Aaron Rents, Inc. Q2 2008 Earnings Call Transcript

Aug.18.08 | About: Aaron's Inc. (AAN)

Aaron Rents, Inc. (RNT) Q2 2008 Earnings Call July 23, 2008 10:30 AM ET

Executives

Gilbert Danielson – Chief Financial Officer

Lee Wilder – Investor Relations

Robert Loudermilk – Chief Executive Officer

Charles Loudermilk – Chairman

Ken Butler – President of Aaron Sales & Lease Ownership

Analysts

Dennis Telzrow – Stephens Inc.

Arvind Bhatia – Sterne, Agee & Leach

John Baugh – Stifel Nicolaus & Company, Inc.

John Harlow – Barlow Henley

Laura Champine – Morgan, Keegan & Company

Chris Rapalje – SunTrust Robinson Humphrey

Robert Straus – Merriman, Curhan, Ford & Co.

Operator

Welcome to the Aaron Rents second-quarter earnings call. (Operator Instructions) I will now turn the call over to Mr. Gil Danielson.

Gil Danielson

I am going to turn the call over briefly to Lee Wilder who does Investor Relations work for Aaron Rents. She will read our Safe Harbor Statement and then she will turn the call over to Robert and Charlie and Ken and myself and will have some further comments.

Lee Wilder

My name is Lee Wilder and I assist in Investor Relations for Aaron Rents. The company’s earnings release issued yesterday and a related form 8K are available on our website, www.aaronrents.com in the Investor Relations Section. This webcast will be archived for replay there as well.

Joining us today are Charlie Loudermilk, Chairman, Robert Loudermilk, CEO, Ken Butler, President of Aaron Sales & Lease Ownership 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 demands 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 2007 annual report on form 10K. Including without limitation the company's projected revenues, earnings and store openings for future periods.

Robert Loudermilk will have a few opening remarks. Charlie Loudermilk will follow and Ken will talk specifically about the Aaron’s sales and lease ownership results and then Gil will add some further information. Robert?

Robert Loudermilk

Thank you, Lee. I would like to again say that we are quite pleased with our second quarter results that have exceeded both our revenue and earnings expectations. Our associates across the board in all divisions both in the field and the corporate offices have worked extremely hard especially in the past two quarters to achieve this record results. Even in these challenging times, I believe our customers are seeing our products and unique payment programs to reposition our household with traditional credit continuing to comeback in line with historical facts that I believe will continue to see more and more individuals realizing the value of the Aaron’s offerings.

Our same store revenue growth in both company operating and franchise store were once again strong in the quarter and we continue to see improvement in our collections as we call renewal efforts nearing our low historical levels. This is again a testament to the hard work of our associates. The flaws of financial results continue to be negatively impacted by the new store startup expenses we call ‘new store drag’ related to all the new stores we have opened in our last 18 to 24 months.

As these stores continue to ramp up in revenue and we slow down the pace of the new store openings, this new store drag will continue to subside and should return to a more normal levels of Q4 of this year. Aaron Direct corporate furnishing divisions continue to reposition itself in this tough corporate climate and MacTavish upholstery manufacturing shows an approximately 12% increase for the second quarter and for the same period last year, six month, a 4% increase and we see that continuing as we go into our traditionally busy season in the fall.

Going forward, as we have stated our plans for the next several years to grow our store base on average in the 10% to 12% range. This year 2008, our net corporate store growth will be somewhat less than the 10% to 12% as we consolidate and sell stores that have not been achieving our revenue and/or profit goals. This slowdown in yearend growth will allow management to build bench strength and should improve future profitability and overall financial performance.

Before I close, I would like to say I am probably one of the luckiest guys alive. We have a great company, built and operated by dedicated associates. My recent promotion to CEO is another chapter and a dream life. Notice that it was impossible without the 53 years of hardworking and personal dedication to this company and associates by our chairman, my father, Charles Loudermilk. I could not ask for a better situation being CEO while have backing foundation and continuing mentoring he provides on a daily basis. I want to thank him publicly for his dedication to this company, myself and our family.

Thank you for your support to our company and we will now will continue to turn the call over to Charlie for his comments.

Charles Loudermilk

Well, thank you Robert. I would say that was an unexpected comment. So, thank you very much for those. It is great to have a son that has the ability that Robert has and let me say to him becoming the CEO, he has been accepted by everyone that I know of and the team is intact. He has done extremely well. I want to thank all of our associates who have made these last two quarters what they are today and I can see where we are going to continue to drive the decision that we made to slow down on store openings has been the right decision and I think that we have a bright future in front of us and Ken, you..?

Ken Butler

Yes, I am ready. Should we go?

Charles Loudermilk

I am sorry. I have to thank our people. Okay, get going.

Ken Butler

Yes I want to reiterate that to you Charlie. There is more price in our management team and all of our associates and franchisees were stepping up in the second and the first quarter of this year to achieve another excellent operating results. We have been working really hard evaluating each and everyone of our underperforming stores and making tough decisions as to whether or not to keep the stores open or these particular stores open or sales or franchisees move a location, change the manager, change the marketing. So, you can see by the recent press release we have been making many of these decisions everyday. We will continue to remain focused on the retention and acquisition of customer base in every market in which we operate.

As a results of our customer focus, we gained 45,582 new customers in the second quarter alone. Last year during the same quarter, we gained 22,189 new customers so we have more than doubled last year’s customer growth. Overall business trends are good and our deliveries, collections are all in line with historical numbers and have improved over the last year. July is also a good start as well.

LCD televisions continue to lead the way as pricing continues to come down making larger size units more affordable for our customers. Our furniture category continues to improve as a result of more advertising and focus and better payment terms that we initiated back in January. We do think the stimulus check certainly of our business but we never saw a really significant increase in early payouts as we normally see in this traditional tax refund month in January and February.

Our franchisees continue to shine with 16% same store sales during the quarter and we awarded an additional 29 store territories during the quarter bringing our pipeline to 285 stores to open in the near future. We will continue to stay on course and focusing our profitability in each in every store in growing our customer base in every community that we operate within. Gil?

Gil Danielson

Okay, I will just go over a few highlights for the second quarter in the first six months. As you know, company’s revenues increased 15% for the quarter to $411.2 million and 14% for the six months to $848.5 million. Yearend sales on lease ownership revenues increased 16% both in the second quarter and for the six months, the second quarter to $381.4 million and the six months $787.7 million.

In addition, our franchisees which are independent operators collectively increased their revenues to a $160.3 million during the second quarter and $327.7 million for the first six months, an 18% and 15% increase respectively over the two periods last year. Revenues of franchisees are not however revenues of Aaron Rents Inc. As Ken mentioned, same store revenue growth in the quarter was strong for the company operated stores that was 4.1% for the stores that were opened over two years, company operated stores the revenue growth, same store revenue growth with 1.5% and again as Ken mentioned the same store revenue growth for the franchise stores with 16.1%.

Net earnings for the quarter were $23.3 million or $0.43 per diluted share compared to $0.36 last year, an increase of 19% and for the first six months, net earnings were $40 million and diluted earnings per share for the first half of the year is for $0.89 compared to $0.89 last year. As mentioned in the press release in the second quarter, we had a $3.4 million gain from the sale of some stores to company’s operated to franchisees to a third party operator. If we take that gain, our net earnings on a non-GAAP basis, the earnings for the quarter were $0.39 per diluted share. New store drive for the quarter was $0.06 per share in the quarter, it was last year in the second quarter of ’07 it was $0.04. We had a couple of cents more with this store drive in the second quarter.

We did a lot of realignment of stores during the second quarter as outlined in the earnings release and that will continue to evaluate that as we go further as we go through the rest of year. At June 30, we had 993 company operated sales and lease ownerships stores, 480 franchise stores, 30 company operated RIMCO stores, seven franchised RIMCO stores and 60 corporate furnishings stores open for a total of 1,570 stores.

As our press release said, we are now back for this year, for 2008 to open approximately 55 to 65 new company-operated stores and also for the same amount, 55 to 65 new franchised stores. We are selling some stores and doing some realignment so the net store growth for this year will be less than 10% probably overall 68%. We do anticipate in ’09 that our square footage growth for ’09, overall combination of company-operated and franchise stores will be in the range of 10% to 13%. We came out with some third quarter guidance, as noted, our guidance for the third quarter is expect revenues in excess of $405 million and diluted earnings per share in the range of $0.32 to $0.37 per share and raised the guidance for ’08, the earnings per share guidance for ’08 to range of $1.54 to a $1.64 per share.

That guidance includes the GAAP numbers for the first and second quarter and then our guidance for the third quarter and fourth quarter. We are not assuming in the guidance anymore asset sales and these numbers, there will be some more asset sales that is not assumed in the guidance moving forward and it is now hard predict that. Just a few other data points, the write off as a percentage of revenues continues to improve in the second quarter as the percentage of our sales and lease ownership store level growth revenues. The write off as a percentage of revenues were 2.4% in the second quarter compared to 2.5% in the first quarter and a year ago in the second quarter, it was 2.7% below that the write off are increasing at a slower rate than our revenues so they are definitely improving in that regard.

Same store revenue growth plan for the rest of the year, we are assuming that the same store revenue for the third quarter of ’08 and our plan is we are assuming around 4.5% for the same store revenue growth and anticipated increasing as in the fourth quarter to around 6%. That concludes my comment and we will certainly open up the call to any…

Charles Loudermilk

Let me just say that we passed one goal or had attained the goal. We have over 1 million happy customers today and that is a big goal over the 53 years I have had this company.

Gil Danielson

We are ready for questions.

Question-and-Answer Session

Operator

Thank you, we will now begin the question and answer session. (Operator’s instruction)

Our first question comes from Dennis Telzrow from Stephens Inc. Please go ahead.

Dennis Telzrow – Stephens Inc.

Good morning, gentlemen, excellent quarter.

Charles Loudermilk

Thank you.

Dennis Telzrow – Stephens Inc.

I know Florida has been one of the weaker geographic areas, I am going to assume that given that you are seeing strength sequentially from the first quarter, that market improved somewhat too?

Ken Butler

I’d say it is still somewhat neutral. This is Ken, I am sorry. But we are still having issues down there that although if you look at it by itself, operating it, it is not bad. Florida has been one of our strength that still haven’t rebounded and we still have negative store comps. Dennis if we pull the Florida market, primarily Florida market out, our same store revenue growth for the quarter would have been 4.9% revenue growth. That was in Florida Mall.

Dennis Telzrow – Stephens Inc.

Okay, that is all I have. Thank you.

Operator

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

Arvind Bhatia – Sterne, Agee & Leach

Thank you, good morning, my congratulations as well. I wanted to first of all just talk about the new store drag which you are modeling in the next two quarters. I know it is going to be down from the second quarter but if you can help us to understand what you are building in your guidance and can you tell us how many stores are in your company as of right now and how many will come in I guess we cannot comment on that but just how many are in the Comp base today?

Ken Butler

Well, addressing new store drag first, it was $0.06 in the second quarter. I think it will trim down a little bit in the third and fourth quarter. Historically, we have always had new store drag in each quarter from I would say $0.02 to $0.04 GPS in any quarter so I think it is still probably be a little higher in than in the third quarter and we get in the fourth quarter and in the first quarter of ’09. We will get back to a more normalized levels.

As far as the stores in the Comp base, company-operated stores are about a thousand stores is 771 stores were in the company..

Arvind Bhatia – Sterne, Agee & Leach

Okay and is there a way to quantify what kind of benefit you might have received this quarter from stimulus checks? I know you said you got some benefit but were you able to say what that benefit was?

Ken Butler

I wish I could, this is Ken again, we really did not see any uptake at all in the early pay off arena which is what we see when the traditional past checks come back in January and February so it is hard to quantify and I think they came back over a short period of time that it is never really noticed but it did help us up. I am sure it did, it always did if our customers got more dollars in their back pocket.

Arvind Bhatia – Sterne, Agee & Leach

Okay so when we think about the third quarter with gasoline still potentially quite high and no stimulus checks, is that maybe how should we think about that I guess?

Ken Butler

Well, we did not think about the stimulus checks this quarter and we are certainly not thinking about it in the third quarter either but we are focused on gaining customers and collecting our money as July is already shaping up that looks very good.

Arvind Bhatia – Sterne, Agee & Leach

And then one follow up to that is-are you guys seeing any anecdotal evidence that perhaps the credit constraints that we have in the economy today that might be actually helping you? I know, in theory, that is supposed to happen, are we seeing any evidence that you are beginning to see that now. Maybe some feedback from store managers, the type of customer that might be coming in to your stores, maybe the products that they are renting, any of that indicating anything?

Ken Butler

No, I do not think we are seeing it. It would take a long term. It would definitely help us to get more potential customers in the marketplace as the market expands so I think that is going to be a good thing in the long term.

Arvind Bhatia – Sterne, Agee & Leach

I guess last question, Ken, can you update us on where you guys are on your sales or lease back with respect to the properties that you actually own?

Ken Butler

We are still working on it. We still have a lot of property out there we like to do sales and lease backs on but as you all can realize the markets a little bit bumpier that it has been certainly in the last year so we are still pursuing it but not confirmed yet and nothing definitive on that.

Arvind Bhatia – Sterne, Agee & Leach

Great, thank you, guys.

Operator

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

John Baugh – Stifel Nicolaus & Company, Inc.

Good morning and great quarter. Good to see you are back on track. My question pertains to the cash loan excluded in the sales and lease back, Gil. What do you expect for the year, I know you are not paying federal cash taxes but you did make a number of franchise store acquisitions. So how do you see cash load excluding in the sale/lease back for account ‘08?

Gil Danielson

We are still positive from operations and cash flow in the first six months. Not as much as I had anticipated. I think we certainly been attempting good and we are purchasing a lot of merchandise to fill the pipeline and give product and from time to time reflect in the improving trend of the business so I do not know. I mean I still think we will certainly have that tax breaks are coming in; we will generate probably $40 million or $50 million of cash flow positive this year that we will not to have to pay Uncle Sam. I think we will be cash flow some operations but I do not think it will be as much as that previously thought just mainly because the business had been strong and we are reselling the pipeline for merchandise. So, that amount is on a…

John Baugh – Stifel Nicolaus & Company, Inc.

Okay, yes. It looks like about a $65 million you said today in net inventory investment, is that right?

Gil Danielson

We have got a lot of inventory here in the first six months and last year was a slow, what I assure was a slow year for us in some respects for our standards anyway.

John Baugh – Stifel Nicolaus & Company, Inc.

And then question for anybody who wants to fill it, as we look out to ’09 and in align of the year with maybe 1600 total stores or something like that and then you said minimally 10% growth maybe more so you are looking at I know a 170 to 200 stores obviously some of those franchise but what are you going to do definitely? Are you going to do any differently in terms of you mentioned building your bench strength when you resume opening stores in a more rapid rate than you did in LA. It obviously is slower than the years prior. How do you feel that? How do you monitor that it is not too much, not too little? Thanks.

Gil Danielson

Yes, I will take that. I think we are comfortable and historically have been in growing our store base and a 10% to 12% range if you look back over the last 15 years. I think when we have gone above that stretches and it stretches back during the [2200] stores we acquired back in ’01, I guess it was and we pulled back the second year with our bench to rebuild and get back to historical growth rate and I see what we are doing this year in getting back to normalized growth next year is just something we are accustomed to so we take a lot of moving franchisees. I would like to see half of it at a minimum come from the franchise community.

Robert Loudermilk

And John, it is Robert. We have been working internally on kind of realigning some of our real estate department. I know we change our head of real estate VP and we have been looking at the way we operate that and the different functions and so both in the whole office and the field so I think we are really retooling to go forward in this more methodical 10% to 12% growth versus in the last couple of years. We were just kind of gun slinging out there, trying to find a bunch of sites and so I think a lot of this reflects when you just see the slow down given the accounting of what we have, the stores we are developing up free standing in any cut and also looking at our personnel throughout the real estate division and evaluating, putting in place to go in this 10% to 12% very predictable, methodical store openings going forward.

John Baugh – Stifel Nicolaus & Company, Inc.

Okay and my last question is maybe targeted to Ken but anybody can jump in, your business clearly accelerated your customer care. Everything seems to have picked up in the second quarter, was that timing strictly matched with what happened with stimulus checks or was the strength before that and if there was strength in April, in May before the stimulus checks had, What was driving it because we know the consumer had a horrible quarter and gas prices were up and they are getting pinched on food and energy and everything so there has got to be an offset or there is going to be something helping, is it strictly stimulus checks or what did you put your fingers on?

Ken Butler

Yes, probably the biggest thing, I can tell you John, if you remember a year ago, our write offs in percent of dollars collected probably were in an all time low from the performance standpoint. We, somewhat in the second quarter we attributed a lot of break ins with the LCD TVs and as it continued and we look under the scarce more, we tried to look in the mirror to see maybe what we were doing different and one thing that we recognized we were doing different was the way we were collecting. We have created a lap out that was pretty sophisticated renewal system as we call it internally not a collection system but it was designed not to have paper and had a lot of bells and whistles have made without looking at a lot of activities which is really great and on paper erratically it surely have done well but when you do not run historical numbers you have to try to sit back and take note of what is different than what it was in the past. So, that is a big thing. We could put a thing around. We made a swift change in the fourth quarter of last year to get that side of the business under the control.

This is a heavy collection business, either way you want to look at it and with collection/renewals efforts are good, the confidence to rent is better in the field on the office side of the game. I saw a change in the first quarter. I think we definitely, after our delivery in the first quarter if you look back with the numbers in the customer growth, we also of course opened up more stores in the middle of the year and our customer growth should be better as well but I think it is confidence in your gain when you are collecting. We have done a better job in the field collecting and that is exactly what has happened.

John Baugh – Stifel Nicolaus & Company, Inc.

Within the franchise units have you have a better comp and my recollection was they didn’t fly in the collections problems that you had so I mean, if your customers holding up really well which is somewhat surprising unless there is some kind of offset like the credit card that is driving people in or something else.

Ken Butler

I do think that we are actually looking at our customer base and most of them have been working in the same community and they certainly are in the crunch with gas prices like everyone else but there is a large percent that have cars that the travel transportation services is the big group. They, like I said, they live and work in the same area so they are cutting back on their trips out and I have seen a lot of reference in that and we are getting to it. They still need the same basic necessities out wide. If the refrigerator goes out, the washer drier goes out, with the change in televisions coming out in February of this year, I think there is an incentive. The other side of our LCD business has really exploded and a year ago when we are releasing a 42-inch LCD TV for $199 a month, pretty pricy proposition and today we are now leasing that same television for $99 so we have had some good price breaks on LCDs and put it in the sweet spot of our customers affordability.

John Baugh – Stifel Nicolaus & Company, Inc.

Thank you.

Operator

Our next question comes from John [Harlow] from Barlow Henley. Please go ahead.

John [Harlow] – Barlow Henley

I just want to get two sets of numbers. One, your customer count for the end of this quarter and what the new store drag was last year.

Gil Danielson

The new store drag last year was $0.04 in the second quarter.

John [Harlow] – Barlow Henley

I am talking about the third and the fourth quarter last year.

Gil Danielson

I do not have those. You can call me John. I do not have those right with me at the moment. I know the fourth quarter, at the top of my head, was $0.11 in new store drag and in the third quarter, do not quote me but it was around $0.06 or $0.07, I think. I can get back to you on that.

Ken Butler

Yes, John the customers count is 1,900,550(One million nine five fifty). That excludes the rent-to-rent and office stores.

John [Harlow] – Barlow Henley

And the difference between company-owned and franchise in that.

Ken Butler

Yes, company-owned let us see 668,718 and franchise 458,933.

John [Harlow] – Barlow Henley

Thank you.

Operator

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

Laura Champine – Morgan Keegan & Company

Good morning. I am getting increasingly interested in that big delta between your comp and your franchisees comp and it seems like your comp is naturally maybe been a little higher because your store base is newer so I am wondering if that is an opportunity for you to drive a better comp in company-owned stores. What are the differences there?

Ken Butler

Yes, Laura. This is Ken again. I guess Gil can probably put some thought on the store aging but there are several factors maybe going into it. If you look at our growth, it has been in a past, heavy in the metropolitan areas and we are wedging stores in between stores and when you do that you are going to get some counter position. So, a lot of our new growth has been in those markets. It is not bad. It is just may slow the growth span of the sister store three miles away. Now, we have not demanded that the franchisees and then I had major metropolitan areas anyway but they really have free turf. If the guys did not make it or having sales or whatever, he has got a lot of territory that he can develop and they are not just in the major cities that are requiring multiple locations so that is one pretty big factor.

I think the other factor is because they are in the metropolitan areas, I think they have been hit harder with the real estate problems such as Florida which has been a part of it but there is other year, there are banks and that market still struggling too, a lot like Florida and places in the Northeast area as well and Georgia, we are having some of the same slight problems. So really that is probably the biggest key that I can see.

Charles Loudermilk

Laura, just looking at the age of the stores and at the end of June, 39% of our company stores were over five years old and 32% of the franchise stores were over five years old and actually the company stores are a little bit older than the franchises.

Laura Champine – Morgan Keegan & Company

Got it, thank you.

Operator

Our next question comes from the Laura Richardson from BB&T. Please go ahead.

Laura Richardson – BB&T Capital Markets

Thanks, hi everybody. I have questions for you. One is what should the tax rate be the rest of the year?

Ken Butler

Well, I think it will be around where it has been slightly over 38% and I would model that for the rest of the year between 38% to 38.2% of the year.

Laura Richardson – BB&T Capital Markets

Okay, and how about share account. Is there a buyback interest or I mean in place I should say?

Ken Butler

Well there is slight authorization out there. We have not been buying any shares recently. So, I mean that is really hard to predict that so I would just basically use roughly the same share account that was in the second quarter of more than EPS.

Laura Richardson – BB&T Capital Markets

Okay and then what is behind your thinking for the comp to get the 6% in the fourth quarter. I would, that is the second year stores coming in to the comp base but I want to hear that from you and any other thinking that is going into that.

Ken Butler

Yes, I mean we did as you all know the last 18 months was a little ton of scores and stores coming in to comp base after 15 months. They have to be open in the quarter for three months last year and three months this year so it is 15 months so you will start seeing those stores coming the comp base here later on and in a way since when they do just a major of other stores ramp up. That is the natural history is the guide in the natural progression with regards to comp store.

Laura Richardson – BB&T Capital Markets

Okay, that makes sense and then the 40,000 something new customers in Q2, was that for rent-to-own, I mean was that for company own or franchise too and how did that compare to the first quarter.

Ken Butler

That was for both and the first quarter we gained I do not have the difference. We have now 963,000 at the end of the quarter and 927,000 at the beginnings so whatever that number is…

Gil Danielson

I am just looking at that. I think we had, I just cannot imagine we had roughly 650 million(?) corporate customers at the end of June. I think it was 341,000 range.

Ken Butler

We gained, in the quarter we gained 34,000 companies customers and 11,000 franchises. If you call me, Laura I can give you the specific details.

Laura Richardson – BB&T Capital Markets

Okay, sounds good. Just a little more questioning on that, is that a net number like whatever customers you loose are also counted in that?

Ken Butler

Yes.

Laura Richardson – BB&T Capital Markets

And how is that sort of..?

Ken Butler

Returns payouts and write offs.

Laura Richardson – BB&T Capital Markets

Okay. Can you tell, this is back to the question someone asked earlier, it is like do you see any difference between the new customers you are getting and any that you maybe loosing?

Ken Butler

No.

Laura Richardson – BB&T Capital Markets

No demographic differences of note or anything?

Ken Butler

No.

Laura Richardson – BB&T Capital Markets

Okay, thanks guys.

Operator

Our last question comes from David Magee from SunTrust Robinson. Please go ahead.

Chris Rapalje – SunTrust Robinson Humphrey

Hi, this is Chris Rapalje on the call for David. I just have a question about mix. You had spoken about some strength in furniture and I was wondering if you have been promoting that category anymore than you may have been doing this time last year and then also if there is any other color you could provide on the other categories in planes and computers, etc.?

Charles Loudermilk

Chris, we are up in every product that kind of forward new leases second quarter this year as in second quarter last year and even for the first half and Ken mentioned the TVs are the huge inquiries really been invited by the LCDs but we are up, I guess we are in dollars were down slightly in bedroom and that is about it. We are up in living furniture over 10%.

Ken Butler

I say one thing that has subject a high in particularly upholstery was back in January of this year. I may have I mentioned this on the last call. We got away from our traditional terms of 12 months for sofa love seats due to price. Pricing was little high we felt and we moved the pricing to 18 months for sofa love seats and then we moved the pricing for 24 month pay out for a package to include cocktail and tables, lamps with the sofa love seats and when we did that we started hitting those sweet spots again for price points of around a $100 a month and there is something magical when we can get something at $99 and it certainly have sparked our upholstery sales over the last six months.

Chris Rapalje – SunTrust Robinson Humphrey

Okay, thanks very much.

Operator

Last question comes from Robert Straus from Merriman Curhan. Please go ahead.

Robert Straus – Merriman Curhan Ford & Co.

Hey, Robert I wanted to congratulate you in your new position.

Robert Loudermilk

Well, thank you Robert. I appreciate it.

Robert Straus – Merriman Curhan Ford & Co.

That was very, very nice and I think, Ken, you had mentioned maybe for second quarter new customers. I think you just broke that down for this quarter 34,000 company owned, 11,000 franchises, is that correct?

Ken Butler

Yes.

Robert Straus – Merriman Curhan Ford & Co.

Do you have those numbers for the year ago periods?

Ken Butler

Yes. At the end of the second quarter last year, we had gained 17,000 customers for the company from 552 to 569 and 6,000 for the franchise community, 287 to 293.

Robert Straus – Merriman Curhan Ford & Co.

Great, okay and then for the last couple of quarters, we have obviously seen some asset sales, the store sales especially to the franchise locations or owners, what is your thought process going forward on that point. Are you sort of looking at a pool of stores out there that are under consideration and while you are not forecasting for us on exact asset sales quarterly or in your guidance, is there any other color that you can provide us along that line?

Ken Butler

Yes there is certainly not a master plan that I think we look at stores that fit within our management geography. We have acquired a number of franchise stores back that frankly were not within our geographical main shift to operate and many of those stores we have reacquired look to re-franchising because that is not in our area stream. The Maine is a classic example we never intended to be in Maine and do not have a VP of operations even close to it and if we franchise us stores that they come back and will continue to look at areas like that just like a pocket here and a pocket there and we got to look at the performance of the stores. If we can at least attain the 6% profit margin then it would be a candidate for franchise but if it was in the city of Atlanta that will be different because there are all company stores and we would certainly then would if we can get a thing the number, we need to be at either look a change in the manager or melting the store.

Gil Danielson

Rob, right, we do sell stores in most cases as we generated gains on the store sale and that is not really part of normal operations but when we sell the store and it becomes franchise stores it is not like we are walking away and leaving it. We have franchise stores that continues and generate the royalty stream for us that is nearly 6% so it gives us generated gains specially at the stores that are around for a while but it does consist many cases where stores are not performing that well in that royalty stream kind of legs up for whatever we were making in that company store.

Robert Straus – Merriman Curhan Ford & Co.

If you were to consider the number of stores out there in what…, Ken, your so-called the one off locations like Maine and that sort of thing, how big is that pool of stores?

Ken Butler

It is not big. It is, of course, it can change by the day based on our management strengths and what not but I do not think it is big. It is 1Ds and 2Cs [ph 38:57] in the big scheme. There maybe 50, I mean if I have my wish list and could get rid of 50 stores that are for franchisees, it might be 50 that I could put on the list.

Gil Danielson

We have done more this year than we have probably in the last five years combined and that is just basically this year a little late and we were just looking at profitability and how it become more profitable both for us and the franchisees and it is just making sense it is some shuffling and some realignment and was not pretty active here in LA. It was just bad moving forward in percentage turns if I will not be as active in two or three years.

Robert Straus – Merriman Curhan Ford & Co.

Okay and just last question Gil for depreciation of rental merchandise for the next couple of quarters, does it make sense that that kind of hovers around the $111 million mark or so? Is that in the right ballpark?

Gil Danielson

Yes, I look at it as the percentage of rentals and fees as we see rentals and fees to go up, depreciation is going to go up but I think if modeling has been running around 35% to 36% of percentage of rentals and fees, I think your price can use that range to do your modeling for the next couple of quarters.

Robert Straus – Merriman Curhan Ford & Co.

Okay, thank you very much. Good luck.

Ken Butler

Thank you.

Operator

And we have no further questions.

Ken Butler

Thank you for your interest in the company and we look forward to next quarter.

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