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Aaron’s, Inc. (NYSE:AAN)

F3Q11 Earnings Call

October 24, 2011 5:00 pm ET

Executives

Gilbert L. Danielson – Chief Financial Officer, Executive Vice President & Director

R. Charles Loudermilk, Sr. – Chairman of the Board

Robert C. Loudermilk, Jr. – President, Chief Executive Officer & Director

William K. Butler, Jr. – Chief Operating Officer & Director

Analysts

David Magee – SunTrust Robinson Humphrey

Analyst for Matthew McCall – BB&T Capital Markets

Analyst for Bud Bugatch – Raymond James

Analyst for Bradley Thomas – KeyBanc Capital Markets

John A. Baugh – Stifel Nicolaus

Operator

Welcome to the third quarterly earnings conference call. (Operator Instructions). I would like to introduce your host, Gil Danielson, CFO of Aaron’s, Inc. You may proceed Mr. Danielson.

Gilbert L. Danielson

Thank you for joining us this afternoon. The operator is going to read our standard Safe Harbor statement before we get started and then we’ll have a few comments, and then after that we’ll have a few questions and answers.

Operator

The company’s earnings release issued today and related Form 8K are available on our website www.AaronsInc.com in the investor’s relation section. This webcast will be archived for replay there as well. With us today is Charlie Loudermilk, Chairman; Robert 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 conditions, competition, pricing, customer demand, litigation, and other issues that could cause actual results to differ materially from those such statements including the risks and uncertainties discussed under risk factors in the company’s 2010 annual report on Form 10K, including, without limitation, in the company’s projected revenues, earnings, and store openings, and store acquisitions, and dispositions activity for the future period.

I would now like to pass the conference back over to Mr. Danielson.

Gilbert L. Danielson

Rob, Ken, and Charlie will have a few comments and then I’ll add some further information.

Robert C. Loudermilk, Jr.

I appreciate everybody joining the call. We had our release earlier and we once again, recorded strong revenue growth this quarter with same store revenues up 5.3% and customer counts up 6.3% over the third quarter of this last year. In addition, although not revenues of Aaron’s, Inc., our franchise stores experienced a 3.1% growth in same store revenues and 3.2% increase in same store customer growth. The total of our corporate and franchise customers were up 9.8% over the same period a year ago.

As noted in the earnings release, even those these gains are outstanding in the current economic conditions, we believe our customers continue to feel the strain of high unemployment and overall economic pressures. Our recession resilient business model has done well through many economic cycles as our large customer base needs a non-credit way to obtain basic home furnishings, and even more so in the current tight credit environment. We have again proved that with proper execution our business can do very well in difficult economic conditions.

Our pre-tax margins were negatively affected this quarter due to the higher depreciation expense of lease merchandise, the cost of rapidly converting over 40 third-party stores acquired and converting the HOMESMART Store concept along with some other increased operating costs due to some positive operational changes we are implementing for future growth and development of the company.

We are quite excited about the experimental HOMESMART weekly pay concept and are consciously ramping up the number of stores. Our current plan is to have approximately 65 HOMESMART stores open by year end and slow down any further openings until we can fully evaluate the store’s financial performance and returns.

Excluding a law suit related charge discussed earlier in the second quarter, net earnings for the nine months of 2011 would have been $105.8 million and earnings per share, assuming dilution, excluding the law suit related charges would have been $1.32, a 23% increase over the nine months of last year. Also note, during the third quarter the company received $125 million from an issuance of a senior unsecured note in a private placement. These funds have and will be used for general corporate purposes and for the repurchase of company stock. We repurchased a substantial number of shares of stock during the quarter.

On October 14th the company closed on its previously announced $10 billion British pound investment in Perfect Home Holdings Limited a UK rent-to-own company. We feel this investment of a 11.5% ownership in the company will give us good exposure to the UK market and can be a springboard for possible European and international expansion. We are quite impressed with the Perfect Home management team and owners. We feel that our partnership will be mutually beneficial in the years to come.

Our Woodhaven Manufacturing plants had a slight decrease in production in dollars of 2% in the quarter but had an increase in production in dollars of 17% for the year-to-date, a reflection of the increasing demand by the Aaron’s stores for our furniture and bedding products. Woodhaven is on track to have a record year in shipments. Thanks for the support of the company and now I’ll turn the call over to Ken for a couple of comments.

William K. Butler, Jr.

This past quarter has been one of the most active quarters that I recall in terms of buying and selling, closing, merging, and moving stores as well as our back office support system. First of all, we moved our Atlantic fulfillment center to a better physical facility and geographic location and this enabled us to move our administrative services into the same location. They, and our last Office Liquidation office store were in the location at I85 and 285 better known as Spaghetti Junction here in Atlanta that many of you may have seen over the last 40 years.

We closed down that facility, moved the last remaining Office Liquidation location into the old fulfillment center in Duluth and when this happened we were able to move the administrative center out of that facility on Northeast into the new fulfillment center. In an even bigger move, we combined our Winston-Salem and Columbia South Carolina fulfillment centers into one location that is operating in Charlotte North Carolina. Additionally, we combined several departments in the home office to create our new associate relations department. All these moves were designed and executed so that we can do a better and more efficient job of supporting our associates in the store.

Right after the end of the, as Rob alluded too, we made an 11.5% investment in the Perfect Home Stores in the UK and we look to exchange ideas and business practices to help both operations in the future, and it’s going to give us an opportunity to own, operate, and franchise stores in the European landscape.

With our core Aaron’s model we opened 24 new locations, closed approximately 20 underperforming stores, purchased the accounts from various competitors to enhance the customer base, revenue, and profitability of 27 existing locations. Additionally, there were four franchise stores sold from franchisee to franchisee. We also opened up one RIMCO stores and we’re seeing very positive results coming in now in that division.

Our new HOMESMART concept is picking up momentum as we opened four new stores, and acquired and successfully converted 37 new locations, bringing out total to 56 stores opened at the end of the quarter. These acquisitions were opportunistic driven and they weren’t projected to be in our store count, and we already have another group of new stores in the queue to be opened in the fourth quarter which should bring us to somewhere in the neighborhood of 70 stores by year end.

We continue to closely monitor the results of these stores as well as the results of the nearest Aaron’s locations. I made it a point to visit the vast majority of these stores and spent time with our HOMESMART and Aaron’s associates at ground level and they see no crossover cannibalization. I get a report daily to match up the results as well and see no sign of it there as well. Although it is still early to be conclusive in the model, one thing we know for sure is that business is brisk in both stores, the Aaron’s and the HOMESMART.

Because of this rapid growth we’re going to slowdown the opening of the new stores in HOMESMART for a short time as we continue to develop the model, work on the infrastructure as evidenced by our recent move of appointing long time associates Mark Rudnick to VP of Marketing over HOMESMART and RIMCO and as soon as this process is complete I see a major acceleration of growth to the brand through company and franchise acquisitions.

Our core overall Aaron’s business remains solid as evidence, the revenues continue to decline to 5.3% on the same store basis for the quarter. At the end of the quarter we had 961,000 corporate active customers and 520,000 franchise customers which represents an increase of 9.8%. In summary, we’re making strategic moves to not only help our operations in the short term but also position us to grow and prosper in the years to come.

R. Charles Loudermilk, Sr.

I just want to thank our 11,000 employees for their hard work for the last quarter and the last year. We’re on track to continue to grow big time. I see it, from my desk, I see a lot of future growth and I’m very enthused over the HOMESMART concept. Everything I see about that seems to be good and I really don’t see any negatives right today and I guess that’s my job, to see the positives and negatives. I’m very enthusiastic about where we’re going.

Gilbert L. Danielson

I’ll give the highlights of the third quarter and the nine month period. Company revenues increased 7% for the quarter to $485.2 million and 8% for the nine months to $1.5 billion in revenues. In addition, our franchisees collectively increased their revenues to $223.9 million for the quarter, a 10% increase over the same period last year and their revenues were up 9% for the nine months to just under $700 million. Revenues of franchisees are not however, revenues of Aaron’s, Inc.

Same store revenue was good in the third quarter. For company operated stores it was up 5.3% and it was up 3.8% for stores open over two years old. For stores that were open over five years old at the end of the third quarter, it was up 1.6% over the same period a year ago. The same store revenue growth for the franchise stores was 3.1%. Once again, we’re seeing in company stores same store revenues in the third quarter were positive in all parts of the country.

As Ken mentioned, we had 961,000 company operated store customers at the end of September and 520,000 million franchise stores an increase of 9.8%. We now just have a shade under 1.5 million customers in the Aaron’s system. I suspect that we will go above 1.5 million at the end of the next quarter. As we mentioned, the customer count on a same store basis for company operated stores was up 6.3% and for franchise stores it was up 3.2% for the third quarter compared to the same quarter of last year. Again, the revenues and customers of franchisees are not the revenues of the company.

Net earnings for the quarter were up 7% to $28 million versus $26.2 million in the same period last year. And net earnings for the nine months were $83.2 million versus $87.6 million last year. Diluted earnings per share for the quarter were $0.36 compared to $0.32 last year and for the nine months the earnings per share were $1.04 for 2011 and $1.70 for 2010. As you’ll recall, in the second quarter we had a charge a law suit of $36.5 million which results from a judgment we had in the second quarter. Excluding that charge, net earnings for the nine months would have been $105.8 million and diluted earnings per share $1.32. That’d be a 23% increase over the nine months of last year.

The dollar amount of our low margin non-retail sales which are the sales of new product to our franchisees were up 2% for the quarter. However, the actual number of unit ships from our fulfillment center increased 12%. We had a lot of new store movement as we talked about in the press release, a lot opening HOMESMART stores, and closing some stores, and buying some accounts, so it was a real active quarter for us from that regard.

To talk about new store drag, new store drag for the Aaron’s store for the quarter was approximately $0.03 per diluted share this year in this quarter and it was $0.04 last year in 2010. The new store drag on the HOMESMART stores which we rapidly ramped up this quarter was approximately $0.03 per diluted share in the third quarter of this year. We didn’t have any HOMESMART stores open at the same period last year.

Margins were affected in the third quarter as a result of an increase in the lower margin early payouts of agreements. Our early payouts went up substantially in the third quarter of this year versus the same period of last year. But it’s a lower margin transaction so you see the increase depreciation expense of leased merchandise in the quarter and that’s a reflection of that. That’s primarily the reason. We did have some product mix too which drills the depreciations up a little bit.

For the three and nine months ended September 30th this year, the company has awarded area development agreements to open [seven to 51] additional franchise stores and at the end of September 2011 there were 247 franchise stores awarded that we expect will be opened over the next several years. At September 30th of this year, Aaron’s Sales & Lease Ownership division consisted of 1,135 company operated stores, 693 franchise stores, 13 company operated RIMCO stores, 56 HOMESMART stores, and six franchise RIMCO stores. We do also have the one Aaron’s Office Furniture store open so our total store count at the end of September was 1,904 stores.

We did have quite a bit of cash on hand again at the end of September at $219 million of cash on hand. And as we previously mentioned here, we did close on our private placement in July that brought in $125 million of cash for the company on long term debt. These funds that we brought in, in July, will be used for general corporate purposes and has been and will be used from time-to-time for the repurchase of company stock. We did mention we did make the investment in Perfect Home in October as we talked about.

Our guidance for the fourth quarter of this year is to expect revenues of approximately $520 million and diluted earnings per share in the range of $0.41 to $0.45 per share. Our revenue guidance for 2011 is to reach approximately a little bit more than $2 billion in revenues and earnings guidance in the range of $1.73 to $1.77. This is a non-GAAP number and it’s updated a little bit from previous guidance. The fiscal year guidance excludes the second quarter $0.28 dilution per share charge from the law suit.

As we historically have done, we have made an initial earnings guidance for the following year, for 2012, and it’s to achieve earnings per share in the range of $1.88 to $2.04 per share. We now anticipate our new store growth of between 6% and 8% for 2011 and expect overall new store growth in 2012 to be in the range of 5% to 9% which has been our goal in guidance for the last several years on new store growth.

We did buy some shares back during the quarter. During the third quarter we acquired 3.6 million shares of our common stock for about $89.7 million. And during the first nine months of this year we have acquired just over five million shares of the company stock at a cost of about $127 million. We currently have board authorization to purchase an additional almost 5.3 million shares. We generated around $94 million in cash flow from operations in the third quarter and $296 million for the first nine months of 2011.

Just looking at the store level gross revenue, write offs of gross revenues, they were 3.3% in the third quarter of 2011. A little bit higher, which is typical in the summer months, than a year ago in the third quarter the percentage write off as a percentage of gross revenues were 3.4% so slightly better than a year ago.

Those are the prepared comments. We’ll certainly take any questions that there may be.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Magee – SunTrust Robinson Humphrey.

David Magee – SunTrust Robinson Humphrey

Just a couple of questions, one I didn’t quite catch what may have driven the early payoff being higher this year versus last. Was there something that drove that?

Gilbert L. Danielson

Well, I think one of the reasons is about a year ago we instituted a 120 days same as cash early payout option and previously it was a 90 day same as cash. You know, I guess people had cash that came in. What happens is you come in and you enter into a lease agreement and then you have up to 120 days if you so desire to basically pay the retail price of the product and catch up on your lease payments and pay the retail price of the product. A lot of people took advantage of it in the quarter so I guess it was certainly a successful program from that side. We got a lot of cash in the door from it, but it is a discounted transaction so it hurts your margins.

David Magee – SunTrust Robinson Humphrey

Is this a program you might continue moving forward?

Gilbert L. Danielson

Obviously it was higher this quarter. I would anticipate it will continue somewhat moving forward. So, if you look at depreciation expense in the fourth quarter, it will probably trend a little bit higher than it has been historically just due to that phenomena; we’ll see.

David Magee – SunTrust Robinson Humphrey

Just secondly, when you look at the HOMESMART stores and they started off well here, what are you looking for sort of on the back end to give you confirmation that this is a concept to grow going forward?

Robert C. Loudermilk, Jr.

Well, I think there will be a few things. One, we don’t want to hurt the main thing. The main thing is Aaron’s so we hope we can open up a model where we can keep the Aaron’s stores churning and feel like the margin’s big enough we can create another profitable model. That being said, if that can happen, how many more of those stores could we have so that’s the big thing. We feel confident. We know how to run the business, it’s the rent and collect business. The overheads of the store are less than an Aaron’s and the prices are a little bit higher so, you know, theoretically at a barebones minimum we ought to obtain the profitability of an Aaron’s stores. So I would think we’d be looking at that as a model.

Gilbert L. Danielson

Yes, I think so. Obviously key, that we’ve talked about before, we certainly don’t want to cannibalize our existing stores or have any negative effect on the Aaron’s model so we’re watching that carefully.

Operator

Your next question comes from Analyst for Matthew McCall – BB&T Capital Markets.

Analyst for Matthew McCall – BB&T Capital Markets

In the release you guys talked a little bit about how that your customers are struggling, which obviously makes sense given the economic environment, but I don’t think you’ve used language that explicit before. So I was just curious if there are any trends you’re seeing that give you a little bit of concern about your customer base overall?

Robert C. Loudermilk, Jr.

No, I don’t think we do. We just hear the same things as you hear in the market and reading the papers. Our customers do become unemployed, they have issues and you know, they’re in a beautiful deal they can turn the product back in with us and have lifetime reinstatement. We feel those struggles and we feel those needs out in the store. On the positive side, I don’t think at any time in our history has our traffic never been better and what we’ve got to do is do a better job of capturing this traffic and converting it into new customers.

I think we’re doing some of that. I think that’s what’s driving some of our same store revenues but bottom line, if we didn’t have that new traffic we would be struggling. I mean, you’ve got high unemployment rates, and customers become unemployed and they can’t make their payments.

Analyst for Matthew McCall – BB&T Capital Markets

How did the average ticket trend during the quarter?

Gilbert L. Danielson

It went down a little bit, let me look it up here. The average ticket was $132 in the quarter. It was $134 in the June quarter. You know historically though, and it was down a little bit, I did look at last year’s June and September average ticket and it went down about a buck. It was higher in June. So I think some of it might be the reflection of the summer quarter, but it is down a bit so we’ll have to watch that and see how that trends. You recall probably the last three of four quarters it’s been pretty well stabilized where it’s been around that $132 to $134 level.

Analyst for Matthew McCall – BB&T Capital Markets

In your guidance and maybe your outlook on this, as far as an operating leverage stand point I know the early payouts hurt a little bit and then just with the new stores, maybe you could talk a little bit how you view operating leverage? I mean, maybe it will be depressed for the next couple of quarters, but with incremental margin down to I think, about 10% this quarter, where do you see that trending over the next few quarters?

Gilbert L. Danielson

We have guidance for the fourth quarter and the fiscal year that’s in our press release. I think same store revenues, they were up 5.3% for the quarter. I mean we’ve been saying that the mid single digit same store revenues is probably what will happen, between 4% and 6% so I feel that will be the case in the next quarter or two. So I think that will be it. As far as overall revenues, increases from lease revenues, I would think the trends in the fourth quarter will be pretty similar in the third quarter from a percentage increase from year-to-year. So, how do we get leverage? Well, we just again leverage off operating expenses as best we can and then we’ll probably be nipped a little bit on increased depreciation expense but if we lever off the operating expense historically the operating expense as a percentage of revenue is always your lowest, or second lowest in the fourth quarter compared to other quarters just because revenues are up.

Operator

Your next question comes from Analyst for Bud Bugatch – Raymond James.

Analyst for Bud Bugatch – Raymond James

Ken, you talked about the fact that there weren’t too many material changes so to get the customer count back up with all the early payouts you had to be reupping probably an increased number of customers. Am I looking at that the right way, and if so, are you having to entice these customers any more heavily now?

William K. Butler, Jr.

Yes, I think we have to bring more sizzle to the table and I think we’ve been successful in doing that. We kind of, in our camp, view the customer becoming the owner of the product as a celebration. We think we’re pleasing customers and making them happy with the program and if they’re happy they’re going to tell other people and they’re going to re lease something else. Our past history has proven that out.

Analyst for Bud Bugatch – Raymond James

Gil, on the new store drag for the HOMESMART stores, obviously the number per store will be a little bit lower than the regular monthly box I guess based on the size and the overhead, but these were already stores in operation. Should we think about it any differently for the organic stores that you’re going to open up from scratch?

Gilbert L. Danielson

Well yes, the results in the third quarter of HOMESMART included a lot of things including we bought a couple of chains and we went through and converted most of their stores to HOMESMART stores. So there’s lots of activity structuring the division, etc. So I mean we’re just into it. Again, we’re very encouraged with the concept but we’re going to have to wait a quarter or two to see how it really ramps up and that’s why we’re going to slow down the growth as Ken mentioned. We get these stores opened and we’re going to watch the ramp up and see how they compare with our existing Aaron’s stores, the costs that are involved and the returns before we move dramatically ahead.

So to answer your question, it’s early, we made a huge leap in this quarter, the third quarter. We got a ton of stores open. We now have a lot of critical mass. We’ve still got some more stores we’re going to open here before the end of December. Once we get those opened, the next couple of quarters, I think we’ll get a better handle on how they’re going to perform compared to Aaron’s stores and how they’ll perform to other weekly stores out there.

Analyst for Bud Bugatch – Raymond James

The last one for me, on the UK investment, I know it’s really early days obviously but our understanding of the market over there, of the rent-to-own guys, is it’s a little bit more aspirational market and the stores are pretty markedly more productive on a customers’ per box basis. What have you guys learned in the maybe due diligence period that you think you might be able to sort of import over here to try and drive the box productivity of the customers?

Robert C. Loudermilk, Jr.

Well, realistic trip over there it certainly is a different approach to the same customer. They do breakout a lot of the charges here in the states that we bundle together a little more transparent which we like frankly. We think it’s pretty interesting how they do it. You learn frankly, that the customers there are the same as the customers here, a lot of them. The UK is very small so there’s a limited number of stores, a couple of hundred, I guess you could have there but there’s really a platform for potential other expansion throughout other countries in Europe.

But, it is a different model and it’s very interesting how it works and how they charge for the different options, the put back and the insurance, and etc. So I think it’s really too early to tell. I can tell you that they’re having some pretty good quarters and months. They plan to open 10 more stores, I think, in the next 12 months up in Scotland so they’re marching on. There’s a chain over there called BrightHouse. What do they have over there Ken, 230 stores?

William K. Butler, Jr.

Yeah.

Robert C. Loudermilk, Jr.

They do very well. They have some very good numbers come out so we’re very enthused about it. I think there’s going to be a lot of, as Ken said, a lot of idea sharing. You know, you kind of get caught up in your own box here and you kind of drink your own kool-aide. It’s been a really good experience. We’ve all been over there and looked at it and we plan to make a number of trips in the next year to really learn. If nothing else, it will be a great learning experience for us to see how they operate and I think we’ll bring back a lot of ideas.

Operator

Your next question comes from Analyst for Bradley Thomas – KeyBanc Capital Markets.

Analyst for Bradley Thomas – KeyBanc Capital Markets

My first question is if you can into a little more detail, I guess kind of some higher level background into the Perfect Home, is this weekly, or monthly? And kind of what is the competitive landscape to here where it’s a lot of mom and pop shops, or are there some dominate players like you and your biggest competitor? Can you guys just go into that a little bit?

William K. Butler, Jr.

I don’t think there’s a lot of small mom and pops. The first breakthrough company over there was BrightHouse. But you know, the UK’s been renting televisions for a long, long period of times. It goes back to the days they had a company called Radio Rentals, they became I think another – whatever the name of the second one. So the consumer over there understands the transaction and they never had the right to own it, and because of the laws you really can’t do a rent-to-own transaction in the UK. But, they found a way to make it a retail transaction with an acceptable interest rate along with the right to return and a warranty built in so the customer gets the same thing.

We think the potential is enormous. One thing about the customer base in the UK is it’s all – pretty much the entire customer base is on some time of government subsidy. Perfect Home knows all these various subsidies and they put most of their customers on automatic withdrawal out of their account to pay their weekly payments. It’s a weekly proposition only because the government subsidies come out every single week.

One thing interesting about Perfect Home is they are kind of like the Aaron’s of the UK. They’re much smaller than BrightHouse. BrightHouse has done a tremendous job but their stores are larger, larger selection and lower prices and that’s kind of the model we’ve done here in the states and that’s kind of why we felt the two companies align themselves very well.

Analyst for Bradley Thomas – KeyBanc Capital Markets

You had mentioned that the HOMESMART stores - I understand the higher revenue. We were thinking that maybe the overhead might be similar to maybe even a little bit more figuring more returns, more calling with the weekly. Can you kind of walk through how we get that lower overhead? Is it just the store size?

William K. Butler, Jr.

Well, the store size is one thing and you know your prices drop your margins too, so our prices are 20% to 25% higher than they are in an Aaron’s store. The main issue is the overhead regarding the building itself. The rest of it, you’re right, we think there might be a little bit more activity, there’s probably more churn and burn, but we’ll have to let all that play out. We’re doing some things to hopefully be able to model and have better customer retention than a typical weekly store but we’ll have to let time tell.

Robert C. Loudermilk, Jr.

I think that’s the key, is the keep rate, as we call it in the industry, of the customer is about 50% here in Aaron’s and the other weekly rent-to-own shops operate anywhere between 18% to 25%. So the thought is, if you get HOMESMART with a little bit better pricing, newer products, supported by distribution and fulfillment centers, your keep rate will increase which will then, as Ken said, be less churn and burn and therefore lower prices to the customer and then gaining market share. I’ve always said lower price drives market share, whatever industry you’re in. So if we can keep the weekly price lower than the other weekly competitors we should be able to drive market share there.

We have just seen the fallout of the Aaron’s customer as we churn, I guess some Aaron’s customers they’re going somewhere and they’ve got to get a bed, refrigerator, or TV, why not to a concept that we can control and give them a little bit better proposition than I think is out there today in the marketplace. So that’s really the concept but to keep the lower prices, get the keep rate up, that’s the experimentation that we’ll do. It looks good. I think we’re probably on to something here.

Operator

Your next question comes from John A. Baugh – Stifel Nicolaus.

John A. Baugh – Stifel Nicolaus

My question was you mentioned mix, I think, affecting depreciation a little bit in the quarter. Can you tell us what you saw?

Gilbert L. Danielson

I think about two thirds of the change in depreciation was the buyouts. The other third was the mix. We did more computers this quarter than we have in previous quarters as to mix. Computers are just about our least profitable item that we have that we lease so that was primarily the major switch between mix, between computers and TVs.

John A. Baugh – Stifel Nicolaus

Then in the $0.03 drag comment on HOMESMART, obviously there’s a ton of stuff going on there, you’re adding staff, you made an acquisition, you opened new stores. But you’re now at 50 odd stores, you’ll be at 70 odd, I’m kind of wondering what the burn rate might be on that drag say, I don’t know, in the March quarter or something when you’ve more or less opened the 70 you’re going to open and you’re going to let it sit for a little while?

Gilbert L. Danielson

I think for the fourth quarter, again we’ve got a few more stores we’re opening here, we will probably have a new store drag similar in the fourth quarter that we had in the third quarter for the HOMESMART stores. But then you get into the first quarter of the year, which as you know obviously historically, the best quarter of the year with the most revenue. I would suspect then that that new store drag will start declining at that stage. Then we’ll get through the first quarter, we’ll see how it performs with the good months, then we get into April and I think we’ll have a better handle on the numbers.

John A. Baugh – Stifel Nicolaus

I know there’s not enough stores to influence it Gil, but they should have a lower depreciation rate than your monthly stores, correct?

Gilbert L. Danielson

That’s correct. The volume in the HOMESMART this quarter was like $5.8 million or something like that, but they don’t have any revenues at the moment. But as they get more revenues, yes the depreciation rate will be lower but I don’t think you’ll see anything dramatic as that until next year.

John A. Baugh – Stifel Nicolaus

Then just clarity, the $41.5 million of commitments and contingencies that’s on the balance sheet, what is that again?

Gilbert L. Danielson

That’s that $36.5 million judgment. We have $5 million insurance on the judgment so that’s just how it’s presented on the balance sheet. The $41.5 million and then we have $5 million of insurance as a receivable so then that’s the net $36.5 million.

Operator

There are currently no additional questions.

Gilbert L. Danielson

Thank you very much for joining us today. We appreciate it very much.

Operator

Ladies and gentlemen thank you for attending the Aaron’s, Inc. third quarterly conference call. This will now conclude the conference. Enjoy the rest of your day.

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