Aarons Holdings Company, Inc.

Good morning, my name is Charlie and I'll be the conference operator today. At this time, I'd like to welcome everybody to the second quarter 2022 conference call for Aaron's company. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you'd like to ask a question during this time, simply press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. Thank you. Mr. Hancock, you may begin your conference.

Thank you and good morning, everyone. Welcome to the Aarons Company's second 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 yesterday afternoon. 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 report. 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, 2021, and other subsequent periodic filings with the SEC for a description of the risks related to our business that may cause the 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.

Thanks, Keith. Good morning, everyone. Thank you for joining us today and for your interest in the Ahrens Company. Today, we are pleased to report consolidated company results for the first time since our acquisition of BrandsMart USA, which closed on April 1st. As a result of the acquisition, consolidated revenues increased in the second quarter. BrandSmart is off to a strong start, and we are encouraged by the performance of this new business segment. In the second quarter, the Aarons business faced a challenging economic environment, as high inflation put significant financial pressure on the lower-income customer that we serve. With gas, food, and housing prices rising, more of our customers' income is needed to cover these basic necessities. making less available for leasing new merchandise or renewing lease agreements. Customer demand and payment activity progressively worsen through the quarter, leading to second quarter revenues, earnings, and earnings per share for the errands business coming in lower than prior year quarter and below our expectations. In light of these trends, we now expect additional pressure on the company's financial performance in the back half of the year, And as a result, we have lowered our 2022 outlook. We have already taken a number of actions to optimize performance and reduce expenses in light of the changing market conditions. We have reduced operating expenses and staffing levels in our errand stores and store support center. We have announced the closure of one of our corporate office locations. and we plan to close and consolidate additional Aarons stores by year end. Also, we have reduced inventory purchases to align with current demand trends. Despite the challenging macroeconomic environment, we remain confident in the resiliency of the Aarons business. Since 1955, our business model has repeatedly proven that it can withstand economic downturns thanks to the loyalty of our more than 1 million active customers who count on us to be there for them when times are tough. We are leveraging our deep expertise and our strong relationships in the communities we serve to navigate this challenging environment. Further, we believe that the investments we've made over the past five years to transform the Aarons business are allowing us to provide our customers with even better service and greater value. For example, Our lease decisioning platforms enable us to optimize our lease origination activity. We have already tightened lease decisioning in response to the declining customer payment trends, and we will continue to monitor our portfolio performance and assess our lease approval rates as the economic landscape evolves. Meanwhile, our innovations in our e-commerce channels and our GenNext program allows us to meet our customers where they prefer to shop. whether in a beautiful errand store or online. We remain very encouraged by the growth of our e-commerce channels and the high performance of our Gen Next store strategy, and we will continue to invest in these initiatives. We will also continue to invest in BrandSmart, which we believe is the low-price leader and retailer of choice for appliances and consumer electronics in the markets we serve. This new segment performed well in the second quarter, exceeding our internal expectations and increasing our optimism about the additional value creation opportunities available through this acquisition. Together with our strong balance sheet and liquidity, we believe that our focus on innovation in the errands and brand smart businesses will enable us to continue delivering a market-leading value proposition to a large and diversified customer base. and will position us for future growth. Now I'd like to welcome Steve Olson, our president, to discuss the operational performance of both Aarons and BrandSmart before Kelly Wall provides additional details on our financial performance.

Thank you, Douglas. I want to begin by extending a warm welcome to our BrandSmart team members. I have truly enjoyed working with all of you over the last several months, and I'm excited about building the future together. I also want to thank our team members across Aarons, Woodhaven, and BrandSmart for your focus and commitment on customer service, continued innovation, and winning in the marketplace. Your efforts have been outstanding. As Douglas mentioned, the Aarons business faced challenges in the second quarter due to inflationary and other economic pressures on our customers. Customer demand was volatile in the first quarter, and as we discussed in the last earnings call, we saw choppiness in April. That trend continued and beginning in mid-May progressively worsened through the quarter. Likewise, lease renewal rates declined in the second quarter beyond the originally anticipated normalization. While performing above pre-pandemic levels through early May, we began to see deterioration in lease renewal rates as the quarter progressed. In the second quarter, Our customer lease renewal rate was 88.5% for all company-operated errand stores, compared to 92.4% in the government's stimulus-aided second quarter of 2021. We also experienced higher lease merchandise returns and an increase in charge-offs, which Kelly will discuss in a few minutes. The lower customer demand combined with higher charge-offs and higher lease merchandise returns led to a decline in the lease portfolio size. We ended the second quarter with a lease portfolio size for all company-operated Aaron stores of $130.8 million, a decrease of 1.5% as compared to the prior year quarter. On a positive note in the Aaron's business, we continue to see strong momentum in our e-commerce channel and Gennex store strategy. E-commerce remains a key customer acquisition channel and revenue driver for the Aaron's business. we have continued to improve our digital marketing strategies, enhance online shopping experience, and expand the product assortment offered on errands.com. These efforts are attracting more customers and improving our conversion rates, leading to a 28.9% increase in e-commerce lease originations in the second quarter versus the prior year quarter. This increase in e-commerce lease originations led to a 4% growth in e-commerce revenues in the second quarter of 2022 as compared to the second quarter of 2021. Also, this important channel continues to represent an increasing percentage of our total lease revenues. In the second quarter, e-commerce represented 15.4% of total lease revenues, up from a 13.9% in the second quarter of 2021. Now shifting to our Gen Next strategy. This strategy continues to deliver meaningful financial performance through the transformation of our in-store customer experience and operating model. In the second quarter, we continue to see lease originations in our Gennex stores open less than one year, grow at a rate of more than 20% higher than our average legacy stores. In the quarter, we opened 36 Gennex locations, bringing our total to 171 company operated Gennex stores, which now account for more than 17.4% of revenues, up from 6.7% in the second quarter last year. As we discussed in the last earning call, we remain committed to this important strategy and look forward to adding approximately 45 more Gennex locations this year. Turning to the BrandSmart business. BrandSmart is a value-oriented retailer with a wide assortment of competitive prices that appeal to a loyal customer base across the entire credit spectrum. In each market we serve, BrandSmart has knowledgeable salespeople, strong brand awareness, and an established local delivery and service network. Each of our 10 BrandSmart stores offers nearly 15,000 items and an average store size of approximately 100,000 square feet. In the second quarter, BrandSmart delivered $181.4 million in revenues. This strong performance was primarily driven by higher average ticket, revenue growth in appliances, and double-digit growth in commerce. Also, as we described last quarter, one of the key synergies for the BrandSmart acquisition is to implement in-house lease-to-own solutions. I am pleased to report that we have successfully launched our new BrandSmart leasing product in the second quarter, which has replaced the lease-to-own solution previously provided by a third party. Our customers and team members are excited about BrandSmart leasing, which brings a faster and improved customer experience. While our new solution represents a small portion of the BrandSmart business today, we are excited about this opportunity and believe it has significant growth potential in the future. In addition to our lease-to-own solution, we remain focused on capturing other key synergies and investing in people, process, and technology for growth opportunities following the BrandSmart acquisition. These include leverage the buying power of our combined companies to reduce our product costs, expand the product assortment offered on errands.com, grow the BrandSmart e-commerce channel, and open new BrandSmart stores in adjacent markets. With that, I would like to hand over the call to Kelly.

Thank you, Steve. As we detailed in the recently filed second quarter 10Q, in addition to the consolidated company, we are now reporting on two business segments, the Aarons business and BrandsMart. The Aarons business segment includes the company-operated Aarons stores, the Aarons.com e-commerce platform, Aarons franchise operations, BrandSmart Leasing, and Woodhaven, our furniture manufacturing operations. The BrandSmart segment includes our 10 BrandSmart USA retail stores and the BrandSmartUSA.com platform. The two business segments are not burdened by unallocated corporate expenses, which include, but are not limited to, equity-based compensation, restructuring, separation, and acquisition-related costs, interest expense, and certain other corporate functions. For all prior year periods I will discuss, we have adjusted the financial results presented to align with the new reportable segments. Consolidated total revenues in the second quarter of 2022 were $610.4 million, compared with $467.5 million for the second quarter of 2021. an increase of 30.6%. This year-over-year increase was primarily due to the BrandSmart acquisition, which was offset by lower revenues at the Aaron's business. Gross profit was $293.1 million in the quarter, $1.5 million lower than the prior year quarter. The decline was primarily due to the lower revenues at the Aaron's business, offset by the addition of BrandsMart, which was not included in the prior year period. Gross profit margin was also lower year over year, primarily due to the acquisition of BrandsMart, which operates at a lower gross profit margin than the Aarons business. Our consolidated operating expenses for the second quarter of 2022 were higher than 2021 due to increases in personnel expense, other operating expense, and the provision for lease merchandise write-offs. Personnel costs increased $8.8 million in the second quarter as compared to the prior year, primarily due to the addition of BrandsMart. This was partially offset by lower performance-based incentive compensation at both the errands business and within functions included in unallocated corporate expenses. Total other operating expenses, excluding restructuring expenses, spend-related costs, and acquisition-related costs, increased $22.3 million in the quarter as compared to the prior year period. This increase is primarily the result of the acquisition of BrandsMart and higher occupancy, shipping and handling, and other miscellaneous expenses at the Aaron's business, which was partially offset by lower advertising costs at the errands business. Adjusted EBITDA in the second quarter of 2022 was $48.1 million, compared with $65.3 million for the same period in 2021. As a percentage of total revenues, adjusted EBITDA was 7.9% compared to 14% last year. This decline in adjusted EBITDA and adjusted EBITDA margin was primarily due to the decline in adjusted EBITDA at the Aarons business, offset by the addition of BrandSmart and lower unallocated corporate costs. On a non-GAAP basis, diluted earnings per share were 79 cents compared with non-GAAP diluted earnings per share of $1.05 in the same quarter in 2021. EPS for this year's second quarter includes a deferred income tax benefit of 15 cents per share, which was generated by the remeasurement of state deferred tax assets and liabilities in connection with the BrandsMart acquisition. Free cash flow was $3.7 million, a decrease of $20 million year over year. This decline was primarily due to changes in working capital and higher capital expenditures in the current year quarter, partially offset by lower purchases of lease merchandise. At the end of the quarter, the company had a cash balance of $28.2 million and total debt of $310.3 million. Total liquidity, including availability under our revolving credit facility, was $273.4 million at June 30th. During the quarter, we paid a quarterly cash dividend and purchased 254,000 shares of the company's common stock. Turning to the business segments. At the Aaron's business, total revenues in the quarter were $430.2 million, compared to $467.5 million for the second quarter of 2021, a decrease of 8%. This decline was primarily due to the lower lease revenues, which we attribute to the lower customer payment activity Steve discussed earlier. Same store revenues were down 6.7% in the quarter compared to an increase of 11.2% for the prior year quarter. Operating expenses at the Aaron's business increased $8 million in the quarter as compared to the prior year period. Higher other operating expenses and provision for lease merchandise write-offs were partially offset by lower personnel expenses. The provision for lease merchandise write-offs as a percentage of lease revenues and fees for the second quarter was 5.7% compared to 2.9% in the prior year period. This increase in the provision expense was primarily due to a higher frequency of charged off lease agreements and an increase in the average net book value of the lease merchandise that was charged off. Both of which have been impacted by the current high inflationary environment. Additionally, the increase in write-off percentage was impacted by the lower lease revenues in the quarter. In the second quarter of 2022, adjusted EBITDA for the errands business was $48 million, compared with $78.6 million for the same period in 2021. As a percentage of total revenues, adjusted EBITDA was 11.2% compared to 16.8% last year. At BrandsMart, retail sales in the second quarter of 2022 were $181.4 million, which is approximately 7% lower than the same quarter of the prior year. This expected decline was due primarily to the normalization of customer demand following a strong second quarter in 2021, which we believe benefited from last year's government stimulus. We are not currently providing a same store sales comp percentage given that all BrandSmart USA stores have been opened for more than 13 months. Gross profit, excluding a non-cash inventory fair value adjustment related to the acquisition, was $45.9 million, or 25.3% of retail sales. In the second quarter of 2022, adjusted EBITDA for BrandSmart was $10.5 million. Yesterday, we issued our second quarter earnings release. which includes the full detail of our updated 2022 outlook. This lower outlook reflects our expectation that the current high inflationary environment will continue to adversely impact customer demand, lease portfolio size, lease renewal rates, the provision for lease merchandise write-offs, and other company expenses. With that, I will now turn the call over to the operator who will assist with your questions.

Thank you. At this time, I'd like to remind everyone, in order to ask a question, please press the number one, probably star, followed by one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Our first question comes from Kyle Joseph of Jefferies.

Kyle, your line is now open.

Hey, good morning, guys. Thanks for Take my questions. Kelly, you touched on it. I've been getting a lot of questions on the write-off side, but in auto finance, you talk about the frequency and the severity, but can you give us a sense for how both of those are changing?

Yeah, happy to, Kyle. In the quarter, our percentage was 5.7%. Of that, the majority of that was was the count that increased that. So I'm going to bridge you actually from last year to this year, which I think will be very beneficial to help you understand this. So we were at 2.9% last year, 5.7% this year. About 175 basis points or so is the frequency, right? The rest is, you know, the increase in the net book value as well as the increase in the reserve for that period as well, because we've been given a higher amount of charge-offs we're seeing And, you know, towards the end of Q2 and how that's continued into Q3, we're obviously reserving for those future anticipated write-offs as well. So it's a combination of those three things which have led to the year-over-year increase.

Got it. That's very helpful. And then on the demand side, obviously we recognize the macro environment, but Do you think, you know, some of it was you saw a bit of a pull forward in 20 and 21 in terms of demand with the stimulus out there and kind of stay at home and just kind of how, it's a crystal ball question and it's difficult in this macro environment, but like how quickly would you anticipate demand recovering and would you see any catalyst for that?

Oh, yes, Douglas. I mean, I think you're exactly right. On 20 and 21, there was a lot of liquidity in the market. A lot of folks had money and were Making retail purchases and entering into more leases. Right now, we're in a really unique market environment. As we said in our comments, we've seen deterioration beyond normalization and demand and in customer payments. That is primarily focused on the errands business, and I just want to be clear on that, which serves a lower income customer as opposed to BrandSmart, which has customers across the credit spectrum. where we're seeing in brands more of normalization, not deterioration beyond normalization. There is no doubt, and it's widely publicized, low-income customers under pressure, gas, food, housing, less liquidity to buy large items for the household, but also struggling to pay their bills. We've mentioned, and Steve said in his prepared remarks, customer demand and payment activity progressively worsened in the errands business through the quarter. As you recall, in our Q1 earnings call, we said customer demand was volatile in the first quarter as we had a resurgence of COVID, then a delayed tax season, and we saw a choppiness going to April. I would say, you know, as we look forward, we are assuming a run rate of demand that's similar to what we're experiencing now in our outlook for the rest of the year. And we would also say that the trend that we saw in lease renewal rates beginning in mid-May that progressively worsened through the end of June, that trend would continue as well. And we would consider that beyond normalization. Encouragingly, we have been utilizing the investments we've made over the past five years to adjust to this macro environment. We have centralized lease decisioning. We've been tightening lease decisioning That is going to have an impact on the demand side of the business a bit as we're tightening and managing, you know, setting the customer for success and sizing the right size deal for their ability to pay. But we are encouraged by that. But our outlook reflects all those pressures in the back half of the year. I'd be remiss if I didn't mention our e-commerce business that despite these demand trends has been a strong point for us. Ecom grew in the quarter. And sales, really what we put into the portfolio by 28%, and that's coming off of a 21% growth in the first quarter. So that's positive. Last thing I would say on this demand environment and renewal environment is inflation is also putting pressure on our cost structure. We have been purchasing items at a higher cost than historically, but we've been able to pass that cost on to our customer. Our average ticket is up. a little over 8% in the quarter, and we've been preserving the margin we're writing into our portfolio through cost increases, which our customer has been taking. So the customer has been taking the cost increases, but we're seeing that dynamic with pull forwarded demand and less liquidity impacting us right now.

Very helpful. That's it for me. Thanks for taking my questions.

Thank you. Our next question comes from Jason Hoss of Bank of America. Jason, your line is now open.

Hey, good morning, and thanks for taking my questions. The first one was curious if you're starting to see any... Hey, good morning. Are you seeing any form of trade down in the errands business in terms of... We typically think in terms of, you know, when we go into an economic downturn, that you'll start to see credit tightening above you, which could push some people into lease-to-own. I'm also curious with all the inflation folks are seeing, if that's causing people to need to use leased loan more. And if not yet, any thoughts as to whether that could be a positive in the coming quarters?

Jason Douglas Yeah. Hey, Jason Douglas. You know, it's tough to gauge right now. We are definitely keeping an eye on it. Should interest rates continue to rise and access to credit get restricted in the future, we believe market for lease to own will expand i think we've said before in a normalized environment and i would say this is a very unique moment that we're in right now but in a normalized environment we believe that inflationary increases would have the customer looking for smaller payments on big ticket items but we are continuing to monitor that you know first of all we're not in a normal environment And secondly, we have not begun to see customer trading down with any kind of credit tightening or interest rate pressure. We're following external data on that and clearly have our ears to the ground to see if that is happening in the marketplace. In addition, we have the ability to look into our internal data in the earns business to see if we're seeing higher credit scores entering our space as well as the composition of our new customers. So while we haven't seen it, we're watching carefully and monitoring going forward.

Thanks. Good to hear. And then as a follow-up, Douglas, I'll start for you. I think you mentioned it briefly about the store closure strategy. I know that was a topic following the spinoff to try to, I guess, grow EBITDA on lower revenue. So I'm curious if you're starting to – kind of dust off that playbook a little bit more and look back into that. Um, and then alongside that, I'm also curious, are we still, should we still expect a brand smart store opening next year and one to two per year thereafter?

Sure. Just on the gym next strategy. Um, as you recall at the time of our spin, uh, we had articulated a strategy where we were going to reduce the number of stores, um, and serve as the same markets that we serve now with fewer stores and bigger e-comm. With the strength of stimulus driven economy over the last two years, we had pulled back as our stores and the markets, there was a surge in demand and we just didn't think it was prudent at the time. While the pace of store closures has been slower, we are beginning to revert back to our closed merge strategy in the second half of this year. And I noted that in my comments about store closures in the back half of the year. We expect to close stores, but it's important to note those stores will be closed merges where we're just getting more efficient in the market. We have the benefit of a recurring revenue business where we can port our portfolio of leases into another store, reduce our cost structure, and drive profitability in those markets. And with our e-com platform and our digital servicing platforms, we can service those customers very efficiently. We have many customers making payments and interacting with us outside of of physical visits to the store, so that's encouraging. We believe fewer, more profitable stores is an efficient way to run the business, and we'll assess market by market where we'll actually be physically repositioning a store versus just merging customers into an existing store. Importantly, and we said this at the time of the spin, we believe this strategy frees up working capital, will help us drive earnings and create stronger cash flow in the business. Yeah, in terms of brands, I'm going to let Steve take that question. Yeah, I'll let Steve take that.

Yeah, good morning. This is Steve. As we mentioned in the prepared remarks, we see opening a brand smart store one to two a year as a key growth strategy for the business. And with that, as we stand right now, we're early in the process. We're doing our market research, both on the customer, both on the competitive positioning and these adjacent markets. And we still believe that and hope to open a store next year.

Great, thank you.

Thank you, Jason. Our next question comes from Scott Siccarelli of Truist Securities. Scott, your line is now open.

Good morning, Scott Siccarelli. Um, so your renewal rate ended the quarter at eight, 88 and a half percent, but deteriorate throughout the quarter. Can you guys give us any idea what the exit rate was? And is that, uh, what, what you're anticipating for the back half of the year?

Yeah, Scott. Hey, it's Kelly. Um, so you may recall in, in, in prior calls, we've kind of, uh, outline that for the full year, kind of pre-pandemic, our renewal rates are between 87% and 89%. Typically, in a normal period, the back half of the year would be about 100 basis points lower than that. And what we're seeing right now as we exited Q2 and in the early parts of Q3, what we're anticipating is through the back half of the year, we're going to be about 100 to 150 basis points lower than our pre-pandemic levels. So, you know, that puts us lower than where we kind of averaged for the quarter, but can give you a bit of a guide for the rest of the year. Very helpful.

And then can you guys provide also some color just regarding how much you're tightening your approval process and maybe, I don't know, Kelly, however you think about it in terms of impacting the portfolio growth rate?

Yeah. Uh, Hey Scott, it's Douglas. I'll talk about it. Tightening, you know, as we communicated, we're now, and I think we've previously said that we're now decisioning the vast majority of our customers through centralized decisioning, both on our stores and in our e-comm channels. Um, really what we're trying to do there is score our customer decides their lease and aligned, uh, their payment amount that they pay to us, their ability to pay. And we think that model is, uh, predictive and, and, and slopes, um, outcomes very well. We've adjusted our model over the course of the last six months, or really over the last 12 months, to adapt to this ever-evolving environment. We expect our lease approval rates to be about 5% lower than they were last year at this time, at the end of the second quarter of 2021. And that tightening of decisioning is reflected in our full-year outlook. Got it. Okay. Thank you very much, guys.

Yep. Thank you, Scott.

As a reminder, if you wish to submit a question, please press star followed by one on your telephone keypad now. Our next question comes from Anthony Chukumba of Loop Capital Markets. Anthony, your line is now open.

Good morning. Thanks for taking my question. First question, you know, I know historically, you know, basically you've sort of guided these merchandise right off rate in the 4% to 6% range. I guess my first question is, based on your updated guidance for 2022, what has been implied, I guess, these merchandise write-up rates? Still sort of in that 4% to 6% range, or is it a little bit higher given this sort of unprecedented macroeconomic environment that we're in right now?

Yeah. Hey, Anthony. It's Kelly. Listen, I think given, like you said, we're in a pretty unique situation here right now, our view is that we are going to be higher for the four-year relative to what we had provided before. Our current thinking right now is that for the four-year 2022, I mean, 6% and 7%. That's the least write-off, so the percentage is the least write-off.

Right, that's helpful. And then just one real quick housekeeping question, and I apologize if this is in the 10-2 and I just somehow missed it. Can you just give store numbers for the Aaron's business for company, operating, and franchise stores?

Yeah, Anthony, it's Douglas. Our company-owned stores is 1,060 stores, 1-0-6-0, and our franchise stores are 234 stores at the end of the quarter.

Got it. Thank you so much.

You're welcome. Thank you. Thank you.

As another reminder, if you wish to submit a question, please press star followed by one on your telephone keypad now. Our next question comes from Bobby Griffin of Raymond James. Bobby, your line is now open.

Good morning, everybody. Thanks for taking my questions. I guess my first question really is more just kind of high level on your in-market and kind of the space itself. The space has gone through a wide variety of economic cycles, but why do you think it's performing differently this one? in terms of being able to control the write-offs or the GMB side of the business or anything like that? Why exactly do you think this one's finding it tougher to manage through than prior cycles we've been through in the rental space?

Yeah, Bobby, it's interesting. You know, this is a unique period of time. You know, we're seeing different market conditions than we've experienced in the past. If you look back to, um, when we've seen credit tightening in the past, certainly it's been, it's been decades since we've seen inflation like this, but like our most recent data point on credit tightening, I would say would be the 2008, 2009 period. Um, you know, credit scores during that time decreased during the recession and our market expanded. which is what we would expect. Same sort of revenue during that time did increase as that market expanded due to the macroeconomic conditions, but we also had a lot of unit expansion going on at the time. I would say today we've got much better analytics to be able to deal with that, and we've got much better touch points with the customer. What's different, you know, this pull forward in demand right now, did not proceed the financial crisis back then. And so that is different. Uh, unemployment was also a lot higher back then and inflation's a lot higher now. So, you know, we've got some different things happening at the same time. And, uh, as we said, that's putting a lot of pressure on our customer, uh, to pull forward. They're not, um, stopping as much as you're hearing from other retailer and their ability to pay is a little bit more challenged. We've reflected all of those dynamics in our four-year guidance and will continue to assess as we move forward.

Okay, I appreciate that. And then I guess lastly, to switch over to BrandSmart, you know, I think you mentioned down on a quarter over quarter. I mean, year-over-year basis is around 7% mid-single digits. Was that pretty stable throughout the quarter? And is that kind of trend held up where we can get a good feel that that business isn't as volatile as what's going on on the other side of the red zone business?

Hey Bobby, it's Steve. I'll be glad to answer that. If you kind of break down the quarter on sales, I would say it did pretty much hold up throughout the quarter, even to the point where we saw some nice improving trends through the recent holiday promotions, both in May and in June leading up to July 4th. We're excited about the business. We're optimistic about the trends. It's a strong management team. The growth in appliances that we saw throughout Q2 was very promising, and we're excited about where we think we can take the e-commerce business and where the future trends hold.

Yeah, Bobby, I'd say we're very encouraged about brand smart, the growth opportunities and value creation opportunities. Just one last word on errands. You know, we're in a unique market situation right now. What's encouraging for me is we have long tenured operators who have been through many cycles and have worked with our customers at a local level through market disruptions. The other benefit we have is a recurring revenue model, unlike retail. allows us to continue to you know service our customers over time and recognize revenue over time we're really encouraged and believe in our current strategy and our value proposition in the market and these expanding channels we have like brand smart like our gen next doors and our growing e-commerce business are very very encouraging we're managing the business right now for the long term and managing through the short-term disruptions and We're very encouraged about our outlook in terms of the growth channels that we have.

I appreciate the detail. Best of luck here in the second half. Thanks, Bobby.

Thank you, Bobby. We have a follow-up question from Anthony Chukumba of Loop Capital Markets. Anthony, your line is now open.

Thank you so much for allowing me to double dip here. Just a real quick question. Obviously, you brought the guidance down, but you increased your free cash flow guidance. I'm assuming that's just sort of working capital benefit from the credit tightening, but just wanted to confirm that or wanted to see if there's anything else you could speak to in terms of that change. Thanks.

Yeah, Anthony, you're correct. Our expectations for demand, we've brought those down for the back half of the year. We're also... as you'd expect, kind of lowering our lease merchandise inventory purchases and managing that very tightly as we go through the course of the back half of the year. Got it. Thank you.

Thank you for your questions. At this time, we have no further questions, so I'll hand back over to Mr. Lindsay for any closing remarks.

Thank you, Operator, and thank you for joining us today. Although we're navigating a challenging economic environment, our team members remain focused on delivering exceptional value and service to our customers and on innovating our business. We're encouraged by the strong performance of our growth initiatives, and we continue to invest in those strategies to drive future growth. Thank you again for being with us today, and we look forward to speaking with you soon.

Ladies and gentlemen, this concludes today's conference call.