Aaron's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Feb.10.12 | About: Aaron's Inc. (AAN)

Aaron’s, Inc. (NYSE:AAN)

Q4 2011 Earnings Conference Call

February 10, 2012 10:00 AM ET

Executives

Gil Danielson – Executive Vice President, Chief Financial Officer

Lee Wilder – Investor Relations

Ron Allen – Interim President and Chief Executive Officer

Ken Butler – Chief Operating Officer

Charlie Loudermilk – Chairman of the Board

Analysts

John Rowan – Sidoti & Company

Brad Thomas – KeyBanc Capital Markets

David Magee – SunTrust Robinson Humphrey

Matt McCall – BB&T Capital Markets

TJ McConville – Raymond James

Rohan Juneja – Seawolf Capital

Laura Champine – Cowen & Co.

John Baugh – Stifel Nicolaus

Arvind Bhatia – Stern Agee & Leach, Inc.

Operator

Good morning, and welcome to the Aaron’s Inc. fourth quarter earnings conference call. All lines will be muted during the presentation process of the call with the opportunity for questions and answers at the end. At this time, I would like to introduce your host, Gil Danielson with Aaron’s, Inc. Thank you, and enjoy your conference. You may proceed, Mr. Danielson.

Gil Danielson

Okay. Thank you. Thank you, everybody, for joining us this morning. As our standard procedure, I’m going to turn it over to Lee Wilder to read our Safe Harbor statement and then we’ll have some opening comments, and then after the comments were done, we’ll certainly take some questions and answers. So, Lee?

Lee Wilder

Good morning. My name is Lee Wilder and I assist in Investor Relations for Aaron’s. The company’s earnings release issued last night 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; Ron Allen, 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 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 activities for future periods.

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

Ron Allen

Thank you, Lee. And good morning, ladies and gentlemen. Thank you for joining us. It’s certainly a pleasure for me to be a part of my first Aaron’s earning call as a member of the management team. While I’ve been a board member since 1997, I’m enjoying being hands-on at learning about the business from the inside and what a great company Charlie Loudermilk has built.

We had a very dedicated, knowledgeable and experienced management team. And as I learn more about this sales and lease ownership business, I have a much clear understanding of how Aaron’s has been so successful and has consistently outperformed our competitors over the years. Also, I’m very encouraged about the future growth and earnings opportunities that lay ahead for us.

In addition to getting around to visit our stores and operations over the last three months, much of my focus has been working with the management team on developing a plan to allow us to grow in a more efficient, better structured and focused way, which would result in even better financial performance and great returns to our shareholders. With those comments, now I’d like to turn the meeting over to Ken. And after Charlie speaks, Gil Danielson will go into more detail and then we’ll be happy to answer your questions. Ken?

Ken Butler

Yes. Well, thanks, Ron. I’d like to first of all share our core business results. We continue to prove on our outstanding model as we netted a net gain of 84,452 new company and franchise customers in the fourth quarter of the year. And for the year, we gained a net of 151,359 new customers. This record result represents a total increase of 11% over last year. Consequently, revenues in company-operated stores increased 8% for the year, allowing us to exceed our internal goal of $2 billion in revenue for 2011.

Our franchise revenue goal of $1 billion fell a little bit short primarily as a result of lower same-store revenues than in previous years. Many of our franchisees have attempted to raise their average income per customer, we call that AIC, over the last couple of years by shortening the term of their agreements and raising the lease rate to the consumer. This is proven to be flawed as their delivery activity went down as the customers saw prices beyond their budget.

As you can recall, our company-operated stores began packaging to a longer term 24-month agreements a couple of years ago in order that we would have pricing that could fit our customers’ budgets. As a result, our company-operated stores have continued to show positive same-store comps even though it’s economically challenged environment. As a result, our franchisees then began following this lead at the beginning of the fourth quarter and responded with their greatest increase in customer gain in their history.

Opportunity for improvement lies in increasing our AIC in the future. And we are launching several initiatives in 2012 that should bring about favorable results. We are very pleased with the customer acceptance of our new HomeSmart brand. We still see no significant cannibalization of the brand with the Aaron’s store that competes in the market.

During the quarter, we continued to assemble our HomeSmart team with a promotion of Marco Scalise to VP of operations as well as the appointment of Mark Rudnick to VP of Marketing. Additionally, we have a veteran group of proven regional managers and general managers running the stores.

At the beginning of 2011, we had planned on opening about 25 new HomeSmart stores. But as a result of three opportunistic acquisitions, we have ended up with the year with 71 HomeSmart stores. As a result, our startup costs and advertising expenses exceeded our original forecast. Our plan now is to get the model profitable as a group and look at this as a great expansion opportunity for 2013 and beyond. We are definitely proud of our past performance in all of our work and dedication of our fellow associates and franchisees, but we’re even more excited about our future.

Now I’m going to turn the call over to Charlie, our Chairman and Founder.

Charlie Loudermilk

Thank you, Ken. Thank you, Ken. I understand that Bloomberg came in with an article. I had lunch with two of the Bloomberg guys yesterday and some questions were asked and I answered them to the best of my knowledge, as everybody knows, I’m very blunt and very honest. And the question really was, would you sell the company – would you be for selling the company? I don’t control the company now. And the answer is, if – as I understand the law, if a sizable offer comes in, it’s my obligation to take it to the Board.

And the next question was, would I sell my stock? And I said that since my son is out of the business and I may be for, I would look at the company differently as to the stock selling or maintaining the stock. So anyway, I wanted the opportunity to explain what Bloomberg says. But anyway, the future of the company is very, very bright. It always has been. It depends on, of course, management.

We can open many, many stores if we have the management capability to do it, and that’s been the fact since I opened the first store with one employee back in Atlanta, Georgia 57 years ago. It’s always – the market has always been there. It is now. It’s just a matter of us executing. It’s a very good business. It’s a very interesting business. We have some core people who have been here for many years.

And at one time we didn’t have the money to open the stores. Now it’s a matter of us continuing the way we’ve been running the store – business. I’ve been trying to run it like Wal-Mart. We have a distribution center within like 200 miles of every store. That’s been there – got a little cold. But anyway, other things that we are doing that our competitors have not done, we’re the only company with all these about 19 different distribution centers and so forth. The net-net is that although we haven’t grown in recently like we – I would like, we still if we’ve grown and we’re still very profitable, and if we get to continue on with opening stores (inaudible) business extremely well.

I guess that’s it. I’m here for any questions, but that’s it. Turn it over to Gil.

Gil Danielson

Yes. I’ll kind of highlight the third quarter and the 12-month on the financial numbers and then from there we’ll take some questions. Just the highlights for the quarter and the year. The company revenues increased 8% for the quarter to $523.5 million and also 8% to $2.024 billion. So on the company’s milestone for the company, we reached over $2 billion revenue mark in 2011.

In addition, our franchisees collectively increased their revenues for the quarter to $225.6 million and $908.9 million for the year. So if we add the revenues of the franchisees along the revenues of the company, we ended up by about $2.9 billion in revenue that’s been recorded at the Aaron’s stores of the company and the franchised stores combined.

Same-store revenue growth in the fourth quarter for the company-operated stores were 3.7% and it was 2.1% for stores over two years old. For stores over five years old, it was positive. It was up 0.5%. The company had just a little over 1 million company-operated store customers at the end of December, and the franchisees had just a little over 500,000 customers. So, for the year, total customers, both company and franchisee customers were up almost 11% for the year as compared to the year-end 2010.

The customer count on a same-store basis for the company-operated stores was up 6.4%, and for the franchised stores, it was up just a little over 4% of same-store customer growth. Net earnings for the quarter was $30.5 million versus $30.8 million in 2010 – for the fourth quarter 2010, and the net earnings for the year were $113.8 million versus $118.4 million last year.

And as we’ve reported in the earnings release last night, our dilute earnings per share for the quarter was $0.40 compared to $0.38 last year. And for the year, the diluted earnings per share were $1.43 in 2011 and $1.44 in 2010. We did in the quarter – we did have the $0.03 diluted earnings per share of charge in the third quarter relating to some acceleration of some restricted stock to stock options.

And if you add that back, it’s a non-GAAP number, which we’ve reconciled in the earnings release. If we add that $0.03 back, the earnings for the quarter would have been at $0.43 per diluted share and $1.46 for the year. And additionally, as you all have known now, for the last six months, we recorded in the second quarter a large $36 million – $36.5 million charge to earnings on the lawsuit that we had in the second quarter. Again, if you add that number back to our earnings for the year, we’ll get $138.6 million, up 17% over last year and EPS would be at $1.75, a 22% increase over the 2010 year.

The franchise revenues for the quarter were up 2% compared to the quarter last year. And the company’s other revenues in the fourth quarter included store sales in 2011 and 2010 of roughly the same amount of just over $300,000. For the fourth quarter of 2010, we opened 16 new company-operated stores, 18 new franchised stores, eight HomeSmart stores, and three RIMCO stores. And for the year, the company opened 51 new company-operated stores, 55 new franchised stores, 24 HomeSmart stores, and six RIMCO stores.

And in addition during the year and also we did some in the quarter, we’ve acquired 44 stores from third-party operators and converted them to HomeSmart stores. We also converted one Aaron’s store to a HomeSmart store. The total net store count for the company at the end of 2011 compared to 2010, we are up 7% in total store count for the year.

The new store drag for the sale of stores at Aaron’s, the basic Aaron’s stores we opened during the year fourth quarter, it was $0.04 in the quarter, but basically the same amount as it was in 2010. The new store drag on the HomeSmart stores, as we mentioned in the earnings release, was approximately $0.03 per diluted share in the quarter and $0.06 for the year.

Through the three and 12 months ended December 31, we have awarded area development agreements to open another 17 and 68 additional franchised stores. At the end of December, there were 230 franchised stores that were in our pipeline that are expected to open over the next several years. At the end of December 2011, we had 1,144 company-operated Aaron’s stores, 707 franchised stores, 16 RIMCO stores, 71 HomeSmart stores opened, and six franchised RIMCO stores and we also had one Aaron’s Office Furniture store. So the total number of stores opened at the end of December was 1,945.

Our guidance for the first quarter, as we stated in the earnings release, is expect revenues of approximately $570 million and diluted earnings per share in the range of $0.58 to $0.62 per share; expect the company revenues for 2012 to be approximately $2.15 billion, and guidance for earnings per share, we didn’t change it from previous guidance, is expect diluted EPS in the range of $1.88 to $2.04 in 2012.

We continue to expect overall new store growth in ’12 in the range of 5% to 7% over the store count we had at the end of ’11. This will be pretty much an equal net between company-operated and franchised stores. We will see more company stores and there will be probably a handful of HomeSmart stores also.

Our Woodhaven manufacturing plant continued to have a good quarter. They increased production (inaudible) 6% in the quarter and also 6% for the year, and it was a record year of shipments for Woodhaven and our plant to manufacture furniture and bedding, they were close to $90 million in shipments at cost for the year.

And I just wanted to comment, our association with our UK partner, Perfect Home, we made an investment in business there four months ago, has been very positive and we continue to be very impressed with the management and owners as well as UK company’s business model. And we feel we’re running quite a bit from Perfect Home and they have also benefited from having access to us. So we continue to look forward for the next several years (inaudible) benefit the relationship with them.

I believe those are the main points I liked to talk about, and we’ll certainly take any questions from those who have.

Question-and-Answer Session

Operator

Certainly. (Operator instructions) Our first question comes from the line of John Rowan with Sidoti & Company. You may proceed.

John Rowan – Sidoti & Company

Good morning, guys.

Ron Allen

Good morning, John.

John Rowan – Sidoti & Company

Just addressing kind of Charlie’s comments earlier, how much you guys have in the buyback authorization, how much availability go into the credit facility, and would you consider buying back his stock versus – you know, if he has to take a different approach versus having it hit the open market?

Gil Danielson

Well, I think it was in the earnings release. We have a lot of buyback authorization left. And so that’s certainly not an issue. You always get more authorization if you need it. We have been actively buying shares back in 2011. We didn’t buy in the fourth quarter, but as you know, we bought a lot of shares in the first nine months of the year, almost $127 million. So, as we go into 2012, how that buyback program will proceed? We certainly have the cash resources to buy more shares back. At the end of the quarter we had $275 million or so of cash and cash equivalents on hand. And we have $140 million credit facility on top of that that Ron drawn on.

Again, going back, we talked about the cash before. We do have some big tax payments coming up over the next couple of years. And so unless Congress changes their mind, which is always possible I guess based on the past number of years, unless the law changes, that cash balances that we have on hand will start going down because we’ll be required to make them on cash payments and payments that do to accelerate the depreciation and incentives by the government we haven’t had to make the last couple years. So it’s a day-by-day thing or week-by-week, but we’ll have to just consider what we’re going to do as far as any stock buyback in the future. I mean, our guidance for next year does not assume any cash buybacks, but we just have to see how it goes.

John Rowan – Sidoti & Company

Okay. All right. Thank you.

Charlie Loudermilk

Well, let me tell you – it's Charlie. I think the article misunderstood or misquoted me. They asked me whereas I have no plans to sell any sizable amount of stock at this hour. I think that my answer to that is it’s very few things that I own that I will sit and add a big price. And so it’s been my flesh and life I guess, family and friends. The number one thing in my life, is of course, as my daughter says, Aaron has been for 50 years – her brother. It’s been my company, you know, I’ve been running. But I have no idea or desire to sell a large amount of stock right now.

John Rowan – Sidoti & Company

Okay. Thanks for clearing that up.

Operator

Thank you, Mr. Rowan. Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. You may proceed.

Brad Thomas – KeyBanc Capital Markets

Thanks. Good morning, and I appreciate Charlie being on to give us some clarification. I want to just ask a little bit more about trends during the quarter. Obviously the earnings right in line with your guidance. The same-store sales results were the lowest that we’ve seen of the year. But when we drill in a little bit closer and look at the two-year rate and the three-year rate, we did see a little bit of an acceleration from the results in the third quarter. Could you just talk a little bit about how you’re feeling about trends in the quarter and how the book of business ended at the end of the quarter?

Ken Butler

Yes. This is Ken. We will get back activity very, very strong. As I alluded to earlier, we had the largest customer gain in our history. Our customer deliveries were up in the franchise community as well really as a result of us just pointing out a couple things that we thought they could do to improve their performance. And so our challenge now is to really work on our average income per customer.

If we could take that up a notch, our same-store sales could go through the roof. So we’re really going to focus on that this year, with the consideration that we don’t want to overload our customers as well. So we’re going to work on customers that we think could get another agreement. And we watched our agreement per customer go up since September ’08. It’s gone up a little bit every quarter. When I say a little bit, it’s probably gone up fractions of a penny, but it has gone up for the last three years. So we’re going to continue to work on that.

Brad Thomas – KeyBanc Capital Markets

Great. And in the press release, I think you talked about the HomeSmart being a drag on earnings of about $0.03 in the fourth quarter, about $0.06 for the year. But what’s the expectation for 2012 and how much HomeSmart could drag or add to earnings?

Gil Danielson

As we talked about in the release is that – we've got the 71 stores open. There will be a few stores and we open here in 2012, but we’re just going to – we're going to slow down on the store openings to see how the business model works. So, that being the case, the new store drag will diminish in ’12 versus where it was in ’11. And in the latter half of ’11, we really had all the acceleration in HomeSmart. So I mean, if you look at HomeSmart loss, we had $0.06 for the year in HomeSmart. I’m certain there will be some more drag in the first quarter, as those stores have been open in the last of ’11, continue to ramp up and gain revenue but there will still be some drag, but expectations as we get near to the latter half of ’12 and those stores – hopefully even sooner we’ll start generating profit.

So I think if we can get through this year on an annual basis with the HomeSmart drag, it’s not really there. It’s a positive of a penny or two. I mean, that’s a pretty good swing between ’11 and ’12 in the numbers. So we’re hopeful and I think that’s certainly is a real positive. It gives us a boost for ’12 versus ’11 on just how we’re opening the stores. Now what we’re going to do at the end of ’12 or sometime during ’12, hopefully sooner than later the performance is better than expected. We’ll kind of decide what the opening plan will be for HomeSmart in the next few years.

Brad Thomas – KeyBanc Capital Markets

That’s great. And then, Gil, you touched on this a minute ago, but just to be clear, today if Congress changed the ruling on deferred taxes on capital investments, what would be your liability today if it changed and what’s the timing at this point that you would – that the laws require you to pay taxes?

Gil Danielson

I hesitate to even answer that question because it is somewhat unknown. But the deferred liability at the end of ’11 was, I don’t have it in front of me, but probably something like $280 million or something like that. That will start going down if we make tax payments. Right now, based on our expectations, the law and as we see it, and as well, projections. For ’11, we only – for 2011, we only made $11 million in cash tax payments.

Just like in ’12, we’re looking at just a little bit under $160 million in tax payments; in ’13, $218 million; and in ’14, $148 million. So it kind of unwinds. It’s all timing differences. No change in rate. We just have had to defer paying the government. It will now unwind over the next two or three years, which will force us to make employees cash payments.

I don’t really have a projection in front of me of what the liability would be at the end of ’12, but historically before the government put in all these incentives, our deferred taxes are always – liabilities, say, $100 million at the end of any given year because we’ve always had accelerated depreciation. So I would expect the number will go down probably $150 million, maybe not by the end of this year, but over the next two years or something like that. It’s a long answer, but –

Brad Thomas – KeyBanc Capital Markets

Yes. That’s very helpful, Gil. No, it’s clear that you all have been mindful of this and keeping a sizable cash balance, but that’s helpful to connect the dots. I appreciate. Thanks again, and best of luck in 2012.

Gil Danielson

Thanks, Brad.

Operator

Thank you, Mr. Thomas. Our next question comes from the line of Matt McCall with BB&T Capital Markets. You may proceed.

Ron Allen

Hey, Matt.

Operator

Our next question comes from the line of David Magee with SunTrust Robinson Humphrey. You may proceed.

David Magee – SunTrust Robinson Humphrey

Yes, hi. Good morning, guys.

Ron Allen

Hi, Dave.

David Magee – SunTrust Robinson Humphrey

Just a couple of questions. On the HomeSmart stores, what metrics are you most focused on there before gaining that [ph] successful enough to roll out faster?

Ken Butler

Well, I think there’s two. This is Ken. One, we’re very closely monitoring the progress of the stores, but also monitoring the progress of the correlating Aaron’s store because we want to make sure we don’t cannibalize that. And we’ve gone back to inception and then reporting. Frankly, the Aaron’s stores in that market have actually gained customers during the time that HomeSmart was open. Obviously we want to make sure HomeSmart ramps up close or near close to what our matrix and our former stores have done. And we’re very pleased with the delivery activities taking place in those stores.

So we’ve hit the two tech point of Charlie’s. And then the last thing we got to make sure it happens is that we run a profitable business. And so that’s probably the third part that we can’t bring to you at this point. But I feel like – just wanted to add a little bit given our earnings around what we guide, getting the organization right, that we will be profitable this year as a unit, and when we do so, when we put the model out, we’ll have a franchisable brand as well. And really the sky will be the limit.

David Magee – SunTrust Robinson Humphrey

Thanks, Ken. What have been your assumption regarding keep rates of this concept?

Ken Butler

It’s about double that of Aaron’s, double being worse that we can see so far. We certainly would like to work on it and get better. But with the less commitment of a customer’s part, with a week versus a month, we know strategically it’s going to be a little bit higher. So we’re going to work – we work the Aaron’s keep rate too. Our primary job of every associate is the acquisition and maintenance for customers. So we think we can get better and the Aaron’s model would add as well.

David Magee – SunTrust Robinson Humphrey

What do you say right now with regard to product inflation for 2012?

Ron Allen

I think we may have stabilized. We’ve actually seen some increases in prices and costs in the appliance arena. The price is up a little bit. I think furniture is still in good shape in that regard. And (inaudible) electronics kind of stabilized.

Ken Butler

We think it’s fairly stable.

David Magee – SunTrust Robinson Humphrey

Are you able to pass on the higher plant cost?

Ron Allen

Yes. I don’t think we have a choice. I don’t – and what we did is we’re not really just price increasing the current model. We’re doing it when the new models come up that have a little bit more features and a little bit more benefit. So I think in the long haul, even though it might be a slightly higher price for our consumer, they will be getting good value for that as well.

David Magee – SunTrust Robinson Humphrey

Thank you, Ken. And last question, how are you feeling about tablets as a category that would grow this year? Is that something you still feel has the potential?

Ken Butler

Yes. We wish it could be an Apple’s tablet, and we just haven’t been able to develop a relationship with them. The tablet business is a new product. And it’s moving well. It’s not doing great. It’s just moving okay. I guess (inaudible).

David Magee – SunTrust Robinson Humphrey

Okay. Thank you. Good luck.

Ken Butler

Okay. Thank you.

Operator

Thank you, Mr. Magee. Our next question comes from the line of Matt McCall with BB&T Capital Markets. You may proceed.

Matt McCall – BB&T Capital Markets

All right. Can you hear me this time?

Ron Allen

Yes, we can.

Matt McCall – BB&T Capital Markets

All right. I just kept talking. So the question I had was one of the references, Ron, you made about you got a plan to grow more efficiently. And I think I’ve asked you this before, as you gone through the first few months, talk about the plan a little bit and more specifically, maybe address the line item outside the top line, where do you see the biggest opportunity on the margin front after your first few months on the job?

Ron Allen

First of all, I feel like we have been very efficient, but we’ve grown very rapidly and we’re just looking at the opportunity now for more efficiencies in the business going forward. Charlie and I have had a lot of conversation about that. We’re engaging maybe sort of the management team in doing that. It’s hard for me to identify specific areas at this point in time, but that will be our focus during this year. We’ll have a pro forma budget plan for 2012 going forward. And just looking at the next year to begin, we just want to know what drove (inaudible) HomeSmart business has got great growth opportunity. We think with proper evaluation of that to be sure we have the model right.

Matt McCall – BB&T Capital Markets

Okay. I guess similarly, Ken, you talked about 2012 and interest increase. I think you said AIC. Can you be more specific there without giving away competitive details? Can you help us out with what the plans are and how you’re going to do that?

Ken Butler

(inaudible) We’ve got one coming that will be probably not knowledge in March, but – I mean, there is some no-brainer low-hanging fruit things we can do such as, again, continue packaging products together that a lot more customers like packages. They like all inclusive. So we’re really taking that more nationwide. For example, in the delivering packages they include a rug and a picture in the package price where they can always – the consumer can take off. It seems to be working very, very well. Additionally, it’s identifying customers. It may have a monthly payment less than our core average that have paid well that could be pre-approved for another product. So there’s some just basic things. And then we are doing some initiatives from an advertising perspective that I think (inaudible) rather not go into.

Matt McCall – BB&T Capital Markets

And then I guess a follow-up to that, last quarter you called out increased promotional activity. And I think, Gil, you mentioned some early terminations that maybe spiked a little bit. What was – maybe review how that progressed or maybe did you see the similar pressures this quarter? And are those the similar promotions you’re talking about for 2012?

Gil Danielson

It was a big effect in the third quarter. But in the fourth quarter, I mean, it kind of all normalized. I think our early payouts in the fourth quarter were up maybe 7% over where they were a year ago in the fourth quarter. So it kind of – I think – and we talked about the 120 days payments, cash promotions and things like that. I just – I mean, looking back in hindsight, I think the third quarter was just kind of a little bit of an odd quarter where buyout happens – they are kind of in a certain part of the country, and we went into the fourth quarter, now we’re kind of back at the normal routines. So I don’t think that it’s a big switch now and certainly materially moving forward.

Matt McCall – BB&T Capital Markets

Okay. Thank you.

Operator

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

TJ McConville – Raymond James

Good morning, Ron. Good morning, Ken, Gil, Charlie. This is TJ McConville filling in for Budd. Thanks for taking my question.

Ron Allen

Good morning, TJ.

TJ McConville – Raymond James

The questions that I have this morning, guys, is on the customer count at HomeSmart. If you don’t mind sharing that, how many of those 1 million-plus customers now are at the HomeSmart stores and how many customers per store do you expect that at those locations?

Ron Allen

I think now there’s about 27,000 some odd customers that are dealing with the HomeSmart core store. I don’t think it would get as big as the Aaron’s store base, strictly because there’s a little bit more churn and burn in a HomeSmart store. It’s just the fact that is weekly, but I think reasonably it can get above what the industry standard has been, and then we feel pretty confident we can accomplish those. I think, again, if we can work on the retention side of the customer base a little bit more and get that down a little bit, I think the stores can get bigger, where commonly our competitors have done in the past.

TJ McConville – Raymond James

Got you. Got you. And on that point, any idea where those customers are coming from, Ken? Are you taking them from the independent operators out there or some of your other competitors’ customers finding the HomeSmart lower cost that much more attractive?

Ken Butler

Yes. I can’t pinpoint that. I can tell you that still I mentioned this a few quarters ago that early diagnosis is we’re getting it done, customers that used to deal with Aaron’s. And we’re continuing in those same percentages. It looks like 40% to 45% of our customer base are ex-Aaron’s customers. Some of them haven’t accounted the Aaron’s store and some of them haven’t accounted the HomeSmart. But in business, there’s just some places that you’ve done business with if you won’t go back to.

And again, 20 years ago, there must have been 10 competitors in every market and most of our customers would dance from one to the other pretty much is down to two these days. So the market is big out there, but some people may feel embarrassed to come back to the Aaron’s store, maybe they owed us something. They are not usually the reason why you generate a return is that they can’t make the payment. And I think the same thing is true for our weekly competitor – nothing that – nobody did anything wrong, they just are a little embarrassed, and don’t know if they can come back and get an agreement.

So I think we’re getting a lot of the X-brand – customers or we’re going to get a lot of X-Aaron’s customers and we may be attracted in maybe someone different just for the fact that it’s new.

TJ McConville – Raymond James

That’s helpful, Ken. And then lastly for me, Ron, I appreciate all the color on the learning thus far in the process. Is that altering the CEO search process in anyway? Can you give us some type of – any kind of update on how that search is going?

Ron Allen

I can’t speak for the board on that. Like you know, I’ve indicated the board, I’ll certainly be happy to stay with the management team for some period of time, but Charlie may want to comment on that, but I know the board is considering its decision. Probably we’ll have a decision within the next month or so.

TJ McConville – Raymond James

Okay. That’s very helpful, gentlemen. Thank you, congratulations and thanks a lot.

Operator

Thank you. Our next question comes from the line of Rohan Juneja with Seawolf Capital, you may proceed.

Rohan Juneja – Seawolf Capital

Hi guys, I just have one quick question. In some of your competitors in the industry, and even you know, do remotely the same kind of businesses, you do have – spoken about margin pressure in the fourth quarter because the consumer wanted more value oriented products. It didn’t seem like you actually saw much of that, and you had customer acquisition that was up, plus deliveries were up, could you just talk some more color on how you were able to avoid that?

Ken Butler

To avoid margin pressure?

Rohan Juneja – Seawolf Capital

Yes.

Ken Butler

You know, I think everyone has a place in the market including Rent-A-Center and they’ve got a very unique and well established weekly model that we respect. Their prices are where they’re at, and our prices are kind of where they’re at. So I don’t think either one of us respond to price very much.

And with our Home Smart model, we’ve kind of wedged in our price there which might be slightly lower, in some days, it may be higher even in Rent-A-Center, you know, we don’t really shock each other that much and worry about it.

I think everybody focuses on their individual plan. So you know, we are aware where we’re at, and we really haven’t had been to the cut prices for margin purposes. And you know, we get some pressure sometimes from our sales when we look at retrial with so many lost leaders we see out there, but at the end of the day, retail or don’t have a lease ownership or a rent-own programs, so there’s no comparison to that – right.

Gil Danielson

You know as we’ve said numerous time, I mean in this current economic environment, I mean there’s positives and negatives for our business, but we perform through the years very well and in good times and bad times in the macro you know, if that’s what you’re doing.

But over time, we’ve navigate successfully though it. I mean we’ve always felt, you know, in this environment where consumer credits are very tight, it has tightened up, standards have tightened up, I think that’s certainly a positive for our business where people could have gotten credit in the past or having a little bit of tougher time doing that.

The negative is unemployment expense are darn high the last two or three years, and nobody’s you know, predicting that’s going to dramatically change. And I guess there were never too unemployment for our customers, for sure higher than the you know, 8% or 9% or whatever in general, not in every case certainly, but in general.

So the good news, and bad news, customers have challenges, it’s stressful time, everybody’s you know, tough getting through the weeks and so, but I think we’ve just superiorly performed and executed. And our services are what our customers want, and they come to our store, and they feel good about it. And we’ve been very, very successful navigating all these headwinds that are out there that may or may not set to other retail.

Ken Butler

Don’t forget the fact that we started a national television campaign last year, I get that a lot and work with groups of our managers and I continue to hear great feedback that it’s working or driving traffic to stores or on television in every market in United States.

So that’s something that didn’t exist even a few years ago. And but now it’s slowing down, it’s definitely working.

Rohan Juneja – Seawolf Capital

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Laura Champine with Cowen & Co., you may proceed.

Laura Champine – Cowen & Co.

Good morning, guys. Gil, this is a small thing, but you raised the revenue guidance a little bit for this year, but not the EPS guidance, what was the thinking around that?

Gil Danielson

Well, it is a small thing obviously. You know, our revenue guidance, we’ve always struggled a little bit with that because a big part of our revenue is those non-retail sales products that we ship from our distribution center and through our franchisees. And it’s not a lot hard to predict in a lot of respects. It’s always going up, but you just don’t know when it’s going up, and it kind of depends on the franchisees when they buy it, when they want it you know, how they feel or whatever.

So we kind of keep it a ballpark that – keep the revenue in kind of a ball parking where we’re at. So you know, again, it’s very fine tuning, we just kind of look that a little bit harder I guess this quarter than we looked at it three months ago when we first came out with guidance.

And I don’t even think we made a revenue guidance for ’12 anyway on the last call we did.

Laura Champine – Cowen & Co.

And then just to follow up since you mentioned the franchisees. I think you guys have – I got the franchisee comps back through 2008, and this is the first time, I know it’s a tiny negative, but it’s the first time it had a negative sign in front of it that I’m aware of. Have they comps negative before? And could you just comment on – I know the customer traffic has stayed strong, but what might be happening to impact the franchisees in a different way than your company own stores are operating?

Ken Butler

Yes, thanks Laura, this is Ken. And I think it is the first time ever that they have had this type of comp. I mean they’re flat. But what has been happening over the last couple of years, I don’t know if you recall, but we’ve got like our furniture quality is extremely well. And – but our appliances were getting high, so I recognize that we were accounting – getting outside the wheel house of our customer base a few years ago when we lowered the price, but increased the term on our packages for furniture, and even our appliances, and packaging electronics so our customer could have an affordable payment plan. It wouldn’t be – they wouldn’t come in the store and get spooked on price.

And we did that, and we have continued to have positive same store sales. And our franchise community, you know, we say we’re the pioneers and they are the sellers. So we kind of have to pay the high way, and prove that we’re doing the right thing. And they saw a price degradation just like that. Our television prices were going down as well as for the franchisees. So they were trying to hold that – average income per customer, by doing so had shorter terms incorporate the higher prices.

We did see customer traffic or the close rate go down in the franchise community, and it warned them, and really put on a big presentation this past October at the Aaron’s Franchise Association meeting, and they responded, I think they all got on board, and they had their best customer gain they’ve had all year. In fact, they had their best customer gain in their history, but you know this is annuity, you don’t get the benefit of that gain in that quarter. I’m glad they did it because I think the same store sales could have – I think you’ll see a reverse trend this year in their same store sales.

Laura Champine – Cowen & Co.

Great. Thanks for that, Ken.

Operator

Thank you. Our next questions comes from the line of John Baugh with Stifel Nicolaus, you may proceed.

John Baugh – Stifel Nicolaus

Good morning, Charlie, Ron, Ken and Gil, and Josh Robin [ph] is listening in and hopefully he’s doing well.

Charlie Loudermilk

Robin is doing extremely well. He’s – thank you for asking. He is comfy and thank you for asking, he’s doing really, really well.

John Baugh – Stifel Nicolaus

Glad to hear that. Just a clarification. Is the $0.03 drag from home smart on top of the $0.04 drag on the overall business – was that inclusive of that number?

Ron Allen

Yes, I mean the overall business had – it had a – I’d say $0.04 for the overall...

John Baugh – Stifel Nicolaus

Yes, okay.

Gil Danielson

Yes, we kind of highlighted the home smart – and those drag for the quarter of probably a little bit higher than we anticipated, not too much, but a little bit higher. But on top of that, we had our normal new store drive our overall business.

You know, I talked about the drag in home smart and how we’ll turn around next year and ‘12, but we’ll continue to have new store drag from our traditional Aaron stores that we open up. And we’ll probably add a little bit more new store drag in Aaron stores at the end of the year, then the first of the year, the way the stores are opening, but it’s the typical you know, $0.03 to $0.03 drag from the Aaron stores that you should expect.

John Baugh – Stifel Nicolaus

Great. And did you have an average income per customer figure or an actual agreement per customer figure? Did it go down year-over-year, up sequentially, flat sequentially?

Gil Danielson

What we have kind of been providing is the average month customer payment. At the end of December, it was $130.53. So it was down a little bit from where it has been. We kind of went through, as you know, John, went through a couple of years, we’re dramatically decreased. We kind of stabilized a little bit in ’11 and it gone down a little bit here at the end of ’11. So that monthly payment is certainly the focus of – as we talk a little bit of focus on what we can do to stabilize that number and build it up, so it’s got higher priorities to work on that number and get it up somewhat.

John Baugh – Stifel Nicolaus

Super. And then, how is – Ken, how is the taxes going? Is there any different (inaudible) to this year’s tax refund timing and you know, any color on what you’re seeing in terms of returns or payouts excuse me, any color. Thank you.

Ken Butler

Yes, thank you. It looks like this year really started February the 1st and I understand it’s going to come in waves, and it has been steady every day since February 1st so we have – we’ve got a lot of payouts, we have a ton of new customer activity as well. I’m totally excited about what’s happening out there, they were capturing and covering these customers that are paying out. And it’s profitable this time of the year, it’s not unprofitable payout as it has – was I think in the third quarter. So you’re seeing people that are paying out relatively early from the Christmas business, but they’re getting something else. So that’s pretty cool. So we’re excited about this season for sure. And look for a good quarter.

John Baugh – Stifel Nicolaus

Super. And Ron, is there any thoughts internationally at this point in terms of additional investment or expansion or acquisitions or now there’s been a management change here, we’re focused on getting the U.S. efficient home smart?

Ron Allen

Well, as Gil mentioned, we have the investment in Perfect Home, and you know, that’s a learning process for us going forward, I think that will be very helpful. But we still feel there’s a tremendous amount of growth here in the United States as well. So that’s going to be our primary focus over this year.

John Baugh – Stifel Nicolaus

Okay. And then the last question is just on Home Smart, if you had to guess at the timing as to quote when you’ll know you’ve got a profitable box – it sounds like you’re fairly comfortable, you’re not cannibalizing, but I agree you want to make 100% sure that’s not the case. But any guess on what part of the year or maybe even the ’13 we feel comfortable that we’ve got a profitable box?

Ken Butler

That’s a good question, our operations and the people in the bill will tell you this much, but it’s not going to happen, you know, you got to be a realist. And I think – I do think in bill, this year, that the group will be comfortable. We’ve got stores already making a profit but we need to see it happen in multitudes of the market. We certainly have enough places to test, I mean we have the stores from the eastern seaboard all the way out to New Mexico, so we’ve got a good foundation to grow in.

It reminds me of when we started Aaron’s Rent-A-Home from the Legacy, Aaron’s Rents business, I don’t know if Charlie remembers, but we had a profit – when we would finally make a nickel, and that was fun. And that same (inaudible) I think cultures existing right now in Home Smart. So we got a lot of people extremely committed, they love this opportunity, it’s a ground for opportunity for our people and I think it’ll happen this year.

John Baugh – Stifel Nicolaus

Great. Thanks for taking my questions. Good luck.

Ken Butler

Thanks John.

Operator

Thank you. Our next question comes from the line of Arvind Bhatia with Stern Agee, you may proceed.

Arvind Bhatia – Stern Agee & Leach, Inc.

Thank you, a couple of questions here. I apologize if you’ve answered them because I jumped on the call a bit late, but I wondered if you could speak to your views now on the key – models that some of your competitors are now pursuing the second question on the consumer financial protection bureau, any views on that given they now have a director.

And lastly, if you could speak to your general expectations for same store sales corporate for 2012? Should we be continuing to look for the mid single digits? Or you know, we’d like to get your thoughts on that now.

Ken Butler

Yes, this is Ken. I guess I can speak on the key – business, and we certainly tip our hats to Rent-A-Center for what they’ve done, amazing they’ve got 750 stores with it, we’re watching it closely. We do have our own concerns internally here that I won’t go into over the call on that particular model.

We are looking at some other alternative ways to do something like that, but it’s not a high priority right now, we think the high priority lies within our own stores. So you know, we’re monitoring it, we’re watching it, and we’re thinking and talk about maybe some alternative ways to do that.

The Consumer Protection Bureau, (inaudible) this past week, I don’t think we’ve been included at this point. And you know, whatever happens, will happen. And you know, our operation and the rent to own industry has a great – has a great lobbying group, and I’m sure that whatever happens, it will be available for us.

Arvind Bhatia – Stern Agee & Leach, Inc.

Ken, conceptually, does – you look at the weekly model differently compared to the monthly – I guess what I’m asking is, is one more vulnerable, or less vulnerable to the regulation?

Ken Butler

I don’t think so. I think we’re all painted in the same brush, I mean we’re serving a customer base is a credit restrain. And that market happens to be bigger than all the customers we have and all the customers that rent a center has. And I know we’re all doing a good service to the – for the community. And I think both of us, both our rent a center, do our business the right way. So I think as long as we got our eyes across – and the main thing is treat our customer with dignity and respect.

Ron Allen

And Arvind, as far as the guidance for ’12, I mean we’ve been saying, I guess – revenue kind of mid single digit, thanks for our revenue growth, we look at ’12 that’s kind of the same range of giving people, I would say if we could do 23.5, 5% same store revenue growth, we’d be extremely pleased.

Arvind Bhatia – Stern Agee & Leach, Inc.

I know the franchisees, same store sales don’t’ have you know an immediate direct bearing on your numbers, but would you expect a pretty good rebound here given your commentary earlier with respect to the franchisee same store sales as well?

Ron Allen

Yes, we’re hopeful, it’s just hard to predict it for sure – because they’re in the – operators, but I do believe that they’re changing that as we discussed, you’ll see some positive.

Ken Butler

Yes, a lot of this – course with the program that we see a rally taking place right now with them, so you know, they need to stay on par, and I think they’ll get back to positive comps.

Ron Allen

By the way, I mean history, that is the first time they haven’t been positive since we started franchising. I think there’s certainly a challenge to get this thing positive.

Arvind Bhatia – Stern Agee & Leach, Inc.

Thank you guys and good luck.

Ken Butler

Thank you.

Operator

Thank you, our next question comes from the line of Ronya Stevens [ph] with Philadelphia Financials, you may proceed.

Unidentified Participant

Yes, this is actually Jordan Homers [ph]. I have a follow up to Arvind’s question. When the (inaudible) model, I don’t believe you’re doing that with any retail at this point, correct?

Gil Danielson

That’s correct.

Unidentified Participant

And I was just wondering, do you have any sense how you would handle the repositions on that in terms of the price that you buy from a reseller has to be higher than you buy a wholesale so when it would come back, wouldn’t there be a much higher cost product than you would be running in your own store?

Ken Butler

Yes, and that’s one of the problems with it, I mean you would have to write down the inventory on a return to put it back in a local store. We’re in a major – why we have the profitability of that store, so you have to put it in the line and do some sort of marketing. You could disguise it, and I do that. And you’ll also know that your core business would suffer, be invisible because you got so many stores that you would see it go down some way. So that’s a concern of ours.

The other concern is, it’s a pretty high rate for a consumer to make. And I don’t know if it’s going to pass that smell test for us that – is it a fair deal for the consumer regardless of the fact that they take it. They have the customer in the store, they are in love with the sofa and they hear a monthly payment that sounds pretty reasonable to them but if they do the math, it may not be as reasonable as – you come in our store with the most – a more reasonable proposition for that customer. If that case, I’d pass. That’s our issue with it.

Unidentified Participant

Okay. And in your Home Smart Storage, is your mark-up the same one weekly as it is on monthly?

Ken Butler

We have a little bit higher mark for the weekly model. It’s a higher price by virtue of terms than the Aaron Store and then the weekly price is little bit higher. There is a mark-up fee, so to speak to go weekly. Frankly, we don’t want the model to be a 100% weekly or I think as our competitors are an 80% weekly, we think we can give the model to that 50-50. And if we can do that, I think our revenue can go higher and our returns will be less than the traditional model. Thus far, since we made these maneuvers. It looks like it’s going that way.

Ron Allen

But as we say, I mean, it’s evolving, so we’re going to see what happens and see if we can get the model to (inaudible) would be a good investment for us.

Unidentified Participant

And on RIMCO, where would their mark-ups fit in between the two?

Ken Butler

It’s little bit higher in a RIMCO store. More probably or more like a Home Smart Store for the most part. But we have to be sensitive in the market there as well. I think the big strategy change we’ve made with RIMCO is we’ve discovered it’s not wheel store, it’s a tire store. And everybody needs tires and certainly people that don’t have the cash to go out and buy spare tires nor the credit to buy tires. And it fits right in wheel house that what our company is about.

So, we’ve had some very positive same store cost with our RIMCO model. We’ve got some great increases in growth ability. By the year, we did open up a couple of stores and I think they’ll be performing well also.

Unidentified Participant

And final question if you don’t mind is the partnerships with the retailers that people are looking, do you know if any of them were exclusive or could the retailer just decide, “Hey, this is a great financing alternative and we’ll just do it ourselves.”

Ken Butler

No. I don’t know of any exclusivity but we’re not out calling on retailers to do that anyway. So, we’re putting fort our efforts and our own opportunities. And we think we have some great opportunities in our stores.

Unidentified Participant

Okay. Thank you.

Ken Butler

Thank you.

Operator

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

Ken Butler

Okay. Well, that concludes our call and thank you everybody for listening in and in your interest in Aaron’s Inc.

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