Aaron's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.26.12 | About: Aaron's Inc. (AAN)

Aaron’s, Inc. (NYSE:AAN)

Q3 2012 Earnings Conference Call

October 26, 2012 10:00 a.m. ET

Executives

Lee Wilder – IR

Ron Allen – CEO

Gil Danielson – CFO

Ken Butler – COO

Analysts

Laura Champine – Canaccord

Arvind Bhatia – Sterne Agee

David Magee – SunTrust Robinson & Company

John Rowan – Sidoti & Co

Brad Thomas – KeyBanc

John Baugh – Stifel

Budd Bugatch – Raymond James

Rob Straus – Gilford Securities

Operator

Good morning, and welcome to the Third Quarter Earnings Conference Call. (Operator Instructions) At this time I’d like to introduce your host Gil Danielson with Aaron’s. Thank you and enjoy your conference. You may proceed Mr. Danielson.

Gil Danielson

Well, thank you all for joining us this morning. As usual, I’m going to turn the call over to Lee Wilder who works in Investor Relations for us and she’ll read our Safe Harbor Statement. And then Ron and Ken will have some comments and I’ll follow at the end. Lee?

Lee Wilder

Good morning. My name is Lee Wilder and I assist in Investor Relations for Aaron’s. The company’s earnings released issued today and the related form 8-K are available on our website, www.aaronsinc.com in the Investor Relations section. This webcast will be archived for replay there as well. With us today is Ron Allen, CEO; and Ken Butler, COO; and Gil Danielson, CFO.

Before we discussed through the results I would like to read the company’s Safe Harbor Statement. Except for the historical information, the matters discussed today are forward-looking statements of the company. As such, they will involve a number of risks and uncertainties, including factors such as changes in general economic conditions, competition, pricing, customer demand, litigation, and other issues that could cause actual results to differ materially from such statements, including the risks and uncertainties discussed under risk factors in the company’s 2011 annual report on form 10K. Including, without limitation, the company’s projected revenues, earnings and store openings and acquisitions and disposition activities for future periods. Ron and Ken will have a few comments and then Gil will add further information followed by Q&A. Ron?

Ron Allen

Thank you, Lee. Good morning, ladies and gentlemen. Thank you for joining us today. We’re pleased to announce another outstanding quarter for Aaron’s. Through the first nine months of year we’ve met our business goals and objectives and we expect 2012 to be another record year for the company in both revenues and earnings. As many of you know, Aaron’s financial performance has been remarkably consistent through the years in all types of economic conditions. As we’ve noted before, we believe the current tight credit environment for customers actually has been a positive for our business and of course, high unemployment levels are a negative.

We believe these economic conditions will continue into the foreseeable future. However as conditions improve, Aaron’s should continue to perform well as we’ve done in the past. Our customers’ desire and need our quality, basic home furnishings to live out their daily lives and usually cannot readily get this merchandise at traditional retailers due to credit constraints. However they can obtain these products at Aaron’s with our flexible payment plans and superior personalized service.

Aaron’s experienced management team knows our business and they know our customers, and we believe are folks perform at an exceptional level. We’re confident that we will meet our 2012 new store opening plans and also continue to see substantial growth ahead for our existing and new Aaron’s sales and lease ownership stores. We anticipate opening about the same number of Aaron stores in 2013 as we do in 2012.

Now the HomeSmart stores continue to ramp up in revenues, and we are optimistic about this weekly pay concept, but we still have some work some to do in perfecting the business model and currently anticipate not opening any significant number of new stores until at least the last half of 2013.

On September 28, we celebrated the opening of our 2,000th store which is located in the Bronx, New York. The Bronx and the other boroughs in New York are areas we have historically had very little presence, and that gives us plenty of more opportunity to open stores there.

Now as I complete my first year as CEO, I’m very proud of all the associates and their accomplishments during this 12 month period. Not only has our financial performance of the company met expectations, we have put in place many strategic and tactical initiatives to improve our infrastructure. We’ve greatly enhanced our associate resource functions, focusing on management development, retention and organization. We put increased emphasis on long-term planning. We invested in information technology, and have other initiatives in process that will result in great value to the company, now and in future years, as this business continues to grow and expand. I’ve been extremely impressed with the ability of our Aaron’s management team and our dedicated associates.

Let me close by reflecting on the fact that our Founder and Chairman, Charlie Loudermilk, retired in the middle of September. I visited with Charlie his last week here, and he told me, he said, Ron I’ve really let go. I said will Charlie that’s great because now you can sit back and look at the company that you’ve created and be very proud of it. But I said, more importantly, I want to look back in two years and feel very good and be very proud of what we’ve done as we build the company that you started. We’ll all miss Charlie, believe me, but we wish him well in his well-deserved retirement.

Again, I thank you for your support and the interest in our company and now I’ll turn the call over to Ken Butler who will talk more about some of the results the quarter and at the conclusion of Gil’s comments we’ll happy to answer any questions you may have. Ken?

Ken Butler

Thanks, Ron and good morning, everyone. As our results indicate, the business climate and our source is strong even coming out of the most difficult quarter of the year. Same-store revenues are now 6.5%, and our customer count on a same-store basis is at 8.2% for the quarter. Our total customer base has grown 12% over the same period one year ago. We had several highlights for the quarter, as Ron mentioned, opening our 2,000th store in the Bronx. This is a huge testimony to years of hard work and dedication from all of our associates and franchisees who have been part of our great company.

We also successfully converted our first store to our new computer system and will begin expanding to convert more stores in the fourth quarter. This new system is replacing our legacy system that has been in place since the early days of Aaron’s. If you could go back to technology in that day, the difference between the new system and the old is like comparing an Atari game system to the new Xbox. Our operators literally are all positioning themselves to be first in line for the conversion.

During the quarter, we opened 14 new company-operated stores and also opened 13 new franchise stores. We acquired four franchise stores back and we sold to stores back to franchisees. We also sold off the remaining assets of our legacy Aaron’s office furniture business to a third party. Our new home store model continues to mature and grow, and we will continue to work in perfecting the model and building a strong management foundation to prepare for the future.

The last highlight of the quarter was the retirement of Charlie Loudermilk,

as Ron mentioned. We are all committed to keep the culture and value system in place that Charlie instilled in us for so many years and to carry forward that legacy as we march into the near future with our eyes set on becoming the largest rental operator in the United States. Gil?

Gil Danielson

Thanks, Ken. I’ll briefly go over the financial highlights of the third quarter. Company revenues increased 9% for the quarter to 529.5 million and 10% for the nine months to over $1.6 billion. In addition, our franchisees collectively increased their revenues to $232 million for the third quarter, a 3% increase over the same period last year, and their revenues are up 7% for the nine months compared to the year ago the 733.6 million. Revenues of franchisees are not of course revenues of Aaron’s Inc.

As we mentioned same-store revenue growth in the third quarter for our company operated stores was 6.5% and 4.8% for the stores that are open over two years during the quarter. For stores open over five years old, it was up 3.7%, which is quite strong, we felt. The same-store revenue growth for the franchise stores was up 3.2% for the third quarter.

The company had 1,090,000 company operated stores store customers and 572,000 franchise customers at the end of the third quarter which was an increase of over 12% in total customers compared to the same period in the third quarter of 2011. The customer account on a same-store basis for company operated stores was up 8.2% in the third quarter compared to the same quarter last year.

Our GAAP net earnings for the quarter were up 3% to $28.9 million versus $28 million in 2011, and GAAP net earnings for the nine months $436.4 million versus $83.2 million. As you know, we had a large reversal of charge in the first quarter this year, and in the third quarter, we had a charge based on Charlie’s retirement. So both those charges had some swings that affected our net earnings for the quarter and for the nine months.

For the third quarter, our GAAP diluted earnings per share were $0.38 compared to $0.36 last year and for the nine months diluted earnings per share were $1.77 for 2012 and $1.04 for 2011.

Just going through the quarter, during the first quarter as I mentioned, the company reported a $35.5 million into income or $0.28 per diluted share for a reversal of accrued lawsuit expense that we had reported in the second quarter of 2011. And during the third quarter this year we reported $10.4 million or $0.08 per diluted share charge to earnings for costs associated with Charlie’s retirement. Excluding the lawsuit related reversals and the retirement charge this quarter, net earnings for the third quarter would have been $35.4 million compared to $28 million in 2011, and diluted earnings per share would’ve been $0.46 this year this quarter in 2012 versus $0.30 in 2011. So the non-net GAAP EPS is up 28% over the quarter last year.

For the nine months, net earnings again on the non-GAAP basis would’ve been $120.8 million compared to $105.8 million last year. EPS would be $1.57 versus $1.32 last year, and that is a 9% increase.

Revenues of the HomeSmart division were $14.2 million during the quarter compared to $5.7 million last year when the division was just starting up. And for the nine months, revenues of the HomeSmart division were $40.4 million compared to $6.7 million for the same period for the nine months of 2011.

As we have noted, I guess we have one more HomeSmart store that’s going to open by the end of the year, but we don’t really plan to open any significant number of HomeSmart stores maybe one or two, plus or minus but nothing significant until the latter half of 2013 to give us some more time to work on the business model.

During the third quarter of 2012, we open 14 company-operated stores and 13 franchise stores. We also acquired four franchise stores and the accounts of three third party stores which are added to Aaron’s sales and leased ownership stores.

In addition, the accounts of two third-party stores were acquired and transferred to HomeSmart, and we sold two company operated stores to franchisees and as Ken mentioned, we sold the last remaining Aaron’s office furniture store to a third-party. And also, finally, we close two company-operated stores during the quarter.

At the end of September 30, 2012, we had 1,190 company-operated Aaron’s sales and lease ownership stores, 717 Aaron’s sales and lease ownership franchise stores, 78 HomeSmart stores, one franchise HomeSmart stores, 17 company operated RIMCO stores and six franchise RIMCO stores for a grand total of stores open at the end of September 2009 stores.

Franchisee activity during the month, we did award seven more area developments to new franchisees or existing franchisees in the quarter and we have added $0.30 more area development agreements during the nine months, and at the end of September, we had 201 stores, franchise stores that people have put money down that are planned to open over the next two or three years.

As we noted in the earnings release, our guidance for the fourth quarter of this year 2012 is that revenues of approximately $575 million and diluted earnings per share in the range of $0.48 to $0.52 per share. Revenues for the year 2012 are again expected the over $2.2 billion. Our GAAP fiscal year diluted earnings per share are expected to be in the range of $2.25 to $2.29. The non-GAAP fiscal year diluted earnings per share excluding the two extra ordinary items should be in the range or expect to be in the range of $2.05 to $2.09.

And again as we have done for a number of years in the third quarter we have put in initial earnings guidance for the next year this being fiscal year 2013, and our initial guidance is to achieve earnings per share in the range of $2.25 to $2.41 per share.

We did buy – repurchase some stock back during the quarter. 873,000 shares and we’ve done 1.2 million shares for the nine months. The dollar amount that we paid in the third quarter for the shares and stocks was 24.6 million and for the nine months was 34.4 million.

Those are our comments. We will certainly answer any questions that people may have.

Question-and-Answer Session

Operator

We will now allow questions from the phone lines. (Operator Instructions) Our first question comes from line of Laura Champine with Canaccord. Please proceed.

Laura Champine – Canaccord

Good morning and congratulations guys. As you may have seen, one of your competitors in the rent-to-own space is struggling a little bit with early payouts. I’m just wondering if you’re seeing that to any extent, I mean they’re citing consumer electronics deflation doesn’t seem to be hitting your numbers, are you actually seeing an elevated level of payouts in the past couple of quarters?

Ken Butler

Yes Laura, I think Gil’s got the specific numbers but we really welcome payouts, number one, it means the customers are satisfied and that’s kind of our mission in the stores is to help our customers achieve ownership. And on the other side, we feel if their happy customers, they’ll get something else for their home. And a couple of years ago, we went from a 98 same as crash program to 120 day same as cash that has created some uptick for our payouts. Maybe, Gil if you’ve got...

Gil Danielson

We did look at earliest payouts on the same-store basis over the last – it looks like the last two or three years, that’s the only data I have in front of me, I could go back deeper. They have in recent years increased at a higher rate, somewhat slightly higher rate than our lease revenue has increased. So that has been a phenomenon we’ve seen for several years now that payouts are out. It hasn’t been – it hasn’t affected our business obviously moving forward and it’s just kind of part of our business now.

Ken Butler

And as Ken said, in many of those cases our customers are looking for that next item they can afford when they do go with early payout. Again that’s a positive for them and certainly a positive for the company.

Gil Danielson

I mean the key in the business as you know is once they pay out early is to put them in another agreement or keep them as a customer. I think we do extremely well. We’ve done extremely well for years and years and years of doing that. So this really is just kind of part of our business. We expect have early payouts, but we also expect to have good customer retention.

Laura Champine – Canaccord

Thank you for that. And then lastly on the systems rollout. I certainly hear you that it’s a big step up in technology. But could you tell us more on the timing of the rollout and whether or not we should a short-term sales disruption just as those systems go live and your employees get trained on them?

Ron Allen

Well, I don’t think so. We’ll have some stores open up by the end of this quarter. We’re going very slowly. The process has been in the works for quite a while, so we’re being very careful and going very slowly and testing it over and over again. But I do anticipate, Nan, as the new year starts that over the next six months that, that rollout will transpire, and we’re confident it’s going to go smoothly. We have spent enough time on it I think working on it. I think it should go smoothly. I think it won’t disrupt business, but I think the big benefit of it is that it is always hard to put a dollar amount how much that’s going to really help our business, but Ken can speak to this. I think at the store level it will certainly make our store personnel have a much easier job.

Ken Butler

Yeah. Absolutely, and I’ve met with the lot of managers this year and probably one of the hot topics is when are we going to retire that legacy system that was put in place many, many years ago and survived the Y2K issues. But a lot of the stores are facing issues with that whole system that I think they’re really ready for the new one. It’s relatively easy to operate, much easier even than the system we’re retiring. So I don’t see a business disruption at all.

Ron Allen

We’re in unique business and we just can’t go out and buy a POS system off the shelf just because of the way we do our unique sort of business. So it is an internal developed system that’s been worked on for a while now.

Laura Champine – Canaccord

Thank you.

Operator

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

Arvind Bhatia – Sterne Agee

Thank you, good morning, guys. I’d like to add my congratulations as well on a strong quarter.

Ron Allen

Thank you, Arvind.

Arvind Bhatia – Sterne Agee

A question on same-store sales assumptions here. You’re doing is extremely well with your same-store sales. It looks like to me in the fourth quarter you’re estimating similar types of comps in the 6%, 7% range. You gave good EPS guidance for 2013. Can you speak to maybe what you’re assuming for your same-store sales for 2013, maybe just some ball park numbers? And then I also want to understand on HomeSmart you gave some numbers on the revenue side. But what kind of – what’s the profitability outlook there for HomeSmart?

Gil Danielson

Well on the same-store revenues – actually the same-store revenues have been better the last few quarters than we really anticipated. We felt this year if we could do mid single-digit same-store revenues that would certainly meet our goals, and I think certainly our earnings have been better because revenues have been better. I don’t know, as far as 2013 we need to zero in on 2013 a little bit and look at our assumptions. Certainly same-store revenues we anticipate they will be positive.

They have been positive every quarter since we started reporting them back in 1999, and historically our business model is as it has been through the years, to have same-store revenues in the mid single digits on a rolling basis. Every quarter is a little bit different, but I anticipate those sort of trends will continue in 2013. As far as HomeSmart’s concerned, yeah we’re still losing money HomeSmart and that’s been a little bit of a disappointment. We felt this year that we could break even on the stores, and we’re trending to lose probably $6 million on the initiatives this year.

But without opening any more stores and really working hard to perfect the model and get past some of these new store start-up costs we have, I would expect that HomeSmart will have a much better financial performance next year unless we make a decision and all of a sudden at the end of next year we decide to really ramp up the stores and really expanded the process. Then you run through the normal same-store start up expenses you have in this business.

Arvind Bhatia – Sterne Agee

Excluding that, you would expect to be breakeven in that business in 2013? Is that a fair assumption?

Ron Allen

If we don’t open any more stores?

Arvind Bhatia – Sterne Agee

Yes.

Ron Allen

I would hope so. If not, it would at least be our goal. If we’re not we might want to go to plan B.

Ron Allen

I think our biggest challenge, Ken, in the home stores has some of the acquisitions, personnel changes in the like that we’ve had to make there, we’ve accomplished a lot this year. We’ve got a ways to go, we’re still confident in moving forward with HomeSmart.

Gil Danielson

It’s kind of operating at the same level if we had opened 79 Aaron stores. So the financial model is very similar and it’s got to mature, and maturity comes with management and time and frankly, our first customer has not gone the full-term yet even from the first store we opened back two years ago. So it’s got to mature itself out a little bit.

Ron Allen

But we’re still very optimistic on the HomeSmart.

Gil Danielson

We really feel that, that can certainly be a good future initiative and a good growth initiative for us but we’re not quite ready to put the pedal to the metal.

Arvind Bhatia – Sterne Agee

Last question is for Ken. I wanted to understand within different product categories if you could maybe comment on what you’re seeing or hearing from the stores, whether it’s computers or TVs? You touched on inflation a little bit but just any product categories that are standing out for you?

Ken Butler

Yes we’ve got a couple of highlights. Furniture, which is great, it’s our best margin item, is up across the board. I think bedroom furniture is up 4% but our youth section is up 54% our bedding is up 18%, upholstery is up 10%. We’ve done a lot of packaging with art and accessories, and those accessories are up 60% over last year. Laundry is up about 20%, and refrigeration is up over 20% so our dry goods are very strong. Televisions are up 4% and the only category we’re down in is computers, we’re down about 5% from last year. But it’s probably pretty healthy to be up in the furniture categories if I had to pick one or the other, I prefer to be up and furniture.

Arvind Bhatia – Sterne Agee

And the computers category is that because of the impact of tablets primarily?

Ken Butler

No, actually we didn’t put tablets and until year ago, and they had a big bang when they first got it. I don’t know if you’ll recall, HP into the category, and we came out with HP within a month they discontinued it and dropped the price substantially. So when they drop the price we pass that savings onto our customers, we had a big bang last year the tablets, we didn’t have that bang, it’s more consistent now. It’s a little bit under 20% of our computer business.

Ron Allen

I think what’s happened is, the market, you know we’ve been in the computer business for a number of years and I think most of our customers now have computers and their getting the other necessities in the house that maybe they had postponed for a while.

Arvind Bhatia – Sterne Agee

That’s great color. Thank you, guys.

Operator

Thank you Mr. Bhatia. Our next question comes line of David Magee with SunTrust Robinson and Company. Please proceed.

David Magee – SunTrust Robinson & Company

Hi. Good morning, guys and congrats from me as well.

Ron Allen

Thank you.

David Magee – SunTrust Robinson & Company

A couple of questions please, one is on the purchases, it looks like you’re getting pretty good leverage right now. I’m curious which categories that’s most pronounced in and what the visibility next year would be?

Ron Allen

As far as our purchased?

Gil Danielson

No, where we’re getting the most value.

David Magee – SunTrust Robinson & Company

It looks like you’re getting by volume leverage that you’re buying better than you did a year ago, I’m expecting it’s is because a lot of your competition isn’t doing as well so you’ve got a little more negotiating.

Gil Danielson

It’s a high-level problem sometimes when a vendor comes in and wants to drop the price because we have other products like it, for example, televisions is a classic example, we’ve seen price degradation for the last four or five years. And it’s not always great news when we get it. You get lower price, but you already own a number of units that are higher priced and still in our inventory so we have to manage that process. We went through that with our computers 10 years ago as we saw price degradation occur there. We held it for as long as we could and then we had to drop and the same thing has occurred with TVs. Our bread-and-butter two years ago was a 52 inch RCA television, big old analog big screen TV that was $99 a month. And today that same TV, our $99 television is a 73 inch Mitsubishi DLP with high-definition, and it’s $99. So there’s the huge drop in prices occurred.

Ron Allen

Dave, as you know, it’s a tough environment for private suppliers, vendors, no matter electronics and furniture, whatever, and we’re growing and we’re getting pretty big now and so we’re a very important customer, and we have a lot of vendors certainly wanted to do business with us. I just think the growth of the company and the size we’re getting now both in company stores and franchise stores, that scale, and I think we’ve got a great buying department too, but that scale has helped us with the vendors in the current environment to really get some good pricing. We appreciate our vendors very well. It’s a great partnership between us and our vendors. It has worked out extremely well for us and for them for a number of years, and we expect that to continue.

David Magee – SunTrust Robinson & Company

On the HomeSmart stores are you seeing a wide range of performance at this point between the stores? Or is it really too early to say since...

Gil Danielson

We do see a wide range, and I think Ron mentioned that earlier. We’ve had some that were acquired stores, and with that you got prices that are up and down on what the former competitor had purchased products for, so that’s somewhat of a challenge for us as well. You’ve got cultural differences when you make acquisitions, and so we’ve had to go through the school of hard knocks and some of those. So there are definite differences, and some of them have been great acquisitions. I think about 40 of the stores we’ve opened generically. It’s about a 50-50 split that we’ve acquired.

Ron Allen

And we’re really watching the organic stores very closely. About half the stores or a little bit less than half the stores are organic, and those are the stores we’re really focusing on, but so that’s going to be the future of HomeSmart, is opening organic stores, and that’s the business model we’re still working on.

Gil Danielson

But the most impressive thing I think we’ve seen with HomeSmart is I get a report, and we all do, on the inception report, and that’s – we’re with the Aaron’s store customer-count wise, revenue wise, when we open the HomeSmart, and collectively as a group with all 79 stores, the corresponding Aaron’s store has grown at about the same run rate as the rest of the core company stores. So we haven’t seen any cannibalization at this point at all with the HomeSmart model.

David Magee – SunTrust Robinson & Company

Within the subset of just organic stores, the HomeSmart stores, are you seeing a wide range of performance with those locations?

Ron Allen

No, not too much. We have seen some numbers that are different than our Aaron’s stores, and some we like and some we may not like, and that’s part of the adjustments we’re working on.

David Magee – SunTrust Robinson & Company

Thank you. And just the last question regarding the early payouts. Are you seeing any difference in terms of the percent of customers who re-up right away? Is that a number that’s constant over time? Or is that changing?

Ken Butler

I think it’s pretty consistent, but what we have focused on for a number of years is the agreements per customer. We’ve had a steady rise with that, I mean very small on the needle but it’s gone up fractions every quarter. So I think that’s very positive that our people have responded to it and focus on the customers that only have one agreement because when they do pay out if they only have one they’re riding off into the sunset. So we know if we can get a second agreement with that customer that it can be very positive. In this year we focus on our 2,000th store, but we had a promotion along with that, that you were pre-approved for $2,000, and current customer base got that same approval. So it generated extra agreements for us.

David Magee – SunTrust Robinson & Company

Great job. Thank you, Ken.

Operator

Thank you Mr. Magee. Our next question comes line of John Rowan with Sidoti & Co. Please proceed.

John Rowan – Sidoti & Co

Good morning, guys.

Ron Allen

Hey, John.

Gil Danielson

Good morning.

John Rowan – Sidoti & Co

One of your competitors, obviously your only competitor, mentioned that over the past year or so there’s been a decline in basically the duration of an average Rent-to-Own contract and now it’s started to tick back up. Have you guys seen a similar shift in the typical duration?

Ron Allen

I don’t have that data with us, and I did hear that, and actually I think ours has probably gone longer.

Gil Danielson

Yeah. I mean we’ve changed the terms and we have longer-term agreements than we’ve had five years ago, so our term’s a little bit longer. But that was planned. It wasn’t...

Ron Allen

A large majority of our agreements were on 12 and 18 months. A couple years ago we decided and made a strategic decision to push to the 24-month agreement, and I think it’s had – the customers are voting and they’re saying they like that better, it’s a more affordable plan for them, and I think they’re in the long run going to get more products. We certainly have created a longer receivable which should actually increased a life.

Gil Danielson

And we’ve also increased customer dramatically by doing that.

Ron Allen

Right.

John Rowan – Sidoti & Co

Okay. And if I’m not mistaken I think spoke in the past that you’re opening one – you granted one franchisee the right to open HomeSmart stores. I was wondering if you were seeing – if they were seeing a similar result whether or not cannibalizing the typical rent-to-own customer?

Ron Allen

Yes, maybe three or four months maybe.

Gil Danielson

Yes it’s not a very strong market and it’s doing really well.

Ron Allen

So it’s a great market when you put these New Mexico.

John Rowan – Sidoti & Co

And then just last question, can you give me a give the example of the television how you’ve held up the monthly rent the same but increase the size of the television. Basically gives the consumer better product at the same price. But of price deflation continues what happens when the consumer doesn’t want 100 inch television? Is there a point at which it just gets too big and the affordability gets a little bit better for the product that you guys basically need to finance on?

Gil Danielson

On that and we just introduced a 92 inch TV and that’s a pretty big TV set, and we got it in at the same price as the 82 inch. So I don’t think we can get much bigger than a 92 inch TV. But it’s a pretty big novelty. I mean the fact that we’ve got a 73, 82, and 92, in our stores at a price that’s more affordable than some your popular retailers, I think it might attract some additional consumers in the long run. I mean we just put this in play very recently so our customers like big always have liked big. And you’ve got a lot of customers that went with LCDs a few years ago as they became very, very popular and a lot of those sizes were 46 inch. So what’s happening now is the 46 inch is going in the bedroom and the big TVs are going and living room. So we’ll deal with what we have to deal with in the future. I can’t predict what’s going to happen, but were encouraged by what we’re doing.

Ron Allen

John, you live in New York, you can run over to the Bronx store this afternoon we could have that 92 inch in your house tomorrow.

John Rowan – Sidoti & Co

I don’t even have a flat screen, so I need one.

Ron Allen

We have what you need.

John Rowan – Sidoti & Co

All right. Thanks, guys.

Operator

Thank you Mr. Rowan. Our next question comes from line of Brad Thomas with KeyBanc. Please proceed.

Brad Thomas – KeyBanc

Hey. Good morning. Let me add my congratulations as well on a great quarter here. Just a follow-up on HomeSmart line of questions, wanted to ask a little bit more about personnel. I know that really some of your best stores the secret is a great manager. How would you grade the personality you have in place right now and the policies and procedures and their abilities to operate that different channel? How long you think it takes before he can really start ramping up and growing at a rate similar to an accelerated rate?

Ron Allen

First of all I think we’ve got a good infrastructure with HomeSmart and we’ve got a good base. Now that being said, the management experience of the store management of running a HomeSmart compared to the experience of running an Aaron stores is quite different because of the age of the brand. I’ve got managers that have been with Aaron’s for decades, literally, so we’ve got some really strong strength in Aaron’s and those guys and gals are not going to make the transition over to HomeSmart.

Our experience running the stores is less and every day they run a store is additional seat time and we just need to get more of that experience. So that’s one of the reasons we want to get a good foundation and not move forward when we we’re not prepared to from a management standpoint. So we grew up quick. We started pretty much from scratch and we’re two years later, 79 stores. So that’s a theme in itself, and I think we’re just at that point we need to catch a breath, tweak a few things that I think we can make better in the model, and then I don’t see a big burst in this next run, but I think our mission will be to try to grow it and grow profitably at the end of the day. Just as we grew Aaron’s.

Brad Thomas – KeyBanc

Great. And then to Gil, just in terms of CapEx spend, where do you think you guys are going to come in for this year and what’s your early thinking on 2013?

Gil Danielson

Our capital expenditures is primary just the bulk of it is leaseholders that we put in stores. We’re not a big CapEx company. It’s going to be comparatively trending what we’ve done this year as far as what we spend is CapEx. And it’ll be a similar trend next year. CapEx goes up just as we open new stores and remodel stores not a real big CapEx business, as you know. So we certainly have the financial resources to continue to grow the company. And still have a lot of cash on hand, and we’re generating some cash now. So I just don’t think that’s going to be an issue going forward.

Brad Thomas – KeyBanc

Great. And just lastly if I could on taxes. I know we’ve had a couple of years where you’ve had an unusually low level of cash taxes. What’s the thinking for 2013? Is that going to start to unwind? And what will we expect in terms of the magnitude of that if it does?

Gil Danielson

We think you never know what’s going to happen with taxes, but we think it’s going to be pretty similar to what we’ve been talking about throughout the years. I still think we’ll pay about $140 million in cash taxes this year mainly because we don’t have the benefit of the bonus depreciations. May or may not be enacted this year, we’ll have to see, but we’re certainly not anticipating on that. I think we paid – had that number. I think taxes so far this year we paid $108 million in cash taxes so far this year, probably pay $140 million for the entire year, and over $200 million in 2013 and over $130 million in 2014 bearing no changes in the tax laws. So we are paying cash tax payments now, and that will continue unless things change. I think it will be next year in 2013 be over $200 million in cash payments next year.

Brad Thomas – KeyBanc

And so should we think of it as what about maybe a $60 million payment above and beyond what you would do just through what you’re flowing through the P&L?

Ron Allen

Yeah. I mean we provide tax. Our tax rate, 37.5% something like that, so whatever we pay above that tax rate will be the effect on the deferred taxes. So kind of look at it that way.

Brad Thomas – KeyBanc

Great. Just trying to keep track of what the government’s doing here. It’s a lot to keep up with. All right. Well, thanks then.

Operator

Thanks Mr. Thomas. Our next question is a follow-up question from the line of John Baugh with Stifel. Please proceed.

John Baugh – Stifel

Good morning, Ron, Ken, Gil. And I’d like to shout out to Charlie, a great career and hope you really enjoy your retirement, Charlie. I’ve got a couple of quick things. I was wondering, Ron, have you done any the longer-range thinking about the number of the store opportunity for the core monthly contract? And in that thinking whether there is any opportunity to contemplate a somewhat smaller box to get us a smaller market?

Ron Allen

Two good questions, John. My number is still about 10,000 as we joke about, so we don’t put a cap on our growth, but seriously we’re doing quite a bit of analysis right now that’s going to probably take another couple of months for us to sort through to really determine what our growth we feel can be in our core Aaron’s stores. We’re not there yet. I still think there’s a lot of growth there, as we mentioned the boroughs of New York, we’re just tapping into that market and the results so far have been very positive and very confirming that we have the right model.

And then you talk about a smaller store and Ken’s been doing a lot of analysis on that, and the smaller store really fits those boroughs. You have higher real estate costs and the like, and what we’re doing is putting smaller warehouses in the stores and we’ll be delivering straight from distribution centers. Again this is a new concept. Ken has really been pioneering. You may want to comment on that a little bit more, Ken. But that may be a model that we can repeat elsewhere particularly in other urban markets where we don’t have a presence today.

Ken Butler

Yeah, the real estate costs are very high, and I guess that’s why we’ve not been in the boroughs for so many years, and as we got there we were looking for ways to operate the stores profitably, so with the 2,000 store, the smaller store than a typical Aaron’s store, but we have signed a lease on a warehouse that’s going to actually make all the deliveries and returns for the stores there. It’s pretty exciting. Our people are really energized. It’s going to take a big burden off the back of the manager running the store.

Could that work in other markets? Absolutely, if we can make it work up here. So you’re looking at Chicago and LA another towns that have that same issue. Now you mention small towns, and we’ve got some other smaller experiments running. We actually have a couple of franchisees doing is to put an outpost, so to speak, a satellite operation in a small town. So we’re looking and all those types of things for our growth in the future, and if likely that works, although it’s not really necessarily a new store, it’s a new storefront It’s can operate within the profitability of another store, so to speak. So they’re getting cheap real estate in small towns, a little bit smaller store, less personnel, and the deliveries are coming out of the main store.

Ron Allen

John, I’d just add to this, we talked a lot about our planning process that we really commenced earlier in the year, and we’re in that planning cycle right now. And we are really engaging our divisional vice president’s and others in this process at this time, we’re going to learn many new things as to how we can better improve and better run this business. But I’m really excited about the future in that regard.

John Baugh – Stifel

Great. Thank you. And then quickly of the franchise revenue, I think it was up only 3% year-over-year, and I recall that I think it was TVs but I may be wrong where they allowed I think pricing to drop within their store. I may be wrong on that. Is this a lingering impact from that or is there some other explanation why their revenues...

Ron Allen

And I think there’s a broader explanation. Kind of looking at franchise revenues aren’t up as high as they have been in previous years but if you kind of look at the revenues for the nine months during the nine months for this year, we have bought back 19 franchise stores. And during this same period back in 2011 we bought back three franchise stores.

So that took revenues out of the franchise system, and of course we get royalties on that revenue so that decreased that. And also the third quarter was not a good calendar for collections for our franchisees, I mean they record their revenues based on their cash collections, and the days just didn’t work very good, so we just didn’t get as much royalties from them this quarter as we did in the previous quarters. So I think those two factors have had an effect on certainly on our franchise revenues. I would expect in the fourth quarter that the revenues will go back up to be more comparable to where they have been the first couple of quarters of the year or last year.

John Baugh – Stifel

Great. Thank you for that color. Good luck.

Operator

Thank you Mr. Baugh. Our next question comes from line of Budd Bugatch with Raymond James. Please proceed.

Budd Bugatch – Raymond James

Hello. Good morning. My congratulations on the quarter and I echo John’s sentiments to Charlie, a great career and congratulations on that and have a great retirement as well. I have a couple of questions. One, as you look at the 1,090,000 customers can you kind of parse out how many of them are HomeSmart customers versus Aaron’s regular customers and maybe what the overlap is?

Ron Allen

Not many. I think we had 38,000 Smart customers at the end of the third quarter.

Budd Bugatch – Raymond James

And Gil, did I hear you correctly say that the profit this year was $6 million pre-tax, or is it $6 million after-tax or are the loss...

Gil Danielson

Pre-tax. It’s not a profit.

Budd Bugatch – Raymond James

I mean the loss.

Gil Danielson

That’s what I anticipated it would be.

Budd Bugatch – Raymond James

And that’s pre-tax?

Gil Danielson

Yes.

Budd Bugatch – Raymond James

Is it $0.05? Or about that.

Gil Danielson

A million is about a penny, rounded here and there so I mean.

Budd Bugatch – Raymond James

Okay. When you look at monthly rate per customer, we calculate I think is down a little bit? Can you talk about what you’re seeing monthly take per customer?

Gil Danielson

What the average customer is paying a month?

Budd Bugatch – Raymond James

Yes, sir.

Gil Danielson

It was $130.32 at the end of September. It was down $0.84 from where it was in June. But it’s hung around at $1.30, $1.31 amount for probably the last five or six quarters or so.

Ron Allen

But doesn’t always go down in the third quarter and it’s a reduction in the third quarter didn’t go as well as it did last year in the third quarter. So I think that’s a positive trend and I certainly hope we’ve scraped the bottom and head in the right direction, because it can have a great impact if we can move that number up.

Budd Bugatch – Raymond James

And I don’t want to beat this well I guess I’m going to beat this EPO issue. You talked about getting EPO customers to re-up with another item. Is there a metric you can put around that? How many customers who do an early payout either have another agreement or go into another agreement within the next week to 30 days?

Gil Danielson

We don’t really have that metric readily available, but we can dig something up, I guess.

Ron Allen

But I think the average customer has 1.5 agreements. So half of our customers have another agreement and we know the customers that only have one agreement. So typically, a new customer coming in the door starts off with one and somewhere through the course of time will work on adding that second agreement to their deal.

Budd Bugatch – Raymond James

And my final question is kind of a broad picture for 2013 of the fiscal cliff is looming closer day by day and unemployment benefits might have a change as well. What is your thinking as to what’s in the guidance on that score and the whole macro issue? Is it just business as usual in the guidance, or is there any thought process?

Ron Allen

(inaudible) I don’t know, we just kind of...

Budd Bugatch – Raymond James

If you do only positive advertising we might vote for you. We’re in Florida and we just – all we see is negative advertising.

Ron Allen

I mean I’m not saying business as usual but yes businesses usual. Now, the margins they certainly make laws and changes that can affect the business moving forward, but as you know we can’t really speculate what that would be.

Gil Danielson

But I don’t see that affecting our customer.

Ron Allen

No really.

Gil Danielson

If anything maybe the unemployment rate comes down and that would have been a positive impact on our business.

Ron Allen

Yes I guess the only thing more unemployment benefits move. I don’t know.

Budd Bugatch – Raymond James

Okay. Thank you very much and good luck on the rest of the year and 2013 and beyond.

Operator

Thank you Mr. Bugatch. Our next question comes from the line of Rob Straus, with Gilford Securities. Please proceed.

Rob Straus – Gilford Securities

Hey, guys. Congratulations on your quarter.

Ron Allen

Thanks, Rob.

Gil Danielson

Thanks, Rob.

Rob Straus – Gilford Securities

I would also like to add having covered Aaron’s for a long time to wish Charlie the very best in his retirement. I have a few follow-up questions. The first, really, is on HomeSmart, to understand better what you’re trying to tweak at the store level. Is this a situation where you’re working to ramp up the sales more? Or is it also other things that you’re tweaking at the operational level? And if it is the latter, are there any details that you might be able to provider us?

Ron Allen

I wouldn’t want to tell you the details from a competitive standpoint. So we’re looking at operating line items that we have been working on some of the line items. And some of that has to do with the marketing as well as just the operational proposition that we offer to the customer. So we’re looking at actively changing a little bit of that behavior.

Rob Straus – Gilford Securities

And secondarily, just a quick question on the computer system. Will you be running two platforms simultaneously for some time? Or when you bring in that new system, does the legacy system just get ripped out and you’re finished with it?

Ron Allen

No we’ve been paralleling it now as far as the stores we have it in. We do have it installed in the stores that we parallel in now. So once we finally decide that we’re ready to deploy, it will be a very quick process, and we can manage that quite quickly, and hopefully if everything goes well, which I anticipate it will, the legacy POS system will be retired quite quickly. It’ll be phased in over several months. It’s not all just one run. It will be phased in at a group of stores over time.

Gil Danielson

Yes we’ve got 2,000 stores, it’s going to take us some time to do it. So if we run into problems, we’ll have time to react for sure. We anticipate a smooth rollout.

Rob Straus – Gilford Securities

And just a quick question, getting back to unemployment benefits. Do you know what your exposure is in your customer base for customers with unemployment benefits?

Gil Danielson

I don’t know right off the top my head, Rob. Certainly see a lot of government checks these days, but whether – I don’t have a real good handle on it. I mean we can find out, but I don’t have it in front of me.

Rob Straus – Gilford Securities

And lastly, I know that you have a lot of opportunity in each of your businesses here domestically I thought I would just ask the international question. I don’t know if that has taken a backseat now HomeSmart seems to be a great opportunity going forward for you. But thought it might give you a chance to talk a little bit about the international front.

Ron Allen

Well we do have the one investment in a company called for perfect home. Gil, Steve Michaels and I spent some time of them back in September. Ken spent some time with them in the past and they’re doing quite well in the United Kingdom. I think they’ll be up to about 52 stores by the end of the year, and they have quite a growth model in place. So that’s something we’re going to look at certainly very cautiously but also very optimistically about a step in the international marketplace. So that would be the one area that we’ll be focused on internationally over the next six to eight months.

Rob Straus – Gilford Securities

Okay. Well, good luck. Thank you so much.

Ron Allen

Thank you.

Operator

Thank you Mr. Straus. And there are currently no additional questions waiting from the phone line.

Lee Wilder

Okay. Well, thank you all for joining us today.

Operator

Ladies and gentlemen, thank you for attending the third quarter earnings conference call. This now concludes the conference. Enjoy the rest of your day.

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