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Executives

R. Charles Loudermilk, Sr. - Chairman of the Board & Chief Executive Officer

Robert C. Loudermilk, Jr. - President, Chief Operating Officer & Director

William K. (Ken) Butler, Jr. – President, Sales and Lease Ownership Division & Director

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

Analysts

Dennis Telzrow – Stephens Inc.

Arvind Bhatia – Sterne, Agree & Leach

Laura Champine – Morgan, Keegan & Company, Inc.

John Baugh – Stifel Nicolaus & Company, Inc.

Chris [Rappeljay] – Suntrust Robinson Humphrey

Laura Richardson – BB&T Capital Markets

Susan Hagar – AG Asset Management]

Aaron Rents, Inc. (RNT) Q4 2007 Earnings Call February 20, 2008 10:30 AM ET

Operator

Good morning ladies and gentlemen and welcome to the Aaron Rents’ fourth quarter earnings call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. The company’s earnings release issued yesterday and the related Form 8-K is available on the Aaron Rents’ website at www.AaronRents.com in the Investor Relations section and this webcast will be archived for replay there as well.

With us today is Charlie Loudermilk, CEO; Robert Loudermilk, President; Ken Butler, President of Aaron Sales and Lease Ownership; and Gil Danielson, CFO. Before we discuss the results I would like to read the company’s Safe Harbor statements. 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 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 2006 annual report on Form 10-K as updated by subsequent quarterly reports on Form 10-Q including, without limitation, the company’s projected revenues, earnings and store openings for future periods.

I will now turn the call over to Mr. Danielson.

Gilbert L. Danielson

Thank you for joining us this morning. Charlie will start the call with a few comments and then Ken will add some further comments and then I will come up at the end and kind of go over the financial highlights and then we’ll have questions and answers after that. So, Charlie.

R. Charles Loudermilk, Sr.

I’m pleased with last year how it came out. We opened over 200 stores. In this business you have a big new store drag, we call it new store drag. Each store loses $150,000 to $200,000 before it turns into a black month and so we have digested that. Of course with that large an expansion you have things such as personnel problems and of course problems with inventory and all the other. So I’m very pleased with how the month came out. I think we’re positioned now to really do well this coming year or the year we’re in today. That’s all I might have to say. Ken.

William K. (Ken) Butler, Jr.

Good morning. First of all I just want to thank and recognize all of our employees, franchisees, partners and suppliers for all the hard work and dedication that’s gone into our aggressive store opening plan over the last 18 months. Although some outsiders and investors have said the plan was ill fated and costly for sure, I am proud of the extra effort that has been put forth by our team to get the advanced majority of the stores opened successfully. As in college football recruiting or any professional sports draft, you cannot measure the success of [inaudible] after class until several years of performance of results. Although have been rightfully critical of the plan due to the loss of short term profitability, I truly believe we will all appreciate this accomplishment several years down the road. In fact I think it’s very similar to the [Holly Meyers] locations we acquired more than five years ago and the quantum leap that was made with our stock performance afterward.

As we enter 2008 our plans are to slow down our new company store openings and allow our management team enough time to absorb the new store drag and focus on our mature operations from a profitability and personnel standpoint. We have around 35 parcels of land we have acquired in addition to the new stores we’re opening this year. Most of these are already permitted and ready to go when we begin a normalized rate of expansion in the not so distant future. Our franchise sales initiative continues to attract quality, well funded franchisees and we remain proud of what our franchised system has and continues to accomplish. Although our business climate has been challenging we have focused on what we can control and our associates have been working hard to reduce our write offs and increase revenue in each and every store. I’m happy to report to you that we are seeing a lot of progress in these areas.

Our current business climate is upbeat as we are seeing an increasing demand for LCD TVs. We think this will continue on as in February of 2009 there will no longer be an analog signal submitted to your television set. What that means is if you currently have an analog TV, you’ll either have to get a converter box to change the signal to digital or purchase or lease a new digital television, hopefully from Aarons, because nobody beats Aarons. We take our current up tick we’re experiencing in our television line as evidence of the trend. Additionally we’ve changed some of our terms in our furniture pricing and we are seeing some immediate results of increasing demand in that category. All in all we are optimistic about our future and everyone on our team is focused on looking for ways to reduce costs, increase revenue and improve operating results.

Gilbert L. Danielson

I’ll just go over a few of the financial highlights for the quarter and 12 months. The revenue has increased 14% for the quarter and 13% for the year. The average sales on lease ownership revenues increased 16% for the fourth quarter and 14% for the year. In addition, our franchisees their revenues that are not revenues of Aaron Rents, they’re their own revenues, but they also increased their revenues 18% for the quarter and 15% for the year. Same store revenue growth for the fourth quarter for the Company-operated stores was 3.9%. Same store revenue growth for the franchised stores was 15%. Net earnings for the quarter were $15.5 million or $0.28 per diluted share and for the year was $80.3 million or $1.46 per diluted share. During the quarter we added a net 99 new Aaron stores and a net 215 stores for the year that’s 15% in store count. We also awarded area development agreements during the quarter to open another 30 franchised stores and our pipeline of stores that are expected to open in the future at the end of December was 284 stores.

At December 31st we had 987 Company-operated sales and lease ownership stores; 480 franchised stores; 27 Company-operated RIMCO stores; 4 franchised RIMCO stores; and 62 corporate furnishing stores for a total of 1,550 stores open. As we noted in our earnings release we plan to open in 2008 between 55 and 75 new Company-operated stores and between 70 and 90 new franchised stores. The Company-operated store openings will be offset somewhat by the merging and selling of some stores not meeting our revenue and profit goals and as we have done in the past we also plan to continue to acquired franchised stores or sell Company-operated stores to franchisees as appropriate.

We expect diluted earnings per share in the first quarter of 2008 to be in the range of $0.38 to $0.43 per diluted share and for the 2008 year in the range of $1.40 to $1.55 per diluted share. Our plans for the next several years are to grow on average over the next several years our store base in the range of 10 to 13% a year. As we did mention our store growth will be a little less than that in 2008 as we do some re-shuffling of the stores that we currently have.

We’ll certainly now turn the call open for any questions that people may have.

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from Dennis Telzrow from Stephens Inc. Please go ahead.

Dennis Telzrow – Stephens Inc.

I wonder if you could talk a little bit, I know loss rates went up on you last year, you talked about the change from the paper base to computer base collections. Any update on improvements there or thoughts?

R. Charles Loudermilk, Sr.

We have been making the change. We had to go back to the Okidata printers and our people have embraced it and today I can proudly say we’re closing our non-renewals, that’s what we call them, at our standard. So we’re collecting the right sum of money and we’re in line where it needs to be.

Gilbert L. Danielson

I just have a few facts that I can throw out for looking at the write off as a percentage of gross revenues. If you look at the store level gross revenues and compare write offs to that number which is really the fair comparison to do it. In the fourth quarter our write offs were 3.1% in the fourth quarter as a percentage of store level revenues versus 2.9% for the fourth quarter of last year and it was 3.2% in the third quarter. So it’s hanging around kind of where it’s been, it’s a little bit worse than the fourth quarter a year ago, it’s a little bit better than the third quarter of this year. Noticing in January which was the only month we’ve completed since the end of the quarter it was up 2.9% so it’s fractionally better than it has been running. We’re encouraged though that the trends we feel are going to tick up and improve and it looks like February trends look pretty good so far and so it takes a little time obviously to make an improvement on that end but it does seem that the trend is trending towards improvement.

R. Charles Loudermilk, Sr.

Also our franchise stores with collections have been very good.

Dennis Telzrow – Stephens Inc.

And one other question, franchisees obviously continue to do better than the corporate on a same store basis, any thoughts on why they continue to be such a big disparity there?

R. Charles Loudermilk, Sr.

Yeah, I’ve got a couple thoughts on it. Actually this past month our non-renewal basis was the same as the franchisee so I think we are getting some marked improvement. If you think of the average franchisee typically may have three or four stores, you’ve got another operator involved, he has a regional manager and they’re very close to the stores so they’re very much on top of their write off game. Not saying anything bad against company stores but we don’t have a retail manager over eight to 10 stores so they’re a lot closer to the operation overall and I think they can take some shortcuts that we can’t take as well. So all in all when you look at it it’s not like the franchisees are beating the corporate stores performance wise 2 to 1. It’s like maybe they’re 10 to our nine.

Operator

The next question comes from Arvind Bhatia from Sterne, Agee. Please go ahead.

Arvind Bhatia – Sterne, Agree & Leach

I want to understand a couple things, one on the traffic side if there is any number you can provide us what kind of an increase you saw in traffic embedded in that 2.9% comp and then are you seeing anything at this point that would suggest that you are actually gaining higher income customers, if you will, due to the uncertainty of the economy? Just sort of on a more macro question and then I’m trying to understand the franchise performance question a little bit more, the 15% of same store sales number seems quite impressive obviously. What was the performance of two year old stores if you will? I’m trying to understand how much the age of these franchise stores have to do with that group’s performance and if there is – because 15% versus 3.9 seems obviously quite a bit different. Is there a more realistic number, you know more comparable number if you will to your own stores?

Gilbert L. Danielson

Well to answer your question working backwards, I guess, on the same store revenues basically the franchised stores do have a slightly younger store base, not much if you look at the stores that are less than two years old, the franchisee stores are a little bit younger than the company stores but it’s not the [inaudible] so I don’t think that’s a big factor in the situation. Since the franchisee’s revenues are their revenues we don’t track them as closely as we do our company stores. I don’t know what their – they haven’t calculated what their revenues would be over a two year period. We just look at it on a quarterly basis and as the last three, four or five quarters it has been extremely strong. It was remarkably strong there in the fourth quarter this year but it has been running very well in the last year, year and a half. So your question on traffic, the one thing we always –

William K. (Ken) Butler, Jr.

I would like to add a little bit of light on that comparative number with franchised same store sales. Number one there isn’t a lot of franchisees in Florida and Florida was a very hit market from our perspective. Florida was our best market, still is one of our best markets but we had stores down there doing $180,000 a month to $200,000 a month that are doing $150,000 a month this year and we’ve got more than 100 of them in that market. And we saw consistency amongst every one of those stores that are down. So that’s impacting our same store sales numbers. We’re seeing some light in Florida right now. Additionally in the same store sales your franchisees aren’t so to speak pushing the envelope. When I say that we’re filling in lots of gaps with stores and when we do that we do get some cannibalism when we’re adding stores to the markets. Atlanta is at 45, 50 stores in it and we keep wedging stores in so when we do that you’re going to take something away from the old store that you don’t see a franchisee doing because they’re not into the major markets. So there’s some light on that.

Arvind Bhatia – Sterne, Agree & Leach

How much is Florida down this quarter?

Gilbert L. Danielson

What I did, I took Florida which as Ken said is mostly all company stores other than very few franchised stores. Our company Western operations which is mostly Arizona, we have a few company stores I guess in California and the Northeast again our franchisee in the Northeast is doing extremely well. We haven’t been as successful up there in the company stores but if you take those three regions out of our 11 regions our same store revenues for the quarter would have been up 5.8% versus the 3.9%.

Arvind Bhatia – Sterne, Agree & Leach

In terms of being able to close the gap versus the franchisees, how high do you thing your same store sales once you take out these anomalies if you will where do you think that number could say over the next 12 to 18 months especially as you start to get the benefit of all the new stores that you’ve opened?

William K. (Ken) Butler, Jr.

I’ll tell you what we’re doing as far as our projections for 08. We’re not really starting the year with much higher projections in same store revenues than what we’ve been experiencing in company the last couple of quarters we do feel it will pick up as we could gather through the year as all these new stores that we’ve opened in the last 18 months come on line and that will drive the comps back up. So we anticipate by the end of this year, last half of 08, you’ll be seeing kind of that mid single digit higher comp, 6 to 7% comp that we have experienced in the past number of years and actually it’s been higher than that the past couple years. But we’re not forecasting immediately that the comp is going to pick up dramatically for the company stores. I would suspect the franchise stores will continue to do well and they’ll continue to open stores and I think you’ll see some – I don’t know if it will be 15% moving forward but it will be good for the franchise stores.

Arvind Bhatia – Sterne, Agree & Leach

And then if you’ll just on the EPS side your annual guidance the way we’re looking at it it looks like the first half should be down because you’d still have the drag, can you give us some color on kind of directionally how you expect the first half earnings to be and then second half similarly directionally?

William K. (Ken) Butler, Jr.

We haven’t even talked about the first quarter. We gave some guidance for the first quarter earnings. We will still have new store drag coming through in the first quarter. We opened a ton of stores in the fourth quarter so the new store drag in the first quarter will be comparable I believe with the fourth quarter numbers. It should start going down as we gather through the rest of the year and we get in the third and fourth quarter that the numbers that we anticipate will be better than certainly they have been in the last few quarters, from a comparison standpoint quarter to quarter, year to year.

Arvind Bhatia – Sterne, Agree & Leach

And then of course the question on traffic and if you’re seeing anything indicating higher income customers?

Gilbert L. Danielson

I’m not sure about a higher income customer. We’re seeing as I mentioned earlier a lot of LCDs moving out the door, that business compared to last year is up quite a bit. We are seeing some up ticks right now in furniture. We’ve stretched the terms out and cut prices a little bit and we’re seeing demand increase their. We’re having a great February. We’ve got a lot of payouts but a lot of our folks are re-upping and so we’re having very good customer growth right now.

William K. (Ken) Butler, Jr.

One thing else as we did mention we did the customer count at the end of December, we had 610,000 customers corporate side and 318,000 on the franchised side. That was up 15% new customers from the same period in December of a year ago.

Arvind Bhatia – Sterne, Agree & Leach

Last question on the economic stimulus package and the tax rebates, etcetera that are expected, is there a way to think about that? Have you built anything into your model, any benefit that you’ve built into your thinking, your guidance at all?

Gilbert L. Danielson

I kind of look back to 01 was the last rebate that the government came up with that I think everybody got them and we couldn’t really – 01 was the year of great growth for us and we opened a lot of the old Holly Meyer real estate locations and so it didn’t really determine whether or not that stimulus had a big affect on our business or not and a couple months after that in 01 911 happened but we certainly did well in 02, 03, 04 after that. I don’t know. We’ll see. It certainly cannot hurt. It’s not really factored in. I mean when our customers do get some discretionary income or get a check like that they tend to put it back into the economy so we hope we certainly gather some of that. This time of the year and has been the case for years and years and years the tax refund has really driven the first quarter to a high revenue and earnings level and that seems to continue. So that shows you how important it is when customers get cash in their hands to our business. There will be one thing on the stimulus package, always [inaudible] details. I haven’t studied that much if it does look like that we’re going to get some additional cash depreciation breaks that Congress passed a couple weeks ago. The way I read it and it’s an 08 stimulus only for accelerated depreciation is that we’ll again be in a period in 08 where we’ll probably pay very little Federal income taxes in this year as part of that. We still have to analyze the law of that when it comes out to really try to get a real handle on what the cash [inaudible] of that will be.

Operator

The next question comes from Laura Champine from Morgan Keegan. Please go ahead.

Laura Champine – Morgan, Keegan & Company, Inc.

It looks like we’re looking for another year of top line growth that’s well in excess of bottom line growth and I understand the new store drag but you’ve also got a good positive comp and I’m a little confused that you’re not seeing more leverage particularly on the operating expense line. Can you tell us why that is and maybe break out for us what’s variable and what’s fixed cost within op ex?

Gilbert L. Danielson

Obviously our projection for the first quarter is at our guidance $0.38 to $0.43 which would be down from where it was the first quarter a year ago so we’re starting out the year with a down quarter so we’ve got some work to make up for to have a good year for us. Really where we do make the money obviously is on our operating expenses, leveraging off our operating expenses. If you look at our income statement and the last few quarters our depreciation as a percentage of revenues and our cost of sales as a percentage of sales has actually improved and I think that’s just a reflection that we are doing a good job in purchasing products and managing our inventory and that certainly improves the margins. Where earnings have been down are due to the operating expenses have been higher than revenues and there is several reasons for that. One is obviously our same store revenues have been lesser in the last few quarters than it has been historically so we’re not collecting much money and end up gaining much revenues in our stores. And also and we opened all these new stores because then the operating expense line where basically that shows up. Stores open up, no revenue, all their costs are in operating expenses so operating expenses go up as a percentage of that. There’s a high fixed level that’s operating costs at the stores. Our break even at the store level is usually about $70,000 to $75,000 a month in revenue and once you can get to that break even and get above that you leverage off of fixed costs of running the stores. That’s where you become profitable. So hopefully we will see some improvement in our operating expenses as they move through the year, as we get past this new store openings and we can lever as we get in the third and fourth quarter. We’ll get much better comparisons levered wise than we were last year. We certainly are very cost conscience, we’re looking at costs in the company, certainly managing our expenses and doing everything as Charlie mentioned. We’re doing everything to improve profitability, profit margins and really get profits back on a more consistent track than where it has been the last few quarters.

R. Charles Loudermilk, Sr.

I want to say that what Gil just said is very, very true. We all gathered around and decided that profitability last year was not what we should have had, than we have ability to do, a lot better than and we have started two months ago cutting the costs, looking at every cost item and I think we have made some really improvements on operations and I think we’re going to see a better profit margin that we’ve seen in the recent past.

Laura Champine – Morgan, Keegan & Company, Inc.

Gil, maybe you could give us a sense of what overheads and occupancy are as a percentage of sales just so we can determine what kind of leverage you ought to see as sales improve.

Gilbert L. Danielson

Well if you look at operating expenses, your salaries and wages and I’ll just give you some round numbers you’d lose about 20% of revenues and that’s obviously a big part. Advertising is 3%, delivery is 3 or 4%, occupancy using a store occupancy is $5,000 to $6,000 a month, $7,000 a month in occupancy. Those are the biggest factors I guess that from the operations standpoint. Obviously the biggest expense at the store level is depreciation of the rental merchandise, the biggest expense I guess, right up there.

Operator

Our next question comes from John Baugh from Stifel Nicolaus. Please go ahead.

John Baugh – Stifel Nicolaus & Company, Inc.

Couple, three things. Ken, the change in furniture terms could you go through that quickly?

William K. (Ken) Butler, Jr.

Pretty much everything on our floor for five or 12 months and our sofa loveseat pricing the majority I guess when a consumer came in the store would be anywhere from $119 a month up to $169 a month and we think we were getting some price shock from our consumers although it was a good value. If they can’t afford the monthly rent then it really doesn’t matter. So we adjusted the term to 18 months, cut the price 25% and it’s definitely the right move. We’re seeing an up tick in that category already. We just did this in the last two or three weeks.

John Baugh – Stifel Nicolaus & Company, Inc.

Now either that would have the impact of improving transactions or customer counter volume in units but you’re taking a monthly price cut and of course you’d cap through the revenue and the additional six months at the end but wouldn’t that actually hurt revenue or are you making enough volume that it’s in the short term in the next 12 months let’s say wouldn’t that actually hurt?

William K. (Ken) Butler, Jr.

I think it’s actually going to increase revenue because what we do off that is we run some packaging to encourage the customer to take cocktail, end tables, rugs, lamps and can put a whole package together at a reasonable price so we think it’s going to be conducive to doing more package deals. So no we don’t think it will be a price cut at all. The other side of it if a customer can’t afford the payment in the second, third, fourth month it results in a return. So we think going forward it’s going to help customer retention as well.

John Baugh – Stifel Nicolaus & Company, Inc.

And, Ken, are you seeing the credit crunch that’s ongoing that’s clearly impacting the lower income person more than the upper income, are you getting any anecdotal or any evidence that customers are coming through your door that heretofore would have applied for credit or gotten credit, anything there?

William K. (Ken) Butler, Jr.

No, I don’t think we’ve seen that yet. I expect to but I certainly haven’t heard or seen evidence of it at this point. It makes common sense that we will but I guess I’ve got a theory on that as if they had a home and a home mortgage and they were kicked out of the home it doesn’t mean they need furniture yet. So time will tell on that as they need to replace the refrigerator or washer and dryer or something to that degree, I think they’ll start coming in but I don’t see a swarm coming to the store. I don’t see that.

John Baugh – Stifel Nicolaus & Company, Inc.

I agree with you on that on the timing. And rent to rents, commentary there, Robert if you’re on?

Robert C. Loudermilk, Jr.

Things we do well, we have the stores out in California and Chicago that we’ve opened that are ramping up nicely. So it seems to be stabilized, it’s becoming a smaller and smaller part of the business and we did separate the office stores and we’re working on that venture to get those stores’ volumes up to get them in the black. But really it’s been good on the rent to rent side and it’s just kind of a flat industry if you will between us and Cort and one or two other players out there. The manufacturing piece very, very busy now, a little slow in January but February is normal and really picked up and a lot of furniture being produced here five to six days a week and so I think it’s a testament to the rent to rent but really the sales and lease volume Ken sees and the distribution centers are very busy delivering a lot of product in addition to the flat LCD TVs. So it’s kind of normal. We’re just seeing a lot of – and all these new stores that we put out there last year are demanding a lot of product so it’s good.

John Baugh – Stifel Nicolaus & Company, Inc.

What was the pre-tax performance in 07 and kind of what was the reasonable guess at 08, Robert?

Robert C. Loudermilk, Jr.

Gil, I’m going to – you got the number on –

Gilbert L. Danielson

Yeah, they did a pre-tax in 07 around $9.4 million which is down from last year’s $12 million. So I’m not really expecting that to improve much in 08, kind of flattish from earnings and from a revenue standpoint. Did $121 million in revenue.

Operator

The next question is from David Magee from Suntrust Robinson. Please go ahead.

Chris Rappeljay – Suntrust Robinson Humphrey

Hi this is Chris Rappeljay on the call for David this morning. A few questions, first if I clarify did you say in opening remarks that there also some changes in terms made on televisions and if so, could you describe what those are?

William K. (Ken) Butler, Jr.

Yeah, the change that’s going to occur is mandated next year.

Chris Rappeljay – Suntrust Robinson Humphrey

No, actually I meant on your terms. On the terms of the contract. I thought you –

William K. (Ken) Butler, Jr.

Oh, no, no. We did not change the terms but if prices have come down on the LCDs they made them much more affordable for the consumer and we think it’s for our consumer and we’re seeing a big up tick in the volume that we’re putting out with LCDs.

Chris Rappeljay – Suntrust Robinson Humphrey

So the changes you made were just the ones you described –

William K. (Ken) Butler, Jr.

Only in the furniture.

Chris Rappeljay – Suntrust Robinson Humphrey

- in furniture.

William K. (Ken) Butler, Jr.

Yeah, that’s correct.

Chris Rappeljay – Suntrust Robinson Humphrey

And then in terms of the macro economy, if there should be any further interest rate cuts this year, how do you tend to think about those as far as what you expect to see in business or any impact on you?

William K. (Ken) Butler, Jr.

I don’t think we’ve ever seen an impact from interest rates whether they’re high or low.

Gilbert L. Danielson

The movements of interest historically has never been a factor that can move the business one point or any time. We have an annuity business obviously with 900,000 customers out there and every month an issue for them in many respects to pay their bills and they certainly are affected I guess [macrolly] by interest rates indirectly but it’s not a – they don’t really relax interest rates on their day to day activity as far as their relationship with us.

Chris Rappeljay – Suntrust Robinson Humphrey

And then finally are you seeing any up tick or any changes as far as look alike competition goes? I know there is one company here in Atlanta but I was wondering if there’s any such activity in other regions and if you’re seeing any changes in that region?

William K. (Ken) Butler, Jr.

Yeah, I think there’s some regional players that have done the math so to speak and maybe replicating what we do and we consider that an honor. We’ve actually gone out and we recruited some of them to become franchisees and successfully done that with a guy in Texas and he’s a big proponent of our program. He doesn’t have to compete against us so we’re looking at more and more of that when people see what we’re doing and want to be a part of it. They’ve got the distribution system behind them, buying power and our credit facility.

Operator

The next question is from Laura Richardson from BB&T. Please go ahead.

Laura Richardson – BB&T Capital Markets

Just a couple miscellaneous questions for you, can you flush out how the new store openings and the closings are going to occur by quarter in 2008?

Gilbert L. Danielson

I don’t have that sheet with me. Most of them in the first quarter I guess.

William K. (Ken) Butler, Jr.

Yeah, I guess we’re going to do some realignment in the first quarter so you’ll see some of that. As far as the openings are concerned on the company side it’s going to be kind of equal through the year is our planning, might be a little bit more openings in the first half but again the new stores open, we’re trying to even them out throughout the year. We are doing some re-shuffling on the franchise and company stores and most of those will take place in the first quarter I think.

Laura Richardson – BB&T Capital Markets

So do you have an idea of what the number of those is going to be?

William K. (Ken) Butler, Jr.

We’re still working on it. It changes every day.

Laura Richardson – BB&T Capital Markets

And back to the delinquency question you got earlier, does that figure you gave give all the 3.1% write off, is that comparable to what you see historically in the SEC filings called net merchandise shrinkage or was that something different?

William K. (Ken) Butler, Jr.

It’s called rental merchandise adjustments is what’s in the SEC filings and those are write offs of our merchandise that we either cannot collect it back from the customers for whatever reason and also includes internal write offs when a TV drops off the back of the truck or whatever. So probably half of those numbers are related to a customer and the other half related to just internal usage.

Laura Richardson – BB&T Capital Markets

And so the one you gave for the fourth quarter, the 3.1 that includes the damages as well as the non-paid –

William K. (Ken) Butler, Jr.

Yeah it’s total write offs and it’s net of recoveries. Shrinkage, internal auditors go through and shrink something.

Laura Richardson – BB&T Capital Markets

Maybe I have the number wrong but for some reason for the third quarter I have that number 2.7% but you just said it was 3.2.

William K. (Ken) Butler, Jr.

- is at the store level kind of how if you look at it. In the fourth quarter this year we did have to make a $700,000 adjustment as a debit to P&L to our reserve. We have a reserve on our book that covers future write offs since our actual write off experience has been going up we’ve had to increase that reserve a little bit, kind of a double whammy. So there is other things in those rental purchase adjustments as reported but I think that the store level is really the best analogy to look at it as far as trends are concerned.

Laura Richardson – BB&T Capital Markets

And does that also include remember a couple quarters ago you talked about theft of TVs from the stores?

William K. (Ken) Butler, Jr.

That’s everything in those numbers.

Laura Richardson – BB&T Capital Markets

And how did you guys fix that problem?

William K. (Ken) Butler, Jr.

Well it’s not completely fixed but we’ve neutralized it I guess. Most of our stores particularly in the city stores are putting the LCD TVs up at night. We’ve got what we call a smoke bandit in a number of our stores that when the glass breaks a canister explodes in the store and fills it up with smoke and that’s been very successful. We’ve put some bars not really bars but gates in certain stores that we needed to and we’re still exploring other avenues. I understand there’s a radio tracking device we can put on televisions that we’re actually looking at right now but we still have them. We’ve had a lot of success in getting people arrested which we think certainly did that. We’re doing that and we’re hoping it’s good enough to stabilize and I think we have seen evidence that it’s stable. But if during the week it doesn’t go back, we still don’t a break in.

Laura Richardson – BB&T Capital Markets

And then just on the subject of the TVs my understanding was that even if you don’t have a digital TV you don’t necessarily need to buy a new one, your cable service will take care of giving you a new box?

William K. (Ken) Butler, Jr.

No, no. I don’t think so. You’ve got to get to your local provider but we think the box is to convert the signal for about $200 or $300. So I’ve just got to believe that a lot of folks are going to go ahead and move to an HD television and not invest in a box.

R. Charles Loudermilk, Sr.

I was just reading this morning the paper, the government is giving a $40 coupon and they’ve reserved a billion three to pay for these coupons. These boxes are going to cost somewhere between $60 and $80, only $60 to $80 and they’ll have a $40 coupon to convert and I think March 1st is the day they’re going to convert next year. And thee coupons are good for 90 days so they’re going to be using them soon and millions and millions of people have already applied for these coupons so they’ll be converting all in all.

Laura Richardson – BB&T Capital Markets

And coupon is that the thing you see the ads on TV for, call this 800 number and we’ll help you out?

R. Charles Loudermilk, Sr.

I just read this in the Atlanta paper today about, I had no idea how that was going to work but it was very detailed in the paper that there’s going to be a $40 coupon given by the government and you take the coupon to the supplier and he gives you a box and the customer is going to have $20 to $30, $40 whatever the retailer wants to charge for the box.

William K. (Ken) Butler, Jr.

The beauty of it is though I think there’s going to be a bigger demand for the high definition television, for the digital signal because you’re going to get a terrific picture and a lot of people all these years passed in buying high def and they really haven’t cut the signal. So the signal is coming and I think it’s going to increase demand. I think the average consumer out here is going to want to have a high definition television.

Laura Richardson – BB&T Capital Markets

So it could be more of a want than more of a need because if you can get a box for $20 or $40 you might live with your old TV but you’re going to want a new one eventually?

William K. (Ken) Butler, Jr.

Absolutely.

Operator

We have a question from Susan Hagar from AG Asset Management. Please go ahead.

Susan Hagar – AG Asset Management

I’m wondering if you have a sense of how many of your customers who own homes will have a bump up in their monthly housing expenses and might be vulnerable to not being able to pay their bills to you?

William K. (Ken) Butler, Jr.

That’s a good question and I really don’t have that answer. But the minority of our customers actually own homes so but I don’t have the answer to that.

Susan Hagar – AG Asset Management

Do you think your managers have a handle on which of their customers are headed in that direction that might be getting higher expenses?

William K. (Ken) Butler, Jr.

I think they do, yeah. Our managers know our customers, they call them month in month out or every 15 days so yeah, they know who – they can tell you who is a problematic account, they can tell you who isn’t based on their payment history. Yeah, they’re pretty close to the action and can see some kickback but I do think it’s such a small minority that own homes that I don’t think they would even be able to give you that answer.

Susan Hagar – AG Asset Management

Do you have that number?

William K. (Ken) Butler, Jr.

We don’t have – the majority of our customers live in a rental property.

Gilbert L. Danielson

I think less than 20%.

William K. (Ken) Butler, Jr.

Also you have to look at the business. We rent the necessities of life, the furniture, the washing machine, the refrigerator and the television set and the customers are going to pay for those necessities just like you’re going to pay for rent. So I don’t think we’re going to be hurt. After 52 years I don’t think the economy has affected us very much. We have made money every year so maybe it’ll help us in some ways because a lot of these people will not be able to buy the product on a time payment and they’ll come to us with no credit checks and so forth.

Operator

Mr. Danielson, we have no further questions.

Gilbert L. Danielson

Thank you for your interest in our company.

Robert C. Loudermilk, Jr.

Thank you.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may disconnect.

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