Q1 2010 Earnings Call Transcript

Transcript Call Date 04/26/2010

Operator: Good afternoon, and welcome to the Aaron’s Inc. First Quarter Earnings Conference Call. At this time, I would like to introduce your host, Gilbert Danielson. Thank you, and have a good conference. You may proceed, Mr. Danielson.

Gilbert L. Danielson - EVP and CFO: Okay. Well, thank you all for joining us today. As is normal routine, (Lee Wilder) will read our standard safe harbor statement, and then Robin and Charlie and Ken will have a few opening comments and then I’ll follow up with some comments on the financial information. So, Lee, go on.

Lee Wilder - IR: Good afternoon. My name is Lee Wilder, and I assist in Investor Relations for Aaron’s. The Company’s earnings release issued today and the related form 8-K are available on our website, in the investor relations section. And this webcast will be archived for replay there as well.

With us today is Charlie Loudermilk, Chairman; Robin Loudermilk, CEO; Ken Butler, COO; and Gil Danielson, CFO.

Before we discuss the results, I would like to read the Company’s safe harbor statement. Except for the historical information, the matters discussed today are forward-looking statements of the Company, as such they will involve a number of risks and uncertainties including factors such as changes in general economic conditions, competition, pricing, customer demand, 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 2009 Annual Report on Form 10-K, including without limitation the Company’s projected revenues, earnings, store openings and acquisitions, and disposition activity for future period.

Robin, Charlie, and Ken will have a few opening comments, and then Gil will add further information on the financial results. Robin?

Robert C. Loudermilk, Jr. - President and CEO: Alright. Thank you, Lee. I do appreciate that. Thank you everybody for joining the conference call. As you’ve probably seen currently released our first quarter results were good, and we’re pleased that they are at the high end of our earnings guidance that we’ve stated.

We’re pleased that our Company-operated stores are having a same store revenue growth of 4.4%, and customer growth of 7.4%. In addition, although not the revenues of Aaron’s Inc., our franchise stores experienced a 5.2% growth in same store revenues during this quarter. In total, our corporate franchise customers were up 12% over the same period last year, and we see customer gains, as we said before, as a key metric in our business, and as long as these gains continue our business should prosper.

As noted in our earnings release, Aaron’s has a very predictably annuity type business that has performed well over a number of years through different economic cycles. Our business model is unique, our customer base remains large and growing. The demand for our products continues to be strong, and we feel the potential for continued growth in both existing and new stores. It is still there we believe for many, many more years to come.

As credit tightened, as we’ve all seen, we’ve done well, and I think that the current economic conditions will continue to be good for our business. We continue to do well, even better in some of our highest unemployment markets that we continue to serve.

In the Aaron’s Office Furniture division, basically 10 stores left in that division, continues to struggle, and we have a plan in place and are working very hard to make changes, closing a few stores, consolidating, selling some inventory, so both revenue growth and overall financial performance will improve.

The Office Furniture market, as I’m sure, many of you are aware, is very difficult at this time in this economic climate, so that alone will make it hard to show improvement until the business conditions improve. However, we are definitely not satisfied with the performance of these stores and expect improvement in financial performance as we continue through this year. We have a lot of folks and associates that are working daily for consolidating stores, moving inventory around, and selling inventory to achieve this goal over the next six to 12 months.

Our plans for 2010 are unchanged, as we are looking to increase our store count by the approximately 5% to 9% stated goal we’ve had over the number of stores opened in 2009. We anticipate that 2010 which happens to be our 55th year in existence will be another excellent year.

Thank you for supporting the Company. Now I’ll turn in over to Charlie for a few comments, and then Ken will talk about some operating results.

R. Charles Loudermilk, Sr. - Chairman: Well, thank you also for your interest in our Company. I just want to say that I’m very pleased with our team. How they’re working, how everything is working together, and I want to thank all 10,000 employees that we have with Aaron’s for the job they’re doing. Running our stores is not easy, but our people are up to the challenge, and they’re doing a great job, and I’m very happy with – as a Chairman very happy with how we are doing it. Ken?

William K. Butler - COO: Yeah, well, good evening, and thank you for joining us this evening. We’re once again very pleased with our operating results as our program continues to dominate the markets in which we operate. Our numbers with our same store sales are up 4.4%, and thanks to our customer count up 7.4% or even more impressive when you consider the phenomenal first quarter of 2009, added with the serious weather related challenges we had in the first quarter, just to compound the obstacles we had to overcome.

As always our people met that challenge. Overall, our customer count is up 12% over last year’s customer base. We expect to continue our new store expansion with approximately 90 new Company-operated stores and 75 new franchise stores for 2010. We’ll continue to weed out, close, or merge approximately 25 or 30 underperforming stores in 2010. Our RIMCO model was profitable for the quarter, and in fact operated in the black all three consecutive months. We’ll continue to tweak this model to maximize revenue and profits, and if we see a profitable way to expand, fit itself in the future.

One thing that I’m most proud about is an initiative we began about a year ago to take Aaron’s Green; not only will we do what’s right for the environment, but it will help reduce the 4operating costs as well. Our factories were the first to jump onboard, and literally have eliminated millions of tons of waste from going to landfills. It all started by maximizing material waste and yields, and expanded with recycling paper, cardboard, sawdust, plastics, and aluminum. Our stores, DCs, and home office support will be following this project as well.

Our real estate and construction department is going green by changing our lighting systems we’ve placed in the stores to conserve energy, as well as changing the paint tow and carpet to biodegradable products. There will also be much more efficient material costs to stop all the waste.

Our DCs have greatly reduced fuel economy and efficiency by contracting outside companies for backhauls to the DC after they’ve made the deliveries to our stores. Our stores were looking in at what they can do to eliminate more paper work in their operations and have already initiated some programs that conservatively will save 125 trees a month. We realized the bigger we get, the more responsible we have to become, and I continue to be amazed by the effort of all our associates, vendors, franchisees, of meeting whatever challenge we present to them. I want to personally thank them on behalf of the Company for their continued dedication and loyalty to our Company and our culture. Gil?

Gilbert L. Danielson - EVP and CFO: Thanks Ken. I will go through some of the highlights of the first quarter. The Company revenues increased 4% for the quarter to $495.3 million. In addition, our franchisees collectively increased their revenues to $220.2 million for the first quarter, a 14% increase over the period of last year. Revenues of franchisees are not however revenues of Aaron’s Inc. Included in last year’s first quarter other revenues was $5.7 million gain on the sale of the Company-operated stores. This quarter, there were no similar store sales. If you exclude that gain from last year’s number compared to these – and it would be a non-GAAP number, but if you did that, our revenues would have been up 6%, and net earnings from continuing operations up 15% in the first quarter of ’10 compared to the first quarter of 2009.

As you all know, we’ve announced a 3-for-2 stock split on April 1st (indiscernible) actually at the end of the day on April 15th and the first quarter earnings per share and weighted average shares have been restated to reflect the stock split.

Same store revenue growth in the first quarter for the Aaron’s Company-operated stores was 4.4% and it was 2.9% for stores over two years old. For the stores over five years old for the quarter, it was 1.2%. Same store revenue growth for our franchise stores was, as previously mentioned, 5.2%.

At the end of the first quarter, we had 840,000 Company-operated store customers and 453,000 franchise customers and that was a 12% in total customers over the comparable number at the end of first quarter of 2009. And as Ken said, the customer count on a same store basis for the quarter was up 7.4%.

The first quarter diluted earnings per share from continuing operations and (actually total) diluted earnings per share were $0.45 compared to $0.43 last year. As the press release noted, the Aaron's Office Furniture stores’ revenues decreased 27% for the quarter and we did lose money in 2010 as been the case for a number of quarter, but as Robin addressed that we do have some plans in place to improve the financial performance of the stores in upcoming quarters.

During the first quarter of 2010, the Aaron's Sales & Lease Ownership division opened 12 new Company stores and nine new franchise stores. We also acquired three franchise stores and one store from an unaffiliated operator and acquired the accounts of four third-party stores. Seven Company stores and one franchise stores were closed during the quarter and also three Aaron's Office Furniture stores were closed.

The new store drag for the quarter and this is after the stock split was approximately $0.03 per diluted share in the first quarter and there was a similar number, again, split adjusted of $0.03 in the first quarter of last year.

Through the three months ended March 31st, the Company awarded area development agreements to open 14 additional franchise stores and at the end of March of 2010, there were 258 franchise stores awarded are expected to be open over the next several years. The store count at March 31st, we had a 1,080 Company stores, 595 franchise stores, 11 Company-operated RIMCO stores, seven franchise RIMCO stores and 12 Office Furniture stores or a total of 1,705 stores.

Our guidance for the second quarter of 2010 is that revenues of approximately $445 million and diluted earnings per share in the range of $0.37 to $0.41 per share. Our revenue guidance remains the same as it was last quarter for the year of approximately $1.85 billion. We have increased our diluted earnings per share expectations for 2010 and again, after the split adjusted, we expect to earn this year in 2010 EPS in the range of $1.48 to $1.60.

Again, our new store growth plans remain the same, and Robin talked about that and we anticipate a similar growth in new stores this year than as that incurred in ’09. At the end of the quarter, we had $112 million of cash on hand. The number is pretty big. I’m not used seeing that much cash on hand. We did use approximately $26 million in cash flow from operations in the first quarter. We had a lot of purchases that we made, as business picked up pretty dramatically at the end of the quarter and we sold 27 million of asset sales and lease backs of stores that we have been doing for the last several years.

The manufacturing shipments from our (indiscernible) furniture manufacturing plants were up 6% in the first quarter, and we continue to have positive same store revenues in some of the highest unemployment areas in the country. So we’re quite pleased that the earnings model is working in these economic times.

We’ll certainly have to any questions that anybody may have at this point.

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