Aaron's Inc.'s CFO Discusses Q3 2011 Results - Earnings Call Transcript

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Aaron’s, Inc. (AAN)

F3Q11 Earnings Call

October 24, 2011 5:00 pm ET

Executives

Gilbert L. Danielson – Chief Financial Officer, Executive Vice President & Director

R. Charles Loudermilk, Sr. – Chairman of the Board

Robert C. Loudermilk, Jr. – President, Chief Executive Officer & Director

William K. Butler, Jr. – Chief Operating Officer & Director

Analysts

David Magee – SunTrust Robinson Humphrey

Analyst for Matthew McCall – BB&T Capital Markets

Analyst for Bud Bugatch – Raymond James

Analyst for Bradley Thomas – KeyBanc Capital Markets

John A. Baugh – Stifel Nicolaus

Presentation

Operator

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Welcome to the third quarterly earnings conference call. (Operator Instructions). I would like to introduce your host, Gil Danielson, CFO of Aaron’s, Inc. You may proceed Mr. Danielson.

Gilbert L. Danielson

Thank you for joining us this afternoon. The operator is going to read our standard Safe Harbor statement before we get started and then we’ll have a few comments, and then after that we’ll have a few questions and answers.

Operator

The company’s earnings release issued today and related Form 8K are available on our website www.AaronsInc.com in the investor’s relation section. This webcast will be archived for replay there as well. With us today is Charlie Loudermilk, Chairman; Robert Loudermilk, CEO; Ken Butler, COO; and Gil Danielson, CFO.

Before we discuss the results I would like to read the company’s Safe Harbor statement. Except for the historical information the matters discussed today are forward-looking statements of the company. As such, they will involve a number of risks and uncertainties including factors such as changes in general economic conditions, competition, pricing, customer demand, litigation, and other issues that could cause actual results to differ materially from those such statements including the risks and uncertainties discussed under risk factors in the company’s 2010 annual report on Form 10K, including, without limitation, in the company’s projected revenues, earnings, and store openings, and store acquisitions, and dispositions activity for the future period.

I would now like to pass the conference back over to Mr. Danielson.

Gilbert L. Danielson

Rob, Ken, and Charlie will have a few comments and then I’ll add some further information.

Robert C. Loudermilk, Jr.

I appreciate everybody joining the call. We had our release earlier and we once again, recorded strong revenue growth this quarter with same store revenues up 5.3% and customer counts up 6.3% over the third quarter of this last year. In addition, although not revenues of Aaron’s, Inc., our franchise stores experienced a 3.1% growth in same store revenues and 3.2% increase in same store customer growth. The total of our corporate and franchise customers were up 9.8% over the same period a year ago.

As noted in the earnings release, even those these gains are outstanding in the current economic conditions, we believe our customers continue to feel the strain of high unemployment and overall economic pressures. Our recession resilient business model has done well through many economic cycles as our large customer base needs a non-credit way to obtain basic home furnishings, and even more so in the current tight credit environment. We have again proved that with proper execution our business can do very well in difficult economic conditions.

Our pre-tax margins were negatively affected this quarter due to the higher depreciation expense of lease merchandise, the cost of rapidly converting over 40 third-party stores acquired and converting the HOMESMART Store concept along with some other increased operating costs due to some positive operational changes we are implementing for future growth and development of the company.

We are quite excited about the experimental HOMESMART weekly pay concept and are consciously ramping up the number of stores. Our current plan is to have approximately 65 HOMESMART stores open by year end and slow down any further openings until we can fully evaluate the store’s financial performance and returns.

Excluding a law suit related charge discussed earlier in the second quarter, net earnings for the nine months of 2011 would have been $105.8 million and earnings per share, assuming dilution, excluding the law suit related charges would have been $1.32, a 23% increase over the nine months of last year. Also note, during the third quarter the company received $125 million from an issuance of a senior unsecured note in a private placement. These funds have and will be used for general corporate purposes and for the repurchase of company stock. We repurchased a substantial number of shares of stock during the quarter.

On October 14th the company closed on its previously announced $10 billion British pound investment in Perfect Home Holdings Limited a UK rent-to-own company. We feel this investment of a 11.5% ownership in the company will give us good exposure to the UK market and can be a springboard for possible European and international expansion. We are quite impressed with the Perfect Home management team and owners. We feel that our partnership will be mutually beneficial in the years to come.

Our Woodhaven Manufacturing plants had a slight decrease in production in dollars of 2% in the quarter but had an increase in production in dollars of 17% for the year-to-date, a reflection of the increasing demand by the Aaron’s stores for our furniture and bedding products. Woodhaven is on track to have a record year in shipments. Thanks for the support of the company and now I’ll turn the call over to Ken for a couple of comments.

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