Aaron's, Inc. Reports Total Revenues $884.6M for the Quarter; $3.38B for the Year

Staff Report From Metro Atlanta CEO

Friday, February 16th, 2018

Aaron's, Inc., a leading omnichannel provider of lease-purchase solutions, announced financial results for the three and twelve months ended December 31, 2017.

"A strong fourth quarter capped a year of significant achievement for Aaron's," said John Robinson, Chief Executive Officer. "We delivered record revenues, EBITDA and non-GAAP diluted EPS for the full year while making strategic investments in each of our businesses to support long-term growth. At the same time, we further strengthened the balance sheet while enhancing returns for our shareholders through share repurchases and dividends. I'm extremely proud of our team and excited about the future."

"Progressive continues to strengthen its position as a market leader by driving innovation. In the fourth quarter, revenue grew 32% and EBITDA increased by 20%. The team is improving speed and ease of use for both customers and retail partner associates. At the same time, we believe our decisioning continues to benefit from scale and further enhancements that are allowing us to capture additional profit dollars and drive more revenue for our retail partners."

"In the Aaron's Business, we are beginning to reap the benefits from our transformation program. This program encompasses a number of initiatives balanced between revenue growth and cost improvement. The Aaron's Business saw meaningful improvement in average ticket and lease margin in the fourth quarter, which contributed to a significant gain in the EBITDA margin. Many of the leading indicators we follow for the performance of the Aaron's Business are positive, underscoring our optimistic expectations for the business going forward."

"As we look to 2018, we believe we can accelerate revenue and earnings growth as we build on our momentum," continued Mr. Robinson. "We are conservatively capitalized, which will enable us to further invest in our existing operations and remain well positioned to execute on opportunities that promote innovation and growth. We also plan to continue returning capital to shareholders, when market conditions are appropriate, as evidenced by our new $500 million share repurchase program, which replaces our prior authorization," Mr. Robinson concluded.

Financial Summary

Aaron's, Inc. conducts its operations through three primary businesses: 1) Progressive Leasing's virtual lease-to-own business ("Progressive Leasing"); 2) Aaron's branded Company-operated and franchised lease-to-own stores, Aarons.com, our e-commerce platform and Woodhaven, the Company's furniture manufacturing operations (collectively, the "Aaron's Business"); and 3) Dent-A-Med, Inc., our second-look financing business.

For the fourth quarter of 2017, Company revenues were $884.6 million compared with $795.0 million for the fourth quarter of 2016. Net earnings were $177.6 million compared with $21.6 million in the prior year period. Diluted earnings per share were $2.46 compared with $0.30 a year ago, which reflects a provisional net benefit of $137 million1 to recognize the effects of the Tax Cuts and Jobs Act (the "Tax Act") of 2017.

On a non-GAAP basis, net earnings for the fourth quarter of 2017 were $47.0 million compared with $36.3 million for the same period in 2016, and non-GAAP earnings per share assuming dilution were $0.65 in the fourth quarter of 2017 compared with $0.50 for the same quarter in 2016.

For the fourth quarter of 2017, non-GAAP net earnings and non-GAAP diluted earnings per share exclude the effects of amortization expense resulting from our 2014 acquisition of Progressive Leasing, amortization expense and acquisition and transaction costs resulting from the 2017 acquisition of our largest franchisee, restructuring charges for the Aaron's Business and DAMI and a provisional tax benefit resulting from the Tax Act. For the fourth quarter of 2016, non-GAAP earnings results exclude the effects of Progressive Leasing amortization, restructuring charges for the Aaron's Business and a gain related to the Company's sale of its HomeSmart business.

Adjusted EBITDA for the Company, which excludes the charges and adjustments mentioned above, increased 21.7% to $89.9 million for the fourth quarter of 2017, compared with $73.8 million for the same period in 2016. See "Use of Non-GAAP Financial Information" and the related non-GAAP reconciliation accompanying this press release.

During fiscal year 2017, revenues increased 5.5% to $3.38 billion compared with $3.21 billion for the prior year period. Net earnings were $292.5 million versus $139.3 million and diluted earnings per share were $4.06 compared with $1.91 last year, primarily due to the provisional tax benefit resulting from the Tax Act and the growth in revenues and net earnings at Progressive Leasing.

On a non-GAAP basis, net earnings for fiscal year 2017 were $184.7 million compared with $167.7 million for the same period in 2016, and non-GAAP diluted earnings per share were $2.56 compared with $2.30 for the same period in 2016. Non-GAAP net earnings and diluted earnings per share for 2017 exclude the effects of amortization expense resulting from the 2014 acquisition of Progressive Leasing, amortization expense and transaction and transition costs resulting from the 2017 acquisition of our largest franchisee, restructuring charges for the Aaron's Business and DAMI, and a provisional tax benefit as a result of the Tax Act. Non-GAAP earnings results for 2016 exclude the effects of Progressive Leasing amortization, a gain on the sale of the Company's headquarters building, retirement and severance charges, and a loss resulting from the Company's disposition of HomeSmart. See "Use of Non-GAAP Financial Information" and the related non-GAAP reconciliation accompanying this press release.

Adjusted EBITDA for the Company, which excludes the charges and adjustments discussed above, was $362.7 million for fiscal year 2017 compared with $342.5 million for 2016.

The Company generated $158.1 million in cash from operations during 2017 and ended the year with $51.0 million in cash compared with a cash balance of $308.6 million to end 2016. The reduction in cash was due primarily to the acquisition of our largest franchisee, scheduled principal payments of the Company's term loan and unsecured notes, the repurchase of common stock and the repayment of the DAMI credit facility, offset by cash from operations. The Company repurchased approximately 1.96 million shares of its common stock during 2017 and, as stated above, has announced a new program to repurchase up to $500 million of its shares.

1 Amount represents a preliminary estimate of the effect of revaluing net deferred tax liabilities to a 21% federal tax rate due to the enactment of Tax Act, which was signed into law on December 22, 2017. The final impact of Tax Act may change from this preliminary estimate, possibly materially, when assumptions are refined and interpretations of the legislation are finalized including the Company's application of any additional guidance that may be issued by the U.S. Department of the Treasury or the Internal Revenue Service.

Progressive Leasing Results

Progressive Leasing's revenue in the fourth quarter of 2017 increased 32.3% to $428.5 million from $324.0 million in the fourth quarter of 2016. Progressive Leasing's revenue for the 2017 fiscal year increased 26.6% to $1.57 billion from $1.24 billion for fiscal 2016. Active doors increased 10% in the fourth quarter of 2017 to approximately 20,000. Invoice volume per active door increased 24%. Progressive Leasing had 740,000 customers at December 31, 2017, a 24% increase from December 31, 2016.

Earnings before income taxes for Progressive Leasing were $38.5 million and $140.2 million for the three and twelve months ended December 31, 2017, respectively, compared with $29.0 million and $104.7 million for the same periods a year ago. EBITDA for the three and twelve months ended December 31, 2017 was $50.0 million and $187.8 million, respectively, compared with $41.7 million and $155.5 million for the same periods of 2016. As a percentage of revenues, EBITDA was 11.7% and 12.0%, respectively, for the three and twelve months ended December 31, 2017 compared with 12.9% and 12.6% for the same periods in 2016. The provision for lease merchandise write-offs was 5.4% of revenue in the fourth quarter of 2017, compared with 5.9% in the same period of 2016. Bad debt expense as a percentage of revenue in the fourth quarter was 12.1% compared with 11.3% in the same period of 2016.

The Aaron's Business Results

For the fourth quarter of 2017, total revenues for the Aaron's Business decreased 3.6% to $446.9 million from $463.5 million in the fourth quarter of 2016. Total revenues for fiscal year 2017 decreased 8.4% to $1.78 billion compared with $1.95 billion for fiscal 2016.

Lease revenue and fees for the three and twelve months ended December 31, 2017 increased 0.6% and decreased 7.1%, respectively, compared with the same periods in 2016. Non-retail sales, which primarily consist of merchandise sales to the Company's franchisees, decreased 17.0% and 12.7% for the three and twelve months ended December 31, 2017 compared with the same periods of the prior year. The decline is attributed in part to the reduction in non-retail sales resulting from the franchise acquisitions completed in fiscal year 2017.

Earnings before income taxes for the Aaron's Business were $25.1 million and $110.6 million for the three and twelve months ended December 31, 2017, compared with $4.8 million and $123.0 million for the same periods a year ago. Adjusted EBITDA for the three and twelve months ended December 31, 2017 was $41.4 million and $180.0 million compared with $32.4 million and $191.2 million for the same periods in 2016. As a percentage of revenue, Adjusted EBITDA was 9.3% and 10.1% for the three and twelve months ended December 31, 2017, respectively, compared with 7.0% and 9.8% for the same periods last year. Write-offs for damaged, lost or unsaleable merchandise were 4.2% of revenues in the fourth quarter of 2017 compared with 4.6% for the same period last year.

Same store revenues (revenues for Company-operated stores open for the entirety of the fourth quarter of 2017 and 2016 and fiscal year 2017 and 2016, respectively) decreased 5.4% during the fourth quarter of 2017, compared with the fourth quarter of 2016 and decreased 7.0% during the 2017 fiscal year, compared to the 2016 fiscal year. Customer count on a same store basis was down 4.0% during the fourth quarter of 2017. Company-operated Aaron's stores had 983,000 customers at December 31, 2017, a 1.0% increase from 2016.

At December 31, 2017, the Aaron's Business had 1,175 Company-operated stores and 551 franchised stores. During the fourth quarter of 2017, the Company acquired six franchised stores, closed or consolidated eleven Company-operated stores and sold one Company-operated store to a third party. Additionally, one franchised store opened, twelve franchised stores closed and one franchised store was sold to a third party.

Company-operated stores that were closed are primarily related to the Company's previously disclosed program to identify, close and consolidate underperforming stores and right size the Company's store footprint in existing markets. During the fourth quarter of 2017, the Aaron's Business incurred a pre-tax restructuring charge of $3.2 million related to these closures. In the 2017 fiscal year, the aggregate pre-tax restructuring charge related to these store closures and other restructuring activities was $17.5 million.

DAMI Results

DAMI's revenue for the three and twelve months ended December 31, 2017 was $9.3 million and $34.9 million versus $7.5 million and $24.1 million for the same periods of 2016. DAMI's loss before income taxes was $2.8 million and $11.3 million for the three and twelve months ended December 31, 2017, compared with a loss before income taxes of $1.6 million and $9.3 million for the same periods in 2016. DAMI's pre-tax, pre-provision loss was $1.8 million and $6.5 million for the three and twelve months ended December 31, 2017 compared with $0.6 million and $3.6 million for the same periods a year ago.

Pre-tax, pre-provision loss is a non-GAAP measure that represents loss before income taxes, adjusted so that loan charge-offs and recoveries are recognized in earnings as they occur by excluding the effect on earnings of changes to management's provision for estimated future loan losses. See "Use of Non-GAAP Financial Information" and the related non-GAAP reconciliation accompanying this press release for more information regarding the calculation of pre-tax, pre-provision loss.

Significant Components of Revenue

Consolidated lease revenues and fees for the three and twelve months ended December 31, 2017 increased 15.7% and 7.9%, respectively, over the same prior year periods. Franchise royalties and fees decreased 24.4% in the fourth quarter of 2017 and 17.3% for fiscal year 2017 compared with the same periods a year ago. The decrease in franchise royalties and fees was the combined result of decreases in revenues generated by the Company's franchisees and the number of franchised stores. The Company's franchisee revenues totaled $162.1 million and $777.7 million in the three and twelve months ended December 31, 2017, a decrease of 24.3% and 15.2% from the same periods for the prior year. Same store revenues for franchised stores were down 5.2% and same store customer counts were down 3.9% for the fourth quarter of 2017 compared with the same quarter in 2016. For the 2017 fiscal year, same store revenues for franchised stores were down 5.4%. Franchised stores had 416,000 customers at the end of 2017, a 23.5% decline from the end of 2016. Revenues and customers of franchisees are not revenues and customers of the Aaron's Business or the Company. Any changes in the metrics presented above from the prior year periods are not adjusted to net out the effects of the July 2017 purchase of our largest franchisee, which had 104 store locations.

2018 Guidance

The Company is providing the following guidance for its 2018 fiscal year. Diluted earnings per share is presented both on a GAAP basis and on a non-GAAP basis excluding intangible amortization related to the 2014 Progressive acquisition and the 2017 acquisition of our largest franchisee and any future one-time or unusual items. Adjusted EBITDA also excludes any future one-time or unusual items. The Company currently expects to achieve the following:

Aaron's Inc. (Consolidated)

  • Revenues of $3.68 billion to $3.89 billion.

  • EBITDA of $380 million to $413 million.

  • GAAP diluted earnings per share of $2.90 to $3.20.

  • Non-GAAP diluted earnings per share of $3.20 to $3.50.

  • Does not include the impact of any potential share repurchase activities.

  • Capital expenditures of $70 million to $90 million.

Progressive Leasing

  • Total revenues of $1.95 billion to $2.05 billion.

  • EBITDA of $215 million to $230 million

Aaron's Business

  • Total revenues of $1.70 billion to $1.80 billion, including lease revenues of $1.40 billion to $1.50 billion.

  • Annual same store revenues of approximately negative 4% to negative 1%, approaching flat in the fourth quarter.

  • EBITDA of $170 million to $185 million.

  • The Company will continue to evaluate its store base for strategic growth and consolidation opportunities, which may include both store closures and acquisitions.

DAMI

  • Total revenues of approximately $30 million to $40 million.

  • EBITDA of approximately negative $5 million to negative $2 million.