Aarons Holdings Company, Inc.

Good morning. My name is Michelle, and I will be your conference coordinator. At this time, I would like to welcome everyone to the Aarons Company fourth quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I will now turn the call over to Mr. Michael Dickerson, Vice President of Corporate Communications and Investor Relations for Aarons. You may begin your conference.

Thank you, and good morning, everyone. Welcome to the Aaron's Company fourth quarter 2020 earnings conference call. Joining me this morning are Douglas Lindsay, Aaron's chief executive officer, Steve Olson, Aaron's president, and Kelly Wall, Aaron's chief financial officer. Many of you have already seen a copy of our earnings release issued this morning. For those of you that have not, it is available on the investor relations section of our website at investor.aarons.com. During this call, certain statements we make will be forward-looking, including our financial performance outlook for 2021. Actual results in the future may be materially different than those discussed here. This could be due to a variety of factors, including, among other things, uncertainties associated with the duration and severity of the COVID-19 pandemic and related impact on the economy and supply chains. I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of our earnings release. The Safe Harbor provision identifies risks that may cause actual results to differ materially from the content of our forward-looking statements. Also, please see our Form 10-K for the year ended December 31, 2020, and other periodic filings with the SEC for a description of the risks related to our business that may cause actual results to differ materially from our forward-looking statements. Listeners are cautioned not to place undue emphasis on forward-looking statements, and we undertake no obligation to update any such statements. On today's call, we will be referring to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, non-GAAP net earnings, and non-GAAP EPS, which have been adjusted for certain items which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance. Let me add one comment as it relates to our basis of presentation. For the month of December 2020, our results represent the consolidated statements of the company and its subsidiaries and is based on the financial position and results of operations as a standalone company. For all periods prior to December 1, 2020, combined financial statements include all revenue and costs directly attributable to the company and an allocation of expenses from our former parent related to certain corporate functions and actions. A more detailed explanation of our basis of presentation can be found in our Form 10-K file today. With that, Alan, I'll turn the call over to our CEO, Douglas Lindsay.

Thanks, Mike, and thank you for joining us today. First, let me take a moment to recognize all of our talented team members for their determination and commitment in 2020, which enabled Aarons to accelerate our key strategic priorities in a very challenging year. Our fantastic team members at our stores, distribution and service centers, Woodhaven manufacturing and store support center work tirelessly to provide products and services to our customers while accelerating our digital and real estate transformation. We overcame the challenges posed by the COVID-19 pandemic while continuing to meet the needs of our customers and safeguarding our team members. At the same time, we delivered annual revenues that exceeded our expectations for the year. and an adjusted EBITDA that was higher than we've generated in several years. In addition, during the year, our teams worked diligently to establish Aarons as a new standalone publicly traded company. The spinoff transaction closed on November 30th, 2020, and following the spend, we are well positioned with a strong balance sheet and cash flow profile to execute on our go-forward strategy. While some uncertainty remains regarding how the coronavirus may impact the economy or consumer behavior, I'm more energized and optimistic about our future than ever. Our business has never been more nimble, and we continue to make investments in technology, decisioning, e-commerce, and store operations that are yielding higher productivity and least portfolio performance. In the fourth quarter of 2020, same-store revenues rose 3.4% as compared to the prior year quarter, primarily due to strong customer payment activity, improving lease portfolio size, and higher retail sales. The fourth quarter was the sixth out of the last eight quarters with positive same store comps, with 2020 representing the first annual positive same store revenue growth since 2013. Additionally, we ended 2020 with a larger and healthier lease portfolio than we had at the beginning of the year. The larger portfolio size is a result of better collections, fewer product returns, and lower write-offs, which was enabled by improvements in operational execution, the rollout of centralized decisioning technology, and enhancements to our customer payments platform. We achieved this larger portfolio despite revenue written into the portfolio that was flat in the fourth quarter. Recall that our implementation of decisioning technology in the second quarter of 2020 effectively reduced new lease originations and therefore revenue written by 6% to 8%. Moving to our e-commerce channel, revenues grew 39% in the quarter and represented approximately 13% of total lease revenues compared to 10% in the fourth quarter of 2019. Thanks to the tremendous efforts of our team, traffic to our errands.com site continues to increase year over year, as our customers are increasingly going online in search of affordable products for their homes. In the fourth quarter, e-commerce traffic was up 29% compared to the fourth quarter of 2019. Despite the significant increase in traffic to errands.com, e-commerce recurring revenue written into the portfolio declined 1.2%, as compared to last year's fourth quarter due to both decisioning optimization and lower conversion of traffic. Conversion is not where we would expect it to be due to the inventory shortages resulting from the global supply chain disruption. However, our inventory position continues to modestly improve in the first quarter of 2021, which should lead to higher conversion rates. I'm encouraged by the progress of our e-commerce initiatives. including our evolving analytics and digital capabilities. Improvements in online customer acquisition, conversion, and decisioning are leading to margin growth and continued positive momentum in this important channel. In 2020, we also accelerated our strategy to consolidate, remodel, and reposition our store footprint with our new GenNext store concept, which includes enhanced showrooms, digital technologies, expanded product assortment, and improved brand imaging. As of the end of the year, we had 47 GenNext stores opened and have more than 60 additional stores in the 2021 pipeline. Our GenNext stores are performing well, delivering new lease volumes that are higher than the corporate averages and in line with our expectations. While the new stores still represent a small portion of our overall store count, We believe over time the execution of our GenNext store strategy will provide meaningful lift to our overall performance. Overall, I'm pleased with our full year of 2020 and fourth quarter results, and I'm encouraged about the future and our new chapter as a financially strong standalone public company. As we look to 2021, we remain focused on our key strategic initiatives of simplifying and digitizing the customer experience, aligning our store footprint to our customer opportunity, and promoting the ERIN's value proposition of low payments, high approval rates, and best-in-class service. I'll now turn the call over to our Chief Financial Officer, Kelly Wall, to discuss our financial results.

Thank you, Douglas. For the full year 2020, consolidated revenues were $1.735 billion, a decline of 2.8% compared to the full year 2019. This decline is primarily the result of a reduction of 253 company-operated stores in 2019 and 2020, partially offset by a 1.8% increase in same-store revenues for the year. Adjusted EBITDA for the full year 2020 was $208.9 million. an increase of $43.6 million or 26.4% compared to the full year of 2019. As a percentage of revenues, adjusted EBITDA was 12% compared to 9.3%, an increase of 270 basis points over the prior year. This increase in adjusted EBITDA is primarily due to an improvement in customer payment activity, fewer lease merchandise returns, and efficiencies in store operations. including pandemic-related staffing reductions in the second and third quarters of 2020. Write-offs were 4.2% of lease revenues in 2020, a 200 basis point improvement over 2019. Annual non-GAAP earnings per share was $3.02 in 2020, an increase of 43.8% compared to $2.10 for prior year 2019. Turning to the fourth quarter of 2020, revenues were $430 million, a decrease of approximately 1% compared to the same quarter last year, despite the closure, consolidation, and acquisition of a net 75 company-owned locations throughout the year. Adjusted EBITDA was $53.7 million for the fourth quarter compared to $51.2 million for the same period of 2019. an increase of $2.5 million or 4.8%. Adjusted EBITDA margin was 12.5% of revenues compared to 11.8% in the same period a year ago, an increase of 70 basis points. The improvement in Q4 2020 adjusted EBITDA margin was primarily due to the reduction in inventory write-offs, partially offset by the comping over the impact of one-time benefits realized in the fourth quarter of the prior year period. These one-time items in 2019 related primarily to gains from real estate sale and leaseback transactions and other miscellaneous items. Excluding these one-time items from 2019, adjusted EBITDA margin in the fourth quarter of 2020 would have improved approximately 250 basis points. Diluted earnings per share on a non-GAAP basis for the quarter increased 11.3% to $0.79 versus $0.71 in the prior year quarter, primarily due to the continuing strength of customer payment activity and reduced lease merchandise write-offs. Operating expenses were down $1.2 million as compared to the fourth quarter of 2019, primarily due to an $11.7 million reduction in write-offs, offset primarily by an increase in advertising spend and the previously mentioned benefit of real estate transactions that took place in the fourth quarter of the prior year. During the fourth quarter of 2020, the company's store labor expense increased compared to the second and third quarters, during which labor expenses were lower due to pandemic-related store closures and furloughs. Write-offs in the fourth quarter were 4.3%, down 300 basis points from the prior year fourth quarter, due primarily to the implementation of our new decisioning technology, improved operations, and the benefit of government stimulus. Cash generated from operating activities was $355.8 million for the 12 months ended December 31, 2020. Cash from operating activities grew $169.8 million year-over-year, primarily due to improved lease portfolio performance, lower inventory purchases, and one-time tax benefits resulting from the CARES Act, partially offset by other changes in working capital. At the end of the year, the company had a cash balance of $76.1 million and less than $1 million of debt. In addition, concurrent with completing the spinoff transaction on November 30th, the company entered into a $250 million unsecured revolving credit facility, which was undrawn at the end of 2020, giving the company more than $300 million of liquidity as of year end. Before I review our outlook for 2021, I want to remind you all that in November, prior to completing the spinoff transaction, the Legacy Combined Company accelerated the payment of its regular quarterly cash dividend, which would normally have been paid in January 2021. Turning to our 2021 outlook, we currently expect total revenues in the range of $1.65 billion to $1.7 billion. This represents a $50 million increase to the bottom end of the preliminary outlook we provided in connection with our spinoff roadshow in November, which is summarized on slide 17 of the roadshow presentation and is available on the investor relations section of our website. Adjusted EBITDA is expected to be in the range of $155 million to $170 million, representing an increase in the midpoint of our outlook as compared to the preliminary outlook we provided in November. As it relates to the seasonality of our financial results, we expect that both revenues and earnings will be somewhat higher in the first six months of 2021 compared to the second six months of 2021. Free cash flows, which we define as operating cash flows less capital expenditures, are expected to be $80 to $90 million. Capital expenditures are also expected to be between $80 million and $90 million for the year. This outlook assumes a few key items we want to highlight. First, no significant deterioration in the current retail environment or in the state of the U.S. economy as compared to its current condition. Second, a gradual improvement in global supply chain conditions. And finally, no incremental government stimulus or supplemental unemployment benefits. To summarize, 2020 was a successful year for Ahrens, despite the many challenges our team members and customers faced. To echo Douglas' earlier comments, I am encouraged by the opportunity ahead of us. The unique nature of Aaron's recurring revenue business model, combined with our strong balance sheet, cash flows, and operating leverage, enables us to perform well during this period of uncertainty. With that, I will now turn the call over to the operator, who will assist with the taking of your questions.

Thank you. If anybody has a question, please press star 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. Your first question will come from Anthony Chukumba from Loop Capital Markets. Your line is open.

Wow, I got to ask the first question on your first call to a publicly traded company. I am honored. Thank you, Anthony. Being a little more serious, congrats on a great finish to a great year. I guess I have a couple questions. My first question is on capital allocation. So you You ended the year with essentially $76 million of cash and virtually no debt, $9 million worth of debt. You're going to generate another $80 million, $90 million of free cash flow, and your stock is trading at kind of a stupid little multiple. So I guess I'm just wondering how you think about capital allocation in terms of cash dividends and also share it.

Yeah, Anthony, hey, this is Douglas. Thanks for being our first question on our first earnings call. Glad to have you here. Yeah, so we've actually, you know, we've got a very nice setup on our balance sheet, as you mentioned, and great cash flow prospects. As Kelly mentioned, 2021, you know, we're going to be deploying a good bit of that cash that Kelly laid out into internal investments and technology and our real estate strategy, and that's been laid out in our – in our outlook. We continue to focus, however, on returning capital to shareholders, and that's super important to us. As you recall, at the time of the spin, when we did the roadshow, we indicated that we expect to pay a dividend of $10 to $15 million in annual cash dividends, and that continues to be our expectation. Kelly mentioned in his prepared remarks we did accelerate our normal January dividend into November of 2020 so our shareholders wouldn't miss a payment while our new board formalizes that dividend policy and makes plans for the future and the future of our capital structure. So that's all in process. We've also historically used share buybacks in the past to return capital to shareholders. It's something that we've been discussing and will discuss as a management team, as a board, and we'll give you more information on that in the future if that is something we want to pursue. And the last thing I would say on this is while M&A activity is not our primary focus right now, we're open to looking at strategic opportunities as they arise. and we will continue to do so as part of our direct-to-consumer strategy and sort of pursuing our core strategy in the business. So I've listed these specifically in the order of focusing on executing our existing strategies, returning capital to shareholders, and then opportunistic M&A as we look to the future.

Got it. That's helpful. And then just one follow-up question. So, you know, in terms of the guidance, you talked about the fact that you expect – sales and earnings are slightly stronger in the first half than the second half. I'm assuming that you're seeing some sort of lingering impact from stimulus, and I know that compares a little bit easier in the first half because your stores are closed. I guess my question is, to the extent that there are additional fiscal and consumer stimulus measures enacted, and I know that the Biden administration is working on a big package right now, is it safe to assume that there would be upside to your current guidance?

Yeah. Hey, Anthony, it's Kelly. You're correct. As we pointed out on the call, our outlook does not include any benefit of incremental stimulus that may be passed this year. If you look back at last year, certainly we and others benefited from the stimulus that was pushed into the marketplace. But again, it's difficult for us to forecast exactly what impact that's going to have on our business, which is obviously why we didn't include it in our outlook. A few things to note, right? While there's generally consensus, it seems, around the size and the makeup of what stimulus may look like, we don't know when it's going to start. We don't know, I guess, formally when it's going to end either, right? So it makes that a little bit challenging. The other thing that's unique this year, is as we were going into the pandemic in early 2020, the economy was in great shape. Unemployment was at record lows. Our customer was in a really good spot. As we sit here today, obviously, unemployment's elevated. You know, customers, we believe, are behind in rent payments and other obligations that they have. So we don't know exactly how they may use that stimulus when it comes available to them relative to how they used it last year. And finally, I think we'd be remiss to not point out that there is some uncertainty right around the tax season this year. We know it's delayed. We know that there's a high probability that our customers will have some liabilities this year that they haven't had in the past. So when you put all that together, it makes it very difficult to forecast. But as a general rule, our customer, whether it's due to rising wages, increasing employment, or government stimulus, when they have greater liquidity, we tend to do better.

That's very helpful. Thanks so much, guys. Keep up the good work.

Thank you, Anthony.

And your next question will come from Kyle Joseph from Jefferies. Your line is open.

Hey, good morning, guys. Congratulations on a good quarter. Regarding the outlook, to your point, is better than when you provided it in November. Can you give us a sense of that? Because you had a bigger portfolio at the end of the fourth quarter. Was that because of some incremental performance following the stimulus in December? And what really drove the improvement in the outlook?

Yeah, it was really a few things, Kyle. So, you know, we did continue to have strong collection activity, right, as we believe as we move to the end of the year that was less impacted by stimulus and continue to be positively impacted by the rollout nationally of our centralized decisioning platform earlier in the year, as well as just the incredible performance that our operating team is putting forward in the field. So those are two things that continue to kind of drive that. The other is we are ending the year slightly higher than what we were thinking as we were completing the roadshow. And then to a much lesser extent, we did get some stimulus in December, which has helped in the first few weeks of the first quarter.

Got it. And then just one follow-up from me. Focusing on credit, does 21 sort of anticipate write-off levels normalizing? And then can you walk us through the outlook for credit performance in kind of the post-centralized underwriting, how performance has been versus your expectations? And then I guess the third leg of this question would be highlight how e-commerce credit performance has been versus your expectations.

Yeah, hey, Kyle, it's Douglas. I'll let Kelly talk about the outlook and what we've assumed there, but I'll just make a general comment on, as you know, and just to remind everybody, we rolled out centralized decisioning in the second quarter of 2020. A large piece of our portfolio now has been centrally decisioned. While we can't exactly differentiate our collections, our strong collection performance this year, how much was related to that versus – We do look at the pools by sort of scoring bands, and we have great confidence that centralized decisioning is improving our results, sort of keeping customers, you know, in the right size deal and making a stronger and healthier portfolio as we move forward. So that's been really successful. I think the biggest win there is probably the reaction by our team members. It simplified processes in our stores and made us more efficient in our labor model. which is great and sort of a win-win from all sides for our errands, for the customers, and for our team members. In terms of e-commerce, This is, again, a big win. As you know, we had centralized decisioning in e-commerce for a long time. We've been continuing to optimize our models there and really restrict, and we commented on this, and our recurring revenue written was down. Part of that down in recurring revenue written was us further optimizing our decisioning on e-com, and that has really benefited us over the course of the year. And by the end of the fourth quarter, We were seeing losses that were close to half of what they were the previous fourth quarter. So we're seeing considerable margin flow through in e-comm, and we're really happy about the decision in there. I'll let Kelly talk about 2021 write-offs.

Yeah, so, Kyle, we obviously enjoyed – lower write-offs this year than we experienced last year and also lower than what I would consider our more normalized historic levels. As it relates to our outlook, we do expect to start to return back to those more normalized levels as well. I believe during our roadshow discussion, I had put out there a range of 4% to 5% in 2021, and we currently expect that the year will play out in that range.

Thank you for answering my questions, and congrats on the end of 2020. Thanks, Cal.

And your next question will come from Brad Thomas from KeyBank Capital. Your line is open.

Hi, good morning, Douglas, Kelly, Mike. Let me add my congratulations as well on a great year and a first quarter here as a public company. Thank you. Sure, sure. One of my first questions, I have two questions. My first is going to be around how you all are thinking about write-offs, and you've addressed this a bit. But at this point, you know, I know we're all just trying to look in our crystal balls and figure out how will behavior in America change over the next, you know, 12, 24 months ahead. But how are you thinking about what normalized write-offs should look like particularly as a vaccine gets out there and some of the stimulus gets behind us.

Yeah, just a couple thoughts on that. If you look at our total collection percentages for get-right-offs last year in 2020, we were collecting 200-plus basis points higher on our portfolio than we had if we look at historic years, the five years prior to that. of a normalized range. While we believe that stimulus helped that, we think as the vaccine rolls out and as potentially we get more stimulus in, that there will be a normalizing of write-offs over time. As we move into the year, we'll see more normalizing. If we get further stimulus, we should be supported in some way. That 200 basis points of improvement is not necessarily all stimulus. It also included the benefit of centralized decisioning, which Kelly mentioned. And so as we look forward, if we have no stimulus, we would expect it to revert back to kind of our five-year averages, which is losing the 200%. And that obviously translates into both revenue reductions in the portfolio, because revenue is our collected revenue, not our potential revenue. And it also translates into write-off performance, which we would see normalizing as well. So Kelly, I don't know if you have any additional comments to that. No, he covered the comments. Okay.

That's great. And then my follow-up question, Douglas, was going to be if you could help talk about some of the things that you're doing with e-commerce and with customer retention, just given the changes in the competitive landscape. And I would say that I'm on the receiving end of more calls to look at this space than I have in a long time. given, you know, SPACs that are happening in the group and acquisitions of B2C players that are occurring. And so it seems that competition is definitely heating up. On the other hand, you've just put up three of the best quarters of same-store sales in a long time. So I was hoping you'd talk a little bit about the competitive landscape and, you know, how you feel like your in-store offering and e-commerce offering are perhaps better positioned than maybe investors perceive to face the competition.

Sure. I mean, first let me say I'm really proud of what the team's accomplished over the past five years. We've modernized our platforms. We've centralized processes. We've built a fully transactional e-commerce business at scale, and our analytics and data systems are driving value in our company every day. And All of this is on the back of a growing e-commerce platform and an omni-channel experience for our customer that we think is definitely leading in the industry. As you know, e-com has always been a competitive advantage for us. We've got a large store network that we can leverage. We've got supply chain, last-mile logistics. And as we grow that, we really feel like we can drive margin performance over time. Also importantly, we're acquiring on e-comm a younger, newer customer to errands, many of those that are shopping on our e-comm site after our store hours. And so we think we've got a huge benefit of our bedded infrastructure and layering e-comm on top of that. As you saw in the quarter, We continue to drive more traffic to our site. I think the big number there was traffic was up 29% in the quarter, thanks to the terrific work that our teams are doing in customer acquisition and search. And conversion of that traffic, while lower during the quarter due to inventory, has also been improving over the course of the year. And we expect that to get back to normalized levels in 2021. So we're super excited about that. It's currently 13% of revenue. We expect it to be a bigger part of the business as we move forward. And as I mentioned on the last Questions from Kyle, probably what's most encouraging is the control of the health of the e-comm portfolio and the loss rates that have been coming down. So as we think about e-comm, we're kind of at, I mean, even though we feel like we're in like inning three, I really feel like we're in inning one. We've got a lot to do. I'm going to let Steve just talk briefly about our roadmap forward on e-com. Sure.

Thanks, Douglas. You know, as we discussed in the Investor Roadshow, you know, we have a multi-year roadmap to drive our e-com business, really focused around digitizing that journey for the customer and then putting them in control. A few things in 21 that we're working on in this area, first, I'd call it personalization. We want to continue to connect our sites to the point of entry for the customer and then give them content that's relative maybe to their prior site experience. We want to continue to enhance the shopping experience, whether that's content, whether that's better filtering or functionality, and obviously an expanded assortment that we continue to add to. We're going to continue to focus on our site performance to make that a great experience and hopefully remove any friction for that customer. and modernize our self-service platform to really putting the customer in control, allowing them to really manage their account, their payments, you know, get servicing that they need and ask any questions. So we're really excited about the roadmap we have at Recom, and it's really going to build upon as we move throughout the year.

Yeah, so, Brad, I think as we look to the future, direct-to-consumer online is hugely a big part of our strategy and hugely important to us. We're adding more products. And we will be looking at any and all things that can help advance us in that area.

And, Brad, just one more thing to add, right, that we view as a differentiator around our model. I mean, we take a true omni-channel approach and stores are a key element of our strategy, which enables the return of product from customers. So that does a few things, right? Better experience for our customer, right? And the second thing is that with returns, with that model, we can go deeper into the risk portfolio, right? to serve more customers. And then finally, you know, we're able to extend terms. So, you know, up to 24-month terms, which allow for lower monthly payments for our customers.

Perfect. That's all really helpful. Thank you all so much. Thank you.

And your next question will come from Bobby Griffin from Raymond James. Your line is open.

Good morning, buddy. Thank you for taking my questions and congrats on having the spend done and now operating as a public company on your own. Thanks, Bobby. For me, I want to dive a little bit into 2021 guidance and just maybe understand a little better what to assume for written revenues into the portfolio in 2021. If we start to lap the centralized decisioning changes you guys made in 2Q of 2021, should written revenues then start to grow back into the portfolio as we lap that?

Yeah, so, Bobby, there's kind of a few things going on there as it relates to the portfolio. Obviously, as part of our real estate repositioning and remodeling strategy, we expect to continue to consolidate stores. As we laid out in the roadshow over the next five years, there's 20% to 30% of our current company-owned stores will be merged into existing stores within markets. That leads to a reduction in the portfolio. But I'd say that on a same-store set, we have a combination of continuing kind of at our current pace of revenue written in, but at the same time, collections, as we've mentioned before, will begin to return to more normalized levels. We believe that's offset, though, in terms of the impact that has on revenues with a higher quality portfolio. So one of the real benefits to our centralized decisioning is that we sit here today with a much higher quality portfolio book of leases. And so, as we collect more on those leases and have less returns as a percentage of the total pool, you know, the expectation is that will ultimately result in kind of zero to 2% positive comps for the year. Okay.

Bobby, the way – I'm sorry. Yeah, I was – Go ahead, Bobby.

I'm sorry. The way I think about it is we'll be comping through the second quarter against that revenue-ridden. So our approval rates are down 6% to 8%, so you should expect pressure over the first two quarters against the prior year and then a relief of that pressure in the second half of the year. I think one of the bridging items that Kelly was getting to on same-store revenues is that while – Revenue written into the portfolio is a leading indicator of the size of the portfolio. So is what we churn out of the portfolio. And last year, we churned out considerably less customers than we had previously. And we mentioned that, that product returns were lower as were write-offs. And that's a component of our portfolio health, that we're keeping customers in the portfolio. We would expect in 2021 to have higher churn than we did, ex-stimulus, than we did in 2020, which puts pressure on the portfolio. And therefore, even though we have a larger size to begin the year, you see it more normalizing, and that's why we're guiding to a 0% to 2% same-store sales.

Okay, that's helpful. Yeah, I should have probably cleared my question up, but I was thinking more on a comp basis, realizing you guys are closing stores. Just for modeling purposes, is there a rough estimate of store count closures that we should assume or relocations that we should assume in 2021 in our models?

Yeah, I think our plan this year is probably to close roughly 50 stores. Okay.

Okay, perfect. And I guess lastly for me, you mentioned you saw a little bit of an uptick with the recent stimulus, I think the $600 check. But just looking at that, was the customer behavior similar to the first stimulus where you know, the prepayments or what they looked at or what they bought or just anything, you know, to help us think about how your customers, you know, behave this round. And maybe we can kind of, you know, translate that a little bit into what would happen if there's another round of stimulus versus the first time we got it back in the summer months in the heart of the pandemic.

Yeah, Bobby, that's a great question. I mean, unfortunately, it's very difficult for us to answer, right? Because I mean, first, when that first round of stimulus came in, we also rolled out centralized decision nationally. There was also, you know, just improvement in operations under our new chief store operations officer, Ryan Malone, that was driving that as well. So it's hard for us to disaggregate exactly how much of the lift that we saw in 2020 You put on top of that, the way it's rolling out is different. So you might recall that customers received the stimulus over a longer period of time back in Q1 and Q2, whether that was checks being melted or just delays in the electronic transfer of funds. And on top of that, the one-time stimulus also included the enhanced weekly unemployment benefit. You roll forward to December, what did we see? So the $600 rolled out. It rolled out much quicker because folks were expecting it and it was more quickly delivered. On top of that, that $600 did not include any monthly unemployment benefit, which quite candidly, I think as we sit back and think about it, is the bigger driver of the stimulus because we benefited from that over a period of months in 2020. whereas the $600 stimulus in December was a one-time pop. At the same time, and I mentioned this earlier, our customers are just in a different spot at the end of 2020 and the beginning of 2021 than they were going into the pandemic. So how they used the stimulus was likely much different.

Okay, that's helpful. And then I guess lastly for me, just on the supply chain, you know, I wrote, you guys called it out in the release that, you know, the guidance assumes moderating getting a little better. But when we look at it sequentially, has all categories that we're seeing issues started to improve, or has there been some categories that have taken a step back in terms of availability, or, you know, are we moving in the right direction across the board?

Hey, Bobby, this is Steve. I'm glad to answer that. I would say that we're seeing moderate improvement across all categories. So, you know, from a demand perspective, you're seeing, you know, the categories that throughout the summer and, you know, into the fall that we're continuing to grow, you know, whether it was appliances, computers, things like that. But from a supply perspective, we work daily with our suppliers to, you know, pre-plan the flow of inventory, when's it coming, and what their outlook is. we're optimistic and believe that we'll see continued modest improvement across all our categories as we move to 21. Great.

Well, I appreciate the details. Best of luck here in the first quarter. Thank you.

Your next question comes from Alex Marossia from Barenburg. Your line is open.

Good morning, guys. Thanks for taking my questions. just starting with a macro level one can you discuss the impact that a minimum wage increase would have on your business from both an expense standpoint as well as how it how it may change your customer profiles uh it's a great great question alexa uh so the 15 minimum wage first want to point out a few things right it's um it's kind of working its way through

the system in D.C. But there seems to be some consensus around how that may look, although there doesn't seem to be consensus yet that it's going to pass. But in terms of how it's going to look, it will be phased out over a five-year period. And with that, what we can say is that in 2021, so this year, there would be no impact to our personnel expense if it goes through as contemplated. And as you roll into 2022, the impact on our business would be less than a million dollars in terms of the increase to personnel expense. Beyond that, it just becomes much more difficult for us to kind of forecast because there's a few moving parts, right? We are continuing to consolidate our stores. We're also continuing to invest in technology, which not only improves the customer experience, but it's also improving our efficiencies. So, again, while no impact this year, modest impact in 2021. Beyond that, difficult for us to forecast as our operations continue to evolve.

Yeah, Alex and Mrs. Douglas, it's important to note that our base wage rate across our store networks is close to that number, and we have also variable pay that is well in excess of that number. And so our comp ranges are higher than $15 in total on average across the portfolio.

Okay, no, understood. That's really helpful. And then just to follow up on the comments you made regarding inventories and the supply chain at the moment, how much revenue do you think was left on the table in 2020? And then how do you make sure customers come to Aaron's before other peers once appliances and electronics in particular get restocked?

Yeah, sure. So, Steve, I'll answer the second half of the question first. You know, through all of our marketing, whether it's broadcast, whether it's email, whether it's digital, we are, you know, weekly marketing messages around our assortment offering, around our price points, and really tying that to our value proposition, you know, why we think Aaron's is a great place to shop. And we're seeing the benefits of that through Q4 in the performance. As far as impact of inventory, I guess, earlier in 2020 and as it moved through, tough to quantify. I'd say that, like most people out there, You know, we saw probably a low point during the summer months, but that has continued to improve. You know, what we definitely can say, and we mentioned in our prepared remarks, is definitely we saw an impact to e-comm as our e-comm business is supported by our new inventory that we carry in our fulfillment centers. We have the luxury of having pre-leased or returned merchandise in our stores, so that allows us to balance our inventory between new and pre-leased products, you know, throughout our network.

Yeah, I think it's also important to note, you know, we serve a large target market of roughly 30% of the U.S. population with products that they look for on a payment, and that's what really differentiates us, a payment, and we believe our payments are – very competitive in the marketplace, and that combined with our high approval rates and best-in-class service, I think it's a compelling value proposition for our customers, and that's why customers continue to shop. We, as part of our strategy, will continue to evangelize that and use that in our marketing and other customer acquisition channels, and we think we've got a lot of room to run there. So we're super optimistic about that and the technology and support systems that we put behind it. All right, great. Thank you both.

your next question will come from john hawes from bank of america your line is open thanks it's uh jason um thanks for taking my question uh so i want hey guys um so i wanted to ask on uh decisioning maybe if you could provide some color on whether that's um if you've been able to loosen that at all relative to 3q uh just given uh the stimulus that's coming it sounds like maybe maybe your customer base is maybe more mixed in terms of the health of uh But, yeah, just curious any color on how that decision compares.

Yeah, I don't want to speak specifically to any loosening or tightening or anything else we've done. What I will say is we continually optimize our decisioning, and we did so all of last year, 2020. We were optimizing our e-count decisioning, which led to great benefits in that portfolio for us. And as we rolled out, our centralized decisioning in our stores. We've continued to see performance release pools, and we're optimizing. Some of that optimization is giving sort of our higher-scored customers in our decisioning matrix more purchasing power with us, and some of it is finding areas where we need to sort of adjust our model. And so I think we've been doing that over the course of the year, and we're seeing the benefits of that, and we will continue to do that on a monthly basis.

Great, thanks. And then a follow-up question, a little more longer-term focus. Is there still an expectation that – I understand EBITDA will be, I guess, down year over year in 2021, but I think there is an expectation that it would grow after that due to the store consolidation strategy. So I'm curious if that's right, if that's how we should be thinking about it longer term.

Jason, yes, it's Kelly. You're correct in continuing to To think about it that way, you recall correctly in our roadshow presentation, we did outline kind of a five-year view, and that included sequential year-over-year growth in earnings after kind of this 2021 reset year, if you will. Revenues are expected to decline at the front end of that five-year period, and then about midway through reverse course and start to grow as we continue to roll out our new stores and see the benefit of those stores and kind of the growth that they're currently demonstrating. And that kind of takes a larger percentage of the portfolio and translates into both top-line growth and bottom-line growth.

Great, thanks. And if I could add in one more question, you mentioned that staffing levels have picked up, I think, sequentially quarter over quarter. I know there were some cuts there due to the pandemic. It's been tough to get a read on that just because I'm not sure to what extent centralized decisioning has allowed you to take out some labor hours. So I'm curious if 4Q at the staffing levels have return to normal? Or are we still running at a lower rate because of the pandemic? Or is there sort of like a lower term, long term rate because of that centralized decisioning? Thanks.

Sure. Jason, it's Douglas. So first of all, we're open for business in all of our stores across the U.S. and Canada right now. And so what you're seeing in our labor costs in Q4 is reflective of a full portfolio being open. What I would say generally is we're better staffed now than we were in Q2 and Q3. So labor has come up. We're still understaffed relative to historical perspectives. and not at our target levels for this year. Our 2021 outlook, however, full staffing of our portfolio, so that's really important to know is that reflects full staffing. It does also reflect sort of what I call sort of right-level staffing for the technology that we've introduced last year in centralized decisioning for the payments. We're now taking 70-plus percent of our payments outside of store, and so we've really made it easier to run an errand store, and that's all reflected in our staffing outlook for 2021. Great. Thank you.

That's really helpful.

And your final question for today will come from John Rowan from Janie. Your line is open.

Morning, guys. Morning. Doug, I think you said earlier that there will be tax liabilities this year for the consumers that they're not expecting or haven't been there in the past. I was just wondering if you could be specific as to what you're referencing.

Yeah, I think Kelly referred to that. We were referencing, as we look out to the end of the first quarter, beginning of the second quarter, our customers will be receiving tax checks as they usually do. You know, so from what we can tell, those tax checks may be, the size of those checks may be pressured by withholdings for unemployment taxes that were not withheld or chose not to be withheld by the consumer during the year. And so we may have pressure on those checks that could put pressure on overall tax season. Yeah, so, John, unemployment benefits, right, are taxable.

So, you know, to the extent that that's not addressed in any legislation that may come forward, right, then it would be create a tax liability for our customers if they're not accustomed to seeing, given the unprecedented level of unemployment benefit they received last year.

Okay. Well, yeah, in some states, they don't withhold those federal taxes. In some states, you have to opt in. So if you have a big cohort of consumers who don't opt in to pay those taxes, they will owe those taxes this year for last year. And then are you guys seeing or did you see any weather interruptions, and is that included in the guidance for one-half earnings being stronger than two-half earnings?

Yes. Of course, we, like everyone else, experienced the weather issues of the last few weeks. You know, we had stores in Texas and in the middle part of the country shut down for a period of time. The good news about our business is we have a recurring revenue model that that allows us to withstand these shocks to the system as we did last year with COVID-19. And so we've got a portfolio that keeps on rolling. Our customers have returned to us once the weather cleared up, and we've seen a rebound there. But all of that has been reflected in this guidance for 2021.

Okay, and then just last, I think, Kelly, you said 50-store closure for 2021 is a good guide for Is that kind of a good cadence to get us down to the correct store number through the 2025 guide, or is there going to be a deviation from that run rate post-2021? Thank you.

Yeah, so the way we think about that is we're going to continue to be optimizing and repositioning our portfolio over the course of the year. We have a number of opportunities I mentioned, you know, collapse two or three stores into one store in certain markets with our new Gen Next concept, and we'll be doing that. I believe what we got into on the roadshow was about a 20% to 30% reduction in our portfolio over the next five years. which equates to roughly 300 stores. So that's what put us on track for that. I think in any given year we may accelerate or decelerate based on real estate opportunities, but that would be tracking to that ultimate goal.

All right. Thank you.

Thanks, John.

This brings us to the end of our Q&A session today. I will turn the call back over to Douglas Lindsay for closing remarks.

I just want to thank everybody for joining us today. So, in conclusion, I just want to say we're really confident at Aarons about our competitive advantage in the growing and evolving direct-to-consumer rent-to-own market. We believe that our strategy is supported by our unique assets, which will deliver expanding margins, earning growth, and strong free cash flow to our investors. Our customers come to us because of our name brand products, our value proposition, our competitive pricing, high approval rates, and best-of-class service, and we believe we've positioned ourselves to win in the marketplace. I couldn't be more excited about where we are right now and the prospect for Aaron's, and I believe we've got the right strategy and the right team to create a rewarding future for our team members, our customers, and our shareholders. Thank you for joining us today, and we look forward to catching up with you next quarter.

thank you everyone for joining us today this concludes today's conference call you may now disconnect