The Aaron’s pany(AAN) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Consolidated revenues for Q2 2023 were $530.4 million, down from $610.4 million year-over-year, primarily due to lower lease revenues and retail sales [17] - Consolidated adjusted EBITDA decreased to $42.4 million from $51.2 million year-over-year, reflecting lower revenues at both business segments [17] - Adjusted free cash flow increased to $36 million, an increase of over $30 million, driven by higher cash from operations and improved working capital efficiency [18][22] - Net debt was reduced by over $30 million to $147.7 million, with a net debt to adjusted EBITDA leverage ratio of less than 1 times [19] Business Segment Data and Key Metrics Changes The Aaron's Business - Lease merchandise deliveries were down approximately 10% year-over-year, attributed to fewer lease applications and a reduction in company-operated stores [10] - The lease portfolio size ended the quarter at $119.6 million, which is 8.6% lower than the prior year quarter but larger than expected [10] - Lease renewal rate was 88.2%, down 30 basis points year-over-year, but in line with pre-pandemic averages [10] - E-commerce lease revenues increased by 5.5% year-over-year, now representing 17.9% of total lease revenues [13] BrandsMart - Comparable sales for BrandsMart were down 20.9% year-over-year, primarily due to weaker customer traffic and a shift to lower-priced products [14] - E-commerce product sales represented 8.1% of total product sales, down from 9.0% in the prior year quarter [15] - Product gross margin improved by approximately 50 basis points year-over-year due to direct procurement savings and strategic pricing actions [15] Market Data and Key Metrics Changes - The overall customer demand environment remains challenging, with a noted decrease in transactions and average transaction values in both business segments [26][29] - The consumer electronics category is facing headwinds, particularly in TVs, due to a significant pull forward in demand from previous years [60] Company Strategy and Development Direction - The company is focused on optimizing profitability in both business segments and executing a multiyear strategic plan to enhance competitive advantages [8] - Investments are being made in marketing and other initiatives to drive new lease origination activity in The Aaron's Business segment [21] - The company aims to expand its e-commerce channel and grow its market presence through strategic procurement and pricing actions [7][15] Management's Comments on Operating Environment and Future Outlook - Management noted that demand trends are expected to persist but anticipate sequential improvements as they lap previous lease decisioning cuts [6] - The company has lowered its consolidated revenue outlook for the year but maintained its adjusted EBITDA and non-GAAP EPS outlook [7][20] - Management expressed confidence in the long-term potential of BrandsMart and the ability to manage costs effectively during challenging demand periods [32] Other Important Information - The company celebrated the one-year anniversary of the BrandsMart acquisition and remains focused on achieving synergies and strategic growth opportunities [7] - New videos showcasing Aaron's GenNext and BrandsMart stores have been posted on the investor website [8] Q&A Session Summary Question: Consumer behavior trends during the quarter - Management noted that demand trends have been challenging, with a 10% decline at Aaron's and a 20% decline at BrandsMart, but lease-to-own business is holding up better than retail [26][27] Question: Insights on BrandsMart's performance - Management indicated that the negative 20% in BrandsMart sales is due to transaction declines and lower average transaction values, but they are focused on profitability [29] Question: Expectations for lease portfolio size - Management expects the lease portfolio to be down in the second half of the year but anticipates improvements as they manage customer demand [70] Question: Weekly payment option uptake - The weekly payment option has been growing, providing customers with flexibility, but it currently represents less than 10% of overall business [63][64] Question: BrandsMart's revenue guidance changes - Management acknowledged that while they expected improvement in demand, they are being cautious with guidance due to ongoing demand pressures [73]