Aarons Holdings Company, Inc.

Ladies and gentlemen, welcome to the Earnings Company Incorporation Second Quarter 2023 Earnings Conference Call. My name is Glenn, and I'll be the operator for today's call. If you'd like to ask a question during the presentation, you may do so by pressing star 1 on a telephone keypad. I will now hand over to your host, Mark Levy, VP Finance and Investor Relations, to begin. Mark, please go ahead.

Thank you. Good morning, everyone. Welcome to our Second Quarter 2023 Earnings Conference Call. Joining me today are Aaron's Chief Executive Officer, Douglas Lindsay, President Steve Olson, and Chief Financial Officer, Kelly Wall. After our prepared remarks, we will open the call for questions. Yesterday, after the market closed, we posted our earnings release on the investor relations section of our website at investor.aaron.com. We also posted a slide presentation that provides additional information about our second quarter results and full year 2023 outlook. During today's call, certain statements we make may be forward-looking, including those related to our outlook for this year. For more information, including important cautionary notes about these forward-looking statements, please refer to the Safe Harbor provision that can be found at the end of the 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, 2022. and other filings with the SEC for a description of the risks related to our business that may cause actual results to differ materially from our forward-looking statements. On today's call, in the release and in the supplemental investor presentation, we refer to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, non-GAAP net earnings, non-GAAP EPS, adjusted free cash flow, and net debt, 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. With that, I will now turn the call over to our CEO, Douglas Lindsay.

Thanks, Mark. Good morning, everyone. Thank you for joining us today and for your interest in the Aarons Company. I'm pleased to report that we delivered consolidated company earnings for the second quarter that were ahead of internal expectations. driven in part by our ongoing focus on cost controls. We also benefited from a healthier lease portfolio, resulting from optimization of our lease decisioning model in prior quarters. The recurring revenue nature of our errands business and its strong cash flow dynamics continue to be an advantage. During the quarter, we generated $53 million in cash flow from operations and improved the strength of our balance sheet by reducing net debt by over $30 million. Over the last four quarters, we've cut our net debt nearly in half while continuing to invest in our strategic growth initiatives. Now turning to the business segments. In the Aarons business, I'm pleased to report that we ended the quarter with a larger than expected lease portfolio size. We've also made great progress on our market optimization initiatives by adding more Gennext and Hub and Showroom stores. We are executing well on the cost reduction initiatives that we previously announced. And our lease decisioning enhancements continue to improve portfolio performance. These items contributed significantly to our strong bottom line performance in the second quarter, offsetting continued challenging customer demand trends. As we look to the back half of the year, We expect these demand trends to persist, but we expect to see sequential improvements as we begin to lap our lease decisioning cuts made in the back half of last year. Now turning to BrandSmart. Macroeconomic factors continue to impact our customers' retail purchasing decisions at BrandSmart to a greater extent than in the errands business. Meanwhile, we are focused on managing profitability through enhanced cost controls and strategic procurement and pricing actions. We recently celebrated our one-year anniversary of the BrandSmart acquisition. We remain confident in BrandSmart's compelling value proposition and our long-term strategic growth opportunities, including expanding into new markets and growing our e-commerce channel. As we discussed, the customer demand environment remains challenging in both business segments. This is reflected in the updated outlook we provided yesterday and our earnings release. We lowered our consolidated revenues for the year, but maintained our adjusted EBITDA and non-GAAP EPS outlook. We have also increased our adjusted free cash flow outlook for the year. As we look ahead, we remain focused on optimizing profitability in both businesses, and we continue to make progress on the execution of our multi-year strategic plan. We are confident that the investments we are making will continue to enhance our distinct competitive advantages and allows us to increase market share at both Aarons and BrandSmart. Before I turn the call over to Steve, I want to let you know that we've posted new videos on our investor website that showcase both our Aarons GenNext and BrandSmart stores. I encourage you to watch these videos. Our stores have a unique retail format, a broad product assortment, and an enhanced in-store shopping experience. We believe our Aarons and Brandthorne stores provide the most compelling customer value proposition in the markets we serve. Now I'll turn the call over to Steve.

Thanks, Douglas, and good morning, everyone. The Aarons business delivered second quarter earnings ahead of our internal expectations. As Douglas mentioned, we executed well in our cost reduction initiative. which more than offset continued challenges in customer demand. Lease merchandise deliveries were down approximately 10% year-over-year. This was largely due to fewer lease applications in the quarter, actions we took to tighten lease decision in prior quarters, and approximately 4% fewer company-operated stores as compared to the beginning of the prior year quarter. Our lease portfolio size ended the quarter with a value of $119.6 million. This was 8.6% lower than the prior year quarter, but larger than we expected. Now moving to our key lease renewal metrics. The lease renewal rate for the quarter was 88.2% for our company-operated air and stores. This rate was down 30 basis points year-over-year, but in line with pre-pandemic averages for the second quarter. Our 32-plus day non-renewal rate was 2.5% at the end of the second quarter. This rate increased 10 basis points year-over-year and reflects a sequential increase of 90 basis points from Q1 of this year, primarily due to normal seasonal trends. We continue to be pleased with improvement in our write-offs. The provision for lease merchandise write-offs as a percentage of lease revenues was 5.4% for the second quarter. This reflects a 30 basis point improvement year-over-year. Now let's talk about our important strategic growth initiatives for the AOS business. Our GenNext store strategy continues to deliver meaningful financial performance through the transformation of our in-store customer experience and operating model. In the first half of the year, we opened 19 GenNext stores, bringing our total to 230 company-operated GenNext stores. At the end of the quarter, these stores accounted for approximately 29% of lease revenues and retail sales. That compares to just over 17% in the prior year quarter. These originations in Gennex stores open less than one year, continue to grow at a rate of more than 20 percentage points higher than our legacy store average. Our Gennex stores have stronger revenue performance than our traditional stores, and we look forward to opening new Gennex stores in the future. In addition, we continue to execute our new hub and showroom program. So far this year, we have converted 72 showrooms bringing the total number of converted locations to 101 since we launched the program last year. Now turning to the Aarons e-commerce channel. We continue to focus on improving our digital marketing strategies, enhancing the online shopping experience, and expanding the assortment with over 10,000 products on Aarons.com. In the quarter, revenues generated from leases initiated on Aarons.com increased 5.5% year-over-year, It now represents 17.9% of total lease revenues as compared to 58.4% in the prior year quarter. We are also pleased that we experienced a yearly year increase in both the volume of lease applications completed on Arrows.com and the conversion of these applications. However, recurring revenue written into the portfolio from e-commerce decreased 10.7% compared to the prior year quarter. This decrease was the result of tighter lease decision in prior quarters and lower average ticket. During the quarter, we also launched a weekly payment option on Aarons.com. As a reminder, we rolled out weekly payments in stores in Q3 of last year. We are pleased that we can now offer our customers the flexibility to choose a low weekly payment option wherever they prefer to shop. Now turning to BrandSmart. As Douglas mentioned, We recently celebrated our one-year anniversary of operating the BrandSmart business. I'm proud of our team as we work to achieve our synergies and implement our strategic initiatives to drive future growth. Starting this quarter, we will be reporting a comparable sales metric, which reflects sales from stores open for the last 15 months. Please see our 10Qs for a more detailed definition. Comparable sales for the second quarter were down 20.9% as compared to the prior year quarter. This is a result of ongoing weaker customer traffic and customer trade-down to lower-priced products across our major categories. Throughout the quarter, comparable sales improved, especially during key promotional periods of Memorial Day and July 4th. As we seek to attract new BrandSmart customers, we continue to invest in our e-commerce channel and digital marketing strategies. Consistent with overall sales performance, we experience pressure in the e-commerce channel. E-commerce product sales represented 8.1% of total product sales, down to 9.0% in the prior year quarter. Despite the demand challenges, we remain focused in optimizing the profitability of the business. For the second quarter, our product gross margin improved by approximately 50 basis points as compared to the prior year quarter. This was a result of direct procurement savings and strategic pricing actions. Finally, I'm excited to report that we are on track to open our first new brand smart store in Augusta, Georgia in Q4. We are confident that our brand and customer value proposition will resonate in this new market. Now, I'll turn the call over to Kelly to provide further details on our financial performance. Thanks, Steve. We filed our Form 10Q earnings release and investor presentation yesterday after the market closed. and these documents can be found on our investor relations website. Please refer to these documents for additional detail regarding our financial performance and outlook for the consolidated company at the two business segments. Also, unless stated otherwise, any comparisons I make to prior periods will be on a year-over-year basis. Consolidated revenues for the second quarter of 2023 were $530.4 million, compared with $610.4 million This year-over-year decrease is primarily due to lower lease revenues and fees and retail sales at the Aarons Business and lower retail sales at BrandsMart. Consolidated adjusted EBITDA was $42.4 million, compared with $51.2 million. This year-over-year decrease is primarily due to the lower revenues at both business sectors, partially offset by lower personnel costs and other operating costs. In addition, as Steve mentioned, write-offs were lower at the errands business. As a percentage of total revenues, adjusted EBITDA was 8% compared to 8.4%. On a non-GAAP basis, diluted earnings per share were 39 cents compared to 79 cents. Despite the lower adjusted EBITDA in the quarter, we were very pleased with our adjusted free cash flow. It was $36 million, an increase of over 30 million. This increase is driven by higher cash provided by operations as we manage merchandise inventory levels at both businesses to reflect the current demand environment. Adjusted free cash flow also benefited from improvements to working capital efficiency and lower capital expenditures. During the quarter, we continued to return capital to shareholders, declaring $3.9 million in dividends and purchasing 66,000 shares of the company's common stock. In addition, We ended the second quarter with $38.4 million of cash and $186.1 million of debt. Our net debt balance at the end of the quarter was $147.7 million, a $30.2 million reduction from the end of Q1, 2023. Since the end of the second quarter of last year, we have reduced our net debt by over $130 million. As a result, Our net debt to adjusted EBITDA leverage ratio ended the quarter at less than one time. Turning to our updated outlook. In the second quarter earnings release, we provided an update to our full year 2023 outlook. This updated outlook reflects our expectation that total revenues for the consolidated company will be between $2.12 billion and $2.22 billion. We have lowered revenues to reflect our consolidated results in the first half of 2022 and to also reflect expected lower product sales at BrandsMart in the back half of the year as compared to our prior outlook. We have maintained our outlook for adjusted EBITDA and non-GAAP EPS for the consolidated company. We have also maintained our adjusted EBITDA at both business segments as we continue to invest in our growth and cost efficiency initiatives. In addition, We currently expect that earnings in the second half of the year will be weighted more heavily in the fourth quarter. This is in part due to additional investments in marketing and other initiatives designed to further drive new lease origination activity in the errands business segment. And finally, we have increased our adjusted free cash flow outlook. This increase reflects our strong cash flow in the first half of the year and continued inventory and working capital efficiency improvements in the last two quarters of the year. And with that, I will now turn the call over to the operator for Q&A.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on the telephone keypad now. If you change your mind, please press star followed by two to withdraw the questions. When preparing to ask your question, please ensure your phone is unmuted locally. We have our first question comes from Kyle Joseph from Jefferies. Kyle, your line is now open.

Hey, good morning, guys. Thanks for taking my questions. Just wanted to get a sense for sort of the consumer behavior during the quarter. You know, I think last quarter you guys highlighted that, you know, there were fewer early buyouts and that benefited margins, despite that you saw stable credit. Obviously, we saw stable credit. Can you give us a sense for what buyout trends were and expectations for the rest of the year to give us a sense where you think margins will go on the errands business?

Yeah, Kyle, I'll start. I would say demand trends, as you noted from our call, have been challenging. We saw that in the quarter, this down 10% at errands and down 20% at BrandSmart. I think when you look within the Aaron's business, that 10% is really a real, like, negative 5%. Within that negative 10 is about half is real demand, half is decisioning and closed stores. And so what we're really encouraged about is the least owned business is really holding up better than retail, I would say. And I think that's because of the payment price points at which our customers are shopping. We're not seeing as much trade down in the lease-to-end business as we are in retail, and Steve can talk a little bit more about that. But you know, the customer continues to adjust to this inflationary environment. Early buyouts were lower in the first quarter, and they continue to be slightly lower in the second quarter. But as you know, the second quarter is not a huge early buyout quarter. I'd say generally in terms of the consumer, the consumer has remained resilient and I think is acclimating to this challenging economic environment. If you look at our renewal rate, the renewal rate was pretty strong relative to pre-pandemic levels, coming in right where we would expect in Q2 for pre-pandemic. And importantly, we really haven't seen any sign of a trade down yet. We are seeing a slightly higher quality customer. coming into Aaron's, but we have not detected either through our BrandSmart waterfall or through our data at Aaron's a significant trade down. We still continue to believe if that happens, it'll benefit us. And last thing I was saying, I'll let Steve touch a little bit on BrandSmart is that, you know, we're really focused right now on getting our shop in order, right-sizing and innovating our cost structure. And we believe if we do that, going forward and the actions we've taken over the last 12 months, we've positioned ourselves really well, particularly with this direct-to-consumer, high operating leverage business, to enjoy the benefits of the rebound when that does occur. So, you know, challenging demand trends, pull forward in demand. Steve will talk about that a little bit, but we feel good about what we can control and how we set up the business for the future.

Great. Thanks, Douglas. Good morning, Kyle. Just quickly touch on BrandSmart. You know, we believe that the retail customer, obviously, in these large ticket discretionary purchases, obviously, is more sensitive to macro trends. When you think about demand on the BrandSmart side, that negative 20%, it really can be broken down into about half that is related to just transactions, so transactions down approximately 10%. And the other half is our average transaction value, down about 10% as well. So what we're facing is not only a demand trend challenge truly on transactions, but just a step back in our average transaction value versus what we saw last year. Average transaction value is still well ahead of pre-pandemic averages, double digits well ahead of that. We're just facing a little bit step down, especially in appliances. In addition, I'd just say that we are really focused on profitability in the brand smart business and not chasing those unprofitable sales that, that sometimes happen in, you know, especially in the consumer electronics category. So we still believe in the business and teams focused really hard to find ways to continue to define growth.

Yeah. I mean, I just reiterate that we're, we're super excited about the long-term potential brands. We are going through a cycle and Steve and his team are doing a great job controlling costs.

Got it, very helpful. And then just to follow up on BrandSpark, can you give us a sense for what the two-year stack of the comp looks like and then give us a sense for, you know, when you anticipate the comp really easing? If I recall, BrandSpark had a very strong 2Q22. Do those comps get a little bit easier in the back half of this year?

Hey, Kyle, it's Kelly. I'll answer the first part of that. So as it relates to a two-year comp, You may recall we acquired the company just over a year ago, and so we've not provided detailed financials on the period prior to us owning them, so we don't have a two-year stat comp to provide to you here. But what I would say as we think about going through the rest of this year, Steve, you want to speak to kind of comps and what we'd expect to lap over as we go into Q3 and Q4?

Sure. Yeah, so as Douglas referenced and I referenced, you know, we expect continued demand challenges in the back half of the year. With that said, we do believe we will see sequential improvement in comparable sales, you know, into Q3, into Q4 as we lap some numbers. Got it.

Thanks a lot for answering my questions.

Thank you. With our next question comes from Vincent Katek from Stevens. Vincent, your line is now open.

Good morning. Thank you for taking my question. Nice to see the additional counts of the hub and spoke model and the GenNext stores. I was just wondering, from a productivity perspective, if you can talk about the benefits of that hub and spoke and GenNext model as it relates to when we think about, say, for example, EBITDA margins. Thank you.

yeah um thanks vincent douglas you know so we opened 11 gen next doors in the first quarter and eight in the second quarter our target is 50 for this year and we're on track for that and i believe we opened 72 showrooms um since the end of 2022 59 of which were in this quarter so you know our we're right on track for 100 showrooms this year i mean the beauty of the hub and showroom model is all this innovation we've put in place over the last five years building larger more relevant gen next doors and then creating digital platforms for our customer to interact with us where they want to be served has allowed us to build this platform in which we can optimize the markets we serve not and so we're serving the same markets but we're doing it with a more efficient cost structure i think at the time of spin we articulated fewer larger stores and bigger ecom and i think what i add to that now is potentially having further reach within the markets to these showrooms. Showrooms are effectively just sales stores. They're typically staffed with two people. They're smaller box. They don't have a warehouse. The hubs that feed them are larger stores. Many of them are Gennext, but there are some legacy stores. And those stores house our distribution, our logistics and delivery and returns. They also house all of our servicing for the market. we're able to put a central hub in place and a county seat and then have one or two showrooms around it to gain greater productivity in the market. In terms of cost effectiveness, it is EBITDA enhancing for that group of stores. We're typically taking out a few headcount when we do that, but it's between 100 and 120,000 a year per store that we showroom in terms of cost efficiency. Some of what you're seeing coming through this quarter in our cost efficiency is the benefit of Hub and Showroom, but there's also obviously benefits of marketing analytics and supply chain that are in there as well coming through.

Okay, great. Thank you for that. It's nice to see the expense efficiency in this quarter's results. The second question, just if – so you highlighted you're not really seeing the maybe trade down activity yet, but if you can maybe talk about how you expect that to play out over time and maybe what sort of consumer behaviors you expect to see as we go through the next couple of quarters in tough times. Thank you.

Yeah. Hey, Vincent, it's Kelly. I'll speak to the trade down and then how it impacts the outlook that we've provided. So similar to last quarter, we've not assumed that we'll see any any significant trade down in the numbers that we've put out. So that would be upside to our outlook if we do see that continue to happen. I mean, we do continue to believe that the customer is a bit constrained relative to what they were certainly during the pandemic. From a renewal rate perspective, we are seeing improvements year over year, and we expect to see that in the back half of this year. So slightly better renewal rates than what we saw in Q3 and Q4 last year. but not quite back to the levels that we'd expect going into 2024.

Yeah, and I would say that's squarely on the back of the decisioning we put in place and the customer acclimating, as I mentioned earlier. I do want to say one last thing. While we haven't assumed a trade down and we're not prognosticating on that, but we do think it would benefit us, this pull forward of demand will release at some point. and particularly in the brand smart business where we're down 20 percent 55 percent of our sales mix is appliances which is an important household category that has a regular replacement cycle and so that we expect to drive uh future revenue that has a little longer tail than the replacement cycle for computers and electronics but um that we feel like both of those businesses will return and we've got a competitive advantage in those okay great thanks very much Great. Great. Thank you.

Thank you. We have our next question comes from Scott Siccarelli from Truist. Scott, your line is now open.

Hey, guys. This is Joe on for Scott. Thanks for taking my questions. Given that you're seeing some of the demand hold up better in the LTO side of the business, can you talk about integrating that solution into the Brandsmore channels?

Sure. Hi, this is Steve Olson. Be glad to answer that. So, um, just a reminder, we, um, implemented our brand smart leasing solution, uh, last year, uh, in, in the May time period. And, uh, we continue to be very pleased, uh, with the results of that and the continued improvement growth on the team's integration, the brand smart store team, uh, with the brand smart leasing team, as well as process and technology improvements, uh, from a performance standpoint, we continue to see the portfolio grow on the BrandSmart leasing side as well as the customer payment activity. So it's a key focus for us and one that we hope and expect to drive further growth.

Gotcha. Cool. And then just on the 5.5% to 6.5% write-offs for the year, is that still what we should be thinking about? And if any color you have on the cadence between 3Q and 4Q, it would be super helpful. Thanks.

Yes. So we are still expecting write-offs in the range of 5.5 to 6.5. So no change there in what we had updated you on on the last call. We're very happy with the performance in the fourth quarter and happy with the trends as we move into Q3 and beyond. As it relates to write-off trends in the back part of the year, there is seasonality in the business. So we would expect that write-offs would increase. but we expect them to continue to be below write-off levels that we experienced in the same quarters of 2022.

Got it. Great. Thanks, guys.

Thank you. With our next question comes from Bobby Griffin from Raymond James. Bobby, your line is now open.

Good morning. This is Alison Jimenez on for Bobby Griffin. Thank you for taking our question. First, on the errand side of the business, despite ending the quarter with a larger than expected lease portfolio size, you left the year unchanged. Is that primarily driven by some caution given the unknown impact on how customers that chose not to utilize the 90-day buyout will behave longer term, or is there something else?

Yeah, I think what we're seeing there, Alessandra, it's Kelly, is We continue to expect demand to be challenged going into the back half of the year. We talked about that earlier in the call. And so what we're seeing is as we go into Q3 and Q4 with the lower EPO activity, early payout activities in Q1 and Q2, those deals are rolling into Q3 and Q4 and paying off. So higher levels of payoffs relative to prior periods. And so that continues to impact demand in the second half of the year, or the lease portfolio size in the second half of the year. And again, we're focused on in Q3 and Q4 on growing that portfolio as we head into 2024.

Okay, that's very helpful. And then maybe on the BrandsMart segment, can you walk us through the puts and takes to get to consistent EBITDA in the segment despite lower expected revenue?

And puts and takes to get to consistent EBITDA. I would say that on the BrandSmart side, what we're focused on is implementing the cost necessary to run the business and to set the company up for sustained growth going forward. One, two, the team's done a great job in a declining revenue environment, managing the costs that we can control to preserve margin. And as we come out of the current depressed demand environment and return to some level of the normal, we feel very good about the leverage that we're going to pick up as the top line starts to grow and we continue to maintain. Between that and the addition of the new store going into next year and the new stores thereafter, as we grow top line, we would expect margin to expand as we're leveraging those fixed costs.

Yeah, this is Douglas. The last thing I would say is Steve and his team have done a great job on both the purchasing side and on the pricing side of maintaining in that business and preserving a margin as you know it's a sort of a mid 20 margin business and so while the revenue declines hurt there are ways to offset that and they've done it they've done a good job of that so you don't know if you want to comment a bit on that you just mentioned you know one of the key drivers of the brand smart value proposition is you know is our ability to purchase great products and great deals and the team continues to

Similarly, as we mentioned in the prepared remarks, we continue to focus on strategic pricing actions and manage the business where there's opportunity to adjust pricing for a margin improvement. We do that as well as obviously those that we want to focus really on a value price to make sure we're competitive in the market. We do that as well. So we will continue to focus both on the procurement side through continued improved purchasing power as well as the pricing side through strategic pricing actions. And then just a reference for Kelly, just further expense management as we move through this challenging demand environment, just continue to focus on, you know, any areas of the expense side of the business, including store labor, to align it with the demand cycle.

That's very helpful. And then lastly for me, it's a little bit hard to parse out given, you know, the difference between consumer electronics and appliances in the brand smart segment, but do you believe that brand smart comp was performing relatively in line with the industry average in Q2?

You know, I, I, I don't really want to want to speak, uh, about the, uh, you know, the industry average, but I, but I will tell, I'll give you a little more context on, you know, the breakdown, you know, our, our, the brand smart comp in Q2. So, you know, appliances, uh, you know, under pressure being 50% of our business, and the majority of that pressure is in the average selling price, which, you know, was down approximately 10%, you know, versus the prior year, where the overall average selling price for the business was down about 6%. We're facing, you know, headwinds in consumer electronics, you know, across categories, especially in TVs, and that more a result of the significant pull forward in demand that occurred in the prior few years. The categories that we're seeing, you know, slightly better performance in, you know, are small appliances and other household goods, seeing what we believe, obviously, lower ticket products, some improvement in trend, and the team has done a great job to continue to expand out that assortment and ensure we have the right prices and the right inventory levels.

Thank you so much, and best of luck in the back half of the year.

Thank you.

Thank you. With our next question comes from Anthony Chukumba from Loop Capital Markets. Anthony, your line is now open.

Good morning, and thanks for taking my question. I guess my first question was on the weekly payment option. You mentioned that you had rolled that out to I know you've had it in your stores for quite some time. I guess two questions related. First one, what have you seen in terms of uptake on that weekly pricing option or weekly payment option? And then as far as you can tell, how much of that is incremental customers as opposed to someone who would have paid monthly and is instead taking advantage of the weekly payment option? Thank you. Sure, Anthony.

Hi, this is Steve Olson. Be glad to answer that. First, I just want to say we're really excited about offering this weekly payment option across our channels, both in-store and online. We think it really gives the customer flexibility, and we know from research that flexibility is an important decision driver as they decide what categories and products to lease. from up from a performance standpoint really hard to break down, you know, what's truly incremental. And what we really look at this leasing business is, you know, what are the benefits of it? What do we call success? It's really allowing us to land and deliver our strong value message with very competitive lease rates you know, across the business that we're using both on our e-commerce channel as well as all of our traditional marketing. So weekly, is still a small piece of our overall business, less than 10%. But we think it's a key driver in landing our value proposition in our low price message.

Yeah, and Anthony, this is Douglas. I mean, we're not going to disclose our penetration online or in stores, but it has been growing. And we do think that these weekly price points we put out are very competitive, particularly in our key core assortment. And we're excited about that. I mean, as you know, this isn't about us trying to become a weekly shop. It's about us trying to put together, put forward the best price point we can in the market and show the customer our value. And so we believe over time we'll take share by doing that.

Got it. And then just one quick clarification. Is the weekly payment option available for leases that are originated in BrandsMart stores?

Not at this time. So, focused more on the 18-month and 24-month lease options. Sorry, the 12 and 18-month. I apologize for that.

Yeah, that's term. But the pay frequency, there is flexibility in pay frequency within the branch of our stores, Anthony.

That's helpful. Thank you.

You're welcome.

Thank you. We have our last question. It comes from Jason Haas from Bank of America. Jason, your line is now open.

Hey, good morning, and thanks for taking my questions. I'm curious to know how you're thinking about the lease portfolio size in the remainder of the year. What are you expecting there from where it should end the year at or what the growth looks like in the rest of the year?

Hey, Jason. It's Douglas. I'll just give it to you high level. As you know, we started the year down a little over 7% at least portfolio size. And at the time we communicated that that number would be more negative towards the middle of the year as we had more churn in the first part of the year and because of the demand environment we were in in the first part of the year. And then would improve throughout the rest of the year, but still to a negative number. We're still seeing that curve of, you know, sort of dropping in the middle of the year and improving to the back part of the year, but it's not as much as before. So, you know, we're still, we're not giving a number for the end of the year, but we still expect the lease portfolio to be down at the back part of the year, but more influenced by incrementally softer demand in the second half of the year.

Got it. That's helpful. Thank you. And then as a follow-up, I'm curious to get a sense for, uh, what happened with brand smart through the quarter, because you had guided, um, at the end of April for the brand smart, the prior brand smart revenue guidance. And then if I called the commentary, right, it sounded like brand smart got better through the year, but now you're lowering the revenue guidance. So had you always been anticipating an acceleration through the quarter? It just wasn't as much as you hoped for. Um, which I guess, yeah. What was the, like, why did you expect an acceleration through the quarter? Or if it's not that, you know, what's changing and how are you thinking about the back half of the year there?

Yeah, AJ, I'd be glad to answer that. This is Steve. So, you know, as we said in Q1, we were experiencing pressure in demand. As we, you know, got into Q2, deep into Q2, you know, obviously that demand pressure continued. We did see a slight improvement in demand as Q2 progressed, especially, during our key promotional periods around the holidays. And with our original guidance, we were expecting improvement in demand throughout the back half of the year, really tied to replacement cycle of products. And as we've stated previously, using just consumer electronics as a base, that replacement cycle is typically in that And when you look back, obviously, at the pandemic years, you'd expect some of those purchases now that occurred a few years ago, customers would be coming in for replacement. So we're just trying to be a little cautious, you know, with the brand smart demand. We do believe the back half of the year will improve from the first half as we lap, you know, some easier comps in the business going forward. But one is we just want to see some consistent improved trends in demand.

Got it. That's helpful. Thank you.

Thank you. We have no further questions for the line. I will now pass back to Douglas Lindsay for closing remarks.

Thank you, operator. We appreciate everyone who's joined us today. As we wrap up, I want to thank our team members at Aarons and BrandSmart and Woodhaven and our franchisees for their relentless focus on delivering exceptional value and service to our customers while continuing to innovate our business and control costs as a company we remain focused on executing our multi-year strategic plan and by investing in our growth strategies before us thanks again for joining us today and we'll talk to you soon thank you ladies and gentlemen this concludes today's call thank you for joining you may now disconnect your lines