buck has done the same thing in Aaron's operating team out in the field. And he has made some changes in the last 30 days or so in that regard, actually, in the field team. He's brought in leadership here in the home office to help our field team in both collections and sales, and that's really beginning to take hold. The other changes we've talked about really are -- they're part of the support system, what we call the infrastructure, such as Robbie Kamerschen. We changed the operations so that -- Robbie truly is a part of the operating team. We've got to work our best to stay out of the kind of trouble we got in from past practices and which led us to -- for example, with California, we can be smarter than that going forward. And so I feel so much more confident with the team in place and how the team has matured over these last 2 months.

Charles Ruff

Okay. Lastly, I saw you recently had a change in the executive severance plan. This obviously was done right before Vintage went public. What kind of message do you think that sends to us, your shareholders?

Gilbert L. Danielson

The change in the severance plan is pretty much formalizing the severance plan that we were basically abiding to or was part of our practices for a number of years. So that was just kind of a clarification to put it in the document that everybody understood. That's been in the works for some while. It's just been ratified by the board. The timing of that has nothing to do with the current debt.

Operator

Our next question comes from the line of Matt McCall with BB&T.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Can you give us an idea of what the gross margin outlook is like? I mean, if you want to talk about the operating level as well. Just what are the assumptions in the guidance for next year? And help us understand kind of some of the puts and the takes and what you're expecting from profitability performance perspective? And specifically, I'm curious about promotional activity.

Gilbert L. Danielson

Well, Matt, in the guidance, obviously our same-store revenue has been pretty weak here in the last couple of quarters or so. So kind of looking forward to our plan for 2014. The real key to the plan is growing your lease revenues, and they have been trending down here in the last few quarters. So based where they're at -- this business, as you know, is a business that when it trends down, when you lose customers and start losing your revenue, it's just due to the annuity nature of the business. It takes a while to build it back up. It doesn't spring back immediately. So putting together that plan, now we're pretty looking at it, and it looks like next year, on lease revenues for the year, we are expecting around 3% growth in lease revenues for the year. It will be lower than that in the first couple of quarters and then accelerating somewhat in the latter half of the year. Again, we have to build our customers back. We did gain customers in the fourth quarter, and we're optimistic that, that will continue. But it will take some time to build the lease revenues back. So with that kind of growth and we're looking at same-store revenue for the growth for the year, which is around 1% for the year, with those kind of revenue growth, that brings you to the earnings guidance that we have. And again, operating expenses grow faster normally than 3%. We're really targeting on that to bring that number down to more closer to the revenue growth. But that's what you'll see this year. Revenue growth, 3% up; and lease revenue, maybe 4% total growth; and then a control in expenses to get to where our guidance is on the earnings. We will benefit a little bit from the share repurchase, though the share count is down a little bit this year. But the tax rate will be higher next year or 2 than it has been here in the recent couple of quarters. Other than that, the focus on the company is to touch the customer, build customers, what I call execution. We certainly have had a lot of issues this year, and I'm saying issues or challenges, and I do believe most of those that we've dealt with in the past 12 months are behind us, I wouldn't say 100% behind us, but we certainly are in a position now that we can get back. And I know Dave is focused and Tristan is focused on operations, touching the customer. I think the people are certainly motivated and our goal is to build revenues and build customers. But again, it will take a little time. That's why the first quarter will be a little softer than maybe some people would've thought. But I do believe through the year, we certainly have our expectations and our plans are to build revenues through the years and build profits.

Matthew Schon McCall - BB&T Capital Markets, Research Division

So can you talk about, I mentioned promotional activity. So can you talk about the maybe average ticket versus customer growth? Do you expect most of the improvement to be from new customers, new agreements and less improvement on the average ticket?

Gilbert L. Danielson

Well, fortunately, average ticket has remained pretty strong for us. I mean, at the end of the fourth quarter, it was $131.28. It's basically been for the last 3 quarters, $131 of some sort. So I think we've done a good job in supporting the average ticket. And so, really, if you look -- if we can maintain that, which should be our expectation, then we can get a little bit more out of it. But if we can maintain that, then it all comes back to gaining customers, new customers and bringing back some of the existing customers that we've had in the past. And so, I would expect your customer growth should mirror your revenue growth. It certainly would if we keep the average ticket the same. One thing, too, Matt, we have slowed down the growth of the stores, as we announced 30 days ago. And why did we do that? I think the situation was, that was done -- obviously our stores haven't been performing as well as it had had in other periods. And really, again, the focus on the business is a focus on our stores, on our existing stores and build back customers in our existing stores and not get distracted from that.

David L. Buck

We also have promotions going on. We have promotions this month as far as our taxes. A lot of our customers get large tax refunds, and we're going to capitalize on that with promotions for this quarter in February and March also.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. And then finally, you mentioned the repurchase. What's the correct starting point for shares or what should we use as your shares outstanding?

Gilbert L. Danielson

Well, I would use in the fourth quarter the shares for the EPS calculation of about 72.6 million. And then in the second quarter and beyond, 71.5 million.

Operator

Our next question comes from the line of Mike Hughes with Ascend Capital Management.

James Ellman

It's actually James Ellman filling in for him right now. Could you comment on how business is progressing year-to-date versus the outlook you gave us late last year? And how much is -- how bad is it? How bad -- how much of the weakness would you say is due to the current weather?

Gilbert L. Danielson

What period are you referencing the outlook, a year ago?

James Ellman

No, no. just the first quarter right now.

Gilbert L. Danielson

Oh, how the first quarter is doing compared to the outlook? Obviously, our expectations for the first quarter have been in our guidance we've put together. And obviously, as I said, it's off a little bit from our previous years and trending down, continuing so. It's early in January. I guess Dave can speak to that. I think January was okay. There certainly has had a lot of bad weather in the Midwest and Northeast, as everybody knows. So we'll see how that plays out. But we're sticking with our guidance that we put out in the press release.

James Ellman

Okay. One of your large competitors recently reported it had some difficult results and talking about how competition has been getting worse and particularly commented on how many big-box stores are starting to offer rent-to-own offerings in-store. How is that affecting your business?

David L. Buck

This is Dave. I would think it is impacting our business to some degree. Exactly, I can't tell you. I don't -- we're going to focus on our customer base, and we're going to maximize our closing rates. And we still have customers coming in. We have plenty of customers to capitalize on. We just need to execute better, and that's what where we're putting our focus.

Ronald W. Allen

One of the things that's unique about our business, James, is we really build our relationship with the customer. They come in on a monthly basis and pay for their items that they purchased or leased. And that's really been a unique feature of Aaron's, and we want to keep building upon that. That's different than normal retail, where somebody comes, buys a product and leaves and really doesn't come back. And we have a real advantage in that regard, continue to build on that customer base. And word-of-mouth is one of the best ways to market our products, but the good treatment of the relationships that we build with our customers.

James Ellman

All right. And I guess I'm a bit surprised that you haven't commented too much on the Vintage offer so far. Do you have any comments on it? I mean, it seems that they are saying that the business is not going in the right direction and it's time for a different management team to run the business. What are your comments on the offer today?

Gilbert L. Danielson

Well, I'll tell you what, I just saw that about 5, 10 minutes before this conference call started. So we don't have any comments. We'll take a look at it and evaluate it or whatever. But this call is for the earnings call, and so we'll comment later on that if we do.

Ronald W. Allen

We have an excellent management team that I have great confidence on going forward.

Operator

Our next question comes from the line of Andrew Jones with North Star Partners.

Andrew R. Jones - North Star Partners, L.P.

I was wondering if you could talk a little bit about the performance of the franchised stores versus the company stores. It seems for a while now that franchisees have been having better results than you guys and they're ordering less stuff from you guys or maybe they're managing their inventory a little bit better. But could you just talk about how they look versus you guys?

Gilbert L. Danielson

Well, they look better. I mean, they have looked better all year, although they've been a little weak here in the fourth quarter compared to their historical results. We've said before, I guess, our franchisees are independent businessmen. They're very -- in general, they're all very good businessmen in general, and they're also very tight in running their operations. I mean, their money is on the line. They watch their dollars relatively closely. Not that we don't here at the company, but they just have different objectives and different modes of operations. So they're still doing well. They haven't bought as much product from us this year as they have in the past, although it does we do plan in 2014 that those non-retail shipments will begin showing positive. I mean, eventually, as I've said before, if people run out of product, they have to buy, and the franchisees have to buy the product from us. So it's positive in January. The shipments to the franchisees did increase. So we anticipate that continuing. But we'll see. I mean, they're still doing very good revenues. They run little tighter ships, lower inventory levels. One of the great strengths of our franchised program is that our franchisees can get product from our fulfillment centers anytime they want it, basically overnight. And so they have no need to order merchandise before they really need it. So that's a great advantage for them, and they've been running very tight this year. But I anticipate that we will start shipping to franchisees. And I -- we are also hopeful that with the ebbs and flows through the year, sometimes franchisees do better than company stores and sometimes companies do better than franchisees, and we're hopeful and we anticipate that company stores will start closing the gap in 2014.

Andrew R. Jones - North Star Partners, L.P.

Okay. And then I was just curious. Given the events of the day, we're all going to have to think about what we think in terms of valuation of the company. And if we look at the last couple of years, we've seen pretty significant decline in EBITDA margins and operating margins. And really since Robin has left, the performance has been disappointing and the stock has kind of reflected that performance. If we look at what the operating margins were back just 2012 and if we had those margins today, we'd be talking about EBITDA $40 million higher than what you guys are looking for 2014, and we'd be looking at earnings per share close to $2.30. So it's a huge impact, and I'm trying to understand what should we -- is the profitability of the business, the earnings power of the business, is the past no longer relevant or is there a road that we could see to getting back to that profitability? Because it's obviously a huge gap down. And I think it's something that, despite you're talking about your confidence in management, I mean, we don't know those people, we only can see the reported results, and they've done nothing but disappointing over the last 18 months. So could you just talk about what the earning power of the business is and what it's going to take to get it back to what it had done just 2 short years ago?

Gilbert L. Danielson

Well, I mean, the reason our profit is down, I'll keep it simple, is that our revenue growth is down. I mean, we have a business model that's built for a revenue growth on a quarterly basis or a yearly basis of 6% or 7%. That's our model. And we're set up to do that. What's happened here recently, we have not gotten that growth in our business for a variety of reasons, which we've gone over a lot through the year. So our confidence is, we still think the business is out there. We think it's a matter of really touching the customer and building those customers and growing revenues. If that's the case, I mean, there's no reason to believe that we couldn't get back to the profitability levels that we had in the past. If that's not the case and for all of a sudden customers have crawled into a cave or this competition is taking business away from us all this other alternative, then we'll have to change the business model. And what we'll have to do is that we're not a growth company anymore. We're just going to change appropriately and just concentrate on cash flow. It is a great business. It's a business that's not going out -- going away anytime soon. But again, as I said before, it's a slow ramp-up business and a slow ramp down business. And it's been slowly ramping down. It's going to take us a little time to slowly ramp it up. And I do believe, again, if we've concluded and if we feel that the moment these customers are still out there, we certainly got experienced management that know how to run the business. You would think that we can get the business back on its previous business model.

Ronald W. Allen

[indiscernible] something, Andrew, if I may, coming here as CEO, we did face a lot of issues as an ongoing business that we had addressed head on in the legal area and the like, and that's certainly taking a lot of my time and focus as CEO. But now for the last several months, fortunately, we've been back focusing on revenue growth and customer growth and that type of thing. So we've got to certainly earn our way going forward. But I feel a great confidence in the team we have in place and in the way we're operating the business today and having most of these major distractions behind us. Instead, we now have a lot of growth ahead of us in California. We couldn't do that until we get this settlement with the California Attorney General because that's something that really affected the ongoing of this company, particularly in the State of California, which is a very important state to us. So a lot of issues of that type we've been addressing. They have been addressed, and we're moving forward in a much more aggressive way with our drive toward revenue growth and customer growth.

Operator

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

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

Just a few questions. One is with regards to the Vintage offer. Could you describe what you see as maybe how Buddy's goes to market differently right now than Aaron's? Is it obvious how much you do things differently than the way you guys have been doing?

Gilbert L. Danielson

David, we're just not going to comment on the Vintage offer at this time because we haven't had a chance to look at it.

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

But no opinion about how they do business at Buddy's though relative to how you guys go to market?

David L. Buck

Well, Buddy's -- this is Dave. They are a weekly business. We're more of a monthly business. The 2 businesses run fairly differently. They run a weekly business more like Rent-a-Center. We run a monthly business and -- which is unique in our industry and with a totally different operation and margins. So the 2 are -- they're more of a Rent-a-Center operation. We're closer to a retail operation in my opinion.

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

And secondly, the marketing right now, it seems like we've talked in the past about maybe targeting your core customer maybe more effectively. And I think I still see commercials on shows that wouldn't necessarily think of your core market watching as much. And is that something that might be done differently in 2014?

Gilbert L. Danielson

Yes, absolutely. Andrea Freeman, I was at a meeting with her yesterday, and we're really targeting -- will be targeting more this year our customers in the neighborhoods where they live. And the Hispanic market is a very strong market for us and that you'll see a lot more focus in that regard.

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

And then lastly, the operating expenses last year. It seems like in the past you guys have been more effective adjusting that relative to business trends. This past year, the number still grew at pretty healthy clip.. Is that explainable by sort of the legal costs and so those sort of distractions or I'm just sort of curious [indiscernible] brought down faster.

Gilbert L. Danielson

Yes, I mean, we've had some extra costs this year that we've talked about. And so there's certainly -- there is additional cost in our infrastructure in areas that we've dealt with this year and the last couple of years, and privacy is one of them, legal is one of them. Some of them are still here with us. So that's brought the operating costs up, and we've had some additional costs in the payroll area and benefits area. But again, the main problem of our model not working, I would say not working, but not performing as well is just the lack of revenue growth. If we had a revenue of growth of 5% or 6% that we talked about, operating expense would probably be a side issue in any discussion. So it's obviously more prevailing now, but -- we're all -- one thing about Aaron's has always been a very cost-conscious company, and we're very mindful of costs, and we watch them very carefully. And if we get the model back on track, well, hopefully, those operating expenses they need, they have to grow less than have been then our revenues are growing.

Ronald W. Allen

Absolutely. And again, let me add to that. Another area of additional costs has been in our IT spend. Information technology has been an area of great focus as we put our new point-of-sale program into all our stores. As I said, we're 75% along the way there, and so that we can roll off some of the contractors we've been using is -- we finish that project, but there are other needs and opportunities with IT. And we'll be carefully focusing our spend of this year in that regard, again, to keep improving opportunity to serve the customer. But another area that's been heavy in IT spend has been security and privacy, implementation of good practices. Those are basically in place right now. So that should come down. But that's certainly been an area of extra expenditures during the last 18 months or so.

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

And I guess, lastly, the -- with regards to market share trends, to the degree that maybe your numbers sort of reflect some of the loss and other sectors have been rough, but maybe there's been some loss here too. Any way to tell where your customers might be going? Is there way to track that or do you have a good sense for that?

David L. Buck

We really don't know exactly how the trend is. We don't have an accurate way of trending where the customers might be going. I think we have enough customers. I think some of the customers are going that direction. If anything, I think with the FICO stores, with the retailers needing the -- needing some of the rent-to-own people and they're helping them get the sales is just I think it tells us that there's more customers out there that the typical lenders are raising their qualifications on their FICO scores and I think that's basically just generating more customers and more opportunities for us. I think we just have to gear our operation to attract those people and get them in our stores. And I think we will capitalize on them and give them better service.

Operator

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

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

Wanted to just ask a follow-up question on this idea of the company potentially being for sale. If memory serves me, there was an earnings call maybe about 2 years ago, where there had been a Bloomberg story saying the company maybe putting it up -- self up for sale. And at the time, the team said that, "Oh, yes, there wasn't an offer out there." If there was, they would certainly consider it. You all would certainly consider it. Would there being an offer out there? Can you just help us understand how the process works? And I presume you guys have to view it and kind of weigh that versus the what the stock could do on its own. So just maybe not addressing this offer itself, could you just tell us the process of how things work?

Gilbert L. Danielson

Well, I mean, until 10 minutes before the call, this hasn't come up before. And the article you referred to a couple of years ago was kind of a misreporting in a lot of respects. So this hasn't been an issue before. So that's why we're not going to comment on it, Brad. So...

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

Okay, fair enough. Just a follow-up on the revenue outlook, Gil. I think the math would be that the guidance implies about 2.7% growth in revenues for the year. We're obviously coming off of a difficult year behind us. I don't think you quite got to that level. And as you go forward, there will be a fewer, a lower pace of store openings. I guess, could you maybe just speak to your confidence in some of the levers you're pulling to drive same-store sales, to get the revenues up to that target?

Gilbert L. Danielson

Yes. I mean, Dave will speak to that. But again, slowing the growth down, the cost rate on our existing stores. I mean, our customer count is down a couple of percent in some of our older stores. I mean, we just got to focus on our existing customers and new customers, too. But we just got to touch and collect the existing customers better than it has.

David L. Buck

We have a lot of emphasis on growing those stores and getting the customers back, like I said earlier. We had our regional managers meeting in January as opposed to the middle of the year to get everybody refocused on what we needed to do to make the change. I think 2013, all the obstacles and things we had in our way, most of them are behind us and our stores can focus in on growing. And that's what we plan on doing in this year, in 2014. We have a very experienced management team out there. We have basically the same team with a few exceptions. And we're very capable of doing it all, doing it again and getting back on target.

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

Okay. And then just a housekeeping item on the taxes. I know someone asked about this earlier. But Gil, could you just give us, at year end, what the deferred tax liability was? Do you know that total number?

Gilbert L. Danielson

Yes, I do. Hold on a second. Deferred taxes at the end of '13 were about $233 million.

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

Okay. And then you mentioned $283 million in cash taxes. You know what the portion of that you would expect from the deferred taxes would be?

Gilbert L. Danielson

Well the deferred taxes will change every year, as you know, based on how much we make our provision and then what comes out that's been deferred through the years. It will go down. It should go down again in '14 because, again, and I think we said we are going to pay $170 million in cash taxes in '14. Our earnings, our provision will not be that high. So based on the modeling, you can have pretty much how the change in deferred taxes will go down in '14, if you follow me.

Operator

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

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

On the Vintage, it's just I'm not going ask you to comment on this offer, but there is a statement that they've made 3 separate, valid, bona fide offers previously. I'm just curious, were those offers different from this offer and were those offers taken to the board?

Gilbert L. Danielson

John, we're just not going to comment on that. Again, we haven't read it. Certainly, we know Vintage. We know those who run Vintage. He's been around in our space for years. So we do -- we see them at times here and there, but we're just not going to comment on the offer.

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

Okay. Thought I'd try. Can I -- do you have agreements at the end of the quarter both franchise and corporate?

Gilbert L. Danielson

Agreements? Oh, the agreements.

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

Number of agreements, yes.

Gilbert L. Danielson

Yes, I do, if I can find them.

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

So while you're digging that out, any thoughts on '14 as to what the HomeSmart loss might be? Do you expect to close that gap materially? And if so, how?

Gilbert L. Danielson

Loss is a bad word. We do not expect a loss in '14.

Ronald W. Allen

John, we feel that we will be profitable in 2014 in HomeSmart. And again, that's due to the work of our Tristan and his management team. We've got a lot of new product going into HomeSmart that's really designed for HomeSmart, things that we haven't had before in HomeSmart and we've cleaned out some of the older inventory that was not moving. And Tristan has a real solid management team. What we did back in the middle of the year, we came up with a model that we said if we could implement this model, it will work and be profitable. We've been in the process of implementing that model and it's going to be profitable.

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

Okay. And then could you help me with the trend in customer or agreements in the fourth quarter? I know it's up sequentially. I think the growth year-over-year was nominal, essentially flat in corporate number of customers. Was there a trend, when you look at the data October, November, December and/or including January here, when you look at the year-over-year performance, which takes out the seasonality, is that number stabilizing, getting better, still trending south?

Gilbert L. Danielson

Well, John, I apologize. I can't find my details but, I will call you. You can call me later. I can give you the customer accounts and the agreements by corp. [indiscernible] comment again on the corp because you did [indiscernible].

David L. Buck

On the quarter we grew 40,000 customers in the fourth quarter. And in January, the snowstorm down south did hurt us a little, but we did a lot better than we did the last January. So I would -- we're definitely on the trend up, in my opinion.

Ronald W. Allen

John, we did a different Black Friday promotion this year. It didn't quite have the pizzazz and sizzle last year. But last year, as you know, 2012, we had free [indiscernible] and we gave away a lot of TVs that returned to us in January and February, and we did not have that this year. So we feel like we had a pretty good Black Friday promotion and product will stay with the customer, obviously, much longer than it did for the previous promotion.

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

Okay. And certainly, the macro environment is tough. We know the news out of the Dollar stores, Rent-a-Center, Walmarts of the world. I'm curious as to whether you're able to look at your business in regions or states, so they are healthier economically. I'm thinking of Texas. Florida seems to be recovering. And can you see any change or any difference in trend in your business in those areas versus across the country?

David L. Buck

We can in some areas. Texas is fairly healthier because of the oil business there is fairly healthy. We have had some management changes in that area. So we really haven't seen the increase we planned on. In 2014, we'll definitely see an increase in that area.

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

Okay. And Gil, if I heard you right, could you just repeat the share count where you are, where you sit right now in share count? I think you said something like 71.5 million going forward. Was that for Q2 through 4?

Gilbert L. Danielson

The first number I gave was EPS share count for the first quarter of '14. And then the share count, the second -- I'll give these numbers of the share count. It was for the next 3 quarters of '14. So let's see if I can see that. Yes, I used for the EPS calculation or for the share count, I would use -- I'm looking, 72.6 million shares in the first quarter and 71.5 million in quarter 2, quarter 3 and quarter 4.

Operator

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

Laura A. Champine - Canaccord Genuity, Research Division

I wanted to drill into the margin issue a little more because in the past, whether it's 3, 5, 10 years ago, we used to talk about operating margins around 11%. But did those were depressed and as soon as the store count growth slowed, you'd see the cost slow, but you'd see operating margins expand. The number we used to talk about was 14%. So I'm still -- I know you got some special expenses, but I'm trying to get my head around the 500-basis-point increase in the operating expense in Q4. And if you can talk to me about why that rapid growth in operating expenses should flatten out this year, which we think you would have to do to hit your guidance?

Gilbert L. Danielson

You have to remember, Laura, we did open a lot of stores this year. The last couple of years, we have opened a lot of stores. And that's been -- this year, we've opened just around 4% in stores. So when we say moving forward, we're going to slow the store count down to 1% or 2%. We do have a lot of stores that have been opened, so we you do have the new-store drag. And we'll continue to have new-store drag next year, even at 1% or 2%. So you'd have to really go through a period of no-store growth or very, very little store growth or probably a couple year period to really have that new store drag come down to de minimus number compared to the previous years. So that's one of the issues. There are still -- we still incur new-store drag on opening the stores. So it's a situation that, in the past, so we have been growing so much faster and we were able to gain a lot of revenues and leverage off our operating expenses and even the home office expenses and that kept them -- the margins up where they were. When the growth slows down, the home office expenses become higher as a percentage of revenues and it shows up in the margin line. So...

Laura A. Champine - Canaccord Genuity, Research Division

Can you talk about -- because to hit the guidance, I think the same-store sales metric would need to improve as we go through the year. Is there anything going on in terms of products that would give us confidence in that or any changes in promotions, which wouldn't hurt ticket, which could give us confidence in that expectation?

Gilbert L. Danielson

Yes, I mean, we are always for looking for new products. One thing that we have suffered here in 2013 is in the big-screen TV business. Mitsubishi was our largest provider of big-screen TVs. DLP television technology and they were a great vendor of ours, and they went out of the commercial TV business about a year ago. So we've had a product gap in the big-screen business, which has always been so important for us. There is still a product gap, but we are talking to several vendors that are going to start building some TVs for us that are going to start being delivered, I believe, in March or May or some time period. That will give us a big-screen television. There's big-screen televisions out there for sure, but our customers love 55-, 70-inch, 80-inch televisions and the current ones out there when Mitsubishi left the marketplace were too expensive. We can't get to a price point. So we have gone to vendors and we think we will certainly get some larger TVs that will come in, in the late spring or just -- so that will be a positive.

Ronald W. Allen

Yes. I might add I was just up an electronics show with our folks in merchandising. And then to reaffirm what you just said, we think, during this year, we will have some larger TVs that will be at attractive prices for our customers. We also might add that our Woodhaven manufacturing facility, Mike Jarnigan and his team had really have some new products coming online with furniture and offerings that we think will have a lot more appeal, particularly to a younger customer. And we're excited about that, and that will be in both of our HomeSmart stores and our Aaron's stores beginning really in the next 3 to 4 months.

Operator

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

John J. Rowan - Sidoti & Company, LLC

Just 2 quick questions. Can you just give me what the tax guidance was again for 2014?

Gilbert L. Danielson

Yes, it's -- I would use a rate, if you're modeling, of 36.5% to 37%.

John J. Rowan - Sidoti & Company, LLC

Okay. And then longer-term question. You say the company's built for kind of a mid-single-digit rate of earnings growth, yet the store growth is slowing down significantly. And when you look at the vintages, as far as storage goes in the same-store sales growth, you can obviously see that the older stores are much weaker. How do you get to that mid-single-digit revenue growth on an aging store base, which is just going to continue unless you ramp back up to a high -- a mid-single-digit rate of store unit growth? But then that poses another problem as to when you're getting towards saturation. I just wanted to understand long term how you look at the expense structure of the company and whether or not you need to manage your business to a much lower revenue growth target.

Gilbert L. Danielson

Well we think we can build revenues. I mean, that's what we talked about here today that we think there is customers out there. There's plenty of customers for us and we can build revenue whether we open another store or not, and we can build revenues in our existing stores. And that's the plan.

David L. Buck

I still have total confidence that we can come back in 2014 and grow. My thinking is more aggressive probably and should be than Gil's, but there's customers out there. In 2013, we didn't capitalize on them. 2014, we will capitalize on. Like I said earlier, I think there's more of our customers in the market. I think that's why the retailers are having to go after our form of financing. So I think there are our customers and we have every intent to go get them. So I think we will grow.

John J. Rowan - Sidoti & Company, LLC

But when was the last time -- I'd probably go back and look at the stuff. But when was the last time that you saw the stores that are in the 2- or even 5-year bucket of age growing at a mid-percentage comp?

Gilbert L. Danielson

We never said...

John J. Rowan - Sidoti & Company, LLC

Isn't that where you have to get to in a lower growth model to get to your revenue growth targets?

Gilbert L. Danielson

There's no question. Same-store revenues are down in all -- in most stores no matter what their age are. So that's a challenge in front of us, and we realize that. And again, we just think we just haven't done a good job this year and that we can go out and build that back up. So that's the plan.

Operator

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

Budd Bugatch - Raymond James & Associates, Inc., Research Division

If my math is right, just last year, we grew operating expenses by about $75 million. And same -- we grew the store revenues about $75 million. And I know I'm talking normalized expenses versus the store revenues. What's the outlook for expenses -- expense growth next year, Gil? What's your kind of budgeted number for normalized expenses next year?

Gilbert L. Danielson

Well our plan, again, is -- the plan calls for revenue growth of 3%. And basically, operating expenses are based in that same range. So, I mean, that's certainly the challenge. There's 2 challenges. Got to do better than the 3% revenue growth, and we certainly got to do the operating expense of bringing them down to 3% or less. So that's it, Budd.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

So with the -- you would expect the revenue growth to -- and the expense growth to match kind of the revenue growth is what we did. Is that delta, Gil, in the operating expenses? Is that all the infrastructure cost that you've had to put in for IT and for the better compliance issues? Is that what we're looking at? Is that the cost of that?

Gilbert L. Danielson

Well, I mean, operating expense, if you do -- expenses go up every year. I mean, you are going to give people raises and there's inflation, and gas was up, down, et cetera. But yes, in general, I mean, we think our operating expenses are at the level they're probably going to be and so they're going to grow a little bit, but not substantially moving forward.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Yes. But, say, that's $10 million of the growth and the growth was $70 million and revenue certainly didn't grow very much as well. And it grows, so maybe you got $20 million for that. Are we looking at $40 million of more structural costs or something like that?

Gilbert L. Danielson

I mean, if you just look at the lease revenues are going up, or you say $50 million, $60 million kind of your number was.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

$70 million.

Gilbert L. Danielson

Operation expense go up $30 million, so you're profitability is going to go up. All things remaining equal, everything else, you're profitability is going to go up from where it was this year.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Certainly, we haven't seen that. And you've talked about getting to a 6% to 7% bogey, what's the time frame? When do we say, "Okay, the business -- if the business isn't going to get there, what's that time frame to get there?"

Gilbert L. Danielson

You're talking about revenue growth?

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

Yes, sir. With that -- you said the model was built on a 6% to 7% bogey.

Gilbert L. Danielson

Well, that's right. And it will not happen in the next couple of quarters. Again, going back, it is a -- we've got to rebuild our customer base. Our customers have grown 1% for the year, but we continue to have to add customers and build your base of customers now taking some time to do it and then anticipate that, that later half the year as those customer base is built to a revenue associated with that will come on board.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

A couple of quarters, are we talking about the end of this year there or are we talking some time in 2015? What are we talking that...

Gilbert L. Danielson

Funny, we're talking at the latter part of this year, Budd.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

To get to 6% to 7%, so that by the time...

Gilbert L. Danielson

No, no. We will not get -- you're not going to get to that until not this year until '15 or '16. It will not happen immediately, but we're looking at the fourth quarter of this year.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

That's right. I understand the full year won't show them, but if we exit in that kind of rate, that's certainly...

Gilbert L. Danielson

I'd say the fourth quarter of this year.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Okay. And my last question is on the same-store sales. You gave us, I think, for the stores over 1 year and the stores over 5 years. How about the store between the 2 periods, between maybe 2 to 5 years? Do we have that?

Gilbert L. Danielson

I don't know if I have that handy. I do, and they're all negative a couple percent to 2% or 3%.

Operator

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

Charles Ruff

So I've been playing around with my model here a little bit. And is it -- it looks like EBITDA will go up about 1% here in 2014. Am I in the ballpark there?

Gilbert L. Danielson

In 2014?

Charles Ruff

Yes.

Gilbert L. Danielson

1% or 2%.

Charles Ruff

Okay. I guess, can you kind of square the circle for me on this? If there's one message you've kind of given us loud and clear is that you have a lot of confidence in where you are now with the management team you have in place and you feel like you can do much better going forward that execution can be better. Yet we're coming off a very disappointing year and you're projecting 1% to 2% EBITDA growth.

Gilbert L. Danielson

Well, I mean, that's what it is. I mean, again, the nature of the business is going to take a while to build the business back up. It's just not going to spring back.

Ronald W. Allen

It takes a while to ramp up in this business, as you know, Chuck. And that's why we're trying to be conservative with that type of forecast, but we're going to be working hard to better that.

Operator

Our next question is a follow-up question from Laura Champine.

Laura A. Champine - Canaccord Genuity, Research Division

This is just a quick one. Gil, do you have the charge-off ratio for Q4?

Gilbert L. Danielson

Yes, I do. Let me look for it. It was 3.8% of the gross revenues, which -- and as we said, it was 3.9% in the third quarter. So it's improved a little bit. It will go down in the first quarter. First quarter is always the better quarter because customers will have cash in the first quarter, so your writeoffs will go down a little bit. But again, it's just a reflection of us running the store, focusing on collections and focusing on the customer.

Laura A. Champine - Canaccord Genuity, Research Division

And Gil, do you have what it was in the year-ago period, the Q4 2012?

Gilbert L. Danielson

3.6%.

Operator

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

Gilbert L. Danielson

Okay. Well, ladies and gentlemen, thank you so much for joining us today, for your interest and support of the company. We will continue to strengthen our team and to serve our customers and enhance the Aaron's brand in order for us to deliver superior financial returns.

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Aaron's (AAN): Q4 EPS of $0.30 beats by $0.01. Revenue of $553.9M (-2% Y/Y) misses by $3.54M.