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Special Note Regarding Forward-Looking Information: Except for historical information contained herein, the matters set forth in this Form 10-Q are forward-looking statements. These statements are based on management's current expectations and plans, which involve risks and uncertainties. Such forward-looking statements generally can be identified by the use of forward-looking terminology such as "believe," "expect," "expectation," "anticipate," "may," "could," "should", "intend," "belief," "estimate," "plan," "target," "project," "likely," "will," "forecast,", "future", "outlook," and similar expressions. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the filing date of this Quarterly Report and which involve risks and uncertainties that may cause actual results to differ materially from those expressed in or implied by these statements. These risks and uncertainties include factors such as (i) any ongoing impact of the COVID-19 pandemic due to new variants or efficacy and rate of vaccinations, as well as related measures taken by governmental or regulatory authorities to combat the pandemic, including the impact of federal vaccine mandates on our workforce and whether additional government stimulus payments or supplemental unemployment benefits will be approved, and the nature, amount and timing of any such payments or benefits; (ii) the possibility that the operational, strategic and shareholder value creation opportunities expected from the separation and spin-off of the Aaron's Business (as defined below) into what is now The Aaron'sCompany, Inc. may not be achieved in a timely manner, or at all; (iii) the failure of that separation to qualify for the expected tax treatment; (iv) the risk that the Company may fail to realize the benefits expected from the acquisition of BrandsMart, including projected synergies; (v) risks related to the disruption of management time from ongoing business operations due to the acquisition: (vi) failure to promptly and effectively integrate the BrandsMart acquisition; (vii) the effect of the acquisition on our ongoing results and businesses and on the ability of Aaron's and BrandsMart to retain and hire key personnel or maintain relationships with suppliers; (viii) changes in the enforcement and interpretation of existing laws and regulations and the adoption of new laws and regulations that may unfavorably impact our business; (ix) legal and regulatory proceedings and investigations, including those related to consumer protection laws and regulations, customer privacy, third party and employee fraud and information security; (x) the risks associated with our strategy and strategic priorities not being successful, including our e-commerce and real estate repositioning and optimization initiatives or being more costly than anticipated; (xi) risks associated with the challenges faced by our business, including the commoditization of consumer electronics and our high fixed-cost operating model; (xii) increased competition from traditional and virtual lease-to-own competitors, as well as from traditional and online retailers and other competitors; (xiii) financial challenges faced by our franchisees; (xiv) increases in lease merchandise write-offs and the potential limited duration and impact of stimulus and other government payments made by the federal and state governments to counteract the economic impact of the COVID-19 pandemic; (xv) the availability and prices of supply chain resources, including products and transportation; and (xvi) the other risks and uncertainties discussed under "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 (the "2021 Annual Report"). Except as required by law, the Company undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances after the filing date of this Quarterly Report. The following discussion should be read in conjunction with the condensed consolidated financial statements as of and for the three months endedMarch 31, 2022 and 2021, including the notes to those statements, appearing elsewhere in this report. We also suggest that management's discussion and analysis appearing in this report be read in conjunction with the management's discussion and analysis and the consolidated and combined financial statements included in our 2021 Annual Report.
Description of the derivative operation
OnNovember 30, 2020 (the "separation and distribution date"),Aaron's Holdings Company, Inc. completed the previously announced separation of the Aaron's Business segment (the "Aaron's Business") fromProgressive Leasing and Vive and changed its name to PROG Holdings, Inc. (referred to herein as "PROG Holdings " or "Former Parent"). The separation of the Aaron's Business was effected through a distribution (the "separation", the "separation and distribution", or the "spin-off transaction") of all outstanding shares of common stock of a newly formed company called The Aaron'sCompany, Inc. , aGeorgia corporation ("Aaron's", "The Aaron's Company" or "the Company"), to the PROG Holdings shareholders of record as ofNovember 27, 2020 . Upon the separation and distribution, Aaron's, LLC became a wholly-owned subsidiary of The Aaron's Company. Unless the context otherwise requires or we specifically indicate otherwise, references to "we," "us," "our," "the Company," and "Aaron's" refer to The Aaron'sCompany, Inc. , which holds, directly or indirectly, the Aaron's Business prior to the separation and distribution date.
Further details of the spin-off transaction are discussed in Part I, Item 1 of the 2021 Annual Report.
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Company overview
Aaron's is a leading, technology-enabled, omni-channel provider of lease-to-own
("LTO") and retail purchase solutions of appliances, electronics, furniture, and
other home goods. Since its founding in 1955, Aaron's has been committed to
serving the overlooked and underserved customer with a dedication to inclusion
and improving the communities in which it operates. Through our portfolio of
approximately 1,300 stores and our Aarons.com e-commerce platform, we provide
consumers with LTO and purchase solutions for the products they need and want,
with a focus on providing our customers with unparalleled customer service and
an attractive value proposition, including competitive monthly payments and
total cost of ownership, as compared to other LTO providers, high approval
rates, and lease plan flexibility. In addition, the Company's business includes
the operations of Woodhaven Furniture Industries ("Woodhaven"), which
manufactures and supplies the majority of the bedding and a significant portion
of the upholstered furniture leased and sold in Company-operated and franchised
stores.
OnApril 1, 2022 , the Company completed the previously announced transaction to acquire a 100% ownership ofInterbond Corporation of America , doing business asBrandsMart U.S.A. ("BrandsMart"). Founded in 1977, BrandsMart is one of the leading appliance and consumer electronics retailers in the southeastUnited States and one of the largest appliance retailers in the country with ten stores inFlorida andGeorgia and a growing e-commerce presence on brandsmartusa.com. The Company paid total consideration of approximately$230 million in cash under the terms of the agreement and additional amounts for working capital adjustments and transaction related fees, subject to certain closing adjustments. The Company's financial results for the three months endedMarch 31, 2022 and comparable prior periods do not include the results of BrandsMart, which will be included in the condensed consolidated financial statements during the second quarter of 2022. Management believes that the acquisition will strengthen Aaron's ability to deliver on its mission of enhancing people's lives by providing easy access to high quality furniture, appliances, electronics, and other home goods through affordable lease to own and retail purchase options. Management believes that value-creation opportunities include leveraging Aaron's lease-to-own expertise to provide BrandsMart's customers enhanced payment options and offering a wide selection of BrandsMart product assortment to millions of Aaron's customers.
Recent store restructuring programs
As a result of our real estate repositioning strategy and other cost-reduction initiatives, we initiated restructuring programs in 2019 and 2020 to optimize our Company-operated store portfolio via our GenNext store concept, which features larger showrooms and/or re-engineered store layouts, increased product selection, technology-enabled shopping and checkout, and a refined operating model. These restructuring programs have resulted in the closure, consolidation or relocation of a total of 319 Company-operated store locations during 2019, 2020, 2021 and the first three months of 2022. During the first quarter of 2022, the Company opened 19 new GenNext locations. Combined with the 116 locations open at the beginning of the year, total GenNext stores contributed 13.2% of total lease and retail revenues during the three months endedMarch 31, 2022 . As ofMarch 31, 2022 , we have identified approximately 63 remaining stores for closure, consolidation, or relocation that have not yet been closed and vacated, nearly all of which are expected to close during 2022. We will continue to evaluate our Company-operated store portfolio to determine how to best rationalize and reposition our store base to better align with marketplace demand. While not all specific locations have been identified under the real estate repositioning and optimization restructuring program, the Company's current strategic plan is to remodel, reposition and consolidate our Company-operated store footprint over the next three to four years. We believe that such strategic actions will allow the Company to continue to successfully serve our markets while continuing to utilize our growing Aarons.com shopping and servicing platform. Management expects that this strategy, along with our increased use of technology, will enable us to reduce store count while retaining a significant portion of our existing customer relationships and attract new customers. To the extent that management executes on its long-term strategic plan, additional restructuring charges will likely result from our real estate repositioning and optimization initiatives, primarily related to operating lease right-of-use asset and fixed asset impairments. However, the extent of future restructuring charges is not estimable at this time, as specific store locations to be closed and/or consolidated, beyond the stores noted above, have not yet been identified by management. 22 --------------------------------------------------------------------------------
Recent developments and operational measures taken by us in response to the COVID-19 pandemic
Our business continues to be impacted by the COVID-19 pandemic. While we have reopened our store showrooms following temporary closures of our showrooms inMarch 2020 , there can be no assurance that those showrooms will not be closed in future months, or have their operations limited. For example, we may be required to close showrooms or limit operations in future months if there are new variants of the virus, vaccine efficacy weakens or we experience localized increases in infections or "additional waves" in the number of COVID-19 cases in the areas where our stores are located and, in response, governmental authorities issue orders requiring such closures or limitations on operations, or we voluntarily close our showrooms or limit their operations to protect the health and safety of our customers and team members. Furthermore, we have continued to experience disruptions in our supply chain which have impacted product availability in some of our stores and, in some situations, we are procuring inventory from alternative sources at higher costs. These developments could have an unfavorable impact on our generation of lease agreements. As a result, the COVID-19 pandemic may continue to impact our business, results of operations, financial condition, liquidity and/or cash flow in future periods. The extent of any such impacts likely would depend on several factors, including (a) the length and severity of any continuing impact of the pandemic, which may be affected by the impact of federal vaccination mandates on our workforce and the successful distribution and efficacy of COVID-19 vaccines to our customers and team members, as well as any new variants of the virus, localized outbreaks or additional waves of COVID-19 cases, among other factors; (b) the impact of any such outbreaks on our customers, suppliers, and team members; (c) the nature of any government orders issued in response to such outbreaks, including whether we would be deemed essential, and thus, exempt from all or some portion of such orders; (d) the extent of the impact of additional government stimulus and/or enhanced unemployment benefits to our customers in response to the negative economic impacts of the COVID-19 pandemic, as well as the nature, timing and amount of any such stimulus payments or benefits; and (e) supply chain disruptions in the markets in which we operate.
The following summarizes the significant developments and operational measures we have taken in response to the COVID-19 pandemic:
•We maintain a comprehensive Program & Policy that is updated regularly to adapt to the ever changing COVID-19 landscape, which covers our prevention controls, support for getting vaccinated, reporting and responding to cases, and return-to-work criteria. •We have established aCOVID-19 Task Force , with executive oversight, that meets regularly to ensure that our response to the fluid pandemic is timely and effective to ensure the safety of our associates and customers to the best of our ability.
• We are monitoring internal and external trends in COVID-19 cases to ensure our response efforts are adjusted according to regional and national needs across our footprint.
•In our Company-operated stores, fulfillment centers, service centers, manufacturing, and Store Support Center operations, we are monitoring for and adhering to applicable federal and state laws,Occupational Safety and Health Administration regulations andCenter for Disease Control ("CDC") and state/local health authorities.
Coronavirus Legislative Relief
In response to the global impacts of COVID-19 onU.S. companies and citizens, the government enacted the Coronavirus, Aid, Relief, and Economic Security Act ("CARES Act") onMarch 27, 2020 , the Consolidated Appropriations Act onDecember 27, 2020 , and the American Rescue Plan Act of 2021 ("American Rescue Plan") onMarch 11, 2021 . We believe a significant portion of our customers received government stimulus payments and/or federally supplemented unemployment payments, pursuant to these economic stimulus measures, which we believe enabled them to continue making payments to us under their lease-to-own agreements, despite the economically challenging times resulting from the COVID-19 pandemic. The Company utilized tax relief options available to Company under the CARES Act. As ofMarch 31, 2022 the Company has a remaining liability of$10.6 million related to 2020 payroll taxes eligible for deferral throughDecember 31, 2022 . 23 --------------------------------------------------------------------------------
Strong points
The following summarizes the main financial highlights for the three months ended
•We reported revenues of$456.1 million in the first quarter of 2022 compared to$481.1 million for the first quarter of 2021, a decrease of 5.2%. This decrease is primarily due to a 4.3% decrease in same store revenues, which contributed to a$15.5 million decrease in lease and retail revenues. The decrease in same store revenues was primarily driven by the expected normalization in the lease renewal rate and lower early purchase options exercised, driven by a government stimulus-aided first quarter of 2021. This decrease was partially offset by a larger same store lease portfolio size, which ended the fourth quarter of 2021 at$111.2 million , up 5.4% compared to the end of the fourth quarter of 2020, and ended the first quarter of 2022 at$107.7 million , up 2.9% compared to the first quarter of 2021. E-commerce revenues increased 3.9% compared to the prior year quarter and were 15.4% and 14.3% of total lease revenues and fees during the three months endedMarch 31, 2022 and 2021, respectively. •During the first quarter of 2022, the Company opened 19 new GenNext locations. Combined with the 116 locations open at the beginning of the year, total GenNext stores contributed 13.2% of total lease and retail revenues during the three months endedMarch 31, 2022 . •Earnings before income taxes were$28.9 million in the first quarter of 2022 compared to$48.6 million during the prior comparable period. Earnings before income taxes during the first quarter of 2022 were negatively impacted by BrandsMart acquisition transaction costs of$3.5 million , restructuring charges of$3.3 million and separation-related costs of$0.5 million . Earnings before income taxes for the first quarter of 2021 were negatively impacted by separation-related costs of$4.4 million and restructuring charges of$3.4 million . •Earnings before income taxes were also impacted by the provision for lease merchandise write-offs as a percentage of lease revenues and fees, which increased to 5.4% for the three months endedMarch 31, 2022 compared to 3.1% for the comparable period in 2021. During the first quarter of 2022, the Company continued to experience the normalization of customer payment activity that started during the third and fourth quarters of 2021 following historically strong customer payment activity experienced throughout 2020 and continuing into the three months endedMarch 31, 2021 , which we believe was partially driven by government stimulus payments and supplemental federal unemployment benefits received by a significant portion of our customers during 2020 and 2021. •Net earnings for the first quarter of 2022 were$21.5 million compared to$36.3 million in the prior year period. Diluted earnings per share for the first quarter of 2022 were$0.68 compared with diluted earnings per share of$1.04 in the prior year period. •The Company repurchased 261,924 shares of common stock for$5.7 million during the three months endedMarch 31, 2022 . The total shares outstanding as ofMarch 31, 2022 were 30,963,018, compared to 34,169,998 as ofMarch 31, 2021 . SinceMarch 31, 2021 , we repurchased 3.6 million shares, which represents 10.5% ofMarch 31, 2021 stock outstanding.
Key indicators
Lease Portfolio Size. Our lease portfolio size represents the total balance of collectible lease payments for the next month derived from our aggregate outstanding customer lease agreements at a point in time. As of the end of any month, the lease portfolio size is calculated as the lease portfolio size at the beginning of the period plus collectible lease payments for the next month derived from new lease agreements originated in the period less the reduction in collectible lease payments for the next month as a result primarily of customer agreements that reach full ownership, lease merchandise returns and write-offs, and customer early purchase option exercises. Lease portfolio size provides management insight into expected future collectible lease payments. The Company ended the first quarter of 2022 with a lease portfolio size for all Company-operated stores of$131.7 million , an increase of 2.3% compared to the lease portfolio size as ofMarch 31, 2021 . Lease Renewal Rate. Our lease renewal rate for any given period represents the weighted average of the monthly lease renewal rates for each month in the period. The monthly lease renewal rate for any month is calculated by dividing (i) the recurring lease revenues related to leased merchandise for such month by (ii) the lease portfolio size as of the beginning of such month. The lease renewal rate provides management insight into the Company's success in retaining current customers within our customer lease portfolio over a given period and provides visibility into expected future customer lease payments and the related lease revenue. The lease renewal rate for the first quarter of 2022 was 89.4%, compared to 92.5% in the government stimulus-aided first quarter of 2021. 24 -------------------------------------------------------------------------------- Same Store Revenues. We believe that changes in same store revenues are a key performance indicator of the Company, as it provides management insight into our ability to collect customer payments, including contractually due payments and early purchase options exercised by our current customers. Additionally, this indicator allows management to gain insight into the Company's success in writing new leases into and retaining current customers within our customer lease portfolio. For the three months endedMarch 31, 2022 , we calculated this amount by comparing revenues for the three months endedMarch 31, 2022 to revenues for the comparable period in 2021 for all stores open for the entire 15-month period endedMarch 31, 2022 , excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues decreased 4.3% during the three months endedMarch 31, 2022 compared to the prior year comparable period.
Seasonality
Our revenue mix is moderately seasonal. The first quarter of each year generally has higher lease renewal rates and corresponding lease revenues than any other quarter. Our customers will also more frequently exercise the early purchase option on their existing lease agreements or purchase merchandise during the first quarter of the year. We believe that each is primarily due to the receipt by our customers in the first quarter of federal and state income tax refunds. In addition, lease portfolio size typically increases gradually in the fourth quarter as a result of the holiday season. We expect these trends to continue in future periods. Due to the seasonality of our business and the extent of the impact of additional government stimulus, and/or enhanced unemployment benefits to our customers in response to the economic impacts of the COVID-19 pandemic, results for any quarter or period are not necessarily indicative of the results that may be achieved for any interim period or a full fiscal year.
Main elements of profit before income tax
In this management's discussion and analysis section, we review our condensed consolidated results. The financial statements for the three months endedMarch 31, 2022 and comparable prior year period are condensed consolidated financial statements of the Company and its subsidiaries, each of which is wholly-owned, and is based on the financial position and results of operations of the Company. For the three months endedMarch 31, 2022 and the comparable prior year periods, some of the key revenue, cost and expense items that affected earnings before income taxes were as follows: Revenues. We separate our total revenues into three components: (a) lease and retail revenues; (b) non-retail sales; and (c) franchise royalties and other revenues. Lease and retail revenues primarily include all revenues derived from lease agreements at our Company-operated stores and e-commerce platform, the sale of both new and returned lease merchandise from our Company-operated stores and fees from ourAaron's Club program. Lease and retail revenues are recorded net of a provision for uncollectible accounts receivable related to lease renewal payments from lease agreements with customers. Non-retail sales primarily represent new merchandise sales to our franchisees and, to a lesser extent, sales of Woodhaven manufactured products to third-party retailers. Franchise royalties and other revenues primarily represent fees from the sale of franchise rights and royalty payments from franchisees, as well as other related income from our franchised stores. Franchise royalties and other revenues also include revenues from leasing Company-owned real estate properties to unrelated third parties, as well as other miscellaneous revenues. Cost of Lease and Retail Revenues. Cost of lease and retail revenues is primarily comprised of the depreciation expense associated with depreciating merchandise held for lease and leased to customers by our Company-operated stores and through our e-commerce platform. Cost of lease and retail revenues also includes the depreciated cost of merchandise sold through our Company-operated stores as well as the costs associated with theAaron's Club program.
Non-retail cost of sales. Non-retail cost of sales primarily represents the cost of goods sold to our franchisees and, to a lesser extent, the cost of Woodhaven’s manufactured goods sold to third-party retailers.
Personnel costs. Personnel costs represent the total compensation costs incurred for the services provided by members of the Company’s team.
Other Operating Expenses, Net. Other operating expenses, net includes occupancy costs (including rent expense, store maintenance and depreciation expense related to non-manufacturing facilities), shipping and handling, advertising and marketing, intangible asset amortization expense, professional services expense, bank and credit card related fees, and other miscellaneous expenses. Other operating expenses, net also includes gains or losses on sales of Company-operated stores and delivery vehicles, fair value adjustments on assets held for sale and gains or losses on other transactions involving property, plant and equipment (to the extent such gains or losses are not related to assets that are a part of the Company's restructuring programs).
Provision for write-offs of rental goods. The provision for rental merchandise write-offs represents incurred charges related to estimated rental merchandise write-offs.
25 -------------------------------------------------------------------------------- Restructuring Expenses, Net. Restructuring expenses, net primarily represent the cost of real estate optimization efforts and cost reduction initiatives related to the Company's store support center functions. Restructuring expenses, net are comprised principally of closed store operating lease right-of-use asset impairment and operating lease charges, fixed asset impairment charges, and expenses related to workforce reductions. Separation Costs. Separation costs represent employee-related expenses associated with the spin-off transaction, including employee-related costs, incremental stock-based compensation expense associated with the conversion and modification of unvested and unexercised equity awards and other one-time expenses incurred by the Company in order to begin operating as an independent, standalone public entity.
Acquisition-related costs. Acquisition-related costs primarily represent third-party legal and consulting fees associated with the acquisition of BrandsMart in
Interest Expense. Interest expense for the three months endedMarch 31, 2022 consists primarily of commitment fees on unused balances of the Previous Credit Facility (as defined below), as well as the amortization of debt issuance costs. Other Non-Operating (Expense) Income, Net. Other non-operating (expense) income, net includes the impact of foreign currency remeasurement, as well as gains and losses resulting from changes in the cash surrender value of Company-owned life insurance related to the Company's deferred compensation plan. This activity also includes earnings on cash and cash equivalent investments. 26 --------------------------------------------------------------------------------
Results of operations – Quarters ended
Three Months Ended
March 31, Change
(In Thousands) 2022 2021 $ %
REVENUES:
Lease and Retail Revenues $ 421,925 $ 444,087 $ (22,162) (5.0) %
Non-Retail Sales 27,827 29,949 (2,122) (7.1)
Franchise Royalties and Other Revenues 6,330 7,018
(688) (9.8)
456,082 481,054 (24,972) (5.2)
COSTS OF REVENUES
Cost of Lease and Retail Revenues 145,779 151,495 (5,716) (3.8)
Non-Retail Cost of Sales 25,356 26,491 (1,135) (4.3)
171,135 177,986 (6,851) (3.8)
GROSS PROFIT 284,947 303,068 (18,121) (6.0)
Gross Profit % 62.5% 63.0%
OPERATING EXPENSES:
Personnel Costs 121,110 124,863 (3,753) (3.0)
Other Operating Expenses, Net 104,359 108,366 (4,007) (3.7)
Provision for Lease Merchandise Write-Offs 21,957 13,417 8,540 63.7
Restructuring Expenses, Net 3,335 3,441 (106) (3.1)
Separation Costs 540 4,390 (3,850) (87.7)
Acquisition-Related Costs 3,464 - 3,464 nmf
254,765 254,477 288 0.1
OPERATING PROFIT 30,182 48,591 (18,409) (37.9)
Interest Expense (350) (344) (6) (1.7)
Other Non-Operating (Expense) Income, Net (927) 402 (1,329) nmf
EARNINGS BEFORE INCOME TAXES 28,905 48,649 (19,744) (40.6)
INCOME TAX EXPENSE 7,373 12,326 (4,953) (40.2)
NET EARNINGS $ 21,532 $ 36,323 $ (14,791) (40.7) %
nmf-Calculation is not significant
Revenue
The following table presents revenue by source for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, Change (In Thousands) 2022 2021 $ % Lease Revenues and Fees$ 409,318 $ 427,641 $ (18,323) (4.3) % Retail Sales 12,607 16,446 (3,839) (23.3) Non-Retail Sales 27,827 29,949 (2,122) (7.1)
Franchise Royalties and Fees 6,118 6,710 (592) (8.8)
Other 212 308 (96) (31.2)
Total Revenues $ 456,082 $ 481,054 $ (24,972) (5.2) %
27
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The decrease in lease revenues and fees and retail sales during the three months
ended March 31, 2022 was primarily due to a 4.3% decrease in same store
revenues, inclusive of both in-store and e-commerce originated lease revenues
and fees and retail sales, which represented $15.5 million of the decrease. The
decrease in same store revenues was driven primarily by expected normalization
in the lease renewal rate and lower exercise of early purchase options by our
customers. These factors were partially offset by the increased size of our same
store lease portfolio size in the quarter. During the first quarter of 2022, the
Company continued to experience the normalization of customer payment activity
that started during the third and fourth quarters of 2021 following historically
strong customer payment activity experienced throughout 2020 and continuing into
the three months ended March 31, 2021 , which we believe was partially driven by
government stimulus payments and supplemental federal unemployment benefits
received by a significant portion of our customers during 2020 and 2021.
E-commerce revenues increased 3.9% compared to the prior year quarter and were
15.4% and 14.3% of total lease revenues and fees during the three months ended
March 31, 2022 and 2021, respectively.
The decrease in non-retail sales is primarily due to comparatively lower product
demand from franchisees stemming from higher customer demand during the
government stimulus-aided first quarter of 2021. Non-retail sales also decreased
by $1.0 million due to the reduction of 12 franchised stores during the 15-month
period ended March 31, 2022 .
The decrease in royalties and franchise fees is mainly due to the reduction of 12 franchise stores during the 15-month period ended
Revenue cost and gross profit
Information on the components of rental cost and retail and non-retail sales revenue are as follows:
Three Months Ended
March 31, Change
(In Thousands) 2022 2021 $ %
Depreciation of Lease Merchandise and Other
Lease Revenue Costs $ 136,664 $ 140,976 $ (4,312) (3.1) %
Retail Cost of Sales 9,115 10,519 (1,404) (13.3)
Non-Retail Cost of Sales 25,356 26,491 (1,135) (4.3)
Total Costs of Revenues $ 171,135 $ 177,986 $ (6,851) (3.8) %
Depreciation of lease merchandise and other lease revenue costs. Depreciation of
lease merchandise and other lease revenue costs decreased primarily due to the
decrease in lease revenues and fees as described above, a $7.3 million decrease
due to higher early purchase options exercised during the first quarter of 2021,
and a $1.2 million decrease due to store closures and consolidations. This was
partially offset by a $1.2 million increase as a result of a higher lease
portfolio size and a $2.7 million increase due to higher inventory purchase
costs.
Retail cost of sales. Retail cost of sales decreased during the three months
ended March 31, 2022 due to the decrease in retail sales driven by the factors
discussed above, partially offset by higher inventory purchase costs.
Non-retail cost of sales. The decrease in non-retail cost of sales during the
three months ended March 31, 2022 is primarily attributable to the decrease in
non-retail sales which was driven by the factors discussed above, partially
offset by higher inventory purchase costs.
Gross profit
Gross profit for rental income and royalties was
in the three months ended
Gross profit for retail sales was$3.5 million and$5.9 million during the three months endedMarch 31, 2022 and 2021, respectively, which represented a gross profit margin of 27.7% and 36.0% for the respective periods. The decline in gross profit percentage is primarily due to a normalization of product mix and availability in the first quarter of 2022 as compared to the government stimulus-aided first quarter of 2021, as well as higher inventory purchase costs in 2022 as compared to 2021. Gross profit for non-retail sales was$2.5 million and$3.5 million during the three months endedMarch 31, 2022 and 2021, respectively, which represented a gross profit percentage of 8.9% and 11.5% for the respective periods. The decline in gross profit percentage was driven by higher inventory purchase costs in 2022 compared to the prior year comparable period. As a percentage of total revenues, gross profit declined to 62.5% during the three months endedMarch 31, 2022 compared to 63.0% for the comparable period in 2021. The factors impacting the change in gross profit are discussed above. 28 --------------------------------------------------------------------------------
Functionnary costs
Personnel Costs. Personnel Costs decreased by$3.8 million during the first quarter of 2022 due primarily to lower performance-based incentive compensation, partially offset by higher store-based wages and additional personnel to support our key strategic initiatives.
Other operating expenses, net. Information on certain significant components of other operating expenses, net, are as follows:
Three Months Ended
March 31, Change
(In Thousands) 2022 2021 $ %
Occupancy Costs $ 45,682 $ 43,309 $ 2,373 5.5
Shipping and Handling 15,253 13,265 1,988 15.0
Advertising Costs 10,700 17,385 (6,685) (38.5)
Intangible Amortization 764 1,684 (920) (54.6)
Professional Services 3,488 3,035 453 14.9
Bank and Credit Card Related Fees 5,562 5,382 180 3.3
Gains on Dispositions of Store-Related Assets,
net (4,450) (1,223) (3,227) (263.9)
Other Miscellaneous Expenses, net 27,360 25,529 1,831 7.2
Other Operating Expenses, net $ 104,359 $ 108,366 $ (4,007) (3.7) %
As a percentage of total revenue, other operating expenses, net, increased to 22.9% for the first quarter of 2022 from 22.5% in the same period of 2021.
Occupancy costs increased during the three months endedMarch 31, 2022 primarily due to higher rent and related occupancy costs as well as higher depreciation of leasehold improvements associated with newer store locations under our repositioning and optimization initiatives and higher utility expense compared to last year. These increases were partially offset by lower occupancy costs due to the planned net reduction of 22 Company-operated stores during the 15-month period endedMarch 31, 2022 . Shipping and handling costs increased primarily due to higher fuel and distribution costs driven by inflationary pressures, partially offset by a 13.6% decrease in product deliveries during the three months endedMarch 31, 2022 as compared to the same period in 2021. Advertising costs decreased primarily due to an increase in vendor marketing contributions eligible to be applied as a reduction to advertising costs and lower advertising spend during the three months endedMarch 31, 2022 as compared to the same period in 2021. Gains on asset dispositions increased primarily due to a$3.8 million gain related to a sale and leaseback transaction of three Company-owned store properties during the three months endedMarch 31, 2022 , partially offset by lower gains related to the sale of Company-owned vehicles in the first quarter of 2022 as compared to the same period in 2021. Other miscellaneous expenses, net primarily represent the depreciation of IT-related property, plant and equipment, software licensing expenses, franchisee-related reserves, and other expenses. The primary increases in this category during the three months endedMarch 31, 2022 were related to higher software licensing expenses and higher travel expenses. The remaining expenses within this category did not fluctuate significantly on an individual basis versus the prior year. Provision for Lease Merchandise Write-Offs. The provision for lease merchandise write-offs as a percentage of lease revenues and fees increased to 5.4% for the three months endedMarch 31, 2022 compared to 3.1% for the comparable period in 2021. During the first quarter of 2022, the Company continued to experience the normalization of customer payment activity that started during the third and fourth quarters of 2021 following historically low provision for lease merchandise write-offs percentages beginning with the second quarter of 2020 and continuing throughout the first half of 2021, which we believe was partially driven by government stimulus payments and supplemental federal unemployment benefits received by a significant portion of our customers. The Company's provision for lease merchandise write-offs has benefited throughout 2021 and 2022 from improved decisioning technology, strong operational focus and payment optimization . Restructuring Expenses, Net. Restructuring activity for the three months endedMarch 31, 2022 resulted in expenses of$3.3 million , which were primarily comprised of$1.4 million of continuing variable occupancy costs incurred related to previously closed stores,$1.4 million of operating lease right-of-use asset and fixed asset impairment for Company-operated stores identified for closure and severance of$0.4 million related to reductions in store support center headcount. Restructuring expenses for the three months endedMarch 31, 2021 were$3.4 million and were primarily comprised of$2.2 million of 29 -------------------------------------------------------------------------------- operating lease right-of-use asset and fixed asset impairment for company-operated stores identified for closure during 2021 and$1.1 million of common area maintenance and other variable charges and taxes incurred related to closed stores. Separation costs. Separation costs for the three months endedMarch 31, 2022 and 2021 primarily represent incremental stock-based compensation expense associated with the conversion and modification of unvested and unexercised equity awards, employee-related expenses associated with the spin-off transaction and other one-time expenses incurred by the Company in order to operate as an independent, standalone public entity.
Acquisition-related costs. Acquisition-related costs primarily represent third-party legal and consulting fees associated with the acquisition of BrandsMart.
Operating Profit Interest Expense. Interest Expense increased to$0.4 million for three months endedMarch 31, 2022 from$0.3 million for the three months endedMarch 31, 2021 . Interest expense for the three months endedMarch 31, 2022 consists primarily of commitment fees on unused balances of the Previous Facility, as well as the amortization of debt issuance costs. Other non-operating (expense) income, net. Other non-operating (expense) income, net includes (a) net gains and losses resulting from changes in the cash surrender value of Company-owned life insurance related to the Company's deferred compensation plan; (b) the impact of foreign currency remeasurement; and (c) earnings on cash and cash equivalent investments. The changes in the cash surrender value of Company-owned life insurance resulted in net losses of$0.9 million and net gains of$0.4 million for the three months endedMarch 31, 2022 and 2021, respectively. Foreign currency remeasurement net gains and losses resulting from changes in the value of theU.S. dollar against the Canadian dollar and earnings on cash and cash equivalent investments were not significant during the three months endedMarch 31, 2022 or 2021.
income tax expense
Income tax expense decreased to$7.4 million during the three months endedMarch 31, 2022 compared to$12.3 million for the same period in 2021 due to a$19.7 million decrease in earnings before income taxes, partially offset by an increase in the effective tax rate to 25.5% in 2022 from 25.3% in 2021.
Overview of the financial situation
The main changes in the condensed consolidated balance sheet of
•Cash and cash equivalents decreased$9.3 million to$13.5 million atMarch 31, 2022 . For additional information, refer to the "Liquidity and Capital Resources" section below. •Operating lease right-of-use assets increased$10.0 million primarily due to additional real estate lease agreements and amendments executed during the three months endedMarch 31, 2022 , partially offset by regularly scheduled amortization of right-of-use assets and impairment charges recorded in connection with restructuring actions. •Debt decreased$10.0 million primarily due to the repayment of the$10.0 million in outstanding borrowings under the Previous Credit Facility during the three months endedMarch 31, 2022 . Refer to the "Liquidity and Capital Resources" section below for further details regarding the Company's financing arrangements.
• Increase in treasury shares
Cash and capital resources
General
Our primary uses of capital has historically consisted of (a) buying merchandise; (b) personnel expenditures; (c) purchases of property, plant and equipment, including leasehold improvements for our new store concept and operating model; (d) expenditures related to corporate operating activities; (e) income tax payments; and (f) expenditures for franchisee acquisitions. Throughout 2021 and 2022, the Company has also periodically repurchased common stock and paid quarterly cash dividends. We currently expect to finance our primary capital requirements through cash flows from operations, and as necessary, borrowings under our Revolving Facility (as defined below). As ofMarch 31, 2022 , the Company had$13.5 million of cash and$232.7 million of availability under its previous$250.0 million senior unsecured revolving credit facility. OnApril 1, 2022 , the Company entered into a new unsecured credit facility (the "Credit Facility") which replaced its previous credit facility and is further described in Note 6 to these condensed consolidated financial statements. The Credit Facility provides for a$175 million term loan (the "Term Loan") and a$375 million revolving credit facility (the "Revolving Facility"), which includes (i) a$35 million sublimit for the issuance of letters of credit on customary terms, and (ii) a$35 million sublimit for swing line loans on customary terms. The Company borrowed$175 million under the Term Loan and$116.7 million under the Revolving Facility to finance theBrandsMart U.S.A. acquisition. 30 --------------------------------------------------------------------------------
Cash flow from operating activities
Cash provided by operating activities was$29.1 million and$20.2 million during the three months endedMarch 31, 2022 and 2021, respectively. The$8.9 million increase in operating cash flows was primarily driven by lower lease merchandise purchases and increases in working capital, partially offset by the normalization of customer payment activity during the first quarter of 2022 as compared to the government stimulus-aided first quarter of 2021. Other changes in cash provided by operating activities are discussed above in our discussion of results for the three months endedMarch 31, 2022 .
Cash used in investing activities
Cash used in investing activities was$17.1 million and$23.4 million during the three months endedMarch 31, 2022 and 2021, respectively. The$6.4 million decrease in investing cash outflows was primarily due to$5.4 million higher proceeds from the sale of property, plant and equipment and$1.9 million lower cash outflows for purchases of property, plant and equipment during the three months endedMarch 31, 2022 compared to the prior year period.
Cash used in financing activities
Cash used in financing activities was$21.3 million and$11.8 million during the three months endedMarch 31, 2022 and 2021, respectively, The$9.5 million increase in financing cash outflows was primarily due to the repayment of the$10.0 million in outstanding borrowings under the Previous Credit Facility during the three months endedMarch 31, 2022 .
Share buybacks
During the first quarter, the Company repurchased 261,924 shares of Aaron's common stock for a total purchase price of approximately$5.7 million . The total shares outstanding as ofMarch 31, 2022 were 30,963,018, compared to 34,169,998 as ofMarch 31, 2021 . OnMarch 3, 2022 , the Company's Board of Directors increased the share repurchase authorization to$250.0 million from the original$150.0 million plan and extended the maturity toDecember 31, 2024 . The remaining authorized share repurchase amount was$141.2 million as ofMarch 31, 2022 . Dividends InFebruary 2022 , the Board approved a quarterly dividend of$0.1125 per share, which was paid to shareholders onApril 5, 2022 . Aggregate dividend payments for the three months endedMarch 31, 2022 were$3.1 million . We expect to continue paying this quarterly cash dividend, subject to further approval from our Board. Although we expect to continue to pay a quarterly cash dividend, the timing, declaration, amount and payment of future dividends to shareholders will fall within the discretion of our Board. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividend.
Debt financing
As ofMarch 31, 2022 , the Company did not have any outstanding borrowings under the Previous Credit Facility (as defined below). The total available credit under our Previous Credit Facility as ofMarch 31, 2022 was$232.7 million , which was reduced by approximately$17.3 million for our outstanding letters of credit. OnApril 1, 2022 , the Company entered into a new unsecured credit facility (the "Credit Facility") which replaced its previous$250 million unsecured credit facility dated as ofNovember 9, 2020 (as amended, the "Previous Credit Facility") which is further described in Note 7 to the consolidated and combined financial statements of the 2021 Annual Report. The new Credit Facility provides for a$175 million Term Loan and a$375 million Revolving Facility, which includes (i) a$35 million sublimit for the issuance of letters of credit on customary terms, and (ii) a$35 million sublimit for swing line loans on customary terms. The Company borrowed$175 million under the Term Loan and$117 million under the Revolving Facility to finance theBrandsMart U.S.A. acquisition. Borrowings under the Revolving Facility and the Term Loan bear interest at a rate per annum equal to, at the option of the Company, (i) the forward-looking term rate based on the Secured Overnight Financing Rate ("SOFR") plus an applicable margin ranging between 1.50% and 2.25%, based on the Company's Total Net Debt to EBITDA Ratio (as defined in the Credit Facility agreement), or (ii) the base rate plus an applicable margin, which is 1.00% lower than the applicable margin for SOFR loans. The loans and commitments under the Revolving Facility mature or terminate onApril 1, 2027 . The Term Loan amortizes in quarterly installments, commencing onDecember 31, 2022 , in an aggregate annual amount equal to (i) 2.50% of the original principal amount of the Term Loan during the first and second years after the closing date, (ii) 5.00% of the original principal amount of the Term Loan during the third, fourth and fifth years after the closing date, with the remaining principal balance of the Term Loan to be due and payable in full onApril 1, 2027 .
The credit facility contains customary financial covenants, including (a) a maximum total net debt to EBITDA ratio of 2.75 to 1.00 and (b) a minimum fixed charge coverage ratio of 1.75 at 1.00.
31 -------------------------------------------------------------------------------- If we fail to comply with these covenants, we will be in default under these agreements, and all borrowings outstanding could become due immediately. Under the Previous Credit Facility and the Franchise Loan Facility (as defined below), we may pay cash dividends in any year so long as, after giving pro forma effect to the dividend payment, we maintain compliance with our financial covenants and no event of default has occurred or would result from the payment. We are in compliance with all of these covenants atMarch 31, 2022 .
Commitments
Income taxes
During the three months endedMarch 31, 2022 , we made net income tax payments of$0.6 million . Within the next nine months, we anticipate making estimated cash payments of$8.0 million for state income taxes and$0.7 million for Canadian income taxes. The Tax Cuts and Jobs Act of 2017, which was enacted inDecember 2017 , provides for 100% expense deduction of certain qualified depreciable assets, including lease merchandise inventory, purchased by the Company afterSeptember 27, 2017 (but would be phased down starting in 2023). Because of our sales and lease ownership model, in which the Company remains the owner of merchandise on lease, we benefit more from bonus depreciation, relatively, than traditional furniture, electronics and appliance retailers. We estimate the deferred tax liability associated with bonus depreciation from the Tax Cuts and Jobs Act of 2017 and the prior tax legislation is approximately$147.0 million as ofDecember 31, 2021 , of which approximately 74% is expected to reverse as a deferred income tax benefit in 2022 and most of the remainder during 2023. These amounts exclude bonus depreciation the Company will receive on qualifying expenditures afterDecember 31, 2021 .
Franchise Loan Guarantee
We have guaranteed the borrowings of certain independent franchisees under a franchise loan agreement (the "Franchise Loan Facility") with banks that are parties to our Revolving Facility. During the third quarter of 2021, the Company reduced the total commitment under the Franchise Loan Facility from$25.0 million to$15.0 million . OnNovember 10, 2021 , the Company amended the Franchise Loan Facility to extend the commitment termination date thereunder fromNovember 16, 2021 toNovember 15, 2022 . As further described in Note 6 to these condensed consolidated financial statements, a new Franchise Loan Facility agreement was entered into by the Company onApril 1, 2022 . This new agreement reduced the total commitment under the Franchise Loan Facility, from$15.0 million to$12.5 million and extended the commitment termination date toMarch 31, 2023 . We are able to request an additional 364-day extension of our Franchise Loan Facility, as long as we are not in violation of any of the covenants under that facility or our Revolving Facility, and no event of default exists under those agreements, until such time as our Revolving Facility expires. We currently expect to include a franchise loan facility as part of any extension or renewal of our Revolving Facility thereafter. AtMarch 31, 2022 , the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was$7.5 million , which would be due in full within 75 days of the event of default. Since the inception of the franchise loan program in 1994, losses associated with the program have been insignificant. However, such losses could be material in a future period due to potential adverse trends in the liquidity and/or financial performance of the Company's franchisees resulting in an event of default or impending defaults by franchisees. The Company records a liability related to estimated future losses from repaying the franchisees' outstanding debt obligations upon any possible future events of default. This liability is included in accounts payable and accrued expenses in the condensed consolidated balance sheets and was$2.0 million and$2.2 million as ofMarch 31, 2022 andDecember 31, 2021 , respectively. The liability for both periods included qualitative consideration of potential losses, including uncertainties surrounding the normalization of current and future business trends associated with the COVID-19 pandemic, and the corresponding unknown effect on the operations and liquidity of our franchisees.
Contractual obligations and commitments
As part of our ongoing operations, we enter into various arrangements that obligate us to make future payments, including debt agreements, operating leases, and other purchase obligations. The future cash commitments owed under these arrangements generally fluctuate in the normal course of business as we, for example, borrow on or pay down our revolving lines of credit, make scheduled payments on leases or purchase obligations, and renegotiate arrangements or enter into new arrangements. Other than the debt arrangements the Company entered into onApril 1, 2022 as described above, there were no material changes outside the normal course of business in our material cash commitments and contractual obligations from those reported in the 2021 Annual Report. 32 --------------------------------------------------------------------------------
Critical accounting policies
Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in the 2021 Annual Report.
Recent accounting pronouncements
Refer to Note 1 to the condensed consolidated financial statements for a discussion of recently issued accounting pronouncements, including pronouncements adopted in the current year.
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