Aaron's (AAN) CEO Ronald Allen on Q2 2014 Results - Earnings Call Transcript

Jul.25.14 | About: Aaron's Inc. (AAN)

Aaron's Inc. (NYSE:AAN)

Q2 2014 Earnings Conference Call

July 25, 2014, 10:00 AM ET

Executives

Garet Hayes - Director, Public Relations

Ronald Allen - Chief Executive Officer

Gilbert Danielson - Executive Vice President and Chief Financial Officer

Steven Michaels - President

John Robinson - Executive Vice President and President and Chief Executive Officer, Progressive Finance Holdings LLC

Analysts

Budd Bugatch - Raymond James

David Magee - SunTrust

John Baugh - Stifel

Jason Campbell - KeyBanc Capital Markets

John Rowan - Sidoti & Company

Operator

Good morning, and welcome to the Aaron's Inc. second quarter earnings conference call. (Operator Instructions)

Participating this morning are, Ron Allen, Chief Executive Officer of Aaron's; Gil Danielson, Executive Vice President and Chief Financial Officer; Steve Michaels, President; and John Robinson, CEO of Progressive Finance and Executive Vice President of Aaron's.

At this time, I would like to introduce, Garet Hayes, Director of Aaron's Public Relations. You may proceed.

Garet Hayes

Thank you, and good morning, everyone. Welcome to our conference call to discuss Aaron's second quarter results.

The company's earnings release issued today and the related Form 8-K/A are available on the company's website, aaronsinc.com, in the Investor Relations section. And this website will be archived for replay there as well.

Before the results are discussed, I would like to read the company's Safe Harbor statement. Statements made during this call regarding Aaron's Inc. business that are not historical facts are forward-looking statement that involved risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statement. These risks and uncertainties include factors such as changes in general economic conditions, competition, pricing, litigation, customer privacy, information security, customer demand, integration of the Progressive acquisition, execution results for our new strategy and other issues and other risk factors and uncertainties discussed under Risk Factors in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as updated in its quarterly report on Form 10-K for the fiscal quarter ended March 31, 2014.

Statements that are forward-looking include without limitation Aaron's projected results, including Progressive's results for future period, statements on cost reductions and strategic initiatives and statements regarding the future effects of the Progressive acquisition on the company's business. Forward-looking statement include without limitation Aaron's projected revenues, earnings and store openings for future periods and statements regarding legal and regulatory approval for loss contingencies.

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

Ronald Allen

Thank you, Garet, and good morning, everyone. And thanks for joining us today to discuss Aaron's second quarter result. This quarter was certainly a transformative period for Aaron's. Our acquisition of Progressive Finance opens new and fast-growing channels to our customers.

The combination with Progressive positions Aaron's to maintain its leadership position in the lease purchase market and to drive shareholder value. There are meaningful synergy opportunities with Progressive, and initiatives to capture these are underway at this time.

Now, while we are optimistic about our future prospects, we are certainly not pleased with the performance of our core business. Today, we will discuss some of those specific steps we're taking to lower our cost and increase revenue.

As a management team, we certainly have a sense of urgency to restore the growth and profitability in Aaron's core business that shareholders have the right to expect. We remain confident in our strategic plan, the actions we are taking will improve Aaron's performance in the upcoming quarters.

As we previously said, we are executing our strategic plan to stabilize and to improve this core business. We first introduced this back in April. Some of the steps we are taking include, a renewed focus on same-store revenue growth, we're finding and growing our online platform, driving cost efficiencies to recapture margin, moderating historic growth, and strengthening and growing our franchise network. We're also undertaking initiatives to manage our SG&A, to improve our inventory management, reduce write-offs by leveraging Progressive's technology.

At this point, we've identified more than $15 million in estimated annual cost savings and efficiencies. Initiatives to realize these cost savings are already underway. Steve Michaels will expand on the work to improve the performance of our core business in just a moment. But I'd like to reiterate how focused our entire company is on these initiatives and the plan that we've outlined.

Now, the Progressive acquisition has exceeded our expectations for both earnings and revenue, and we expect that strong performance to continue. Our teams are working together to realize the full value of the synergies that made the Progressive acquisition so attractive.

John Robinson will discuss Progressive in more detail later on in the call. But again, we are fully committed to the path of returning Aaron's to sustained growth and profitability, and we will take full advantage of the opportunities ahead.

Before I turn the call over to Gil Danielson, I would like to say a few words on the retirement of Dave Buck, our Chief Operations Officer, which we announced yesterday afternoon.

Dave has provided great value to the operations of Aaron's, beginning with his involvement at the store level from 25 years ago, and later in his leadership of our top-performing division for several consecutive years. The Aaron's team thanks him for his service, his dedication, his contribution to the company's performance over these many years. And Dave is now exploring franchise opportunities with us, and we would hope to see him stay in the Aaron's family.

With Dave's retirement, we are streamlining the structure of our management team. We're eliminating the Chief Operations position and Aaron's veteran Tristan Montanaro and Michael P. Ryan will report directly to our President, Steve Michaels.

Michael Ryan, who is formally Vice President of Franchising, will continue to be actively engaged with our franchisees to ensure continuity. But to help him in that role, Aaron's franchise veteran Scott Harvey has been promoted to the position of Vice President Franchise. These moves have been well received within the company.

I'll now turn the call over to Gil, to provide an update on our financial performance. Gilbert?

Gilbert Danielson

Thanks, Ron. I will touch on a few of the financial results for the quarter. Revenues for the second quarter increased 22% to $672.5 million and 10% for the six moths to $1.258 billion.

Revenues in the second quarter and first half include $138.9 million in revenue from Progressive Finance, which was acquired on April 14, 2014. Collective revenues of our franchisees for the quarter were $242.6 million and $514 million for the first six month. However, please note that revenues of franchisees are not revenues of Aaron's.

Same-store revenues in the second quarter for company-operated stores decreased 3% compared to the same period last year. And the customer count on a same-store basis for company-operated stores was down 2.8%.

Same-store revenues for franchise-stores were down 2.3% and their customer count was down 3% for the quarter, respectively. Again, revenues and customers of franchisees are not revenues and customers of Aaron's.

Revenues in our HomeSmart division for the second quarter increased to $16 million and for the first six months were $33.3 million, an increase of 2% over the same period last year.

Net earnings for the quarter were $8.5 million versus $25.9 million last year. Net earnings for the six months were $46.8 million versus $76.9 million in the same period last year.

During the second quarter of 2014, pre-tax earnings were negatively impacted by amortization expense and estimated transaction cost related to the Progressive acquisition. In addition, the company incurred financial advisory and legal cost and restructuring charges related to store closures. Included in pre-tax earnings for the second quarter of a year ago was an accrual for a regulatory investigation and charges relating to retirement expenses and the change in vacation policies.

On a non-GAAP adjusted basis, excluding from all period the above-mentioned items, net earnings for the second quarter of this year would have been $27.2 million compared to $38.6 million for the same period in 2013 and earnings per share, assuming dilution, would have been $0.37 compared to $0.50 a year ago. Net earnings for the first six months of 2014 would have been $56.7 million compared to $89.5 million last year and earnings per share would have been $0.92 versus $1.17 last year.

The total number of stores open at the end of June was 2,136. On July 15, we announced the closing of 44 stores and an expected charge of approximately $7 million in the third quarter, as a part of this restructuring plan.

We are updating our guidance for the remainder of 2014 to reflect Progressive acquisition. Diluted earnings per share is presented both on a GAAP basis and a non-GAAP adjusted basis, which again excludes the transaction-related amortization and the one-time fees and expenses.

For the third quarter, we expect consolidated revenue of approximately $695 million and that include $175 million attributed to Progressive. Fiscal year 2014 revenues in the range of $2.65 billion to $2.7 billion, again, including the Progressive revenues, since the April '14 acquisition, which we project at approximately $500 million.

Third quarter and fiscal year EBITDA for Progressive is projected to be in the range of $15 million to $17 million for third quarter and $45 million to $50 million for year, again, the year beginning on April '15. Third quarter and fiscal year GAAP diluted earnings per share in the range of $0.20 to $0.25 and $1.12 to $1.22, respectively. And third quarter and fiscal year 2014 non-GAAP adjusted diluted earnings per share in a range of $0.36 to $0.41 and $1.55 to $1.75, respectively.

These are the financial points I would like to cover. And our number one priority at this time is to increase the profitability of our core business. We're certainly dedicated and focused on doing that. As a management team, we understand what we need to do to get there.

Steve will now walk us through some of the planned cost savings and efficiencies along with the aggressive steps we are taking to lower cost and increase revenues. Steve?

Steven Michaels

Thank you, Gil. Yesterday was the 100-day anniversary of my being named President of Aaron's. And while I am certainly disappointed with the unacceptable results of our core business, I have to say I am both encouraged and optimistic. We continue to reshape and sharpen our focus on Aaron's core business, and are making good progress on our strategic plan to position Aaron's for long-term stability and growth.

As Ron said, we have now identified more than $50 million in potential annual cost savings and efficiencies. We have begun work on some of these projects and will begin soon on many others. We expect a majority of the impact from these efficiencies to be felt in 2015 and beyond.

I'd like to break that number down, so you can see how we'll get there and also talk about some of the innovations we're introducing to better serve our customers and drive revenue growth.

First, our strategy to stabilize same-store revenue across the core business is founded on improved execution, merchandising and pricing initiatives and enhanced marketing strategy. These strategies not only help to improve the in-store customer experience, but are specifically geared towards driving new customers into Aaron's stores.

Some of these in-store initiatives include the upcoming August launch of our Wise Buy campaign offering vendor supported reduced lease rates, which will provide improved value to our customers, a SKU optimization program that will redeploy inventory investment to improve our ongoing in-stock position in everyday items as well as circular promotional items, providing an easier collections process by developing recurring payment capabilities to allow our customers to engage with us the way they would like, text messaging capabilities for renewals and marketing, and engaging a third-party vendor to assist with sales incentives and associating customer engagement.

Additionally, we have sharpened our focus on pricing opportunities and recently implemented the first phase of our targeted price increases across certain product categories. We will continue to monitor the results and make further adjustments of opportunities arise.

As we recently announced, we are in the process of closing 44 underperforming stores. All of these stores will be closed in the third quarter of 2014. These store closures are anticipated to reduce operating cost on an annualized basis by an estimated $15 million in 2015. The 44 stores have been selected based on a variety of criteria including cases where performance was not meeting our expectations or where we could serve customers more efficiently from nearby locations.

We are continuing to evaluate our overall store portfolio. So even as we continue to add new Aaron's and Aaron's franchise locations with high yield potential, we'll be looking for opportunities to optimize our store base.

Let me turn to our initiatives to manage operating expense. We believe we can execute on our plans with a leaner organization. We have identified opportunities to cut significant cost in non-merchandize purchases and manufacturing cost. We anticipate these actions will result in approximately $15 million in annualize cost savings to be realized in 2015.

Beginning immediately with the majority of the impact felt in '15, we plan to take $10 million annually out of operating expenses, which we expect will allow us to effectively recapture margin. We are restructuring operations and support functions, which will largely be driven by rationalization of personnel and associated cost.

Some other actions we have underway to reduce cost, include assessing savings through more efficient sourcing of indirect spend, implementing a new system to better manage service centers and performing a network optimization study on our FC infrastructure, which we expect to complete in the fourth quarter.

Now, on the Aaron's online. We are making substantial improvements to the Aaron's online experience. Our rollout of enhancements will begin in the third quarter and continue into early 2015. As you will have seen, Aarons.com has a new look and has been fully redesigned to complement our new Own the Life you Want campaign. We are also working on enhanced marketing and improved tools for our Aaron's home solutions call center, which supports our online traffic.

More recently, we are extremely pleased with an e-commerce pilot program, which we have been developing over the last few months. This program is an example of what we can accomplish when a cross-functional team comes together and deploys his talents towards a focused goal. I am so proud of this team made up of individuals from across Aaron's and Progressive, and happy to be able to report that beginning on July 14, we have officially transacted online.

This pilot program is an important practical step in our efforts to build and test the functionality of our e-commerce platform. We will continue to build on key findings and technology, logistics, marketing, merchandising, and accounting. Transforming Aaron's online will take time though, and while we don't expect the revenue and earnings contribution from the online business to be substantive in 2014, we believe it will be a key revenue driver in years to come.

Finally, we identified the need to strengthen and grow our franchisee network. To that end, we've committed additional support staff to our franchise operations to assist franchisees and improving the performance of their stores. We expect our online initiatives to be of great value to the franchise community and the pilot program I referred to earlier is also being tested in some of our franchise stores.

Our ability to leverage Progressive's technology will help us drive customers from Aarons.com directly into our franchisees businesses. As you can see, we have identified a number of near and longer-term actions to improve performance in our core business.

Finally, I would like to wish Dave a very happy retirement and looking forward to him remaining part of the Aaron's family as he explores franchise opportunities with us. I would like to reiterate the comments Ron made about our two Senior Vice Presidents of Operations. I have had the pleasure of knowing and working with Tristan and Michael for more than 15 years. And I am confident that together we will make great strides in accomplishing the initiatives we have laid out. We look forward to reporting on these initiatives in the coming quarters.

Now, I'd like to turn the call over to John Robinson, who will review Progressive's performance this past quarter and the advantages we expect from the continued integration of our businesses.

John Robinson

Thank you, Steve. Q2 was another strong quarter for Progressive. Our outstanding team continues to execute at a high level for our retail partners and customers. Invoice volume, which is the dollar amount of the merchandize we purchase from retailers, is the best leading indicator of our future revenue. Invoice volume today generates lease revenue over the next year or so.

Invoice volume for Q2 2014 was approximately $137 million versus approximately $81 million in Q2 2013, representing a 70% year-over-year growth rate. Invoice volume for the first six months of 2014 was approximately $260 million versus approximately $156 million in the first half of 2013, representing a 67% year-over-year growth rate.

We continue to generate strong invoice volume growth from both existing retail doors as well as new doors added to the Progressive program. Our business continues to grow with our exiting retailers as their experience with the product increases and our technology improves make the process as simple as possible for the retail associate and customer at the point-of-sale.

Our pipeline of new merchants remains strong. We are currently in discussions with or testing our product with some very large national retailers. In addition, we continue to have success signing up new local and regional retail partners.

There is a lot of momentum in the market right now to sign up new retailers across a number of attractive verticals, but we believe our product offering is the leading solution in the market today. We are investing in the next generation of Progressive products. All of these new products are targeted at expanding our addressable market as well as improving the retail experience at the point-of-sale.

When released, we believe these products will make our offering even more compelling to our retail partner and customers. The combination with Aaron's opens up tremendous opportunities for both companies. Improving the merchandize returns process at Progressive is one of the most obvious areas. Improving the returns process will not only get result in better collections performance on our leases, but will also give us the ability to expand our addressable customer base.

Since the transaction with Aaron's closed in mid-April, we have tested a returns process. Based on the success of the test we are rolling out a pilot program in August. Assuming the results of the pilot are as successful as the test, we would expect to begin rollout of the new returns program across our major markets by yearend. We believe the synergies from this initiative can be meaningful in 2015.

Overall, we are very pleased with our Q2 performance at Progressive, but remain focused on continuing to improve our product and service for our retail partners and customers.

Now, I'd like to turn the call back to Ron.

Ronald Allen

John, thank you. And with that, Jackie, we'd like to open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Budd Bugatch with Raymond James.

Budd Bugatch - Raymond James

I guess the first question I've got, just as more of a formatting question. How are we likely to see results reported in the future and what are we likely to see on the Qs in terms of just being able to do a model by segment? Is that something we're going to see to the detail we saw maybe in the 8-K/A?

Gilbert Danielson

Yes, Budd, I mean we will be doing that. We certainly have segment reporting like we do now and Progressive will be one of our segments and we'll report revenues and earnings on them. We'll also begin reporting EBITDA on a quarter and year-to-date on Progressive and as well as the company in total. So you'll start seeing that stuff coming through in our filings.

Budd Bugatch - Raymond James

And will it come through in the releases, Gil, or do we --

Gilbert Danielson

Yes. We'll put them on the releases.

Budd Bugatch - Raymond James

Because right now I realize there's a lot of moving parts and you couldn't probably do it for this release. So it will be more robust do you think by the time we get to the third quarter?

Gilbert Danielson

Yes, I believe so. Well, now the Progressive is part of our organization for two-and-a-half months in the second quarter. So I am working on the formatting, but we will be providing the more EBITDA information moving forward.

Budd Bugatch - Raymond James

On the cost savings then, thank you for the color on the reshaping of the core business. I agree, I think that's a very important issue for Aaron's. I was curious on the first bullet, you've got a recurring cost, I think it's recurring of $15 million, which you talk about non-merchandized purchases and that seem to me to be a little bit counter with the idea that that's recurring item. Is that something I am misinterpreting? Do you have a one-time savings on the non-merchandized purchasing? Is it something that, for this year do you think that's also recurring or is it most of that?

Gilbert Danielson

Those will be recurring kind of on an annual basis moving forward in future periods and we've identified that as annual savings that found in the organization and its better those will be recurring in the future.

Budd Bugatch - Raymond James

And John, for you, can you give us kind of maybe some metrics. I think we know that you had 15,000 doors at the time of the closing, I think. And you talk about some strength there in terms of future. What do we look like or what metrics do we have now to talk about doors?

John Robinson

We're not sharing that number yet. The reality of that door number, the way we look at our business right now is we look at kind of invoice volume growth potential. And for us given the nature of our product, the fact that we can operate in so many different types of retail environment, all doors aren't alike. So from our perspective we've given guidance for the year, for the quarter and the year.

And we feel comfortable with that guidance today. We feel comfortable that we have the doors in our system today to execute on that guidance. Obviously, we have to execute in the next two quarters, but we feel comfortable with that right now. And that the metrics that we shared in our press release and in my comments are the metrics we're going to share right now.

Budd Bugatch - Raymond James

Well, you did tell us in Q2 you had a $137 million of invoice volume. And maybe you could parse that by existing and new doors or new partners?

John Robinson

Sure. I mean the vast majority of that -- we've talked about this in the past. The nature of our product is there is a ramp cycle for new doors. So the vast majority of that volume is from doors that have been in this system prior to the quarter. So like 90%-plus comes from doors that were in the system prior to the quarter.

And that's the reason I can give you comfort about the remaining two quarters is because you kind of got to have the stores in this system to generate the revenue for the remainder of this year certainly. And then the doors that we add, the retailers that we add will have an effect on '15 more than anything at this point.

Budd Bugatch - Raymond James

And my last question for you is on the test of the returns, is it too soon to know what that does for the economics in terms of your cost of good sold and your gross margin?

John Robinson

It is too soon to know, but we've run some test in some Texas markets and we were very pleased with the results. It's obviously very nice for us to be able to work with Aaron's who are absolute experts at that part of the business. So we are very encouraged. We haven't given any guidance. I want to be clear. The guidance that we have given does not include any synergies from any of this stuff.

So it's all upside to the projections we've given, but we are really encouraged. We're going to start a more formal pilot in August and the hope is that it goes as well as the test. And if it does, we would want to get to our major market as quickly as possible. I don't think we're prepared. We have an internal timeframe that we're working up right now, but we are unprepared to share that, but we expect to be aggressive about that.

And for us, its two things, I mean we have to think about as if there is opportunity for margin improvements, so improvement in our pool performance of our leases, but also the ability to offer the product to more customers, so it could be a volume improvement as well. So we're really excited about it. And we're pushing really hard on them.

Budd Bugatch - Raymond James

And just the last thing. The test of the test, was that in furniture stores or was it in mattress stores? What was the nature of the product?

John Robinson

Across all of our verticals.

Operator

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

David Magee - SunTrust

I just had a few questions. One is to the degree that you're raising selective pricing, but at the same time, you talk about offering some maybe reduced lease rates with some vendor partnerships. Could you sort of clarify what's happening sort of net-net with that? And are you seeing any other pricing moves in the marketplace by competition that would be to following you or that you're responding to?

Steven Michaels

This is Steve. We are looking to improve margin across certain select categories. So we have deployed some selective price increases and margin increases on certain verticals as of July 1. And to the extent that, we can work in partner with our vendors to maybe in promotional periods, bring those lease rates back down, but maintain the margin that we have desired in that vertical.

We're going to take those opportunities. And so that's the result of our August Wise Buy campaign and actually we're excited about the Black Friday items that we've already secured and working on that promotion as well, but with the idea that we need to achieve a higher margin where we think we can take it.

And as we mentioned on the last call, we have some headroom versus our major competition in the lease rate and total cost of ownership standpoint. So we feel like we do have the ability to do that and we have begun that process, but as I did mentioned we will be continuing to monitor it and make adjustments as necessary, but those things can work hand-in-hand.

And as far as the general marketplace, I think our main competitor has mentioned the dynamic pricing model, and so they are making some adjustments as well. And then, retail environment is certainly very promotional right now. But we're monitoring it and don't think we really have to react to that right now, but we are very keen on watching the velocity of our customer activity based on the price moves that we make.

David Magee - SunTrust

John, I think I heard you mentioned in your remarks that you are in the process of developing, did you say new products or programs for your customers?

John Robinson

Yes, that's right.

David Magee - SunTrust

Could you give a little more color about what that means?

John Robinson

Sure. So I guess, I don't want to say too much, but the goal for us obviously is to expand our product offerings to more customers. And one thing we've talked about publicly is our ability to go deeper into the customer base and we believe that having a product offering that will allow us to kind of go end-to-end down at the tertiary side of the market, then we can really expand our offering for retails and customers.

So that's an area that we're focused on for sure. Larger deal sizes is something that we hear from our retail partners and we want to be able to react to that. So we want to be able to be extremely flexible for our retail partners and customers to offer lease products across the spectrum. And so we're developing flexibility in our system to allow us to do that, and that's stuff that we're working on -- we've been working on.

We're also working on application processes to make the point-of-sale experience a lot quicker and easier for the retail associate and the customers, so mainly in those areas that we are focusing. And a lot of the stuff has been going on even prior to the Aaron's transaction, we will release these things hopefully in the second half of this year and in '15.

David Magee - SunTrust

And then lastly, Gil, I was curious just based on the initiatives that strengthened the core business and the numbers you have out there now for EPS for the balance of the year. Do you anticipate any backend deposit of comp territory between now and yearend or is that more -- ?

Gilbert Danielson

That's not in our guidance, David. The comps were low there in the second quarter and we anticipate that will be the situation in the third quarter, perhaps a little bit more deterioration and continue on into the second quarter. So the guidance moving forward on a core business assumes that the business will still be basically at the same level it is.

And we are working hard, as everybody says to make a lot of improvements in cost saving, our initiatives going on, but as look forward kind of taking the conservative approach at what we think we can do over the next couple of quarters and that's what's in our guidance.

Operator

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

John Baugh - Stifel

I'd like to follow-up on Mr. Bugatch's question on the disclosure. It would be helpful for sure. And on that front, do you have Aaron's core EBITDA number for Q2, Gil?

Gilbert Danielson

I do not have that available right now, John. I certainly can provide that to you.

John Baugh - Stifel

And I guess I have a couple of questions. First, relating to the core business and guidance, and recognize you just commented that you'd certainly not expect comps to reverse. If you look at customer count, corporate customer count, you've decelled I think eight quarters in a row year-over-year.

It seems to be like a couple of points per quarter, some quarters worse. So I guess my question is more like a '15 question. Given your cost cutting, I guess you've got pricing dynamics, online initiatives, I'm just curious as to how you think about the core earnings next year? Are you assuming continued customer count lead and if not, why? And if so, where does that sort of leaves the core earnings as we look at '15 versus '14?

Ronald Allen

John, we need to do some more work on '15. We need to refine our guidance for '15 in both, the core business and the Progressive business. So it's a little premature to really talk about how we think the revenues are going to go in the core. We'll work on it pretty hard, and then when we'll do the next quarter we'll try to refine where we think '15 is going to go.

And the reason I say that, I mean we're in the situation that, I mean our core business has been declining here as you know for a number of quarters. And again, we have a lot of things going on that we think can certainly help, but everything is kind of in process right now. So I think that that's just the kind of run there a little bit.

John Baugh - Stifel

And then, if I did the math, right, John, the implied Q4 revenue is $165 million, that's down from $175 million in the third quarter. Is there seasonality in your business or is that just a conservative number?

John Robinson

We do have seasonality. I don't know -- I was just trying to think. I mean the reality of it is our business will grow sequentially from Q2 to Q3 to Q4. So I mean we have seasonality in a sense that there Q4 is typically a busy quarter for us. So I mean we would expect those quarters to be as strong as we had originally projected, if not stronger. And we've raised our guidance for the year, but we've just been conservative in doing that.

John Baugh - Stifel

Well, I may have done my math wrong. And I assumed about $21 million of revenue from half-a-month of April to get to the $500 million number, if that's right, then it would imply a sequential slowdown.

Gilbert Danielson

I don't have the numbers in front of me for that. But there is certainly not a sequential slowdown in our business.

John Baugh - Stifel

And maybe a question for you, Ron. HomeSmart, where are we with that? Is that something in light of everything that's going on? And the growth prospects with Progressive, doesn't that make sense to consider folding that in, divesting it, I don't know what you can do with it. I understand it's going to lose less money going forward or maybe make a little money. But where is your thoughts or Board's thoughts, as it relates to HomeSmart?

Ronald Allen

I think we had mentioned earlier, in an earlier call, that we slowed our growth at HomeSmart. We're kind of pausing our growth. We had an excellent meeting with our leadership team at HomeSmart, a month ago, and there is still a tremendous amount of enthusiasm. We opened five additional stores in the last six months maybe seven months and we've got some new store drag there.

But the 78 kind of legacy stores, they were profitable and we expect the whole division to be profitable for this year. And we haven't lost our enthusiasm for HomeSmart at all, John. I personally still think it can be a growth vehicle for us. But as you know, our primary focus now is to really bring our cost down on our core business and generate revenue there. But HomeSmart should be certainly a positive for us this year.

John Baugh - Stifel

Was it a positive comp? Did you grow customers in that segment?

Steven Michaels

On the HomeSmart front we made, I think as we've said on the call, starting in about the summer of last year really made some program changes to tack it towards a more traditional weekly business, and those changes have really been worked away to the system. And so the customer count is up a little bit, but on that same revenue base, it's a more profitable four-wall model.

And so it's really been more of a turnover of the revenue base as opposed to really a growth story. We continue to believe in those 78 core stores, we have a revenue base that can achieve the type of model profitability that we need, but it's still a process to continue to turn that revenue over a little bit.

Ronald Allen

Tristan took that over in July of last year and his leadership has really been excellent. The team he's built and the fact that Steve said, we've really reprogrammed a lot of the offerings in HomeSmart to better fit the weekly model. But those are in the furniture lines from Woodhaven and now we have Ashley and HomeSmart as well as rightsizing the electronics TVs and alike. So we expect that to continue to be an encouraging trend this year.

Operator

Our next question comes from line of Jason Campbell of KeyBanc Capital Markets.

Jason Campbell - KeyBanc Capital Markets

You guys announce the initial kind of cost saving you expect. Is this something that you've kind of done the work over the past three or four months and this is kind of what you think you can get or is this kind of the low hanging fruit, and then maybe early next year as you dig more into it, there might be more of these coming down the pike?

Gilbert Danielson

Well, certainly, we have identified the $50 million in cost savings, and we think are certainly achievable and certainly potential, but they are very achievable, but we're not done looking. We worked very hard here in the last recent months. And we feel certainly, as Steve talked about it, there could be some more store rationalizations, some other initiatives that we will do, and we'll keep looking at that. So this is a start. We're going to tackle this. But it's not to say that that's done, that we're completely done.

Jason Campbell - KeyBanc Capital Markets

And then onto Progressive, you talked about $500 million benefit to Aaron's this year. I believe in the past you had talked about more of a pro forma full year revenue for Progressive. I was wondering how much did you bring up that kind of pro forma estimate?

Gilbert Danielson

I think initially for the 12 months that Progressive was looking about $630 million to $650 million in revenue. And in our guidance we brought that up about $25 million now for the year.

Jason Campbell - KeyBanc Capital Markets

And then lastly, you guys spoke about HomeSmart. I know had had looked internationally, I mean you had something over and I believe it was United Kingdom. I mean is that still something you're looking into or do you still have that stake or what's kind of transpired with that now with Progressive in the mix?

Steven Michaels

Perfect Home is the company that we have a stake in the U.K. And I guess I should say we extended our relationship with them through the summer of 2015. So we continue our partnership and continue to have great dialogue and are still enthusiastic about their prospects and their business model. But it is something that we certainly deferred and mutually extended the relationship into this middle of '15.

Operator

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

John Rowan - Sidoti & Company

If I missed this, I apologize. I had to jump off for a second. But what was Progressive's revenue for the second quarter of '13?

Gilbert Danielson

Second quarter '13, I don't have that right in front of me, John. Again, the results for Progressive are just since we acquired them. Results are available, obviously. I may have to get back to you on that.

Operator

Our next question is a follow-up question from the line of David Magee with SunTrust.

David Magee - SunTrust

Just one another question, John, when you mentioned the pursuance of the new products for customers, I'm just curious is that something you go into with a set gross margin in mind or are you willing to take a lower margin in those cases for the additional sort of gross profit dollar growth?

John Robinson

Yes. I think our first thought on that would be to try to maintain our gross margin, when we're pricing that, and that would probably set the -- that would be kind of the construct that we would use to think about structuring the products. And obviously, where we're going to learn a lot in the next couple of months is on the return side and what that means for us, but that would be absolutely the construct that we would use for them.

David Magee - SunTrust

Is the implication there, that if the returns works out the way they should and helps the margins, does that allow you to be a little more aggressive on the price side upfront?

John Robinson

That's the hope.

David Magee - SunTrust

Yes.

John Robinson

Yes, absolutely. We've got to get that process, with Aaron's involved, we believe we're going to get that really streamlined. But we're learning right now. That is the expectations.

I do have an answer for that prior question that the Q2 '13 revenue was about $95 million for Progressive.

Operator

Our next question is a follow-up question from the line of Budd with Raymond James.

Budd Bugatch - Raymond James

Gil, just a couple of things. One, you've got preliminary amortization expense in the Progressive block on the release of $9.7 million in the quarter. And I think in the 8-K/A, it looks like on a quarterly basis that was I guess about $12 million a quarter?

Gilbert Danielson

If you look forward, Budd, for the next couple of quarters, it should be about $11.4 million.

Budd Bugatch - Raymond James

Per quarter?

Gilbert Danielson

Yes. Again, it was lower, because it was a stub period in the second quarter for Progressive.

Budd Bugatch - Raymond James

And I guess the EBIT would have been just the $260,000 with the Progressive EBITDA, is that right? The depreciation of property assets is what would be the DA side of that?

Gilbert Danielson

Yes. Just the PP&E, it doesn't include the depreciation of the lease.

Budd Bugatch - Raymond James

And one more, what do you think the interest expenses are quarterly now, how is that going to change from the 8-K or?

Gilbert Danielson

One thing, when we bought Progressive, when we fully allocate the interest to them, and that's going to run on a quarterly basis of about $5.5 million on a quarterly basis.

Budd Bugatch - Raymond James

That's right. Because the balance is Aaron's related on the financials, right?

Ronald Allen

When we fully load it, pretty much.

Budd Bugatch - Raymond James

I can see that. I'll guess, one last, I'll try one more. Just the cost of lease for Progressive, cost of lease ownership, which I think the way Progressive reports it, just for modeling purposes or do we need to wait for the Q on this one?

Gilbert Danielson

Well, you can wait. But if you kind of look at depreciation as a percentage of lease revenues, and one way to look at it was kind of their cost of lease, and that's about two-thirds of the lease revenues, 64%, 65%, so you can use that to kind of --

Budd Bugatch - Raymond James

They reported, I think a gross profit I think of 25.7% or 26% in the 2013 results.

John Robinson

It's higher this quarter than that, and you'll see that the gross margin has improved.

Gilbert Danielson

Yes, Improvement in gross margin.

Budd Bugatch - Raymond James

Order of magnitude?

John Robinson

Its north of 26% now.

Operator

And there are no additional questions waiting from the phone lines.

Ronald Allen

Well, thank you, Jackie. And we'd like to thank everyone for joining us today. Needless to say, we are very hard at work at Aaron's to get our core business back on track. And we continue to build for the future and grow our customer base with our great team at Progressive. We look forward to updating you on our progress on our next call.

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