Aaron's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Apr.27.12 | About: Aaron's Inc. (AAN)

Aaron’s, Inc. (NYSE:AAN)

Q1 2012 Earnings Call

April 27, 2012; 10:00 am ET

Executives

Charlie Loudermilk - Chairman

Ron Allen - Chief Executive Officer

Ken Butler - Chief Operating Officer

Gil Danielson - Chief Financial Officer

Lee Wilder - Investor Relations

Analysts

Brad Thomas - Keybanc Capital Markets

John Baugh - Stifel Nicolaus

John Rowan - Sidoti & Company

Matt McCall - BB&T Capital Markets

David Magee - Suntrust Robinson Humphrey

Jordan Hymowitz - Philadelphia Financial

Chuck Ruff - Inside Investments

Laura Champine - Canaccord Genuity

TJ McConville - Raymond James & Associates

Arvind Bhatia - Sterne Agee

Operator

Good morning, and welcome to the first quarter 2012 Aaron’s Inc earnings call. All lines will be muted during the presentation portions 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, well thank you everybody for joining us this morning. As usual I’m going to turn it over to Lee Wilder to read our standard Safe Harbor statement and then we’ll start the call. 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 are 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, litigations, customer pricing, information security, customer demand 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 2011 Annual Report on Form 10-K, including without limitation the company’s projected revenues, earnings and store openings and store acquisitions, as well as disposition activity 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. We thank you for joining us today. I’m honored to participate in my second earnings calls since becoming CEO. It’s a pleasure to discuss the first quarter results of our operations.

As detailed in our earnings release last evening, we had another outstanding quarter with records in both revenues and earnings and overall results were better than expectations. We raised our revenue and earnings guidance for the year and feel we have very good momentum as we move forward through the rest of 2012.

Now business has continued to be strong through the high customer traffic and demands and our ability to execute and meet that demand, even though our customers have been affected for years now by high unemployment and generally difficult economic conditions.

As we’ve noted in the past, we feel that high consumer credit market has actually helped Aaron’s business, as customers in the past who would have qualified for credit at retail establishments are being constantly turned down for financing. People need good basic homes furnishings and they can obtain these goods as Aaron’s, with our very good product offerings, our service, our flexible payment plans and the fact there are no credit checks.

We anticipate that the current market conditions will continue to exist in the foreseeable future and if the past is any indication, we should have a continuing good environment for our business.

Now during my first six months as CEO, I have observed and worked with an outstanding team of associates. Aaron’s has a long tenured management team throughout the organization, who grew our customers in the market place and our business model is superior to others.

Our management team has been spending more time recently on business planning and the re-thinking of some of our support functions and exploring ways to do various tasks a little better, which over the long term will result in improved efficiencies and increased profitability for the company.

One thing we are concentrating on in 2012 is improving our management recruiting, our trading and retention. Our goal is to make Aaron’s one of the premier work places in America and to continue to attract outstanding Managers and Associates.

Most of you are probably aware that we did settle the sexual harassment lawsuit in the first quarter and brought back in income, some of the amount that had been accrued for in the second quarter 2011 for this litigation expense, and believe me, its good to have this distraction behind us.

Today the future looks bright for the company, there is plenty of expansion left opened in existing stores and in new ones and we are encouraged by the early returns of our HomeSmart stores. There is always room for improvement, but the company strategy and growth plans are not changing, there is certainly no reason to do so.

Charlie Loudermilk founded this company a remarkable 57 years ago, which has proven year-in and year-out to be exceptional in every way and I plan to continue to learn from Charlie and build on the legacy he has established and given our customers, our associates, our business partners and our shareholders. We again thank you for your support and interest in the company.

Now I’ll turn the call over to Ken Butler who will talk more about the results of the quarter and at the conclusion of Gil’s comments, we will answer any questions that you may have.

Ken Butler

Well, thank you Ron and first of all I want to thank all of our associates and franchisees for your continued hard work and dedication in helping us to consistently perform at a very high level of service to our customers and shareholders.

This service resulted in a gain of 40,000 new customers into the Aaron’s and HomeSmart family, which represents a 14% increase in customer account over the same quarter a year ago. We will continue to focus more just on the basic execution of running our business model, as our traffic in our stores is brisk and I know everyone on our team feels we have an opportunity to even do better in the future.

We had 74 HomeSmart stores opened at the end of the quarter. I am pleased with this progress so far. We improved the bottom line of these stores from the loss of $0.03 in the fourth quarter to a loss of $0.001 in the first quarter. We will follow the aggressive expansion of the model temporarily as we evaluate and tweak the model.

We built a long-term potential for HomeSmart that’s huge and can help propel future growth for the entire company. Again, no big initiatives to announce, other than the commitment from all of us to focus on our core business and to continue to deliver great results in the future.

And at this time I’d like to turn the call over to our Founder, Charlie Loudermilk.

Charles Loudermilk

Thank you Ken and I want to recon everything you’ll just said. We are doing well. We have an outstanding team in place to run the company. I don’t know that we’ve had more future that we have right now. I’m very happy and I want to again thank everyone who’s given a lot in the last three months.

Again, good solid quarter that we just announced. I’m assuming we can have a great quarter, I think right now after the one we have now, the second quarter. What I’m trying to say is that Ron Allen is learning the business very quickly and I think that looks very promising for the company. But here again, thank you to the franchisees and also to everyone. Thank you. Gil

Gil Danielson

Okay, well thank you Charlie. I’ll briefly go through some of the highlights of the first quarter. The company revenues increased 10% for the quarter to $586.9 million and in addition our franchisees collaterally increased their revenues 10% for the quarter, up to $254.4 million.

Same store revenue growth in the first quarter for our company-operated stores was 4.8% and it was 2.6% for stores over two years old. The company stores in the system over five years old, thanks to our revenue increase, it was 1.3% over the previous year.

The company had just a little bit more than a million company operated store customers and 554,000 franchise customers at the end of the quarter. As Ken mentioned there’s a 14% increase in the total customers over the number at the end of the first quarter last year. The customer count on a same store basis for company-operated stores was up 8.6% in the first quarter compared to the same quarter of last year.

Same store revenues for franchise stores were up 6.3% for the quarter and same store customer accounts for the franchise stores were up 8.3%. Revenues in customers of franchisees however are not revenues in the customers of Aaron’s Inc.

Net earnings for the quarter are up 50%, there’s $71.2 million and our EPS, our diluted earnings per share for the quarter was $0.92 compared to $0.55 for the same period last year. As noted in the earnings release, during the first quarter we did take in to income $35.5 million or $0.28 per diluted share and approval reversal of the law suite charges that we set up in the second quarter of 2011.

Excluding this law suite related reversal of accrual in the first quarter, our net earnings would have been $49.2 million, up 11% over the same period in the last year and as the earnings release said, diluted earnings per share would have been $0.64, a 15% increase over last year.

HomeSmart continues to ramp up as expected. Revenues of the HomeSmart division for the quarter were $12.5 million versus $330 million in revenues last year and then as Ken mentioned, our new store operating, new store drive for the HomeSmart stores this quarter was approximately $0.01 per share and that’s compared to the $0.03 per share in the fourth quarter last year and 7% for the whole year last year.

So as we stated, we are going to open a few HomeSmart stores this year. We’ve opened a couple in the quarter. There’s a few more that we’ll open in the rest of the year, but we will not have the rapid ramp up of HomeSmart that we had last year and even though we were off a little bit in the first quarter, we are hopeful that for the whole year that we will be very, very close to profitability. It will be quite a swing from the previous year.

During the first quarter of 2012 the company opened nine company operated Aaron’s Sales & Lease Ownership stores, six franchise stores and two HomeSmart stores. We also acquired three franchise stores and we account for nine third party stores. In addition, we acquired one store from a third party operator and converted it to a HomeSmart store and during the quarter three company operated stores were closed.

At the end of the quarter, March 31, we had 1,153 company operated Aaron’s Sales & Lease Ownership stores, 710 Aaron’s Sales & Lease Ownership franchise stores, 74 HomeSmart stores, 16 company operated RIMCO stores and six franchise RIMCO stores. We also had one office store still opened. The total number of stores opened at the end of March was 1,960.

During the quarter we continued our efforts in the selling of new franchise stores and we awarded area development agreements to open the relevant traditional franchise stores and at the end of March we had 223 franchise stores that are under area development agreements that are planned to open over the next several years.

Our guidance for the second quarter this year with respect to revenues were approximately $525 million and diluted earnings per share in a range of $0.44 to $0.48 per share. Our non-GAAP fiscal year 2012 diluted earnings per share, which excludes the reversal of the lawsuit accrual. Our guidance is $1.96 to $2.08 toward the year, which is an increase over the previous guidance of $1.88 to $2.04.

Our EPS guidance for the second quarter and for the fiscal year ’12 doesn’t assume any significant repurchases of company stock. We did not do any repurchases in the first quarter. We still have over five million shares authorized, so we certainly may repurchase shares from time-to-time moving forward.

We continue to expect overall new store growth in 2012 in a range of 5% to 7% over the comp store account at the end of 2011 and for the most part there’ll be probably a little bit more company operated and franchise stores, but for the most part an equal amount of stores and again as I mentioned, including a handful of HomeSmart stores.

All in all it’s a good quarter for us. We did better than – with that expectation we certainly have good momentum going into the rest of the year. So we’ll certainly turn it over to any questions that you may have.

Question-and-Answer Session

Operator

Certainly. We will now allow questions from the phone lines. (Operator Instructions). Our first question comes from the line of Brad Thomas with Keybanc Capital Markets. You may proceed.

Brad Thomas - Keybanc Capital Markets

Thanks. Good morning guys and congratulations on a good quarter.

Ron Allen

Thank you Brad.

Brad Thomas - Keybanc Capital Markets

First of all I just wanted to ask about the customer growth, very strong customer account. I mean, at least the strongest in the last couple of years, looking back at our data. Anything in particular that you did in this particular quarter to drive that strong growth?

Ron Allen

Well Brad, a year ago we started our national media campaign and I think our traffic has gradually grown each quarter. I think we’ve been alluding to that over the last three or four quarters, so hopefully we are doing a little bit better job of executing in the field. Also really if you compare it to last year, we had some struggles with the weather. We had a tough winter last year that created some downtime, so I think this year we got a pretty clean set of pattern of the whole quarter and I think you saw what we are capable of doing.

Brad Thomas - Keybanc Capital Markets

Good, good. Was there anything worth calling out in terms of how the tax season played out; anything notable on your end in terms of the early payouts?

Ron Allen

No. It really was about the way it was last year. I think we did a better job of executing and coming out of it with a gain in customers. I think last year maybe we struggled with that. It could have been rather related, but I think we purely landed on our feet at the end of the quarter with a better receivable for the rest of the year and customers.

We had our early payouts for the quarter where we’re up just a little bit more than 9%. But a year ago for the quarter they are 8.5%. So I mean specifically during this time in the last few years early payouts have been strong in the business, which we factored that into our outlook for the year and again it was this year too, so we are very encouraged and that’s why we feel pretty good about the business.

Brad Thomas - Keybanc Capital Markets

Great, and then just lastly as we look at your earnings guidance for the year, I think you beat the high end of your first quarter guidance by a couple of cents and your guidance for the full year at the mid point raised a little bit more than that. Any particular line item or area that you’re looking for more strength through the balance of the year versus what you were expecting three months ago.

Ron Allen

Not relatively. I mean it’s always hard to give guidance as we start the year, but certainly got into it. We had a good first quarter. Revenue growth was a little bit stronger than we anticipated and I think that’s all good news. We kind of looked into that a little bit and that’s kind of why we changed the revenue up a little bit and the earnings up a little bit.

Brad Thomas - Keybanc Capital Markets

Sounds great. Thanks guys and congrats again.

Operator

Thank you Mr. Thomas. Our next question comes from the line of Dillard Watt with Stifel Nicolaus. You may proceed.

John Baugh - Stifel Nicolaus

It’s actually John Baugh, good morning everyone.

Ron Allen

Hi John.

John Baugh - Stifel Nicolaus

I wanted to start with HomeSmart. If I did the math right, you were around $60,000 of revenue per store per month. So if you could first tell me if that’s close to right? And then if it is, how does that equate to where you think the breakeven, number one. And then number two, how does the ramp – from when you got start, I know you acquired some of these stores, as well as have a lot of new opening. How does the ramp schedule look like?

Ron Allen

God, I think the ramp schedule looks really good. The stores are consistently gaining customers and revenue and we’re not sure really how the shape of the model is going to be, where our breakeven point is, it should be right now. We’re on a cash base system pretty much there, but you still have some new store drag with newer stores in there.

The one issue we have is we have the organic stores we’ve opened, which is about a third of them and then you got the acquired stores that we’ve opened as well. So some of the acquired stores you have to go through a series of hard knocks as you might say from running the customer stores that might not have charged off in a more organic store and maybe some cost associated with that, where we find maybe some book values that don’t really match up to what they should have been, so.

Anyway, we’re happy with the growth of it. We think we can make money where we are at. Well certainly if your near and you have a high amount of pressure to gain customers and I think that same culture is in the benchmark to continue to gain.

John Baugh - Stifel Nicolaus

Ken, is it still too early to tell, I guess particularly with you organic stores, when those key rates are going to shake out and is that the primary thing your waiting to see or where are you with the price your charging or the term.

Ron Allen

Well, the key price is certainly higher than they are in Aaron’s and it’s one area we want to address or I’d like them to be, because it’s just creating more work at the end of the day and we want to satisfy customers and a good keep rate would be indicative of it. But the pricing, we played with it three or four times and can’t quite get it to where we need it to be at, but I think this last move we’re making right now is going to be where we need to be.

John Baugh - Stifel Nicolaus

I’m sorry, when you said keep rates, you meant the reverse, your getting too many returns.

Ron Allen

I am getting more returns than an Aaron store, anybody knew we would and we thought we would. I think it’s logical, because you’ve got a weekly customer and not as much of a commitment or turn as a monthly customers. So we know the weekly model is going to perpetuate more returns than an Aaron’s model.

John Baugh - Stifel Nicolaus

And lastly on this, what was the latest tweak in pricing?

Ron Allen

It’s more internal with the computer and converging of weekly rates and if I told you everything, I’d have to kill you, so I can’t. I’d be a little bit more exterior (ph), but I think we’re still as we said in the last conference call. We’re going to have to go through another couple of quarters. We’ve got the summer coming up. I think by the end of the summer and the stores ramp up, we’re quite confident that the existing stores we have are going to become more and more profitable before we use less and less money, but I think it’s going to be probably this fall before we can certainly definitely say that tomorrow is where everybody wants it.

John Baugh - Stifel Nicolaus

And the last question, I’m lazy, I haven’t done the calculation, but back on the core business, how does the revenue per customer, revenue per contract look either sequentially and/or year-over-year.

Ron Allen

I think we gained on it a little bit. The average, this is the average for the quarter, the average monthly cuts in payment, $130.90 and it’s up about $0.40 from the last quarter.

John Baugh - Stifel Nicolaus

From the fourth quarter.

Ron Allen

Yes.

John Baugh - Stifel Nicolaus

Right. Thank you.

Operator

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

John Rowan - Sidoti & Company

Good morning guys.

Ron Allen

John.

John Rowan - Sidoti & Company

Ken, in the past you’ve given out a number, if I’ve not mistaken, about the number of new consumers who are turned down for in-store financing. Am I mistaking and if I’m not, do you have an update on that number?

Ron Allen

I think you’ve mistaken. I mean we are not experts in the retail market place, but they’ve certainly got lot of customers. We hear casual comments from people all the time, but I wouldn’t want to quote a number, but it’s quite large.

John Rowan - Sidoti & Company

All right, fair enough. And also, do you just have the differed tax, taxes as of the end of the quarter.

Ron Allen

Lets see, the balance in differed taxes. Let me see if I do. $285 million.

John Rowan - Sidoti & Company

All right, thank you.

Operator

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

Matt McCall - BB&T Capital Markets

Thanks and good morning everybody.

Ron Allen

Good morning Matt.

Matt McCall - BB&T Capital Markets

So maybe Ron this is for you. In your opening comments, one of the things you talked about was in rethinking your support functions, improving your range on recruiting, training or retention. So I’ve kind of asked this question in the past. It sounds like that’s definitely a focus on the SG&A line and so maybe expand on that a little bit and then going back to Gil, what’s the expected SG&A impact? What’s the expected benefit to the P&L that you can talk about from those initiatives?

Ron Allen

It’s hard to say Matt at this point in time. We’re really focusing on the turnover in some of our associate groups to minimize that and to clarify the opportunities people have to grow within the company. We think we made a lot of progress in that and anytime you have a more turnover than you should that increases your overhead cost for sure and that’s one things we are spending a lot of time on. I don’t know if Gil you want to.

Gil Danielson

It’s going to be positive and certainly hard to quantify. You can quantify it looking backwards a lot easier than forward, and so, but really can’t this time. But everything we do here, we are always very aware that there is always room for margin improvement in everything we do and increases efficiency and we are always working on that.

Always using a very small way and no individual project by itself really amounts to a huge initiative. But we are very optimist that some of these things that we are doing, but over the long term and the long term over the next several years or so will certainly help margin expansion.

Matthew Mccall - BB&T Capital Markets

Okay. And Ken may be for you that we talked about or you talked about traffic growth and then you mentioned taking it. When you talked about it and I think in the past you motioned some promotional programs that you enacted and I know this is a pick up in some of the franchisee, specifically same store sales were very strong relative to last year, so can you talk about if there are any promotional programs that are driving some of that and similar to the last question, how are these programs impacting either revenue or margins.

Ron Allen

Yes, first of all I am pound of the franchisees rebounding the way they did. I don’t know if you recall, but their same store comps and almost got really almost negative. We were a little bit stubborn. We’re the pioneers and they are the settlers, so we almost have to prove things out before they make a move and I certainly respect that and we made a big play on that within our Aaron’s franchise association meeting back six months ago and they responded and their comps are back up. So we are very happy and pleased with that.

We are all certainly aware of our average income per customer. I wish I could wave a magic wand and they’d go up $10, so this would have a huge impact for the company and that’s where we hopefully we’re going to go. But as far as revealing any of the initiatives, I think I would prefer not to.

Public knowledge, we are going to celebrate our 2,000th store this year sometime, which would be pretty exciting and to kind of honor that we created an initiative in the stores that you are pre-approved for $2,000 and if your doing the math on that, that was, if every customer took the $2,000 it would actually raise our ASP a couple of bucks.

Matthew Mccall - BB&T Capital Markets

So is it safe to say that improvement to the same store sales metrics for the franchisees was acceptance of some of those programs, that’s your belief.

Ron Allen

Absolutely. They jumped on board. We proved to them what we were doing was working and they completely followed suite, almost as a complete union. It was really neat to see that change so quick.

Matthew Mccall - BB&T Capital Markets

Okay, thank you all.

Ron Allen

Okay.

Operator

Thank you Mr. Mccall. 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 and good quarter.

Ron Allen

Thank you.

David Magee - Suntrust Robinson Humphrey

Just a couple of questions, one just following a bit on the last point, I know you’ve all been working on packaged deals, so trying to add to the average income that way. Do you think due in the regard that seems to working for you that you’d care to point out.

Ken Butler

Yes, I think so. As you go back, we’ve been working on packages for a long time, so we are doing more and more bundling, not just in the furniture arena, we are doing it as well in televisions, with Sands and Blu-Rays and so its not something that we just started a month ago. And the consumer demand and their pocketbook is going to determine where I see it as much as we may try to the influence it. So I think we are holding pack with it because of the job, the good job everybody is going out there in the filed.

David Magee - Suntrust Robinson Humphrey

Are there any areas in the country that seem to be responding to what you are doing to improve the average income?

Ken Butler

No. In fact, I guess we’re probably work on this overall metrics around the county than we’ve ever operated at. I don’t have really any one part of the county that’s struggling. All our operating VPs, they have about 11, I mean about 100 and some odd stores a piece and seem to be working on eight cylinders right now. So pretty thumbs up as far as what our performance is across the board.

David Magee - Suntrust Robinson Humphrey

The advertising seems to be paying off in terms of the traffic account accelerating. What do you anticipate advertising to be as a percentage of sales this year, either quantitatively so just sort of directionally compared to last year?

Ken Butler

I think it will be the same. If you go back a number of years, I think we went back 20 some odd years and it really hasn’t changed where we can envision and the dollar amounts typically don’t change, because we spend the same amount per store. If we raise revenue, the percentage will go down.

David Magee - Suntrust Robinson Humphrey

Thanks and just lastly, a little bit of inflation on the business, maybe more on the appliance side this year. Is that something that’s being managed through pretty effectively?

Ken Butler

I’m sorry, I didn’t understand it please.

David Magee - Suntrust Robinson Humphrey

There’s been a little bit of an inflation in the business this year.

Ken Butler

Surely, with the appliances here, with the appliance inflations. I hate to say it, some times the price increase seem to be fairly welcome. There are many price increases as we’ve had that have effected us, because it’s though when you get a price decrease. You already own a number of units out there at a higher cost and then you get a price decrease. If you drop the price and pass it straight to the consumer on a decrease, your in effect cutting your margins on all the other products you have.

So when you get a price increase, it can work to your advantage, the other way sometime and we understand that the prices went up for everybody. So we weren’t too hesitant with that and our acceptance from the customer viewpoint seems to be very good still.

David Magee - Suntrust Robinson Humphrey

Great, thank you Ken and good luck here.

Ken Butler

Great, thanks.

Operator

Thank you Mr. Magee. Our next question comes from the line of Jordan Hymowitz with Philadelphia Financial. You may proceed.

Jordan Hymowitz - Philadelphia Financial

Hey guys. Congratulations on a good quarter.

Ron Allen

Hey Jordan. How are you?

Jordan Hymowitz - Philadelphia Financial

My question concerns the Kiosk business. You guys have noticeably avoided the Kiosk and your competitor had disappointing margins in that business and there seems to be an increasing amount of competition on price in that business from other competitors hurting the margins now. I was just wondering, do you have any change in thought on that business. Are you still avoiding that business, and you continue to see other new entrance like Flexicom entering that business at lower price points.

Ron Allen

You got me to answer to that. I mean we are watching it. I think we’re intrigued by it and we certainly wish everyone well that’s in it. We were concerned about the prices and the legitimacy of the business, because you can get yourself into some pretty shady water with those type margins and so we are watching it and there have been a number of other companies that have entered it, but it just don’t seem to effect us, but it is a source of revenue and profitability.

What we looked at with some other companies when we got opportunities in the past to kind of look under the skirt is that we did really feel it would be accretive to our earnings to get into that business. The models that we looked at just weren’t generating the profit overall with what we’re generating.

Jordan Hymowitz - Philadelphia Financial

And where do you think the line is drawn, I mean between an installment loan and a rent down. Because in your core business if you are renting at four to five times, its clearly rent to own transaction, but if you’re having like 80% keep rates when does it become an installment loan and not really a rent down in your mind.

Ron Allen

You have to ask…

Jordan Hymowitz - Philadelphia Financial

Thank you.

Ron Allen

Rent on agreements, rent on agreements, that’s what we’re…

Operator

Thank you Mr. Hymowitz. Our next question comes from the line of Chuck Ruff with Inside Investments. You may proceed.

Chuck Ruff - Inside Investments

Hi, good morning.

Ron Allen

Good morning.

Chuck Ruff - Inside Investments

One the fourth quarter call you gave us the expected cash taxes this year and the next couple of years. Even taking that into account, the balance sheet is very conservative. Can you tell us longer term what you feel is the proper capitalization, the proper debt to EBITDA for the company.

Ron Allen

Well we’ve always as you know, we’ve always had a strong balance sheet. Guess we are a little concerned in that respect. It certainly has serviced us well for the last 20 years. Typically historically we’ve had debt to capital ratios of 20%, 25%. It’s been as high as 45% for the last 20 years, but in recent years it’s been lower, it’s around 12% now.

Chuck Ruff - Inside Investments

Now, you’ve got a big net cash position.

Ron Allen

Yes we have a cash position. We are going to have to pay about $135 million it looks like in cash taxes this year, that’s according to this morning, that’s couple of years. So they are coming up for renew, up for payment, but we are generating some cash more so than we’ve had in the past. We just aren’t growing as quickly as we’ve done years ago. We’re growing nicely. A few retailers are growing in 5%, 7% a year, but we are bigger and it’s hard to grow the 15%, 20% as you saw in the past.

Well, what we’ll do with the cash, we’ll continue to invest it in the business, I would suspect and it is from time to time that we will continue to buy back sock in the market place or the use of cash for the business. Maybe there are some other opportunities, but that’s kind of what the thinking is right at the moment.

We could grow quicker than we are now. There are plenty of opportunities to do that. We approved the model on HomeSmart. There is a lot of growth opportunities there that will take some of our financial resources to do, but we are a little premature on that and we are just going to continue to be what we are.

So it’s kind of a long answer to the short question that we really haven’t, we don’t have a definitive plan on how we are going to deploy the cash over the next three or four years. We’re think about it a lot, but we haven’t decided.

Chuck Ruff - Inside Investments

Sure. Do you have, not that you want to be there every quarter, but do you have a kind of optimal debt to equity number in mind. You talked about 20% to 25%; is that where you kind of want to get to longer term?

Ron Allen

I would say that’s probably where we probably fall in longer term, in a little bit more static environment than we are now. There’s some uncertainty out there today, but certainly in a tight situation how much – what’s going to happen on taxes, and then also we’re still going to have to protect our growth plans for the next couple of years, especially if HomeSmart becomes a good model for us.

Chuck Ruff - Inside Investments

Okay, thank you.

Operator

Thank you Mr. Ruff. Our next question comes from the line of Laura Champine with Canaccord Genuity. You may proceed.

Laura Champine - Canaccord Genuity

Good morning gentlemen. My question is on early payout. I know they always peak in the first quarter, but how did those track year-on-year.

Ron Allen

I think you got that Gil.

Gil Danielson

What was that question for?

Laura Champine - Canaccord Genuity

The early payouts.

Gil Danielson

Its early info, but …

Ron Allen

Yes, I mean the first quarter was the tax refunds that really drive it, but in the first quarter of ‘12 our early payout from the revenue standpoint is $33 million. A typical quarter other than the first quarter is $8 million to $10 million a quarter, so…

Laura Champine - Canaccord Genuity

Okay, so nothing unusual there this year.

Ron Allen

No.

Laura Champine - Canaccord Genuity

And then with your ticket, up some sequentially, but it looks like still down year-on-year with customer count growing faster than revenue. Then is the issue there units per agreement or is that the item by item price is lower than it once was.

Ron Allen

It actually, the item-by-item – the unit per agreement or per customer has actually risen and has constantly been rising over the last five.

Laura Champine - Canaccord Genuity

Is there something going on with technology that’s pushed that item-by-item price down or is it just the consumer choosing something a little more modest.

Ron Allen

I think its both. If you go back particularly with televisions and computers, we’ve had price degradation going on. It has settled somewhat, but I think also what’s going on in the economy, that your consumer out there is very budget conscious these days and they are a little bit more hesitant than they used be.

Laura Champine - Canaccord Genuity

Got it. Thank you.

Ron Allen

Thanks a lot.

Operator

Thank you Ms. Champine. Our next questions from the line of Budd Bugatch with Raymond James & Associates. You may proceed.

TJ McConville - Raymond James & Associates

Good morning Ron, Ken, Gil, Charlie. Its TJ McConville filling in for Budd. Congratulates on the quarter and thanks for taking my questions. Most of them have been answered, but may be Ken or Ron, on the customer count, driven by the national advertising, can you give us a high level sense for who your customer is today maybe versus a year ago. Are you seeing as we get some of this economic stability, maybe some customers actually trading up, where as they’ve been trading down over the last several years or is there any noticeable change there.

Ron Allen

No, I don’t see they were reaching up to a higher demographic, I think we are reaching a little wider with our demographic. One time we maybe got a little bit misled as we saw the use of the credit cards, our lives over the last 10 years. But really what was happing is these rises were most customers actually have debt cards.

So it really wasn’t a change in customers as we once may have thought was and we continue to monitor them. But it seems to be the same. There’s a lot of people in our demographic when you look at the demographics of household income less than $50,000.

TJ McConville - Raymond James & Associates

Okay and so they are coming from that target demographic as far as you can tell, that’s very interesting. How about in the HomeSmart segment, Gil did you give the number of customers of Ken in that actually segment?

Ron Allen

We didn’t give it. I don’t know if we have it right now.

Gil Danielson

No, we gained 5,300 home store customers of the total gain we had. It was something like 33,000 range, you can call me back.

TJ McConville - Raymond James & Associates

Okay, not a problem, but I’m just taking a look. So if its around 35 or 1000 or so, you have 450 stores. How many do you need to get to John’s point earlier, to that sort of breakeven level or what are you looking at being able to service in those stores.

Gil Danielson

Yes, I guess really the bottom line about half the stores, most of them are profitable and another half may be not be. I think they can make money in the lever we are at. We just got to clean some stuff on the backside.

We are positive to grow. We got may be another person in the store than maybe a typical model would have and we are looking at the features for growth as well. So if we just stopped growing right now and went back and tweeted, we probably could make money at every store.

TJ McConville - Raymond James & Associates

Okay. Very good gentlemen. Thank you again for taking the questions. Best of luck on the rest of the year.

Ron Allen

That’s TJ.

Operator

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

Arvind Bhatia - Sterne Agee

Yes, thank you and my congratulations as well.

Ron Allen

Thank you.

Arvind Bhatia - Sterne Agee

I had a couple of questions, one quick one and one on the product side. First one for Gil, the free cash flow this year, Gil do you have an estimate of what you expect for the full year, and then...

Gil Danielson

Yes, I don’t have a definitive estimate. Obviously we generated some cash in the first quarter. I think we’ll continue to do that this year, but we just haven’t talked about a definitive number on that.

Arvind Bhatia - Sterne Agee

Okay, no problem. And then on the product side, I was wondering how the change from PCs to tablets might be impacting that part of your business. Just wondering what computers represent today and is that business then shifting to other things? How are you kind of handling that transition that’s going on?

And then if you could may be talk about furniture a little bit, where that is, what kind of growth you saw in that category, anything going on in that category?

Ron Allen

Yes, I mean for the quarter, you can look at it on a same store basis versus year-over-year. Certainly the furniture items, the upholstery and the bedroom furniture, dinning furniture certainly have been very strong. Its been – as our TV business has been up a little bit also and mostly other items are. The only thing we’ve been a little bit soft on has been computers in the last few quarters, but other than that, most all of the other categories have been up quite, at least single digits in the last few quarters.

Arvind Bhatia - Sterne Agee

The computers, you don’t really see that as a big shift. It will be a gradual one which you guys can absorb.

Ron Allen

Yes, I mean computers for years as you know has been a huge growth area for the business and obviously the last couple of years its slowed down quite a bit as markets become more saturated.

Arvind Bhatia - Sterne Agee

Got it and my last question is going back to the HomeSmart discussion a little bit. I know that you guys are taking a closer look and perhaps by fall you’ll have decision on kind of the extension plans going forward. But once you determine that, can you give us some sense of how aggressive you would want to be? What kinds of initial dilution you might be comfortable talking on etcetera, just high level. I know again assuming that everything goes as planned and you have your model by fall, what should we be thinking for the following year.

Ron Allen

Well, you should be thinking some new store drives for HomeSmart stores. It really comes back as it comes back through the years is that if we really, the model proves itself and we really think it’s a great opportunity for us, we certainly would have to get management to run the stores and so that will be the challenge moving forward. And so we certainly don’t want to over expand and not be able to mange the business and so that’s going to be the big criteria, to decide what the growth rate would be in the future and we just haven’t decided that yet.

Arvind Bhatia - Sterne Agee

Wonderful. Great, thanks guys.

Operator

Thank you Mr. Bhatia. There are currently no additional questions waiting from the phone line.

Ron Allen

Okay, well thank you all for joining us today.

Operator

Ladies and gentlemen, thank you for attending the 2012 Aaron’s Inc. earnings conference call. This now concludes the conference. Enjoy the rest of your day.

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