Aaron's, Inc., a leading omnichannel provider of lease-purchase solutions, announced financial results for the three and six months ended June 30, 2018.

"The second quarter built on the strong results we are realizing from our strategic investments," said John Robinson, Chief Executive Officer.  "We served a record number of customers across our platforms, achieved a double-digit gain in consolidated revenue and increased adjusted EBITDA compared to the prior year.  We're encouraged by our momentum as we enter the second half and believe we remain on track to achieve our financial objectives for the year."

"Progressive delivered another quarter of outstanding revenue and profit growth," continued Mr. Robinson.  "The team continues to optimize performance across a large base of existing retail doors which is positively impacting revenue and profitability.  Progressive's lease pools are performing in line with our expectations, and we're excited about our pipeline of potential retail partners."

"The Aaron's Business continued to see improvement in a number of key metrics in the quarter, notably, higher year-over-year recurring revenue written into the lease portfolio and expanding lease margins.  In addition, we're encouraged by the progress of our business transformation initiatives and we continue to invest to improve our omnichannel platform."

"During the quarter, we returned $50 million of capital to shareholders through share repurchases and ended the quarter with $94 million in cash and net debt to capitalization of 8.9%.  Early in the third quarter, we strengthened our omnichannel business with the acquisition of several Aaron's franchisees across a number of attractive markets.  After these acquisitions, we remain conservatively capitalized with ample liquidity to support our strategic objectives," concluded Mr. Robinson.

Financial Summary

Aaron's, Inc. (the "Company") 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, our Aarons.com e-commerce platform and Woodhaven, the Company's furniture manufacturing operations (collectively, the "Aaron's Business"); and 3) Dent-A-Med, Inc. ("DAMI"), our second-look financing business.

For the second quarter of 2018, Company revenues were $927.9 million compared with $815.6 million for the second quarter of 2017.  Net earnings were $38.5 million compared with $36.3 million in the prior year period.  Diluted earnings per share were $0.54 compared with $0.51 a year ago.  The effective tax rate for the second quarter of 2018 was 23.0% compared with 36.2% for the prior year period, primarily due to the lower tax rates provided under the Tax Cuts and Jobs Act of 2017 (the "Tax Act").

On a non-GAAP basis, net earnings for the second quarter of 2018 were $59.6 million compared with $48.5 million for the same period in 2017, and non-GAAP earnings per share assuming dilution were $0.84 in the second quarter of 2018 compared with $0.68 for the same quarter in 2017.

For the second quarter of 2018, 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 and one of the 2017 franchisee acquisitions, a reversal of restructuring charges for the Aaron's Business and charges and expenses related to the full impairment of the Company's investment in PerfectHome.  The Company invested in PerfectHome, a U.K. rent-to-own business in 2011.  In July 2018, PerfectHome entered into the U.K.'s insolvency process and was subsequently acquired by its senior secured lender.  As a result, the Company believes it will not receive any further payments on its subordinated secured notes investment and recorded a full impairment and related expenses of approximately $22 million in the second quarter.  For the second quarter of 2017, non-GAAP earnings results exclude the effects of Progressive Leasing amortization and Aaron's Business and DAMI restructuring charges.

Adjusted EBITDA for the Company, which excludes the charges and adjustments mentioned above, was $97.0 million for the second quarter of 2018, compared with $95.7 million for the same period in 2017.  See "Use of Non-GAAP Financial Information" and the related non-GAAP reconciliation accompanying this press release.

During the first six months of 2018, revenues increased 13.4% to $1.9 billion compared with $1.7 billion for the prior year period.  Net earnings were $90.7 million versus $89.6 million for the first six months last year. Diluted earnings per share were $1.27 compared with $1.24 for the first six month period in 2017.  The effective tax rate for first six months of 2018 was 22.3% compared with 35.8% for 2017.

On a non-GAAP basis, net earnings for the first six months of 2018 were $118.1 million compared with $106.3 million for the same period in 2017, and non-GAAP earnings per share assuming dilution were $1.65 compared with $1.48 for the same six month period in 2017.

Non-GAAP net earnings and non-GAAP diluted earnings per share for 2018 exclude the effects of amortization expense resulting from our 2014 acquisition of Progressive Leasing and one of the 2017 franchisee acquisitions, restructuring charges for the Aaron's Business, tax effects related to a Tax Act adjustment, and charges and expenses related to the full impairment of the Company's investment in PerfectHome.  Non-GAAP earnings results for 2017 exclude the effects of Progressive Leasing amortization and Aaron's Business and DAMI restructuring charges.  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 mentioned above, was $191.1 million for the six months ended June 30, 2018 compared with $205.1 million for the same period in 2017.

The Company generated $266.8 million in cash from operations during the six months ended June 30, 2018 and ended the second quarter with $94.3 million in cash, compared with a cash balance of $51.0 million at the end of 2017.  The increase in cash is due primarily to cash from operations offset by common stock repurchases and an aggregate of $96.2 million of debt amortization.  The common stock repurchased during the second quarter of 2018 totaled 1,233,670 shares for $50.0 million.  The Company has authorization to purchase an additional $431.6 million of its common stock.

Progressive Leasing Results

Progressive Leasing's revenues in the second quarter of 2018 increased 29.5% to $483.7 million from $373.5 million in the second quarter of 2017.  Progressive Leasing's revenues in the first six months of 2018 increased 31.2% to $970.2 million from $739.6 million for the same period of 2017.  Invoice volume increased 24.7% in the quarter, driven by a 17.6% increase in invoice volume per active door and a 6% increase in active doors, to approximately 20,000.  Progressive Leasing had 758,000 customers at June 30, 2018, a 17.3% increase from June 30, 2017.

Earnings before income taxes for Progressive Leasing were $44.6 million and $79.6 million for the three and six months ended June 30, 2018, compared with $38.2 million and $74.0 million for the same periods a year ago.  EBITDA for the second quarter and first six months of 2018 was $55.8 million and $102.0 million, respectively, compared with $50.1 million and $98.6 million for the same periods of 2017.  As a percentage of revenues, EBITDA was 11.5% and 10.5%, respectively, for the second quarter and first six months of 2018 compared with 13.4% and 13.3% for the same periods in 2017.  The provision for lease merchandise write-offs was 6.7% of revenues in the second quarter of 2018, compared with 5.5% in the same period of 2017.  Bad debt expense as a percentage of revenues in the second quarter of 2018 was 10.3% compared with 9.7% in the same period of 2017.

The Aaron's Business Results

For the second quarter of 2018, total revenues for the Aaron's Business increased 0.3% to $435.0 million from $433.6 million in the second quarter of 2017.  Revenues for the first six months of 2018 decreased 1.1% to $893.7 million compared with $903.9 million from the same period a year ago.

Lease revenue and fees for the three and six months ended June 30, 2018 increased 5.1% and 3.3% compared with the same periods in 2017.  Non-retail sales, which primarily consist of merchandise sales to the Company's franchisees, decreased 22.9% and 23.1% for the three and six month periods ended June 30, 2018 compared with the same periods of the prior year.  The decline is attributed primarily to the reduction in non-retail sales resulting from the franchisee acquisitions completed in fiscal years 2017 and 2018.

Earnings before income taxes for the Aaron's Business were $7.7 million and $40.8 million for the three and six months ended June 30, 2018, compared with $21.5 million and $70.1 million for the same periods a year ago.  The decrease was primarily due to charges related to the full impairment of the Company's investment in PerfectHome and increased operating expenses related to franchisee acquisitions completed over the prior twelve months and investments in business transformation initiatives.  Adjusted EBITDA for the three and six months ended June 30, 2018 was $42.4 million and $90.4 million compared with $46.7 million and $107.9 million for the same periods in 2017.  As a percentage of revenues, Adjusted EBITDA was 9.7% and 10.1% for the three and six months ended June 30, 2018, respectively, compared with 10.8% and 11.9% for the same periods last year.  Write-offs for damaged, lost or unsaleable merchandise were 4.0% of revenues in the second quarter of 2018 compared with 3.6% for the same period last year.

Same store revenues (revenues for Company-operated stores open for the entirety of the second quarter of 2018 and 2017) decreased 1.8% during the second quarter of 2018, compared with the second quarter of 2017.  Customer count on a same store basis was down 4.3% during the second quarter of 2018.  Company-operated Aaron's stores had 956,000 customers at June 30, 2018, a 2.6% increase from 2017.

At June 30, 2018, the Aaron's Business had 1,179 Company-operated stores and 530 franchised stores.  During the second quarter of 2018, the Company acquired three franchised stores and consolidated six Company-operated stores.  Additionally, no franchised stores opened and two franchised stores closed.  During July 2018, the Company acquired 90 Aaron's-branded franchised stores from three franchisees for an aggregated purchase price of $126.8 million.  The acquisitions are expected to benefit the Company's omnichannel platform through added scale, strengthened presence in certain geographic markets, and enhanced operational control to execute our business transformation initiatives.

DAMI Results

DAMI's revenues for the three and six months ended June 30, 2018 were $9.2 million and $18.8 million versus $8.5 million and $16.7 million for the same periods of 2017. DAMI's loss before income taxes was $2.3 million and $3.6 million for the three and six months ended June 30, 2018, compared with a loss before income taxes of $2.7 million and $4.5 million for the same periods in 2017.  DAMI's pre-tax, pre-provision loss was $1.4 million and $3.5 million for the three and six months ended June 30, 2018 compared with $0.9 million and $2.1 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 six months ended June 30, 2018 increased 17.8% and 17.4%, respectively, over the same prior year periods.  Franchise royalties and fees decreased 5.5% in the second quarter of 2018 and 7.5% for the first six months of 2018, compared with the same periods a year ago.  The decrease in franchise royalties and fees was the combined result of the lower number of franchised stores and decreases in revenues generated by the Company's franchisees.  Franchisee revenues totaled $158.1 million in the six months ended June 30, 2018, a decrease of 23.6% from the same period for the prior year.  Same store revenues for franchised stores were down 2.7% and same store customer counts were down 4.5% for the second quarter of 2018 compared with the same quarter in 2017.  Franchised stores had 386,000 customers at the end of the second quarter of 2018.  Revenues and customers of franchisees are not revenues and customers of the Aaron's Business or the Company.  With the exception of the same store metrics, the year-over-year comparisons presented above are not adjusted to reflect the purchase of 123 franchised store locations whose results are included in the franchisee data for the six months ended June 30, 2017 period.

2018 Outlook

The Company is reaffirming the 2018 guidance it provided in its February 15, 2018 press release and its subsequent update on April 26, 2018.