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Aaron's Inc. (NYSE:AAN)

Q2 2011 Earnings Conference Call

July 25, 2011 5:00 p.m. EDT

Executives

Gilbert Danielson – CFO, EVP, Director

Lee Wilder – Investor Relations

Robert C. Loudermilk Jr. – President and CEO

William "Ken" Butler Jr. – COO, Director

R. Charles Loudermilk – Chairman of the Board

Analysts

Brad Thomas – KeyBanc Capital Markets

TJ McConville – Raymond James & Associates

Arvind Bhatia – Sterne, Agee & Leach, Inc.

David Magee – SunTrust Robinson & Humphrey

Chuck Ruff – Insight Investments

John Baugh – Stifel Nicolaus

Laura Champine – Cowen & Company

John Rowan – Sidoti & Company

Operator

Good afternoon and welcome to the Aaron's Second Quarterly Earnings Conference Call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end.

At this time, I would like to pass the conference over to your host, Gil Danielson, CFO of Aaron's Inc. Thank you and you may proceed, Mr. Danielson.

Gilbert Danielson

Thank you for joining us this evening. I'm going to turn the call over to Lee Wilder who does Investor Relations for the company and shall read our standard Safe Harbor Statement. And then we'll get started on the conference call.

So, Lee.

Lee Wilder

Good afternoon. My name is Lee Wilder and I assist in 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, Charlie Loudermilk, Chairman; Robin Loudermilk, CEO; Ken Butler, COO; and Gil Danielson, CFO.

Before we discuss the results, I would like to read the company's Safe Harbor Statement. Except for the historical information, the matters discussed today are forward-looking statements of the company. As such, they will involve a number of risks and uncertainties, including factors such as changes in general economic condition, competition, pricing, customer demand, litigation, and other issues that could cause actual results to differ materially from such statements, including the risks and uncertainties discussed under Risk Factors in the company's 2010 annual report on Form 10-K, including without limitation the company's projected revenues, earnings and store openings, as well as store acquisitions and disposition activity for future periods.

Robin, Ken and Charlie will have a few comments, and then Gil will add some further information. Robin?

Robert C. Loudermilk Jr.

Thank you, Lee, I appreciate it very much.

Obviously, we are pleased with our second quarter results, and excluding all suit-related charges, met expectations. And we have said over the year, we feel Aaron's is a recession-resilient business that has performed well in both good and bad economic times. We continue to expand our company and open new stores, and the Aaron's business model has more than proven to be successful throughout the years. We have plenty of growth remaining in our existing Aaron's model and we are very optimistic about the potential of our new HomeSmart weekly pay concept which we are beginning to roll out. Ken will talk more about this later in the call.

Aaron's sales and lease ownership business continues to grow in revenues and customers. In the quarter, revenues were up 9% in the division, and our company-operated store had same-store revenue growth of 5% and customer growth of 6.2%. In addition, although not revenue of Aaron's Inc, our franchise stores experienced a 2% growth in same-store revenues and a 3.9% increase in same-store customer royalty. The total of corporate franchise customers were up 9% over the same period of last year. These growth results are once again excellent, especially in these economic conditions. We expect these trends to continue throughout the remainder of the year.

In the second quarter, we unfortunately recorded charge to earnings of $36.5 million related to a sexual harassment judgment, as outlined in our earnings release. We strongly believe that the award in this case does not accurately reflect the evidence presented, and we are preparing to file post-trial motion with the court to reduce the size of the award, or otherwise appeal the verdict. The charge to earnings this quarter reflects our estimated worst-case scenario, if we are not [inaudible] successful in reducing the dollar amount of the judgment.

On a positive note, our Woodhaven furniture manufacturing plant increased production in dollars 46% in the quarter and 25% for the year, a reflection of the increased demand -- increasing demand by both Aaron's and HomeSmart stores for our furniture and bedding products. Woodhaven is on track for a record year of shipments, approaching $100 million at cost, which is an exciting achievement for all of our associates.

Thanks for your support of the company, and I'll turn the call over to Ken for a few comments, and then Charlie.

William "Ken" Butler Jr.

Okay. Well, thank you, Robin.

Once again, like the first quarter, we got out of the gate with the tremendous issues in the month of April and May with a record number of tornadoes across the Midwest, South and even the Northeast, plus the threat of flooding in the Mississippi River that resulted in not only interruptions to our day-to-day operations but also store closings and write-off to merchandise as a result of the disruption caused by these events.

There were many acts of heroism from our associates, particularly in Tuscaloosa, as [inaudible] tornado destroyed the store and the shopping center during normal business hours. Not only did our associates manage to find a safe place in the store, but immediately went to the rescue of others in the center after the tornado passed. Shortly after, I had the opportunity to visit with our associates in Tuscaloosa and Joplin, Missouri, and can only tell you the words nor pictures can describe the devastation which went through these towns and communities.

Despite these challenges, our great team of associates still managed to gain 34,000 new customers for the quarter and attain our revenue and profit goals. Our traffic in our stores remained strong, and I can attribute that to our national media campaign. Without weather stopping us, we have gotten off to a fast start with our Christmas in July promotion. So, our overall business climate is very, very good.

Our new HomeSmart concept is gaining quick momentum as we opened 10 new stores during the quarter, plus made an acquisition this past week to put us on pace to have 60 HomeSmart stores by the end of the year. Although still early to have a complete financial model, I will say our first store open became profitable in May, and each subsequent store opened since has exceeded Aaron's model in new customer deliveries and average new store drag.

The huge advantage we have in this model as opposed to someone else opening is we already have an experienced management team in place, a proven operating model, all the back-office support in place, and a roadmap of the most successful markets to enter. Thus, we can avoid having underperforming stores located in underperforming markets that our Aaron's model has gone through. Aaron's school of hard knocks has opened a superhighway for future HomeSmart expansion.

Our main concern was whether it cannibalized any of our core Aaron's stores, and thus far we do not see this at all, as we monitor this on a day-to-day basis with each store that has opened. If we prove out the financial model, we will select from a top tier of our franchisees and then give them right to first refusal for their markets, and we feel we can put a big number of stores in our franchisees' hands as well as a big number that we can open in the company as well.

We have already got the attention of several independent leaders, as evidenced with our recent acquisition of Crusader, as well as some others in the works. Many will have an opportunity to convert to the Aaron's or HomeSmart model or look at this as an opportunity to sell their stores.

All in all, we are happy with our core Aaron's business as well as our HomeSmart and RIMCO brands. Thank you for your continued interest in us, and I'll turn the call over to Charles.

R. Charles Loudermilk

Well, thank you, Ken.

I am pleased with the great results of the second quarter [inaudible] as it is and so forth [inaudible] people that we have [inaudible] Aaron, we have a great team, and [inaudible] thought about [inaudible] of work. They have worked very hard. It hasn't been easy, but there was all the disasters that's happened [inaudible] and done well.

I guess the only other thing that [inaudible] very disappointed with the trial, with the court decision and the write-off that we're having to take. [inaudible] everything I knew, I would not say [inaudible] from my point of view [inaudible] out-lawyered, and I think that we will come back and hopefully we will have a different decision by the court down the road.

But the net really is I'm happy with the quarter and I think we're going to continue to have very good quarters. Everything I see is positive. Thank you.

Gil?

Gilbert Danielson

Okay. Thank you, Charlie. I'll go through some of the highlights of the second quarter and the six months.

Company revenues increased to 8% for the quarter to $482.7 million and also 8% for the six months to $1.015 billion. In addition, our franchisees collectively increased their revenues to $218 million for the second quarter, an 8% increase over the same period last year and 9% for the six months to $459 million. Revenues of franchisees are not, however, revenues of Aaron's Inc.

Same-store revenue in the second quarter for Aaron's company-operated stores was 5% and 3.2% for stores that are over two years old. For stores that were over five years old at the end of June, same-store revenues were up 1.2%. Same-store revenue for the franchise stores were up 2%. The same-store revenues in the second quarter were positive in all parts of the country.

The company had 935,000 company-operated store customers and 511,000 franchise customers at the end of the second quarter, a 9.2% increase in total customers over the number at the end of the second quarter of last year. The customer count on a same-store basis for the company-operated stores was up 6.2% in the quarter. As I mentioned, same-store revenues for franchise stores were up 2% and their customer count, for franchise stores, were up 3.9% for the quarter compared to the second quarter a year ago. Again, revenues and customers of franchisees, however, are not revenues and customers of Aaron's Inc.

Net earnings for the quarter were $10.8 million versus $24.4 million in 2010. Net earnings for the six months were $55.2 million versus $51.4 million last year. For the second quarter, diluted earnings per share were $0.13 compared to $0.30 last year, and for the six months, diluted earnings per share were $0.58 versus 75% a year ago -- $0.75 a year ago.

As mentioned, in the second quarter, a charge of lawsuit expense of $36.5 million was recorded, which result from the judgment on the lawsuit and expenses less our insurance coverage that we did have. Excluding the charge, and this would be a non-GAAP number, net earnings for the quarter would have been $33.3 million and diluted earnings per share $0.41.

During the second quarter of 2011, the Aaron's Sales and Lease Ownership Division opened 17 new company-operated stores, 12 new franchise stores, 10 HomeSmart stores and one RIMCO store. We acquired the accounts of one third-party store. Also five company-operated stores to an Aaron's franchisee and one store to an independent operator. Eight company-operated stores and two franchise stores were closed in the second quarter. We still have one store remaining in the Aaron's Office Furniture Division, and as outlined in the press release, the revenues were quite small and it was a positive gain both in the second quarter and for the six months.

Through the three and six months ended June 30 of this year, the company awarded area development agreements to open 38 and 44 additional franchise stores at the end of June of this year. There were 276 franchise stores awarded that are expected to be opened over the next several years.

At June 30th, the Aaron's Sales and Lease Ownership Division consisted of 1,143 company-operated stores, 681 franchise stores, 12 company-operated RIMCO stores, 15 HomeSmart stores, and six franchise RIMCO stores. Again, we also had the one Aaron's Office Furniture store. The total number of stores opened at the end of June 2011 was 1,858.

At the end of June, we had cash on hand of $176 million. Subsequent to the end of the second quarter, we received $125 million as a result of private placement of senior notes, with payment of interest-only for two years, and then the notes mature out in five equal installments of $25 million each over the next five years. The borrowing rate on these notes is 3.75%.

These funds will be used for general corporate purposes and for the repurchase of stocks from time to time. We did refer to stock during the quarter. As you'd recall or as you'd seen in May, Board directors approved and authorized repurchase of additional 5.9 million common shares, bringing our total common shares authorized to 10 million. During the quarter -- or during the six months, we acquired 1.454 million shares of common stock and we have current Board authorization to purchase an additional 8.9 million shares. The average price we paid in the first six months of this year is $25.75 or just a little bit more than $37 million.

We generated over $57 million in cash from operations in the second quarter and over $200 million for the six months of 2011.

Our guidance for the third quarter of this year 2011 is we expect revenues of approximately $480 million and diluted earnings per share in the range of $0.35 to $0.39 per share. Our revenue guidance for 2011 remains unchanged, to reach approximately $2 billion in revenues, and fiscal year 2011 diluted earnings per share in the range of $1.73 to $1.81, which is updated from previous guidance.

This fiscal 2011 guidance is a non-GAAP number and excludes the second quarter $0.28 per diluted share, EPS share charge for the lawsuit.

That's our prepared comments, and we'll certainly the call over for any questions that anybody may have.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now have the question-and-answer session. If you would like to ask a question, please press star followed by 1 on your touchtone keypad. To remove your question, press star followed by 2.

Our first question comes from the line of Brad Thomas with KeyBanc Capital Markets. You may proceed.

Brad Thomas – KeyBanc Capital Markets

Thanks. Good afternoon, and congratulations on a great quarter.

Robert C. Loudermilk Jr.

Thank you.

Brad Thomas – KeyBanc Capital Markets

I wanted to ask about HomeSmart. It seems like things are still going very well in this young concept. You bumped up the number of stores you're planning to have by the end of this year. I was hoping if you could just help us think a little bit more about what level of growth to model for this company going forward. Do you hit the pause button when you get to 60 stores, or are you ready hitting the threshold that you need to see in order to do a similar level of growth in 2012? How are you thinking about things at this stage?

William "Ken" Butler Jr.

Yeah. Hi, Brad, this is Ken. We have I think projected that we would open 20 to 25 stores this year, and when we got an opportunity to convert these stores, we certainly took advantage of it because we think it's a good match for us. But at the end of the day, we probably will slow it down. In fact, I've already kind of ordered our real estate department to [inaudible] what we got, but we've got a big job to convert these stores that we've acquired. So we'll go through a little cooling-off process and hopefully that the new stores we've just opened catch up and tweak them all a little bit more.

But the early prognosis [inaudible] very optimistic on the first five we opened, as you recall, last quarter. And the next 10 we've opened this quarter even coming out of the gate much, much stronger than those first five. So we want to grow profitably at the end of the day and have a good base of stores. And then I think we'll have something we can [inaudible] out pretty quick.

Brad Thomas – KeyBanc Capital Markets

That's great. Ken, I think it was you who mentioned that you want to reach out to your franchises and give them right of first refusal on the concepts. How does that play into the growth rate or the growth potential for HomeSmart?

William "Ken" Butler Jr.

Well, I think it's tremendous. And I can't -- we kind of look at ourselves we're the pioneers and the franchisees are settlers, so we have to prove what we do with numbers, just like we do with you all. So, once proven, I mean we're actually holding them back now. They have a number of them that call me very frequently and, are you ready, are you ready, are you ready? And so we're going to hold them back a little bit longer, but we think we could realistically get out 200 to 300 stores pretty quick, if we choose to franchise it. And we will definitely franchise it. So I think we can repeat what Aaron's has done in the past but do it in a shorter period of time.

Brad Thomas – KeyBanc Capital Markets

Great. And I just wanted to follow up on expenses during the quarter. I mean I think this is one of the best quarters for expense leverage that we've seen in a couple of years. I was hoping you could just highlight, were anything specific to this quarter, was it just that you're up against a lot of expense growth in the second quarter of last year, and how are you thinking about expenses in the back half?

William "Ken" Butler Jr.

Well, we're always working on it, as you know, to try to improve our cost structure and our expense structure.

Robert C. Loudermilk Jr.

This is Robin. We've talked about a lot of initiatives that we're taking here at the office and the field, just looking at the way we do business and technology and a lot of things. I think you're starting to see some of that creep into our numbers. Everything we do takes time, but we're literally trying to look at everything we do and see how we can do it better, cut costs out of it. We're also working on our bottom stores, our infrastructure. We're looking at our management in the field.

So hopefully we'll turn over a lot of rocks and as time, you know, as we pull the growth back, we talked about that in the last couple of calls, as we pull growth back, we feel now we have an opportunity to really look at the bottom line and the expenses and work on that. And that's really what I've been focused on. And all of our associates have really stepped over the plate, gave us some great ideas, and we'll implement some [healthy] changes gradually, and I think it's working. So hopefully we'll just continue that trend; that's our plan.

William "Ken" Butler Jr.

One thing you know also, last year, throughout last year, we were closing the Office Furniture Division, we had some big charges in the second quarter of last year [inaudible] that they are not reappearing. In fact, Office Furniture is slightly profitable --

Robert C. Loudermilk Jr.

Slightly positive, yeah.

William "Ken" Butler Jr.

Yeah. So that's helped out this year.

Brad Thomas – KeyBanc Capital Markets

Great. Thanks again, and congratulations.

Operator

Thank you, Mr. Thomas. Our next question comes from the line of Budd Bugatch with Raymond James. You may proceed.

TJ McConville – Raymond James & Associates

Good afternoon, everyone. This is actually TJ McConville filling in for Budd. Thanks for taking my questions. And congratulations on the quarter.

Robert C. Loudermilk Jr.

Thanks, TJ.

TJ McConville – Raymond James & Associates

Sure. Ken, back to your commentary about the getting-out-of-the-gate into some pretty nasty weather, can you give us a little bit more detail on the progression of comps then maybe throughout the quarter, or maybe at least what the variance was between the weak rent and the stronger rent. It sounds like things had actually been accelerated throughout the period.

William "Ken" Butler Jr.

Well, I think it's more about customer growth than it is anything. It's a disruption of business, you've probably heard us more than anything. Markets that even threatened by tornadoes or hit by tornadoes seem to just go completely flat. So…

Robert C. Loudermilk Jr.

And while the water coming down on top of stores.

William "Ken" Butler Jr.

Yes. So there aren't a lot of customers out really shopping during those times, and it's three days here and three days here in a month, but we really made a great comeback in the month of June.

From a financial standpoint, April wasn't a bad month, May actually was a little bit tougher just by way that the calendar fell. But all in all, we got through it and our people seem to [inaudible] at it and we'll figure it out.

Robert C. Loudermilk Jr.

You know, TJ, we said in the last conference call that probably [inaudible] should be in the mid single digits, 4% to 6%, as you define that mid single digits. It came out at 5%, and there's a little bit of month to month, but it's pretty much in that range.

So you kind of look to the third quarter, fourth quarter, the rest of the year, I kind of expected that kind of guidance for the comps through the rest, and that's a couple of quarters anyway.

TJ McConville – Raymond James & Associates

Okay. That's real helpful, guys.

And then on -- and following up on Brad's question about the franchise opportunity in the HomeSmart stores, and I take it, it sounds like it's further down the road, but talk to me about, when you're getting maybe an independent to convert to an Aaron's and not necessarily sell to you guys but maintain their franchise position, how does switching from a weekly shop to a monthly shop, or how did it in the past, how high did that rank on the list of push-backs?

William "Ken" Butler Jr.

I think it really depends on the attitude of the operator. We had some that were just unbelievably successful that completely just gave in to the program and said, "We're going to do it. We're not going to question it." And you get some other long-term operators that want to do the Aaron's program from a financial standpoint but don't want to make the mental commitment and [cost] commitment, it becomes more of a challenge.

So, you know, you get an operator that's been in business for a long time, he's going to challenge you on everything you do, particularly if it's in a completely different model than he's operated. So their numbers seem to be somewhat sluggish, but if you're getting somebody that embraces our program and doesn’t just walk -- or talk the talk but is going to walk the talk, so to speak, they will perform much, much better.

TJ McConville – Raymond James & Associates

Okay. And then lastly, on the national ad campaign, we just talked about the customer growth, so, seemingly the returns there you're pleased with and we should expect similar levels through the remainder of the year, is that fair?

William "Ken" Butler Jr.

I would hope so.

TJ McConville – Raymond James & Associates

Okay. All right, guys. Those are the questions. Thanks for taking them again. Congratulations. Best of luck for the rest of the year.

Operator

Thank you, TJ. Our next question comes from the line of Arvind Bhatia. You may proceed.

Arvind Bhatia – Sterne, Agee & Leach, Inc.

Thank you, and my congratulations, guys.

Robert C. Loudermilk Jr.

Thanks, Arvind.

Arvind Bhatia – Sterne, Agee & Leach, Inc.

A couple of questions, first, on HomeSmart. Also trying to understand, or maybe if you can refresh our memory on kind of the story economics, are all of the stores in that 4,500 square feet -- I think you're a little bit bigger. But just help us understand the size, perhaps the first store that made profit, how many months it took to reset profitability levels. And then I guess that 200 to 300, I think, Ken you had mentioned, is that a potential target for 2012, or are you referring to a little bit longer term --

William "Ken" Butler Jr.

Yeah, I think the 200 to 300 is not going to happen in '12. I think if we opened up the program to our franchisees, what I'm saying is I think they would -- we could sell [turf] in the 200 to 300 store range pretty quick. And usually when they do that, will give them three years to develop it. So, just in the franchise community alone, there's a lot of immediate potential. I wish I could open the 300 franchise stores when we first opened our rent-to-own concept back in 1990. It took us years to develop it.

So we've been there, done that. We got a great group of franchisees. It will be a very easy sell, we think, to our best operators.

And the smaller markets where we have a franchisee, we shouldn't put another model. So we're very sensitive to that as well.

Your other question was regarding --

Robert C. Loudermilk Jr.

Breakeven.

Arvind Bhatia – Sterne, Agee & Leach, Inc.

Time that it takes.

William "Ken" Butler Jr.

The older store is Houston, just nine months old, and then we have two other stores, stores that are seven months old, and everybody else is on its way down the list, maybe four months. Houston has been a great homerun. I mean [inaudible] had a heavier expense list than a typical HomeSmart store would have, and they made money in their seventh month. So it's been very good.

The other two stores that are open have ramped up pretty well too. It's maybe a little bit less in revenue than a normal parent store, but profitability has been right on track and on the ramp-up. But it's very young. All stores are very young. I mean we got -- had 15 stores opened at the end of June. Again, you know, the oldest was the Houston store. So I think on our next conference call, another three months, we'll certainly have a lot better information, a lot better historical track record to share with everybody. But we're very encouraged of the stores that are open.

Arvind Bhatia – Sterne, Agee & Leach, Inc.

And the pricing there, from what I remember, your pricing was going to be a little bit lower than competition on average weekly competitor. Is that still the case with the average store?

Robert C. Loudermilk Jr.

Well, we don't price it looking really at the competitor. We price it where we think we can price it, as low as we can and still make a profit. But, you know, we know that prices have to be higher than Aaron's because you're doing more labor, you're touching -- have more customer touches. And so consequently, that's where we started. We'll tweak it up, depending on how we need to tweak the model. But that's something we look at on a daily basis.

So we're mindful of where the competitor is, but [we play] completely different, we have different terms than our competitors, so we don't really look at the price, where they charge, trying to make it a very attractive package for our customer base.

Arvind Bhatia – Sterne, Agee & Leach, Inc.

And last question, just obviously you had a good quarter, you're taking the lower end of your guidance up as well. When you look at all of the cross currents, whether it's higher gasoline, unemployment levels, offset by the credit situation out there, the social security tax benefit and things of that nature, just how do you see the rest of the year, and perhaps maybe taking us a little bit longer than that, maybe all of next year, what are you projecting? Do you see any change at all now that we've had unemployment at this level for certainly a long period of time? And then maybe talk about very near-term trends in July so far, the summer timeframe tends to be tough for the industry, if you can give us some color there as well, I'd appreciate it.

William "Ken" Butler Jr.

Arvind, do you see anything positive in the industry? The way you outlined it there, pretty negative.

We're choosing not to participate in this recession.

I don’t know. I mean you kind of look at our guidance for this year, we're really not expecting the macroeconomic environment to improve any. I mean the unemployment is high. Obviously 9% unemployment, our customers' unemployment is much higher than 9%, are working people, working-class people.

So we're kind of assuming just in our guidance the macro environment is going to kind of remain the same. Tight credit, high unemployment. Certainly if we could get a lift in employment, that would be very positive. But no one is really predicting that at any sort of magnitude. We will see. But we're just going to plod away like we've had I guess the last couple of years, you know, pretty tough environment.

Robert C. Loudermilk Jr.

This is Robin. As Ken mentioned in his comments, our national ad campaign seems to be really helping, whether that's keeping traffic strong or not, but something is. And I was at the stores last week, and traffic is strong, and we're seeing a lot of folks come into the stores.

So, you know, we're choosing the kind of keep on keeping on and doing what we're doing and this recession it worked itself out. And if we feel like we stick to our guns and stick to our model and continue to open the Aaron's doors as we've been doing and execute, there's not much we can do about the macro, we just want to keep our [nose] to the ground, I think that's just been our operating mantra.

Hopefully fuel prices come down towards the end of summer and we always have pretty good third and fourth quarter, we'll see, if that plays out like it has in the past. We always kind of panic in the summer because it slowed down a little bit.

So we're pleased. We got the Aaron stores, we continue to open those, it's been great, we got another thousand stores open both company and franchise. So there's a lot of growth runway there, HomeSmart to take us into the next future.

So we're preparing for the next two, three years and we're looking five years out too. So we just feel pretty good here and we just have to execute.

Arvind Bhatia – Sterne, Agee & Leach, Inc.

Great. Good answers. Thank you.

Operator

Thank you, Mr. Bhatia. Our next question comes from the line of David Magee with SunTrust Robinson & Humphrey. You may proceed.

David Magee – SunTrust Robinson & Humphrey

Yeah, hi. Good afternoon, guys.

Robert C. Loudermilk Jr.

Hi, Dave.

David Magee – SunTrust Robinson & Humphrey

Good quarter. Just a couple of questions. One is the, you mentioned that the franchise is very strong, and that's good and that's unique I think in the broader industry out there. What are you seeing right now with regard to consumer electronics? Are you seeing any change from the trend line there?

William "Ken" Butler Jr.

Hi, Dave. On a same-store basis, our new leases that we've written year-over-year, we were up in every category, and leases including televisions were up 11%. The weakest group was computers, which was slightly up 1%. But every other category was up, and Robin talked about furniture. Upholstery, which is our main furniture item, was up 28%.

Robert C. Loudermilk Jr.

The interesting thing in computers, I was talking to Mitch Paull, our VP of Purchasing, did a great job, you know, the tablets out there, I think a lot of people are seeing laptops and computers, there's a lot of question mark where are these tablets going, will it replace the laptop or not? Is it functional enough? That's going to be kind of interesting play. We always trend-follow, as you know. I mean it has to kind of prove itself and we'll follow the trend, whatever the trend is. But…

William "Ken" Butler Jr.

[inaudible] trend, no one will have on our stores yet, and that's the --

Robert C. Loudermilk Jr.

Yeah, we're just trying to figure out --

William "Ken" Butler Jr.

[inaudible] computers are somewhat flat.

Robert C. Loudermilk Jr.

I think some customers that are coming in maybe are saying, "Hey, I'm going to hold off six months just to see what happens with the tablet." That's going to play. But the fact is, they need a computer of some sort, whether it's a laptop or a tablet, just depending on the functionality. That's one thing I think that's exciting out there, is where does that go, and we'll figure that out and move on like we always do.

David Magee – SunTrust Robinson & Humphrey

What is your assumption regarding ASPs in the second half of the year? Are you think they'll be flat on a year-to-year basis?

Gilbert Danielson

Our average customer payment in June was $134.25. It was actually up from $134.14 in March. So it's kind of stabilized in that range. I mean it just moved in pennies during the last three or four quarters.

Robert C. Loudermilk Jr.

Every dime counts.

Gilbert Danielson

But I anticipate that will remain in that range, $134, $135 in the next couple of quarters.

David Magee – SunTrust Robinson & Humphrey

Thank you, Gil. And lastly, just on the non-retail sales, sort of picked up in the quarter. I know that number seems to bounce around a bit. Anything there as far as trend to watch?

William "Ken" Butler Jr.

No, I wouldn't -- I don’t think [inaudible] much of it. I mean as long as the franchisees continue to build revenue, as long as we keep opening franchise stores, I mean it may vary a little bit quarter to quarter, but it is going to go -- it is going to get kind of tracked up, kind of as franchise royalties increase.

David Magee – SunTrust Robinson & Humphrey

Okay. Great. Thanks. Good luck.

Robert C. Loudermilk Jr.

Thanks, Dave.

Operator

Thank you, Mr. Magee. Our next question comes from the line of Chuck Ruff with Insight Investments. You may proceed.

Chuck Ruff – Insight Investments

Hello. You're already sitting on obviously a large cash position. Can you explain a little more why you issued a $125 million bond?

Gilbert Danielson

I mean there are several reasons. One, probably an overriding issue, is the rates are extremely well, and this is seven-year money, and 3.75% through seven years I think, who knows on rates, but it's extremely low now. I think we had an opportunity to get some additional funds.

And also we plan to buy stock back, and we have been buying stock back from time to time, and we will continue to buy stock back, and so we will use some of the money to do that.

And then on top of that, I mean we do have, as we talked before, we're not paying any federal income tax this year. Unless there was change in '12, '13 and '14, we'll have some huge tax payments that will come up. And so we certainly will have the balance sheet and be ready for those tax payments that come about.

Chuck Ruff – Insight Investments

Can you give us an idea of how much cash taxes will exceed book taxes in '12 and '13?

Gilbert Danielson

Well, they'll be substantial. I mean we'll pay about $150 million in cash taxes next year, in '12. So we don't have any projections out there for book taxes, but you can kind of use that, you can calculate it.

Chuck Ruff – Insight Investments

That's just in '12, okay. Great.

And even taking that into account, because you've got so much cash and a little debt, you've got a very, very conservative capital structure. Why do you choose to run the business that way?

Gilbert Danielson

Well, you know, it's not always the cash. Our debt to cap now is very low, I think it would be about 14% or 15% with -- adjusted for the private placement. It's been as high as 45% in the last 15 years, 20 years or so.

What happened the last several years is that we sold our legacy rent-to-rent business, [we called it] furniture, in '08. That brought in a lot of cash. And we hadn't paid any taxes, federal taxes, for several years. So those two events that kind of caused us to be in this situation.

Historically, up to '08, we were a net borrower. We never had a cash on hand. It has changed the last two or three years. But we'll see, we'll look at it. But I just feel that in this time, to have a little interest cost of money and have cash needed is a good strategy.

Chuck Ruff – Insight Investments

Okay, thank you.

Gilbert Danielson

Now there's a challenge. Let me just say that that's the way I've tried to run this business, going to [16] years, very conservative, but I've had to borrow a lot of money all these years to buy inventory, but we've always been a very tight operating company, and that's the way I feel that -- that's why we've come up to be one of the stronger, better rental operators in the United States from the beginning, and that's the way I'm running my life. I have no debt.

It is surprising to me to see the dollars in the bank when I have been borrowing all my life, sometimes all [inaudible]. But I'm very pleased with our position and I do think we should be buying stock and see a very bright, bright future. How we're running this business, how it's coming to customers, and everything, I don’t see a negative out there. So I'm very comfortable in buying the stock back and running the thing very conservatively. Thank you.

Chuck Ruff – Insight Investments

Okay, thanks.

Robert C. Loudermilk Jr.

Thank you.

Operator

Thank you, Mr. Ruff. Our next question comes from the line of John Baugh with Stifel Nicolaus. You may proceed.

John Baugh – Stifel Nicolaus

Thank you. Good afternoon, Charlie, Rob, Ken and Gil. I apologize for any background noise, I'm in an airport. But a couple of quick questions here, could you just address charge-offs, number? And I want to dive in to the cannibalization, look to charge-offs first.

Gilbert Danielson

The write-offs were, for the quarter, gross revenues were 2.7%, so, comparable [inaudible].

John Baugh – Stifel Nicolaus

And then, Ken, I think you mentioned that customer add was impacted by the weather, because I think customer add was slightly below square footage growth. Is that true or was there anything else influencing customer adds?

William "Ken" Butler Jr.

I think we added 32,000 last year in the second quarter, if I'm not mistake, and we had a 34 this year. I think it could have been a lot better, but we just kind of went flat in the month of April and May. But I'm pretty optimistic. And it was really the weather. I mean I can't tell you how many times the things like the tornadoes hit on Thursday, Friday or Saturday, on very critical days to our business. But at the end of the day, it was what really occurred, probably wasn't as big as what was advertised.

John Baugh – Stifel Nicolaus

And so, was the customer add stronger in June than April '09?

William "Ken" Butler Jr.

Yeah, we got stronger in June than we did in April and May.

John Baugh – Stifel Nicolaus

Okay. Great. And then on the cannibalization, I recall asking that question I think the last call, as you went into some detail of how you could track customers, you can see certain customers that used to be Aaron customers that are no longer. So I'm comfortable with that. I'm curious, as you acquire or convert how you're going to measure cannibalization and whether there's any concern about a bunch of stores that you acquire being very close to an Aaron's concept store. Thank you.

William "Ken" Butler Jr.

Yeah, we don't have any answer other than this recent acquisition. But I think it would probably be less than even normal because already have a competitor in the marketplace, so it's not like we're adding a new competitor, we just got one with different flags on it and different colors. But I think I mentioned last time, each HomeSmart, the numbers really haven't changed. Each store we've opened has about 8% of its customer base has an account at the Aaron store, and they're not giving up the Aaron's account, they just I guess need a weekly [paid] account also.

About 45%, close to that number, used to doing business with Aaron. They've chosen not to come back for whatever reason, and some of the stores, and I'm talking about for Aaron's, are very low numbers. They are like store 16, store 20, store 80. So they've been around 15 to 20 years, and these customers -- you know, if you get return and you make a payment, you're embarrassed, and for whatever reason they hadn't come back to Aaron's, and then [inaudible] [gets a shot at them]. And the other whole half of the customer base, we've never seen, didn't know they existed.

So we think the market is large out here. At the end of the day, I think there's a lot of room for a lot of folks. The industry has really consolidated more over the last 15 years. Most markets is us and rental center, and we have seen a huge gap and opening for another competitor.

John Baugh – Stifel Nicolaus

Okay. And then I just want to make sure I heard you right, because I think TV deflation is running down double-digit year-over-year. You said you're up 11% in revenues on a comp basis for TVs, is that right?

William "Ken" Butler Jr.

On leases, number of leases.

John Baugh – Stifel Nicolaus

On the number of leases, okay. You know what it is on a dollar basis?

William "Ken" Butler Jr.

On a unit basis.

John Baugh – Stifel Nicolaus

On a unit basis it was up 11%. Do you know how that converts to dollars --

William "Ken" Butler Jr.

Don't have a dollar basis.

John Baugh – Stifel Nicolaus

Okay. Thank you.

Robert C. Loudermilk Jr.

Thanks, John. Good golfing.

Operator

Thank you, Mr. Baugh. Our next question comes from the line of Laura Champine with Cowen & Company. You may proceed.

Laura Champine – Cowen & Company

Good afternoon, guys, and congratulations on a 5% comp in a tough environment. Really the only impact I can see with that tough environment is it looks like your customer count growth for both Aaron's owned and franchise stores, is growing a percent or two better than the revenues, which would seem to indicate that that ticket is headed slightly lower still. Is there -- am I right at viewing that as a macroeconomic impact? And is there anything else that I'm missing? How do you think the high unemployment rate and inflation and so forth are impacting your business?

William "Ken" Butler Jr.

Well, I mean it's probably not helping a whole lot. I mean it's certainly -- but, you know, everything we do in this business takes a long time, and so, yeah, maybe it's taking a little bit down on customer growth, but still I mean it takes a long time to work its way through the system. But I think the environment is good for us. I mean I just feel that -- it could be better, always could be better, always could do better. But I just feel this environment, where employment is at and where credit is at is pretty good.

Robert C. Loudermilk Jr.

[inaudible] the assessment program that's doing well, because people just flat can't get credit right now. So that's [inaudible] for what they're doing and we think we're going to be the beneficiary with our stores as well. I think our industry is going to benefit across the board. So we're seeing that with RIMCO and HomeSmart and Aaron's, they are all doing much better than they did even a year ago, particularly even the RIMCO and what we're now seeing with HomeSmart.

Gilbert Danielson

We all get, you know, we've looked at states that have high unemployment, and the most recent count, Nevada, 12% unemployment, and we have same-store revenue growth of 7% in Nevada where [inaudible] just about everywhere. So we're still having real good same-store growth in very, very unemployment areas. But certainly we should -- the economic condition will get a little better for everybody.

Laura Champine – Cowen & Company

Well, I appreciate the color. Thank you.

Robert C. Loudermilk Jr.

Thank you, Laura.

Operator

Thank you, Ms. Champine. Our next question comes from the line of John Rowan with Sidoti & Company. You may proceed.

John Rowan – Sidoti & Company

Good afternoon. Gil, you just said that you were positive in just about every area. Where are you negative?

Gilbert Danielson

In revenues.

John Rowan – Sidoti & Company

Yes.

Gilbert Danielson

I'm just looking. There's a couple of places that we reported negative, very, very slightly in New Mexico, which has always been a pretty good state for us, and very, very slightly in the [inaudible] those are the two negative states.

John Rowan – Sidoti & Company

Okay. And then obviously, you guys were up slightly on the average customer ticket size. Is that -- how long has that been trending down for? Because it seems like it's a reversal of a prior trend.

Gilbert Danielson

It's been going on about three or four quarters. I mean you've seen our history in our IR presentation where it really nosedived for about three years. And I think the last year it has pretty well flattened out.

John Rowan – Sidoti & Company

Okay. And then just one last question, the whole lawsuit appeal. I mean, is this something that's going to work itself out over months or years?

Robert C. Loudermilk Jr.

Years.

Gilbert Danielson

Yeah, I would say it is years. I mean it's going to be a long process, I would suspect. So I think we characterize it as years, hopefully not too many years, but years rather than months.

John Rowan – Sidoti & Company

Okay. All right. Thank you.

Operator

Thank you, Mr. Rowan. There are currently no additional questions waiting from the phone lines.

Gilbert Danielson

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

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