Aarons Holdings Company, Inc.

Hello, everyone, and welcome to the Aaron's Company Q3 Earnings Call. My name is Charlie, and I'll be coordinating the call today. You'll have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. And I'll hand over to your host, Keith Hancock, Senior Director of Corporate Affairs, to begin. Keith, please go ahead.

Thank you, and good morning, everyone. Welcome to the Aaron's Company third quarter 2022 earnings conference calls. Joining me this morning are Douglas Lindsay, our Chief Executive Officer, Steve Olson, our President, and Kelly Wall, our Chief Financial Officer. After our review of the third quarter, 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 who have not, it is available on the Investor Relations section of our website at investor.erins.com. With our third quarter release, we are updating our reporting format. This simplified look provides an efficient and easy comparison of important metrics against previous quarters and includes additional commentary about our results. Our accompanying PowerPoint presentation, also available on the website, is also focused on results from the third quarter. During today's call, certain statements we make will be forward-looking, including those related to our financial performance outlook for the remainder of 2022. Please refer 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, 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 refer 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 on our website. Now, please welcome the Aarons Company CEO, Douglas Lindsay, to share more about our third quarter results. Douglas?

Good morning, everyone. Thank you for joining us and for your interest in the Aarons Company. Today, we're pleased to report our consolidated company results for the third quarter of 2022, which closed on September 30th. This quarter, we delivered solid results for both revenues and adjusted earnings in what remains a challenging economic environment. And as a result, we are raising the midpoint of the full year 2022 guidance we provided on July 25th. Within the errands business segment, high inflation continues to impact our core customer. While gas prices fell during the quarter, food and housing costs remain high. Despite these headwinds, merchandise deliveries to our customers steadily improved during the quarter, resulting in revenue and earnings for the Aarons business coming in line with our expectations. Our third quarter performance benefited from ongoing investments in lease decisioning and digital payment and servicing platforms, as well as continued investments in our key growth strategies, including Aarons.com and our GenNext store program. These platforms give our customers increased flexibility in where and how they shop either online or in a beautiful Aaron store. Meanwhile, we remain focused on driving efficiencies in our cost structure and leveraging our data analytics and technology platforms to drive profitability. We're also executing on our previously announced real estate repositioning and optimization program. And this quarter, initiated a new plan to further reduce expenses. Turning to BrandSmart, we continue to be pleased with this acquisition. BrandSmart USA is the low-price leader and retailer of choice for appliances and consumer electronics in the markets we serve. We believe our competitive position in both price and selection is a meaningful differentiator in attracting new and repeat customers from across the credit spectrum. In the third quarter, BrandSmart once again performed at a high level, with both product sales and e-commerce channel performance surpassing our internal expectations. Moving forward, we remain confident in BrandSmart's growth potential and optimistic about capturing the synergies announced at the time of the acquisition. In particular, we are excited to open our first new BrandSmart store in 2023. Finally, I want to thank all of our team members at both Aarons and BrandSmart for helping us deliver positive results this quarter and for remaining focused on our key initiatives. Together with our strong balance sheet and liquidity, we believe our focus on innovation in both businesses enables us to deliver our market-leading value proposition to a large and diversified customer base while positioning us for future growth. Before I turn the call over to our president, Steve Olson, I want to particularly recognize the hard work and dedication of our teams in responding to Hurricane Ian. Through their efforts, we were able to ensure the safety and security of all impacted team members and to reopen our stores quickly. I will now turn the call over to Steve.

Thank you, Douglas. I second your remarks in thanking all of our team members across Aarons, BrandSmart, and Woodhaven. Your focus and commitment on customer service Continued innovation and winning in the marketplace is truly outstanding. I am proud to be a part of this team, and I look forward to working with you and growing our business. Now turning to the performance of the Aaron's business segment. As Douglas mentioned, our customers continue to face challenges due to inflationary and other economic pressures. Despite these headwinds, the Aaron's business still delivered third quarter results in line with our expectations. As expected, we continue to see softening in our lease renewal rate, higher lease merchandise returns, and increased charge-offs. In the quarter, our customer lease renewal rate was 86.3% for all company-operated air and stores, which was down 340 basis points from the prior year quarter and below pre-pandemic averages. Kelly will discuss our lease merchandise returns and charge-offs in a few minutes. We continue to respond to these challenging trends by focusing on preserving profitability through tightening our lease decisioning algorithms, leveraging our enhanced digital servicing platforms, and executing our lease renewal strategies. In the quarter, customer demand was stronger than expected. We attribute this positive trend to well executed strategies across our store and e-commerce channels. Also, Our lease portfolio size for all company-operated stores ended the third quarter slightly ahead of our internal expectations at $125.8 million, a decrease of 4.8% as compared to the prior year quarter. Shifting to our growth strategies within the Aarons business, we were pleased to see positive sustained momentum in e-commerce and Gennex stores. These important channels contributed more than one-third of our total errands business revenue in the third quarter. E-commerce remained a key customer acquisition channel and revenue growth driver for the errands business. The performance of our e-commerce channel was outstanding in the third quarter because of our dynamic digital marketing strategies, further improvements in the online shopping experience, and an expanded product assortment. More and more customers are shopping with us at errands.com, resulting in increased website traffic and higher conversion rates as compared to the prior year quarter. Due to our digital marketing strategies and the strong performance of our e-commerce team, we continue to increase the sales volume through this important channel. Recurring revenue written into the portfolio from e-commerce lease originations increased 24% compared to the prior year quarter, while total e-commerce revenues increased 11.1% year-over-year. Furthermore, the e-commerce business represented an increasingly higher percentage of our total lease revenues. In the third quarter, e-commerce represented 16% of our total lease revenues, up from 14.2% in the prior year. Now turning to our Gennex strategy, which is continuing to deliver meaningful financial results. We believe our Gennex stores and teams deliver the best customer experience in the industry through a larger, brighter, and easier to navigate showrooms that offer expanded product assortment. In the quarter, we continue to see lease originations in Gennex stores open less than one year, grow at a rate of more than 20% higher than our average legacy stores. These stores now account for more than 22% of revenues, up from 8.5% in the third quarter last year. I am also excited to announce that we opened our 200th GenNext store in Flint, Michigan earlier this month. In the quarter, we opened 24 GenNext stores and remain on track to open a total of 100 new GenNext locations in 2022. We are committed to this important real estate optimization strategy and plan to open additional Gennex locations in 2023. Now turning to Brandsmart. As Douglas mentioned, Brandsmart once again performed at a high level with overall product sales and e-commerce results exceeding our internal expectations. We believe that our strength as a value-oriented retailer will continue to attract a full spectrum of customers in this challenging economic environment. In the third quarter, BrandSmart's product sales decreased by only a half of 1% from the third quarter of 2021. This solid performance was primarily driven by a strong execution of our promotional events, a higher average transaction value, sustained revenue growth in appliances, and strong e-commerce sales. In a short time, we have made meaningful improvements to the BrandSmart e-commerce shopping experience and introduced new digital marketing strategies, that are leading to significant revenue growth in this important acquisition channel. For the third quarter, e-commerce product sales were up 18% as compared to the prior year, and in the quarter, represented over 9% of total sales. Our BrandSmart team continues to perform at a high level as we introduce new strategies and tactics to drive this important new business segment. Additionally, we are pleased with our progress in executing our integration and synergy initiatives related to the BrandSmart acquisition, and we are increasingly optimistic about the opportunities for future store and e-commerce growth. We look forward to opening our first new BrandSmart store in 2023. Now, I'll turn the call over to Kelly to provide further details on our financial results. Thanks, Steve. Consolidated revenues were $593.4 million in the third quarter of 2022, compared with $452.2 million in the prior year quarter, an increase of 31.2%. This year-over-year increase was primarily due to the BrandsMart acquisition, which was offset by lower revenues at the Aarons business. Consolidated operating expenses for the quarter were higher than in the third quarter of 2021, primarily due to the impact of the BrandsMart acquisition on personnel expenses and other operating expenses, and an increase the provision for lease merchandise write-offs. The increase to personnel expenses were partially offset by lower performance-based personnel expenses at the errand stores and our corporate functions. Other operating expenses increased $17.6 million in the quarter as compared to the prior year period. Consistent with the second quarter of this year, this year-over-year increase is primarily the result of the acquisition of BrandSmart and higher occupancy, shipping and handling, and other miscellaneous expenses at the errands business, which was partially offset by lower advertising costs at the errands business and a gain related to the sale-leaseback transactions initiated during the quarter. Consolidated operating expenses were also higher year-over-year due to increased restructuring expenses and a goodwill impairment charge of $12.9 million recorded in the quarter. The need for an interim goodwill impairment test for the company was triggered by the decline in the company's stock price and market capitalization during the period. We engaged the assistance of a third-party valuation firm to perform the interim goodwill impairment test. This included an assessment of the Aarons Business and BrandsMart reporting units fair values relative to their carrying values. The fair values were derived using a combination of income and market approaches, and the company determined that the errands business goodwill was fully impaired. There was no goodwill impairment charge related to the BrandsMart reporting unit. During the third quarter of 2022, restructuring expenses increased primarily related to operating lease right of use asset and fixed asset impairments and severance costs related to our real estate repositioning and optimization restructuring program, and a new operational efficiency and optimization program that the company initiated in the recent quarter. This new program is intended to strengthen operational efficiencies and optimize the company's overall costs. We believe that both of these restructuring programs will continue to support our long-term strategic goals while reducing our overall expenses. Consolidated adjusted EBITDA was $35.2 million in the third quarter of 2022, compared with $53.6 million for the same period last year. The decline in adjusted EBITDA was primarily due to a decline in adjusted EBITDA at the Aaron's business offset by the contribution of BrandsMart. As a percentage of total revenues, adjusted EBITDA was 5.9% compared to 11.9% in the prior year quarter. On a non-GAAP basis, diluted earnings were $0.31 per share compared with non-GAAP diluted earnings per share of $0.83 in the same quarter in 2021. Adjusted free cash flow was $50.1 million in the third quarter of 2022, an increase of $40.6 million when compared to the same period in the prior year. This increase was primarily due to higher cash provided by operations, which was largely due to lower inventory purchases that align with current demand trends, and incremental proceeds related to sell-leaseback transactions initiated during the quarter. partially offset by higher capital expenditures in the current quarter. At the end of the third quarter, the company had a cash balance of $37.8 million and total debt of $274 million. This represents a $45.9 million reduction to our net debt balance from the end of the second quarter. Total liquidity, including availability under our revolving credit facility, was $310.6 million on September 30th. During the quarter, we paid a quarterly cash dividend of 11.25 cents per share, returning $3.5 million to shareholders. We did not repurchase any shares in the quarter. Turning to the business segments. As a reminder, 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 Brands of Mart 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, goodwill impairment charges, and certain other corporate functions. At the Ahrens business, total revenues decreased 8.7% in the quarter to $412.9 million. primarily due to the lower lease revenues, which were attributed to a lower lease portfolio size during the quarter and a corresponding decline in customer payment activity that Steve discussed earlier. Same-store revenues were consistent with our expectations, declining 7.7% compared to an increase of 4.6% for the prior year's quarter. Gross profit was $257 million, a decline of 9.7% as compared to the prior year quarter. The decline in gross profit was primarily driven by lower lease renewal rates and lower new lease originations, as well as higher inventory purchase costs as compared to the prior year quarter. Operating expenses at the Ahrens business decreased $1 million in the quarter as compared to the prior year period due to lower performance-based compensation and other operating expenses, partially offset by a higher provision for lease merchandise write-offs. The provision for lease merchandise write-offs as a percentage of lease revenues and fees for the third quarter was 7.5%, compared to 4.9% in the prior year period. This increase in the provision expense is in line with our expectations for the quarter and 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. Additionally, the increase in write-off percentage was impacted by the lower lease revenues in the quarter. Similar to the second quarter of this year, We believe that charge-offs were impacted by the quarter's high inflationary environment, and we expect this trend to continue into the fourth quarter. Adjusted EBITDA for the errands business was $42.5 million in the quarter, compared with $66.8 million for the same period in 2021, due primarily to a decrease in gross profit and a higher provision for leased merchandise write-offs, partially offset by lower personnel costs. As a percentage of total revenues, adjusted EBITDA was 10.3% compared to 14.8% last year. At BrandSmart, retail sales in the third quarter of 2022 were $183.3 million, which is approximately 1.1% lower than the same quarter of the prior year. Gross profit was $41 million, or 22.4% of retail sales, and adjusted EBITDA for BrandSmart was $6.6 million for the quarter. Adjusted EBITDA margin was 3.6%. Finally, please note that we have revised the full-year 2022 outlook that was provided in our second quarter earnings release. We have raised the midpoint of our outlook for consolidated revenues, earnings, and adjusted free cash flow. Our revised outlook continues to reflect our expectation that the current high inflationary environment will continue to adversely impact customer demand, including average ticket size in both businesses, lease portfolio size, lease renewal rates, the provision for lease merchandise write-offs, and other segment level and corporate expenses. With that, I will now turn the call over to the operator who will assist with your questions.

Thank you. If you'd like to ask your question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you're unmuted locally. Our first question comes from Anthony Chukumba of Luke Capital Markets. Anthony, your line is open. Please proceed.

Good morning. Thanks for taking my question. I guess my first question is on the rollout of the lease solution to BrandsMart stores. If you could just give us an update on how that's going.

Yeah, Anthony and Douglas, as we mentioned on the last call, we got that up and running in May of this year, and so it's in all stores, and it went according to plans. We're really happy with that. We've been able to continue to increase our portfolio size as we're gaining penetration in those stores. I would say the uptake in terms of customers to that product is where we thought it would be, and we're continuing to optimize it and build out the infrastructure around it. I think when we communicated at the time of our acquisition deal, it's going to be about a three-year process to begin building that portfolio, and it still won't be at full run rate by year three. in those 10 stores. And so we're happy with the progress we're making and we're continuing to optimize it.

Got it. That's helpful. And then, you know, you mentioned in the Aaron's business that merchandise delivery steadily improved and customer demand was stronger than you expected. I guess my question, are you seeing any sort of credit trade down? In other words, are you seeing any indications that subprime credit is tightening at all and maybe you're getting the benefit from that like you've seen in prior economic downturns?

Yes, so far we have not seen any sign of a trade-down. It's tough to gauge. We do believe if default rates increased and the credit stack above us and credit gets restricted, it'll benefit the leased-own market. we're not seeing anything in particular right now. We do monitor external sources on that to look for tightening, and we're also looking at our internal data to identify if we're experiencing any higher credit scores entering our space or if we're seeing credit scores in the mid-range or lower range of our space increasing proportionately, and that would tell us that there's a trade-down happening. But we've got, you know, all eyes on it, but to date we have not seen it. But when we do, it'll appear in the form of new customers disproportionately growing in our space.

Got it. Thanks, and good luck with the holiday selling season.

Thank you. Thank you. Our next question comes from Kyle Joseph of Jefferies. Kyle, your line is open. Please proceed.

Hey, good morning. Thanks for taking my questions and appreciate the new format on the press release. So looking at that, we see the lease renewal rate and what that's done year over year. Can you remind us where the lease renewal rate is versus kind of the long-term historical average? That's the first question. And then second question, you guys talked a lot about centralized underwriting, but talk about sort of any tweaks or changes you're making on the underwriting front.

Yeah, Kyle, I'll take the, the renewal rate one. Um, so as you probably recall, just looking at our numbers pre pandemic, our renewal rates were between call it 87 and 89%. Um, you know, during the stimulus aided period, those rose to about 88 to 91%. Um, we really saw that begin to happen in the latter part of, um, 21 and going into a 22. And then we began to see, um, I'm sorry, a lot of part 20 going into 21. We then began to see normalization during 21. And what we're experiencing now is, um, we're doing rates that are down lower than that lower than pre pandemic by a hundred basis points or so. Uh, we believe this is just a correction in the market. We're seeing the air kind of come out with a bubble of stimulus. Um, as you recall, we, we mentioned. Pre-pandemic, we believe that centralized decisioning would create renewal rates or about 100 basis points above our pre-pandemic levels. We continue to believe as things normalize over time, the decisioning will benefit us, but we continue to monitor it. The subprime customer continues to be under pressure with inflation, gas, housing, and food prices, and we don't have a crystal ball on when that will subside, but we do believe our decisioning is working. We've been able to tighten decisioning here over the last year by several hundred basis points, and we believe that's benefiting us as well. So we're really happy with the investments we've made in decisioning, and we think over time, renewal rates will normalize.

And, Kyle, it's Kelly. Just to add one or two other points here, right, you may recall that on the last call when we were talking about outlook for 2022, we had anticipated that in the back half of the year, our lead stream roll rates would be between 100 and 150 basis points lower than the pre-pandemic level. So what we were expecting in Q3 played out exactly in line with what we were forecasting. And then the updated, so our revised outlook that's in the release that we put out yesterday reflects kind of that continued expectation that we're going to be down below pre-pandemic levels as we finish to hear here.

Got it, really helpful. The last comment I would make on lease decisioning is we expect to have the lease decisioning tightened for the near term, and that's reflected in both our demand assumptions for Outlook and in our renewal rate assumptions.

Got it. Thanks for that. And then one follow-up for me on BrandSmart. Obviously, sales have been very resilient there. But, you know, as you walk through kind of the macro environment, I know you guys are growing ticket size and e-comm, but kind of your expectations for the gross profit, which has actually been fairly resilient there, too, as well.

Yeah, I'd say that, you know, our expectations for gross profit margin, Kyle, is really largely unchanged, maybe tightening a little bit from our initial expectations. By a little bit, I mean, you know, kind of call it, you know, 50 to 100 basis points, right, as we're seeing some tightening of average ticket size, you know, as well as just, you know, promotional activity that we're expecting through the back part of the year. So, again, no material change in kind of the view of that business as we're going forward here, at least in the near term.

Great. Thanks very much for answering my question. Thank you.

Thank you. Our next question comes from Scott Chigure of Tourist Security. Scott, your line is open. Please go ahead.

Thank you. Good morning, everyone. I guess I have a follow-up question on the comment that you weren't seeing any trade-down activity. Douglas, what metrics are you guys looking at to inform that view? Is there anything else outside of just customer credit scores that you're looking at, or is that the primary kind of data point that you're focused on?

We're looking across channels. We fly our customers as new, previous, or existing customers, and so we stratify those customers by our proprietary scores that come in, which is an amalgamation of a lot of data, as you might imagine, and our models. But we're constantly looking for different profiles of customers coming in, and we're also looking at external data. We do have BrandSmart is a retailer that's another data point that allows us to see what's happening at the cash register and whether there's changes in the credit stack above us there. And we monitor that as well. So there's really two sets of internal data that we're looking at. And while I would sort of characterize the market right now as volatile, we see peaks and valleys in terms of customers coming in and out of our space, but nothing sustained at this moment.

Got it. Okay. And what do you think changes that? Like what would cause us to kind of revisit the type of experience you had back in kind of like 08, 09, where you actually had people kind of coming into the top of the funnel, if you will?

Yeah. Hey, Scott, it's Kelly. Listen, I'd say our view is that it's kind of a function of time, right? I mean, if you go back and look at what happened in that 2008, 2009, 2010 period, we didn't see it happen over a quarter, right? It happened over a series of quarters when we started to benefit from it. I mean, again, some of the external data that we're looking at are average outstanding balances on credit cards, average savings rate in households, kind of stratified based on credit type or score. And so as we look at that, what we're seeing is that certainly availability of credit to the consumer is tightening right the faults are starting to tick up in the consumer space right above us which is a trend similar to what we saw you know in that in that in the prior period but again that that played out over a series of months and really kind of two or three quarters before it led to uh an effort to the business so that's what we're watching you know it's to be seen plays out exactly i recall The last recession was a liquidity-driven recession. This one, it's a different dynamic, but we're starting to see it play out in kind of similar macro trends and results in terms of impact on the consumer, you know, timing and liquidity, and then what we're believing will play out ultimately into additional needs for payment options. Got it. That's very helpful, guys.

I think that's exactly right. Go ahead.

Let's go. No, I was going to say that's very helpful, and I had a sidebar. I didn't want to cut you off. Sorry, Douglas.

Yeah, I was just going to say, you know, 2008 and 2009 was a bang for the recession with significant tightening very quickly. Things have changed since that time, and I think the tightening will happen, if it does, more gradually this time. There was also the dynamics are different here. There was a significant pull forward in demand. through the pandemic, did not precede the financial crisis at that time. So there's two things going on on the demand side and on the, you know, sort of what's going on with the consumer side. I would also note unemployment was a lot higher then, and inflation's a lot hotter now. And while it's abated slightly, it hasn't abated that much. So we continue to monitor all those things. There's a lot of macroeconomic variables going on right now.

Yep, very helpful. And the last one, you guys have obviously had a pretty big increase sequentially in terms of your write-off provision. Do you think provisions have peaked, or are we looking at kind of like moving to even higher levels, just kind of given the macro environment?

Yeah, hey, Scott, it's Kelly. So, Our view on write-offs for this year are unchanged from the last update that we had. At that time, we were anticipating that we'd end the year somewhere between 6% and 7% of lease revenues, our write-offs would. And that continues to be what we're seeing right now. I think what I'd point out is One, write-offs for the third quarter were right in line with what we were expecting. So, you know, proud of the team to deliver on that, right, in what's been a very, very challenging payment environment, right? But the second thing I want to point out is that in a typical year, the third quarter is our highest quarter for write-offs. And then you tend to see about a 25 to 50 basis point improvement as you go from Q3 into Q4. That's looking at kind of pre-pandemic averages. We're not anticipating things will get materially worse. We're actually expecting that we see performance in Q4 relative to Q3 in line with kind of those pre-pandemic trends. But obviously, we're paying close attention to that as inflation data continues to come out and we're watching the performance of the customer going into the holiday season. So hopefully that gives you a little bit more color kind of building upon what we shared last quarter.

Really helpful. Thanks, guys. You're welcome. Thank you.

Thank you. Our next question comes from Bobby Griffin of Raymond James. Bobby, your line is open. Please go ahead.

Good morning, buddy. Thanks for taking my questions. Kelly, I guess this is kind of a two-part question here, but Can you maybe expand a little bit on the restructuring program? Is that kind of a multi-year program? And will some of those savings flow into the bottom line, or is that just really to help offset kind of other inflationary pressures we see basically across retail today? And then kind of the second part of this question is, With the portfolio being smaller, what levers do you have in the business to kind of pull on the cost side as we enter 2023? Because I know a smaller portfolio can drive, you know, deleverage in other parts of the business when we think about tuning up our models for 2023.

Yeah, Doug, thanks for the question. So in regard to our new program, we're at the early innings of kind of focusing on that. So I do expect it's going to – kind of last over a few quarters here and in the next year, but we're currently kind of sizing the duration of it. And what I would point out is the areas that we're going to be focused on is underperforming stores, right? That aren't part of our broader gen next strategy that we may be consolidating to drive some efficiencies, focusing on our operational models and some central tweaks we can make there to pull costs out of stores, I continue to focus on centralizing as much of the activity that takes place in the stores into our corporate functions, as well as just kind of overall costs across the organization. So it's multifaceted, right? We've got teams internally and we're partnering with folks externally to assist us with it. And I would expect as we head into the next quarter to be in a position, Bobby, to provide more specific guidance around kind of size and duration at that point in time. But to answer your specific question, But this is not a one-quarter exercise. It's something that we anticipate is going to go forward over the next few quarters.

Yeah, Bobby, I'll take the second part of your question. I mean, in terms of cost efficiencies, obviously, you know, our margin flow through on the portfolio size and renewal rate is what it is. But we believe as the portfolio size shrinks and even stabilizes, there's opportunity to take cost out of the business. We've been doing that through store consolidation efforts. and through modernization of our platforms. Ecom is a significant differentiator for us. Our ecom business grew in sales 24%. We got higher conversion there. We believe a better customer experience, and that creates efficiency and takes labor out of our stores. We're also investing, as you know, continually in decisioning. In servicing technology, 80% of our customers are paying us outside of the stores now, and that allows for more efficient store opportunity. They can be more productive and it takes labor out of the stores. And we continue to find ways to be more efficient there through centralization of a lot of activities, including delivery and the whole service process. So we continue to work on that. We have multiple things in test and we're optimistic about continuing to optimize the cost structure. The last thing I'd say is on Supply chain, we continue to look at our supply chain. So as our store-based shrinks, you know, we look at our fulfillment centers, we look at our trucks on the road, et cetera, and we're continuing to find more ways to take costs out there. And the last thing, our biggest expense is pay, pay in our stores, and our variable pay structure does flex up and down during these times, and so we've got to great pay structure for all of our team members in our stores, but it does move up and down with the state of the business.

Okay. That's very helpful. I appreciate that. And maybe just to follow up and follow up on Scott's question before me, when you look at the different tranches that you've been writing, like you guys have tightened a few times here this year, when you look at some of the newer tranches of leases that have reflected the updated credit conditions and your updated decisioning, are you starting to see signs that lease merchandise or renewal rates is stabling and i guess maybe it's first payment rates uh first missed payment rates coming down or just anything inside kind of the newer leases that would give hope that maybe we're at a peak here of of the impact on the consumers it's still probably too early to call that corner yeah yeah i think it's too early to call that corner bobby um

we continued to see softening into the third quarter but it was as expected our outlook that we gave on july 25th had weakening in both renewal rates and write-offs higher write-offs to the course of the year and those are coming in right in line with our expectation and our fourth quarter Our guide for the rest of the year implies about the same level as we're seeing now. So we're not making a forecast for 2023. We'll update you on future calls on that.

Okay. I appreciate all the details. Best of luck here. Thank you.

Thank you. Our next question comes from Jason Haas of Bank of America. Jason, your line is open. Please proceed.

Hey, good morning, and thanks for taking my questions. I'm curious to hear more about what drove the improvement in BrandSmart. I think on the last call, you had said that I believe it was July was running in line with the down 7%. They used it in 2Q. So I'm curious what drove that improvement in August and September, and what are you seeing now as we go into October here?

Hey, Jason. This is Steve. Thanks for the question. So as July proceeded, we absolutely started to see some improved results. August went positive as a result of some great work around our promotional events leading up to the holiday in September, as well as strong performance in appliances and e-commerce. Those trends continued into September and then saw a little softening in the back half of September, maybe some around the hurricane. And then as we look into October, some of the trends we're seeing, we're definitely seeing a little softening in average transaction value. A lot of that coming through in consumer electronics, the average selling price dipping in TVs and computers, things like that. So we're excited about our holiday season, excited about the marketing plans we have in place, excited about the strong performance of our e-commerce business down at BrandSmart, and excited We'll see how the customer reacts, but we think our plans are right and the team is ready for the customer to shop during the holiday.

Yeah, I think the sign that average transaction value is down at BrandSmart, that's another indicator. We think the consumer is not yet turned yet. So we continue to see the consumer looking for value, both at Aaron's and at BrandSmart, and they're seeking it out and they're price shopping across competitors. And we believe our promotional strategy, our value prop, is well aligned with that, particularly on the retail side as the near prime and prime consumer who we don't see at Aarons is looking or seeking out value in other places. And BrandSmart is a destination, big box, high volume destination for value type appliances, electronics, and other home goods. And we're super excited about that value prop given this economic environment.

Great, thank you. And then as a follow-up question, maybe for Callie, on the interest expense for 4Q, it seems to imply, based on the press release, maybe like $6 or $7 million of interest expense. Is that right for 4Q? And then if I did the math right there, is that the right quarterly run rate to use as we think into future quarters next year?

Yeah, I'd say that that looks a bit high to me, Jason, as I think about the fourth quarter. All right. I mean, just to make sure that you're using the right rates, right, for our debt. In Q3, the average rate on our credit facility was just over 4%. It's a variable rate facility, you know, so for plus a spread. I think we're expecting an average between, call it five and a quarter and six and a quarter on an annual basis as we end the year here. So if you use those numbers, that should help you kind of tighten up that estimate that you're getting on the interest expense.

Okay, got it. I think, yeah, maybe my numbers are a little off. If I could squeeze one last thing. I was just curious about the spread between sales and comps for errands. It looks like for 3Q, the sales growth wasn't down as much as comps. But then it looks like what's implied for 4Q is we'll see sales growth lower than what's implied for comps. So I'm just curious if you could talk about the dynamic there. I know it can swing around based on when you close stores and transfer over those leases. So any color on how to think about that would be helpful. Thanks.

Yeah, Jason, I may be misinterpreting what you're saying, but are you asking about sales relative to same store revenues, that concept? Yeah. Yeah. Okay. Yeah. So our, our, our sales, um, at errands while they were down, but improving sequentially during the quarter, uh, are only one contributor to our lease portfolio size. So we sell into our lease portfolio and we have, um, leases churn out of our lease portfolio. We ended the portfolio down 4.8% at the end of the quarter. And so that's gonna, that's our starting point for revenue. And then we further have to collect on the portfolio, and we were down roughly 350 basis points on collections. So the four down, which you have to really average the quarter down in portfolio size, and then the degradation and renewal rate really was driving the minus 7.7% in same-store revenues. That is a different concept than when we talk about sales in Aaron's business, which is how much do we put into the portfolio in the quarter. So, you know, that will continue to be a differentiator as we talk about Aaron's same-store revenue, which is achieved revenue on the portfolio year-over-year versus the BrandSmart comps year-over-year in terms of product sales, which is really our retail sale type.

Yeah, two other things I would add there, Jason. One, when you're looking at the segment level lease revenue and fees for Darren's business, that does include brand smart leasing, whereas our same store sales comp number does not. So I believe that lease revenues and fees were down 7.3% in the quarter versus a down 7.5% comp. So the addition of the brand smart leasing revenues while small helped there. The other thing is our same store sales comp set does not include all of our stores. And some of those stores that are excluded would include Gennex stores, which are performing materially better than our legacy stores. So that's another thing that's contributing to the difference in the numbers there.

Got it. That's helpful. Thank you.

You're welcome. Thank you. As a reminder, if you wish to submit a question, please press star followed by 1 on your telephone keypad. We have a follow-up from Anthony Chukumba of Loop Capital Markets. Anthony, your line is open. Please proceed.

Thanks for allowing me to double dip here. Just wanted an update in terms of how you're thinking about capital allocation. Obviously, you took on some debt to do the BrandSmart deal, but you are going to generate solid free cash flow, and obviously your valuation is just super depressed. So just love an update on that. Thanks.

Hey, thanks for the question. So, but then our, uh, our capital allocation priorities are unchanged, right? As we, uh, as we've moved through the year, year, year, you may recall that on kind of the last call and discussions from the quarter, right? Um, what's what's changed is that we do have debt on the balance sheet. So as we think about our capital allocation priorities, first and foremost, we're going to continue to invest in the business to support our strategic initiatives and drive earnings growth. Second, we're focused on reducing our debt balances and staying in line with our target debt levels there. Third, opportunistic M&A as things come up, which is less of a focus right now, but it's part of our strategy. And then fourth, returning capital to shareholders. So obviously having returned $3.5 million to shareholders through dividends in the prior quarter, but that's something that continues to be important to us. I would remind you, and I think you know this, right, we do have $136 million remaining on the share repurchase authorization that our board granted to us. That's something that we're looking at each quarter, as well as I want to highlight that in the third quarter, we did reduce net debt $46 million, which is in line with that second point in our capital allocation priorities.

That's helpful. Thank you.

You're welcome. Thank you.

Thank you. We currently have no further questions, so I'll hand back over to Douglas, Lindsey, for any closing remarks.

Thank you, Operator. We appreciate everyone who's joined us today. Although we continue navigating a challenging economic environment, our team members remain focused on delivering exceptional value and service to our customers and innovating our business every day. We're continuing to benefit from investments we've made in lease decisioning and digital payment and servicing platforms, and we continue to invest in growth at both Aarons and BrandSmart through our e-commerce and new store programs, and we're very excited about that. Thank you again for being with us today, and we'll talk to you soon.

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines.