Aarons Holdings Company, Inc.

Good morning. My name is Elliot. I'll be your conference coordinator. Welcome to Aaron's Company Inc. First Quarter 2022 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. And I'd like to turn the call over to Keith Hancock, Senior Director of Corporate Affairs for Aaron's. You may begin your conference.

Thank you and good morning, everyone. Welcome to the Aaron's Company First Quarter 2022 Earnings Conference Call. Joining me this morning are Douglas Lindsay, our Chief Executive Officer, Steve Olson, our President, and Kelly Wall, our Chief Financial Officer. After our prepared remarks, we will open the call for questions. Many of you have already seen a copy of our earnings release issued last evening. For those of you that have not, it is available on the Investor Relations section of our website at investor.ehrens.com. During this call, certain statements we make will be forward looking, including forward looking statements related to our financial performance outlook for 2022. 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 31st, 2021 and other subsequent periodic filings with the SEC for a description of the risk related to our business that may cause actual results to differ materially from our forward-looking statements. On today's call, we will be referring to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, non-GAAP net earnings, non-GAAP EPS, and free cash flow. 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 in our earnings release and the supplemental investor presentation posted to our website. With that, I will now turn the call over to our CEO, Douglas Lindsay. Douglas Lindsay Thanks, Keith.

Good morning, everyone, and thank you for joining us today. I'm pleased to report a strong start to 2022 and continued positive momentum at the Ahrens Company. In the first quarter, we delivered financial results consistent with our expectations for the quarter, and we remain on track with the 2022 outlook we provided for the Ahrens core business and our February 23rd earnings release. I'm proud of all of our team members in the field, our store support center, and at our Woodhaven manufacturing facilities who work hard every day to continue to innovate within our business. Through their efforts, we were able to deliver results consistent with our expectations and to continue to invest in our strategic initiatives despite the challenging economic environment. In addition, I'm thrilled to report that we completed the previously announced acquisition of Brandsmart USA on April 1st, 2022. We believe Brandsmart enhances our ability to execute on our mission of providing consumers with easy access to high-quality products through affordable lease and retail purchase options. I will share additional insights related to the BrandsMart acquisition after we discuss the Aaron's Core business. Regarding the Aaron's Core business, we delivered results consistent with our expectations for the quarter. On a two-year basis, same-store revenues were up 9.6%. In addition, we ended the quarter with a larger lease portfolio than the same period in 2021, which we achieved despite volatility in consumer demand in the quarter. Also in the quarter, we experienced expected normalization in customer payment activity, which resulted in lower lease renewal rates and higher write-offs. As we look ahead to the remainder of 2022, we are also navigating the challenging economic environment facing the market. including ongoing inflationary pressures, the uncertainty arising from geopolitical conflict and a complex supply chain. Despite the volatile economic environment, I remain confident in our outlook for the year and our ability to optimize performance using the many levers inherent in our direct-to-consumer model. We believe our customer value proposition is compelling and gives us a competitive advantage. Over the last several years, we have significantly transformed the Aaron's core business with the goal of continuing to provide an exceptional customer and team member experience while also driving greater productivity in our operating model. To achieve this transformation, we made significant investments in promoting the Aaron's value proposition, digitizing all aspects of the customer lifecycle and optimizing our store footprint. As a result, our brand awareness in the first quarter reached the highest level since 2018. Our enhanced e-commerce platform continues to grow, attracting a new and younger customer. Our digital payment platforms offer increasing flexibility and convenience to our customers. Our centralized decisioning platform enables an increasingly predictable lease portfolio. and our more than 135 GenNext stores continue to outperform our legacy stores. I'd like to expand further on a few of these growth initiatives. First, our fast-growing e-commerce channel remains a key revenue driver and an area of strategic focus, with e-commerce revenues representing 15.4% of lease revenues in the first quarter. This is the largest contribution of e-commerce revenues to total lease revenues since launching Aarons.com. We are attracting more customers to our website, improving conversion rates, and enhancing the customer experience. We more than doubled our online product assortment in the last year. And importantly, we have meaningfully accelerated the speed with which we are able to introduce new products to our e-commerce channel. We expect to leverage these capabilities to drive growth in our business by expanding our marketplace. offering a broader product catalog to our Aarons lease-to-own customers. Complementing our investment in digital channels, our GenNext store concept continues to deliver a superior customer experience and drive meaningful financial performance. In the first quarter of 2022, lease originations in our GenNext stores opened less than one year, continue to grow at a rate of more than 20 percentage points higher than our average legacy stores. Following the opening of 19 new GenNext locations in the first quarter, our 135 company-operated GenNext stores accounted for more than 13% of lease and retail revenues. We remain committed to the GenNext strategy and currently plan to add more than 80 additional GenNext stores this year. For a total of approximately 100 GenNext locations in 2022. We continue to innovate here at Aarons, and the business transformations we have implemented are yielding great results. We are excited to apply the assets and capabilities we have built to our newest platform for accelerated growth, BrandSmart USA. As discussed in our last earnings call, we believe the acquisition of BrandSmart will provide meaningful value creation opportunities. We continue to expect this transaction to deliver a variety of strategic and financial benefits. It broadens our customer reach and significantly expands our total addressable market. It leverages Aaron's strengths to create an in-house lease-to-own solution. It significantly increases the product assortment available to Aaron's customers. And the transaction also yields significant purchasing power and cost synergies. We are operating Aarons and BrandSmart as separate lines of business, each operating under their current brand. The BrandSmart business reports into our president, Steve Olson. Steve and his team are already hard at work integrating BrandSmart into the Aarons family and executing on our strategic initiatives. Our initial efforts are focused on capturing the synergies for the transaction, as well as making investments in the BrandSmart business to position it for future growth and to enable it to operate effectively as part of a public company. We have already begun work on the implementation of an in-house lease-to-own solution for BrandSmart customers, which we expect to launch in the second quarter of this year. We are also preparing to add some of the BrandSmart product catalog to errands.com by the end of the year and are beginning to assess procurement synergies between the two businesses. Finally, we have begun assessing optimal locations for new BrandSmart stores with the intent of opening one to two stores per year beginning in 2023. This is an exciting time for our company as we have new opportunities to drive long-term value for shareholders, create opportunities for our team members, and enhance our compelling value proposition. We continue to expect the combined company to deliver more than $3 billion in total annual revenues and more than $300 million in adjusted EBITDA by 2026. We look forward to reporting BrandSmart's second quarter performance in our next quarterly earnings release. Before I turn the call over to Kelly, let me reiterate how pleased I am with the progress we're making on our strategic initiatives. For both our Aaron's core business and BrandSmart, I remain confident we have the right team, the right strategy, and the right platforms to deliver long-term growth for all of our stakeholders. With that, I'll now turn the call over to Kelly Wall to discuss the details of our first quarter results and 2022 outlook.

Thank you, Douglas. Before I share our financial results for the quarter, I want to remind you that the financial and operating results for the first quarter of 2022 and prior periods do not include BrandsMart. As Douglas noted, the acquisition closed on April 1, 2022, and results for BrandsMart will be included in the company's consolidated financial statements beginning in the second quarter of 2022. With that said, I am pleased to share the financial results for the Aaron's Core business for the first quarter of 2022. Total revenues in the quarter were $456.1 million, compared with $481.1 million for the first quarter of 2021, a decrease of 5.2%. This decrease in total revenues was primarily due to lower lease revenues attributed to the expected normalization of the lease renewal rate and lower exercise of early purchase options by our customers. These were partially offset by the increased size of our lease portfolio year over year. More specifically, the company ended the first quarter with a lease portfolio size for all company-operated stores of $131.7 million, an increase of 2.3% compared to a lease portfolio size of $128.8 million on March 31, 2021. Lease revenues in the first quarter also benefited from an increase in average monthly rent per agreement, which is partially offsetting lower customer delivery volume. To help offset the continuing high inflation we are experiencing in the cost of lease merchandise, we continue to adjust product lease rates and modify the product assortment mix offered to our customers. The same factors that have impacted lease revenues also contributed to a 4.3% decline in same-store revenues for the first quarter of 2022, compared to the 14.8% increase in the prior year quarter. On a two-year basis, same-store revenues were up 9.6%. In the first quarter of this year, our customer lease renewal rate was 89.4% for all company-operated stores compared to 92.5% in the government stimulus-aided first quarter of 2021. We have discussed the benefits to our customers from government stimulus programs on prior earnings calls, and as we continue to comp over stimulus-aided periods, we expect that this normalization will continue to result in lower customer lease renewal rates and lower customer demand when compared to the same prior year periods. As Douglas highlighted, we continue to experience strong performance in our e-commerce originations channel. E-com revenues grew 3.9% in the first quarter of 2022, after increasing 41.9% in the same quarter of the prior year. E-commerce also has continued to represent an increasing percentage of our total lease revenues, increasing to 15.4% in the first quarter of 2022 from 14.3% in 2021. At the end of the quarter, we had 135 company-operated Gennex locations. These stores contributed 13.2% of lease and retail revenues in the first quarter, up from 5.2% in the first quarter last year. We plan to open a total of approximately 100 GenNEXT locations in 2022. Due to the continued challenges in the global supply chain, we have delayed 20 of the previously communicated planned GenNEXT locations into 2023. With this change, we currently expect to have 215 GenNEXT locations by year end. which will represent approximately 20% of our company operated stores. In addition, our Gennex stores are generating favorable revenues and earnings growth when compared to our legacy stores and are continuing to meet our internal expectations. With lease originations in Gennex stores open less than one year, continuing to grow at a rate of more than 20 percentage points higher than our average legacy stores in the first quarter of 2022. Turning to our operating expenses for the first quarter, personnel costs declined $3.8 million in the first quarter as compared to the prior year, primarily due to lower performance-based incentive compensation, partially offset by higher wages for in-store team members. Similar to the fourth quarter of 2022, Staffing levels in the first quarter at our stores remain below our operational targets due to the ongoing challenges in the U.S. labor market for retail-based hourly employees. Excluding restructuring expenses, spin-related costs, and acquisition-related costs, total other operating expenses declined $4 million in the quarter as compared to the prior year period. This decrease is primarily due to lower advertising costs partially offset by higher occupancy costs, shipping and handling, and other miscellaneous expenses. The increase in occupancy costs is attributed to higher store maintenance and utility costs and the rent and leasehold improvement depreciation related to our new GenNext format stores. The provision for lease merchandise write-offs as a percentage of lease revenues and fees for the first quarter was 5.4%, compared to 3.1% in the prior year period. As expected, this increase in write-offs was primarily due to lower customer payment activity this year as compared to the government stimulus-aided first half of 2021, where lease renewal rates were 300 to 400 basis points higher than what we experienced pre-pandemic and the continued product cost increases in our leased merchandise. We also believe that the current macroeconomic conditions and especially the high inflation our customers are facing have impacted payment activity. Adjusted EBITDA in the first quarter of 2022 was $54.7 million compared with $73.9 million for the same period in 2021. As a percentage of total revenues, adjusted EBITDA was 12% compared to 15.4% last year. The decline in adjusted EBITDA and adjusted EBITDA margin was primarily due to the expected lower lease renewal rates and expected higher provision for lease merchandise write-offs compared to the government stimulus-aided levels in the first quarter of 2021. On a non-GAAP basis, diluted earnings per share were 87 cents compared with non-GAAP diluted earnings per share of $1.24 for the same quarter in 2021. Free cash flow was $10.7 million, an increase of $16.6 million year over year, primarily due to lower purchases of lease merchandise sale and leaseback transactions for three company-owned stores and lower capital expenditures in the current year quarter. For the year-to-date period ended April 22nd, the company has repurchased 516,000 shares of the company's common stock for approximately $11 million. On March 3rd, 2022, the company's board of directors increased the share repurchase authorization to $250 million from the original $150 million plan and extended the maturity to December 31, 2024. The remaining authority under the new share repurchase plan is $135.8 million. Additionally, on April 5, 2022, the company paid a quarterly cash dividend of 11.25 cents per share. This is an increase of 12.5% from the previous quarterly cash dividend of 10 cents per share. As I stated previously, we closed the acquisition of BrandsMart on April 1st, 2022. In connection with the transaction, we replaced the existing $250 million unsecured revolving credit facility with a new credit facility that includes an unsecured $375 million revolving credit facility and a five-year $175 million unsecured term loan. As of April 1st, the consolidated company had $121.2 million of borrowings outstanding under its revolving credit facility. Including cash on hand, our total available liquidity was approximately $260 million at closing. which included $237 million available under our unsecured revolving credit facility. Turning to our outlook, we have updated our full year 2022 outlook to reflect the acquisition of BrandSmart. This updated annual outlook includes nine months of financial results for the acquisition. We expect total consolidated revenues of between 2.32 billion and $2.39 billion, and consolidated adjusted EBITDA of between $200 million and $215 million. We also expect consolidated non-GAAP diluted earnings per share of between $2.65 to $2.90 per share, consolidated capital expenditures of $100 million to $125 million, and consolidated free cash flow of $45 million to $55 million. Additionally, we are assuming an effective tax rate of 26% and the diluted weighted average share count of 32 million shares. We have not assumed any additional share repurchases in 2022 for purposes of this outlook. Excluding the BrandsMart acquisition, the ARIN's core business annual outlook for total revenues adjusted EBITDA, and annual same-store revenues remains consistent with the outlook provided on our fourth quarter 2021 earnings call. For BrandSmart, we expect revenues of between $545 million and $565 million and adjusted EBITDA of between $20 million and $25 million for the nine-month 2022 period post-acquisition. As Douglas discussed earlier on this call, the addition of BrandSmart is expected to provide many strategic and financial benefits, and we believe the transaction has significant synergy opportunities. More specifically, we believe that the in-house LTO synergy will provide approximately $15 to $20 million of annual run rate EBITDA by the end of 2024, and the increase in product assortment provided to the Aaron's customers and procurement opportunities will provide synergies of approximately $5 million and $10 million, respectively. We are also investing in people, process improvement, and technology to position BrandsMart for growth and to operate this business as a segment of a public company. We expect this incremental expense to be approximately $10 million annually. Net of these incremental investments, we are forecasting annual net run rate synergies of $20 to $25 million by the end of 2024, which we expect to double by the end of 2026. When combined with our existing e-commerce and GenNext growth platforms at Aarons, we continue to believe that the consolidated business will deliver total revenues of over $3 billion and adjusted EBITDA greater than $300 million by 2026. With that, I will now turn the call over to the operator, who will assist with your questions.

Thank you. For our Q&A, if you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question today comes from Bobby Griffin from Raymond James. Your line is open.

Good morning, everybody. Thank you for taking my questions. I guess first, Kelly and everybody, Doug, I appreciate the detail on the renewal rates. Just curious, did that move around a lot during the quarter, or are we kind of now at the level around 89-ish percent that you feel is the new baseline for the business, given all the work you've done with centralized decisioning and some of that stuff?

Yeah, Bobby, as you recall from previous calls, you know, renewal rates have strengthened over the last year and a half with stimulus in the economy. Our historic renewal rates are, call it in the 87% to 88% range. At the end of 2020 with stimulus coming in, they increased by about 200 to 300 basis points. And then the first half of 2021, they were up 300 to 400 basis points. So that's where we're comping over now. So this normalization is really as expected. And as we look forward, the renewal rates were normalizing as expected going into the year. So what's reflected in our guidance is really consistent with what we had seen. This normalization as the government stimulus is coming out is really nothing different than what we articulated on our last call.

So just to say it another way to make sure I understand, like 1Q played out, 1Q of 2022 played out. the way the 89 ish percent is played out kind of as you expected. And that's what that type of rate is what's assumed and to go forward as well. 89 or so rough numbers.

Yeah, well, it's important to realize that we have a seasonal business. So what was expected in Q1, as you know, tag seasons in Q1, but it was as we expected. And, you know, we believe will still be comping negative to last year in q2 because of the stimulus aided q2 last year but still normalizing down we believe as we get into q3 and q4 those will be closer to historic levels seasonally adjusted for those two quarters perfect that's very helpful and i guess two questions two fob questions on some of the detail on brand smart um one

I was a little surprised you guys mentioned the synergies for the in-house lease solution but called out the run rate probably by the end of 2024. Can you just maybe unpack that timing? I would have thought maybe that would have came a little bit sooner, given that's one of the biggest synergy buckets and a large, compelling opportunity. Is there just some investments that have to be made there to kind of get that up and running or anything else to help us understand some of the behind-the-scenes work that has to take place to get the in-house leasing solution in BrandsMark?

Yeah. Hey, Bobby, it's Kelly. Happy to unpack that a little bit for you. So, um, you know, as, as we are kind of integrating this business and focusing on, uh, standing up the in-house lease to own a product there, you know, remember it's a portfolio based business. So, you know, day one, we'll have a few agreements and then I'll grow over time. Right. And in the first quarter we'll recognize. less than a full year run rate of revenue and EBITDA contribution associated with that. So as the portfolio size increases through that business, we'd expect that the contribution on an annual basis would grow over time. And you're right, we do have some upfront investments that we need to make. We're obviously leveraging our existing decisioning technology, our expertise around reverse logistics, as well as you know, infrastructure and know-how that we have across the organization that we believe will help us stand this up fairly quickly. But again, the portfolio nature of the product is what's kind of leading to that ramp over time.

Makes sense. And then I guess lastly, I mean, there's a lot of fear out there on big ticket home durable spending altogether kind of right now as we go over some really tough comparisons and, you know, housing turnover and some metrics have slowed. you know, great to see the portfolio size up, but can you maybe give us some more color on now that you have BrandSmart as well, kind of how their business has trended over the last couple months? Have you seen any type of behavior from customers that would show you trade downs happening? Is anything there to help us maybe get a better sense of where the consumer and your customer is today? Sure. Hey, Bobby, this is Steve.

I'd be glad to answer that. So I'm going to first start a little bit with give you a background on the category mix of the BrandSmart business. So Their business is obviously weighted more to appliances, and that ranging at about 50% of their mix, followed by consumer electronics around 25%, computers around 8%, and furniture and other categories in the low single digits. As Douglas mentioned and Kelly mentioned in their prepared remarks, absolutely BrandSmart is comping over stimulated periods the last couple years, but They continue to see nice growth actually in average selling price across their categories. So the benefit of Brandsmart with their broad assortment, with their compelling value proposition is supported by their knowledgeable sales force that allows them to talk to the customer inside the store. and get them to understand the benefits of trade-up features and functions in each product. So they're doing that on a daily basis, and I believe that is supporting what I see through Q1 is continued growth in their average selling price.

Yeah, Bobby, the other thing I'd say on the demand side, so we're brand smart as expected, normalizing, but we're seeing strength in categories, as Steve mentioned, and particularly in margin. We'll report on that in Q2 as we move forward in the business. In terms of the errands customer, The demand environment is normalized as expected. I did note in my comments that there was some volatility during the quarter. As you know, we had a very strong end to Q4 of last year. Inventory was in great position and our sales were very strong. In the holiday season, as we went into January, as you know, there was a resurgence of COVID. And that sort of impacted us through mid-Feb, where we started as tax season came upon us sort of after the Valentine's Day period. We saw real strength in demand, and that persisted all the way through the end of March. So, you know, the consumer, I would say there's a lot of volatility out there. One thing I'm really happy about is our e-commerce business has remained strong all the way through that. So we've got very strong comps and e-com revenues up 3.6 over the last year, up 41%. So it's a real strength of ours. And so we continue to monitor that as we look forward. Steve mentioned sort of price and what was the customer paying the price that we're offering. I'm happy to also say that we've been able to drive average ticket with our consumer. David Wiltshire- Average ticket at the errands businesses up 6% year over year and we've been able to offset price increases that we've seen. David Wiltshire- With higher ticket and preserving margin and the errands business, which is really good now that's, not to say that our customer isn't under pressure, we obviously. David Wiltshire- serve a credit challenge customer who has cost increases in all aspects of their business. But we believe that the decisioning algorithms we have set us up for success as we move forward, and the renewal rates are as I've communicated earlier. So I'm really pleased with the way the business is performing.

Thank you. I appreciate all the detail. Very helpful. Congrats on the strong quarter versus tough comparison, getting BrandsMart closed. Look forward to seeing what you guys do with the business.

Great. Thank you.

We now move on to Jason Haas from Bank of America. Your line is open.

Hey, good morning, and thanks for taking my questions. The first one's on write-offs. I'm curious, I think on the last call we had talked about write-offs getting better throughout the year. I know that the typical seasonal cadence is they do tend to pick up through the years that customer runs through their liquidity. So I'm curious if that's still expectation for write-offs to come down through the year. And then I'm just trying to reconcile that with the lease renewal rates, which are supposed to get I guess, lower through the year. So I'm just trying to understand those two dynamics. They seem to be kind of moving in different directions.

Yeah. Hey, Jason. It's Kelly. So on the write-off side, you're right. We had called out on our prior call that write-offs would be higher in the first quarter than what we had seen last year and higher than what we had seen kind of historically on a kind of seasonally adjusted basis. Right. So just to remind you, we came in at 5.4% for the quarter. That's up from 3.1% last year. And we think that this increase has been driven by a few things. One, the anticipated normalization in the customer activity that we've seen, customer payment activity that we've seen. We've also, and Douglas said on this briefly, there was a delay in the tax season. That impacted That plus the normalization impacted lease revenues for the quarter, as well as charge-offs. So charge-offs were up. The other thing that was impacting charge-offs in the quarter were the higher net book value of the lease merchandise. Again, that's been up year over year due to the inflationary pressure that we're seeing as we're buying product kind of going forward. Now, as we look at that and we think about the rest of the year, we do continue to feel like we're going to land in that annual range that we've talked about before. of 4% to 5%, albeit at the high end, again, consistent with what we were thinking when we put out our original plan for the year last quarter. The seasonality is a bit different this year. We've talked about that some as well with typically Q1 would be your lowest period. It's going to be at the high end of our four quarters this year. And we would typically see some improvement, an increase in Q3, and then Q4 tends to be kind of right around Q3 as well. So we're starting to get back to a more normal cadence, at least that's what we're planning for. But again, we're paying very close attention to this because some of the things that we're facing right now we haven't seen in over a decade. But again, I want to reiterate, we feel good about that kind of coming in on an annual basis at the high end of that 4% to 5% range.

Yeah, and Jason, it's Douglas. As that relates to our lease renewal rates, and I may have admitted this in my comments to Bobby, we're seeing normalization, particularly in the second half of the year, kind of comping the pre-pandemic normalization, albeit at a higher rate than pre-pandemic levels. I think we've previously communicated 100 basis points higher than pre-pandemic levels, so we see that normalizing but settling in above pre-pandemic levels, which kind of correlates with our write-off guidance, and that's because of our decisioning algorithms we've put in place. We now have over 90-plus percent of our network being decisioned through centralized decisioning, and we have a lot of levers and a lot of predictability in the portfolio.

Thanks, that's helpful, Collier. And then for a follow-up, a bit related to a question Bobby asked, just on the BrandSmart revenue and EBITDA guidance for 2022, I'm trying to reconcile that with the numbers that you gave for 2021, which were, I know I'm comparing four quarters to three quarters, but it does seem like if I try to adjust for seasonality, I don't know the exact seasonality of BrandSmart, it does seem like it's a step down. I think on the EBITDA side, you talked about, I think, the $10 million of public company costs. And it sounds like maybe on the revenue side, you're lapping over some stimulus compares. But I'm just curious if you could provide any more color on just how 2022 revenue and margins for BrandSmart compared to 2021.

Yeah. Hey, Jason, it's Kelly. So you're spot on in that we provided a range of 20 to 25 million on EBITDA. That is the last nine months of the year. So if we kind of start there, And Levelset is the last nine months of 2021. BrandSmart in those nine months, they delivered about $39 million of EBITDA. And so from there, the $10 million of investments that I did talk about, that's an annual number. It's also a net of kind of adding back some one-time investments that we're making along the way. So as we think about what that net number is going to look like for This year, it'd be about $7 million of investments. And again, that's in people at both the store and the store support center, as well as investments in process and technology. Again, as we look to set the company up to deliver consistent growth going forward, as well as, quite frankly, to operate it as a segment of a public company. We're also looking to bring their staffing levels back up to where they were at pre-pandemic times. likely not all the way back up, but we do think it's important to invest back into the stores there in terms of labor in the stores. We're also seeing increases in just other store-related OPEX, kind of more inflationary kind of driven things outside of just the cost of product that we're selling. And then the remainder of that would be normalization from last year into this year as we see the demand trends slightly lower.

Yeah, as I just mentioned, those demand trends are lower over a 2000 inflated 2021 year. I mean, when you look at our two and three year performance in that business, it's been very strong. And we believe the markets that we're serving in Florida and Georgia are very strong markets. And so just generally, I'd say, excuse me, the integration is going very well. And we're super optimistic about the business looking forward.

It's great to hear. Thank you.

We now move to Kyle Joseph from Jefferies. Please go ahead.

Hey, good morning, guys. Thanks for having me on and answering my questions. Just one follow-up on BrandSmart for modeling as we incorporate it into our models just for kind of the expense breakdown. Give us a sense for gross profit margins at that business.

Yeah. Hey, this is Steve. I'll be glad to answer that. I'll relate back to the category mix. So, you know, obviously when you, when you look at the, the, the weight of appliances in their business relative to, to other retailers in the market, you're going to see a gross margin in the, like call it 21 to 22, 2% range. And that, that is obviously off the benefit of, of having appliances, you know, at that 50% range and consumer electronics, you know, slightly lower than other players.

Okay, understood.

Kyle, one thing I'd say is we're trending, you know, as the shift mixes and our product categories, that margin will mix. We've seen real strength in appliances in that business and we'll continue to add new products into that business and more as Steve gets a hold of it and his merchandising team and as we work with the very talented brands of our merch team and four of our medics, those profiles will change. But we'll give you more detail about that as we move forward in the business.

Got it. Appreciate that. And then, you know, a lot going on in the world and everything. Can you just give us a sense for kind of the cadence of both the comp as well as write-offs through the first quarter and kind of into April and when you really saw tax refunds start to hit and how that impacts. And then admitted, you know, there was Omicron and there's just a lot going on, but just give us a sense for the cadence of both the comp and write-offs through the quarter and kind of since the quarter.

Yeah, sure. I mean, I think I mentioned a little bit in my remarks with Bobby, you know, ended the year strong last year in January. We saw this early resurgence of Omicron and, Obviously, our demand softened during that time as we had not only customers not visiting our stores, but employees out. That came back mid-February as we saw a delayed tax season, albeit a tax season that showed up ultimately, strengthening through the month with great strength in the month of March to end the quarter. That being said, our store business was down year over year. We were comping a very strong sales quarter last year. But all during that time, our e-comm business was very strong, comping a huge comp last year. And so we're really happy about that. As we ended the quarter and entered April, we continue to see strength in our e-comm business. But we continue to see volatility in the store business and choppiness. We continue to monitor it. But fortunately, we have a lot of levers in our business to be able to offset that. We're doing things on the promotional side. and certainly able to control what we can control there. So as we look at the outlook going forward, our revenue outlook remains the same. It's on slightly softer demand, but slightly higher ticket, still staying within the annual range that we provided. And as I mentioned earlier, A big part of our revenue, because we're a portfolio business, is not just the size of the portfolio, but the quality of the portfolio. And we believe renewal rates are normalizing, albeit at higher than pre-pandemic levels. So that gives us confidence in reiterating our guidance for the year.

Got it. Very helpful. And then just one last one from me, kind of post-brand smart. How are you guys thinking about Do you have any sort of target leverage? And then kind of update us on your capital allocation priorities. It sounds like you're planning kind of a mix of new store builds between GenNext and BrandSmart, but just update us on capital allocation priorities.

Yeah. Hey, Kyle. It's Kelly. So I'd start with our capital allocation priorities. Really, they remain unchanged from what we've talked about in the past. We're going to continue to focus on investing in both of our businesses to drive revenue and earnings. We're excited that we now have three platforms for growth going forward. Obviously, our GenNext repositioning and remodeling program that's ongoing on the Aaron side, as well as e-com growth with both businesses. And then last and certainly not least is the BrandSmart acquisition, where we're expecting growth to come not only from the synergies that we've outlined, but also as we move into 2023 and beyond, opening new stores. So we're going to continue to focus primarily there, and as long as we're seeing returns where we'd expect them to be, we'll make investments across all those three platforms. And in second and third, looking at M&A, as it makes sense, as well as returning any excess capital to the shareholders, I mean, clearly, we're very focused from an M&A perspective on integrating this acquisition that we just completed in terms of closing it, so we're hard at work there. So, again, the focus will primarily be on, as we have excess capital, returning that back to shareholders, as it makes sense. From an overall kind of capital structure perspective, you know, I'd say, you know, longer term, we'd want to operate the business consistently at less than, one and a half turns of net debt divided by adjusted EBITDA. You know, pro forma for this transaction, we're around, you know, one turn of leverage. And, you know, and we would expect with some free cash flow to potentially lower that going forward. But at the same time, as we have opportunities to invest in these businesses, we'll, you know, we'll utilize that capital to do so there appropriately also.

Great. Thanks very much for answering all my questions. Thanks, Kyle.

We now turn to Anthony Chukumba from Loop Capital Markets. Your line is open.

Good morning. Thanks for taking my question. First question, just a quick housekeeping question. What were the store counts for company-operated stores and then franchise stores at the end of the first quarter?

Yeah, so hey, Anthony, it's Kelly. At the end of the first quarter, we had 1,070 stores. company-owned stores or company-operated stores, and then 236 franchise-operated stores for a total of 1,306 stores across the franchise here. Got it. That's helpful. I think 135 of those stores are new Gen X format stores.

Got it. And then just a real quick update, you know, I guess on supply chain, you know, I know that's, you know, the headline for a number of retailers last year, and it seemed like you guys fared better than most, but we'd just like to get an update there if that was an admin at all to your first quarter results.

Sure. Hey, Anthony, this is Steve. I'd be glad to answer that. As Douglas mentioned in his prepared remarks, we feel we're in a really strong inventory position coming out of Q1 across all of our major categories. And that's just the result of all the hard work, both the merchandising and supply chain teams within the Aarons business, as well as the BrandsMart business, just setting themselves up, having the right inventory in the right place. I think just generally, you've got to learn to live in this new supply chain environment, and that's just about building in the correct lead times, and safety starts to run the business. And I really believe we've done that through all the hard work that's been done over the last quarter. Yeah, that's helpful. Keep up the good work.

Thank you.

We now turn to Bill Chappell from Truist. Please go ahead.

Thanks. Good morning. Can you, I guess, talk a little bit more on the supply side? Specifically, it's kind of brand smart. Clearly, appliances are still tough to find, and I just don't know if there's a way to quantify how much that hurt or negatively impacted sales for BrandSmart last year. If you see some kind of window opening up in the next six months where appliances in particular, but not all things, will start to be more full stores, more full full sales or if it didn't have that much of an impact compared to other retailers? Sure.

I'd be glad to talk. This is Steve again. I'd be glad to talk about some of the general trends that we've seen, that BrandSmart has seen in their business. So BrandSmart today, coming out of Q1, you know, coming out the close of the acquisition, obviously is in a strong position. inventory position across all their categories and most importantly in their appliance business. They've got great supplier partners and they have a very broad assortment. To put it in a range, over 180 refrigerators, 70 laundry pairs and close to 200 ranges. So what that gives them is the ability to always have an offering from the low end to the high end. I can't speak specifically about any details they may have seen last year, but assuming maybe there were minor holes in the assortment, but having that broad assortment allows them to trade and have the appropriate items at every price point to benefit the customer. Their business continues to perform well in appliances. They had positive results in their Q1 business. And we believe, looking forward, that from an inventory perspective, we'll continue to watch it closely. But hopefully, we'll continue to be in a strong position.

Well, I guess with that answer, so do you think BrandSmart got a boost last year by having available product that may as other retailers start to get inventory or water selection inventory. I mean, clearly appliances are short a lot of places. So I'm just trying to understand, was that a net benefit, it sounds like, for BrandSmart by just having availability?

Yeah. Hey, Bill, it's Douglas. I mean, listen, as Steve mentioned, we've got very talented buyers down there. You know, as a merchant-driven culture, they're scrappy. And I would say much like the Aaron's business, we did a great job of making sure inventory was in stock during some of the more challenging periods on global supply chain issues, and I think they did the same. We're not going to directly comment on their performance last year, but as Steve said, they've done a really nice job, and we continue to see strength in appliances there. We'll unpack BrandSmart a bit more in the second quarter as we report their performance next quarter. Got it.

And then just last one for me, just understanding the brand's part, seasonality. Is there any way just for optically us thinking of kind of percentage of revenue for the year on third quarter versus fourth quarter, or is it pretty heavily fourth quarter similar to kind of errands?

Yeah, I think typically most retailers are heavier fourth quarter, Bill. But I think what we're trying to really get our hands around as we integrate this business, you know, in the same way that we have acknowledged that the seasonality for 2022 for errands is a bit different than a typical year, we may see similar trends at BrandSmart as well. So right now we're not prepared to comment specifically on seasonality and quarter-to-quarter trends, but we do expect to unpack that a bit more going forward.

Bill, what I'd say on that, just coming to the top a little bit, is the seasonality in BrandSmart will be different than the seasonality at Aarons because Aarons has a recurring leasing business, recurring revenue that's impacted by liquidity of the customers per season. BrandSmart is a retail business that will perform more similarly to traditional retailers. So you can look to that as a guide.

Got it. Thanks so much.

Great. Thank you.

We have no further questions. I'll now hand back to Douglas Lindsay, CEO, for closing remarks.

Okay. Thank you for joining us today. As we continue to navigate a challenging macroeconomic environment, we're pleased that we've delivered financial performance consistent with our expectations for the quarter. Our team members remain focused on delivering exceptional value and service to our customers. and we're investing in our strategic initiatives, both at the Aarons core business and at Brandsmart. We believe we're well positioned to create long-term value for all of our stakeholders and look forward to reporting the consolidated results of both Aarons and Brandsmart next quarter. Thank you again for being with us today, and we look forward to speaking with you soon.

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.