The Aaron’s pany(AAN) - 2023 Q4 - Annual Report

Part I Item 1. Business The Aaron's Company, Inc. is an omni-channel provider of lease-to-own and retail solutions for home goods through its Aaron's and BrandsMart U.S.A. brands - The Company is a technology-enabled, omni-channel provider of lease-to-own (LTO) and retail purchase solutions for home goods through its brands: Aaron's, BrandsMart U.S.A., BrandsMart Leasing, and Woodhaven Furniture Industries[12] Systemwide Store Count (as of December 31) | Store Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Company-operated Aaron's Stores | 1,019 | 1,034 | 1,074 | | Franchisee-operated Aaron's Stores | 224 | 232 | 236 | | BrandsMart U.S.A. Stores | 11 | 10 | — | | Systemwide Stores | 1,254 | 1,276 | 1,310 | - On April 1, 2022, the Company acquired BrandsMart U.S.A. for $230 million in cash to expand its customer reach and total addressable market[12] - Key strategic priorities include transforming the Aaron's Business through e-commerce and GenNext stores, enhancing and growing BrandsMart, and implementing enterprise-wide operational efficiencies and cost optimization[15][17][18] - The company operates two reportable segments: The Aaron's Business (including Aaron's stores, aarons.com, Woodhaven, and BrandsMart Leasing) and BrandsMart (retail and e-commerce operations of BrandsMart U.S.A.)[19] Item 1A. Risk Factors The company faces material risks across several categories including legal, operational, strategic, and economic factors - Business Risks: Subject to new or additional laws and regulations, potential for costly legal proceedings, product safety/recall issues, impacts from inflation, challenges in talent recruitment and retention, and significant cybersecurity threats including data breaches and AI-related risks[66] - BrandsMart Acquisition Risks: Potential failure to realize anticipated synergies and unexpected costs or difficulties in integrating the BrandsMart business[67] - Operational & Strategic Risks: Challenges from product commoditization, intense competition, execution of the strategic plan, managing inventory, and dependence on proprietary algorithms and third-party data[68] - Industry & Franchise Risks: Negative characterization of the LTO industry by advocacy groups and media, potential litigation with franchisees, and operational failures by franchisees impacting the brand[69][70] - Stock & General Risks: No guarantee of dividend payments, requirement to maintain effective internal controls (failure of which could be adverse), dependence on consumer spending, and geographic concentration of stores[70][71][72] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[103] Item 1C. Cybersecurity The company has implemented an enterprise cybersecurity program based on the NIST Cybersecurity Framework to manage and mitigate threats - The company's enterprise cybersecurity program is based on the NIST Cybersecurity Framework and is designed to identify, protect, detect, respond to, and recover from threats[103] - Oversight is provided by the Board of Directors and the Audit Committee, with day-to-day management led by the Chief Information Security Officer and an Enterprise Information Security Steering Committee[105] - To date, no cybersecurity attack or threat has materially affected the Company's business, results of operations, or financial condition[104] Item 2. Properties As of December 31, 2023, the company operates 1,019 company-owned Aaron's stores and 11 BrandsMart U.S.A. stores Company-Operated Aaron's Stores by Location (Top 5 States) | State | Stores | | :--- | :--- | | Texas | 143 | | Florida | 76 | | Georgia | 68 | | North Carolina | 62 | | Ohio | 58 | - The company's principal executive office is a 74,000 sq. ft. leased facility in Atlanta, Georgia, and it also has significant furniture manufacturing facilities in Georgia totaling 738,000 sq. ft.[108] Item 3. Legal Proceedings The company is involved in a lawsuit regarding wage scale disclosures in job postings, with no other material litigation reported - A lawsuit was filed on October 11, 2023 (Jacob Atkinson v. Aaron's, LLC) alleging violation of Washington's Equal Pay and Opportunity Act for not including wage scales in job postings, and the company filed a motion to dismiss[109] - The company states there is no other material pending or threatened litigation outstanding as of December 31, 2023[109] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[110] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is listed on the NYSE, pays a quarterly dividend, and has an active share repurchase program - The company's common stock trades on the NYSE under the symbol 'AAN'[112] Share Repurchase Activity (Q4 2023) | Period | Total Shares Purchased | Average Price Paid per share | Max. Dollar Value Remaining ($) | | :--- | :--- | :--- | :--- | | Oct 2023 | — | $ — | $127,033,496 | | Nov 2023 | 1,945 | $8.07 | $127,017,800 | | Dec 2023 | — | $ — | $127,017,800 | | Total | 1,945 | | | - The Board's share repurchase authorization was increased to $250.0 million in March 2022 and extends through December 31, 2024, with $127.0 million remaining available as of year-end 2023[114] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2023, consolidated revenues decreased 4.9% to $2.14 billion, impacted by a decline in the Aaron's Business segment and restructuring charges Consolidated Financial Highlights (Year Ended Dec 31) | Metric (in thousands) | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $2,139,890 | $2,249,434 | (4.9)% | | Gross Profit | $1,119,319 | $1,161,773 | (3.7)% | | Operating Profit (Loss) | $12,550 | $(2,548) | nmf | | Loss Before Income Taxes | $(1,058) | $(14,743) | 92.8% | | Net Earnings (Loss) | $2,823 | $(5,280) | nmf | - The decrease in 2023 consolidated revenues was primarily driven by a $157.0 million decline in the Aaron's Business segment, partially offset by the full-year inclusion of the BrandsMart segment[135][147] - The Aaron's Business lease portfolio size ended 2023 at $117.7 million, a 7.0% decrease from year-end 2022, reflecting lower customer demand[136][139] - The company is actively implementing restructuring programs, including the Real Estate Repositioning and Optimization program (GenNext stores) and an Operational Efficiency program, incurring $15.6 million in related expenses in 2023[130][133][149] - Cash provided by operating activities was $180.4 million in 2023, an increase from $170.4 million in 2022, driven by improved earnings and lower lease merchandise purchases[163] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on its variable-rate debt, partially mitigated by an interest rate swap - The company is exposed to interest rate risk from its variable-rate borrowings under the Credit Facility, which totaled $194.5 million at year-end 2023[177] - In March 2023, the company entered into an interest rate swap agreement on a notional amount of $100.0 million to hedge against rising interest rates, effective through March 2027[177] - A hypothetical 10% increase or decrease in interest rates would change the company's annual interest expense by an estimated $0.7 million on its unhedged variable-rate debt[177] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, including an adverse opinion on internal controls due to a material weakness - The independent auditor, Ernst & Young LLP, issued an adverse opinion on the Company's internal control over financial reporting as of December 31, 2023[188] - A material weakness was identified in the design of information technology general controls (ITGCs) related to user access, program change, and segregation of duties for certain IT applications within the BrandsMart segment[188][193] Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,826,576 | $1,858,463 | | Cash and Cash Equivalents | $59,035 | $27,716 | | Lease Merchandise, Net | $622,262 | $693,795 | | Total Liabilities | $1,140,438 | $1,163,061 | | Debt | $193,963 | $242,413 | | Total Shareholders' Equity | $686,138 | $695,402 | Consolidated Statement of Earnings Data (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Total Revenues | $2,139,890 | $2,249,434 | | Gross Profit | $1,119,319 | $1,161,773 | | Operating Profit (Loss) | $12,550 | $(2,548) | | Net Earnings (Loss) | $2,823 | $(5,280) | | Diluted EPS | $0.09 | $(0.17) | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on any accounting or financial disclosure matters - None[362] Item 9A. Controls and Procedures Management concluded that disclosure controls were not effective as of December 31, 2023, due to a material weakness in IT general controls within the BrandsMart segment - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023[363] - A material weakness was identified in the BrandsMart segment related to the design of information technology general controls (ITGCs) concerning user access, program changes, and segregation of duties[365] - Remediation efforts are underway to modify access rights and standardize ITGCs, with the material weakness expected to be remediated in 2024[366] Item 9B. Other Information During Q4 2023, CEO Douglas Lindsay terminated a Rule 10b5-1 trading arrangement - On November 10, 2023, CEO Douglas Lindsay terminated a Rule 10b5-1 trading arrangement that was adopted on November 2, 2023[369] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[370] Part III Item 10. Directors, Executive Officers of the Registrant and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - The required information is incorporated by reference from the registrant's definitive Proxy Statement for the 2024 annual meeting of shareholders[372] Item 11. Executive Compensation Information on executive compensation is incorporated by reference from the 2024 Proxy Statement - The required information is incorporated by reference from the registrant's definitive Proxy Statement for the 2024 annual meeting of shareholders[373] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2024 Proxy Statement - The required information is incorporated by reference from the registrant's definitive Proxy Statement for the 2024 annual meeting of shareholders[375] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 Proxy Statement - The required information is incorporated by reference from the registrant's definitive Proxy Statement for the 2024 annual meeting of shareholders[376] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2024 Proxy Statement - The required information is incorporated by reference from the registrant's definitive Proxy Statement for the 2024 annual meeting of shareholders[377] Part IV Item 15. Exhibits, Financial Statements and Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K - Lists the financial statements of The Aaron's Company, Inc. which are set forth in Item 8[379] - Provides a detailed list of exhibits filed with the report, including the Stock Purchase Agreement for BrandsMart, the Credit Agreement, and various management compensation plans[381][383][384] Item 16. Form 10-K Summary The company has not provided a summary for this item - None[387]