THE AARON'S COMPANY, INC. 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," "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 set forth in these statements. These risks and uncertainties include factors such as (i) the uncertainty regarding the impact of the COVID-19 pandemic and related measures taken by governmental or regulatory authorities to combat the pandemic, including uncertainty regarding the nature and extent of the impact of recent government stimulus payments or supplemental unemployment benefits on our customers, and the nature, amount and timing of any such future payments or benefits, including the impact of the pandemic and such measures on: (a) demand for the lease-to-own products offered by us, (b) our customers, including their ability and willingness to satisfy their obligations under their lease agreements, (c) our suppliers' ability to provide us with the merchandise we need to obtain from them, (d) our employees and labor needs, including our ability to adequately staff our operations, (e) our financial and operational performance, and (f) our liquidity; (ii) the possibility that the operational, strategic and shareholder value creation opportunities expected from the separation and spin-off of the Aaron's Business 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) 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; (v) 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; (vi) 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; (vii) risks associated with the challenges faced by our business, including the commoditization of consumer electronics and our high fixed-cost operating model; (viii) increased competition from traditional and virtual lease-to-own competitors, as well as from traditional and online retailers and other competitors; (ix) financial challenges faced by our franchisees, which we believe may be exacerbated by the COVID-19 pandemic and related governmental or regulatory measures to combat the pandemic; (x) increases in lease merchandise write-offs, especially in light of the COVID-19 pandemic and its adverse economic impacts, as well as 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 pandemic; and 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, 2020 (the "2020 Annual Report") and under Item 1A, "Risk Factors" of Part II of this Form 10-Q below. 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 and combined financial statements as of and for the three months endedMarch 31, 2021 and 2020, 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 2020 Annual Report. 21 -------------------------------------------------------------------------------- Description of Spin-off Transaction OnOctober 16, 2020 , management ofAaron's, Inc. finalized the formation of a new holding company structure in anticipation of the separation and distribution transaction described below. Under the holding company structure,Aaron's, Inc. became a direct, wholly owned subsidiary of a newly formed company, Aaron's HoldingsCompany, Inc. Aaron's, Inc. was subsequently converted to a limited liability company ("Aaron's, LLC") holding the assets and liabilities historically associated with the historical Aaron's Business segment (the "Aaron's Business"). Upon completion of the holding company formation, Aaron's HoldingsCompany, Inc. became the publicly traded parent company of theProgressive Leasing , Aaron's Business, and Vive segments. OnNovember 30, 2020 (the "separation and distribution date"),Aaron's Holdings Company, Inc. completed the previously announced separation of the Aaron's Business segment from itsProgressive Leasing and Vive segments and changed its name to PROG Holdings, Inc. (referred to herein as "PROG Holdings " or "Former Parent"). The separation of the Aaron's Business segment 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. ("Aaron's", "The Aaron's Company" or the "Company"), aGeorgia corporation, 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'sCompany, Inc. Shareholders of PROG Holdings received one share of The Aaron'sCompany, Inc. for every two shares of PROG Holdings' common stock. Upon completion of the separation and distribution transaction, The Aaron'sCompany, Inc. became an independent, publicly traded company under the ticker "AAN" on theNew York Stock Exchange ("NYSE"). Unless the context otherwise requires or we specifically indicate otherwise, references to "we," "us," "our," "our Company," and "the Company" refer to The Aaron'sCompany, Inc. , which holds, directly or indirectly, the Aaron's Business prior to the separation and distribution date. References to "the Company", "Aaron's, Inc.", or "Aaron's HoldingsCompany, Inc. " for periods prior to the separation and distribution date refer to transactions, events, and obligations ofAaron's, Inc. which took place prior to the separation and distribution. Historical amounts herein include revenues and costs directly attributable to The Aaron'sCompany, Inc. and an allocation to the Company of expenses of the Aaron's Business related to certain PROG Holdings' corporate functions prior to the separation and distribution date. Business Overview The Aaron'sCompany, Inc. is a leading, technology-enabled, omni-channel provider of lease-to-own ("LTO") and purchase solutions generally focused on serving the large, credit-challenged segment of the population. 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, including furniture, appliances, electronics, computers and a variety of other products and accessories. We focus on providing our customers with unparalleled customer service and an attractive value proposition, including low monthly payments and total cost of ownership, high approval rates and flexible lease ownership plans. In addition, we offer a wide product selection, and for our lease customers we offer free prompt delivery, setup, service and product returns, and the ability to pause, cancel or resume lease contracts at any time with no additional costs to the customer. Recent Restructuring Programs and Franchisee Acquisitions As a result of our real estate repositioning strategy and other cost-reduction initiatives, we initiated a restructuring program in 2020 to optimize our company-operated store portfolio. This restructuring program has resulted in the closure, consolidation or relocation of a total of 106 company-operated stores during 2020 and the first three months of 2021. We also further rationalized our home office and field support staff, which resulted in a reduction in employee headcount in those areas to more closely align with current business conditions. We currently expect to close, consolidate, or relocate approximately 85 additional stores byDecember 31, 2021 under this program. Additionally, from 2016 to 2019, we closed and consolidated a total of 294 underperforming company-operated stores under similar restructuring initiatives. 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. Under the real estate repositioning and optimization restructuring program, though all specific locations have not yet been identified, the Company's current strategic plan is to remodel, reposition and consolidate our company-operated store footprint over the next 3 to 4 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 OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. As a result of the COVID-19 pandemic, we temporarily closed our showrooms inMarch 2020 and shifted to e-commerce and curbside service only for all of our company-operated stores to protect the health and safety of our customers and associates, except where such curbside service was prohibited by governmental authorities. Since that time, we have reopened our store showrooms, but there can be no assurance that those showrooms will not be closed in future months, or have their operations limited, if, for example, there are localized increases 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 associates. Furthermore, we are experiencing 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 have had an unfavorable impact on our generation of lease agreements. The COVID-19 pandemic may 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 the pandemic, which may be impacted by the successful distribution of COVID-19 vaccines to our customers and associates, as well as any localized outbreaks or additional waves of COVID-19 cases, among other factors; (b) the impact of any such outbreaks on our customers, suppliers, and employees; (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 for our business. The following summarizes significant developments and operational measures taken by us in response to the COVID-19 pandemic: •In our company-operated stores, we are following the guidance of health authorities, including requiring associates to wear masks and observe social distancing practices. We have also installed protective plexiglass barriers at check-out counters, implemented enhanced cleaning and sanitization procedures, and reconfigured our showrooms in a manner designed to reduce COVID-19 transmission. •In conjunction with the operational adjustments made at our company-operated stores, we accelerated the national rollout of our centralized digital decisioning platform, which is an algorithm-driven lease decisioning tool used in our company-operated stores that is designed to improve our customers' experiences by streamlining and standardizing the lease application decisioning process, shortening transaction times, and establishing appropriate transaction sizes and lease payment amounts, given the customer's profile. We completed the national rollout during the second quarter of 2020, and that decisioning platform is now being utilized in all of our company-operated and most of our franchised store locations inthe United States . •To assist the franchisees of our businesswho were facing adverse impacts to their businesses, we offered a royalty fee abatement fromMarch 8, 2020 untilMay 16, 2020 and modified payment terms on outstanding accounts receivable owed to us by franchisees. In addition, payment terms were temporarily modified for the franchise loan facility under which certain franchisees have outstanding borrowings that are guaranteed by us. •Our management team and store support associates are continuing to work remotely for the near future. Additionally, we reduced our corporate real estate footprint by electing to permanently vacate one of our leased administrative offices inKennesaw, Georgia during the fourth quarter of 2020. 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 have received stimulus payments and/or federally supplemented unemployment payments, pursuant to these economic stimulus measures, which we believe have 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. In addition to the stimulus payments mentioned above, we also believe that certain elements of the American Rescue Plan, primarily the temporary expansion of the child tax credit which increases the amount of the credit, makes the credit fully refundable, and allows for half of the credit to be paid in periodic installments beginning during the second half of 2021, should have a beneficial impact to our customers, though the extent and timing of any such benefit is currently unknown. Additionally, we may experience an increase in the exercise of early purchase options or decreases in the total number of new ownership plans, as customers could potentially opt to use such payments and credits to acquire merchandise outside of our LTO solutions. 23 -------------------------------------------------------------------------------- The CARES Act included several tax relief options for companies, which resulted in the following provisions available to the Company: •Aaron's, Inc. elected to carryback its 2018 net operating losses of$242.2 million to 2013, generating a refund of$84.4 million , which was received inJuly 2020 , and a discrete income tax benefit of$34.2 million recognized during the three months endedMarch 31, 2020 . The discrete tax benefit is the result of the federal income tax rate differential between the current statutory rate of 21% and the 35% rate applicable to 2013. •Throughout 2020, the Company deferred$16.5 million in payroll taxes that it was permitted to defer under the CARES Act, which generally applies toSocial Security taxes otherwise due, with 50% of the tax payable onDecember 31, 2021 and the remaining 50% payable onDecember 31, 2022 . •Certain wages and benefits that were paid to furloughed employees are eligible for an employee retention credit of up to 50% of wages paid to eligible associates. Separate from the CARES Act, theIRS extended the due dates for estimated tax payments for the first and second quarters of 2020 toJuly 15, 2020 . Additionally, many states offered similar deferrals. The Company took advantage of all such extended due dates. The federal supplement to unemployment payments originally lapsed onJuly 31, 2020 , but has been extended on a prospective basis throughSeptember 2021 . The current nature and/or extent of future stimulus measures, if any, remains unknown. We cannot be certain that our customers will continue making their payments to us at recently experienced levels if the federal government does not continue supplemental measures or enact additional stimulus measures, which could result in a significant reduction in the portion of our customerswho continue making payments owed to us under their lease-to-own agreements. Highlights The following summarizes significant financial highlights from the three months endedMarch 31, 2021 : •We reported revenues of$481.1 million in the first quarter of 2021 compared to$432.8 million for the first quarter of 2020, an increase of 11.1%. This increase is primarily due to a 14.8% increase in same store revenues, partially offset by the planned net reduction of 78 company-operated stores and the reduction of 88 franchised stores during the 15-month period endedMarch 31, 2021 . The increase in same store revenues was driven by a larger same store lease portfolio size, which ended the fourth quarter of 2020 at$86.3 million , up 3.3% compared to 2019, and ended the first quarter of 2021 at$85.7 million , up 6.2% compared to the first quarter of 2020, and strong customer payment activity, including retail sales and early purchase option exercises. We believe this was due in part to (a) operational investments including the national rollout of our centralized digital decisioning platform and digital customer onboarding; (b) new direct to consumer marketing programs in both in-store and e-commerce channels; (c) government stimulus payments and supplemental federal unemployment benefits received by a significant portion of our customers; and (d) lower prior period revenues caused by the temporary closure of our showrooms and a shift to e-commerce and curbside service only for all of our company-operated stores as described above in March of 2020. •Earnings before income taxes were$48.6 million in the first quarter of 2021 compared to losses before income taxes of$470.3 million during the prior comparable period, due primarily to a goodwill impairment charge of$446.9 million incurred during the first quarter of 2020. Earnings before income taxes during the first quarter of 2021 were negatively impacted by spin-related separation costs of$4.4 million and restructuring charges of$3.4 million . In addition to the goodwill impairment charge mentioned above, operating results from the first quarter of 2020 were negatively impacted by a$14.7 million charge related to an early termination fee for a sales and marketing agreement and restructuring charges of$22.3 million . We also recognized$5.7 million of incremental allowances during the first quarter of 2020 for lease merchandise write-offs, franchisee accounts receivable, and reserves on the franchise loan guarantees due to the potential adverse impacts of the COVID-19 pandemic. •We recorded income tax expense of$12.3 million during the three months endedMarch 31, 2021 as compared to a net income tax benefit of$146.5 million during the first quarter of 2020. The net income tax benefit recognized in 2020 was primarily the result of losses before income taxes of$470.3 million as well as a$34.2 million net tax benefit generated by a net operating loss carryback that the Company recorded pursuant to the provisions of the CARES Act, as further discussed above. 24 -------------------------------------------------------------------------------- Key Metrics 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 period, 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 2021 with a lease portfolio size for all Company operated stores of$128.8 million , an increase of 3.6% compared to the balance as ofMarch 31, 2020 . 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. For the three months endedMarch 31, 2021 , we calculated this amount by comparing revenues for the three months endedMarch 31, 2021 to revenues for the three months endedMarch 31, 2020 for all stores open for the entire 15-month period endedMarch 31, 2021 , excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues increased 14.8% during the three months endedMarch 31, 2021 compared to the prior year comparable period. Seasonality Our revenue mix is moderately seasonal. Adjusting for growth, the first quarter of each year generally has higher revenues than any other quarter. This is primarily due to realizing the full benefit of business that historically gradually increases in the fourth quarter as a result of the holiday season, as well as the receipt by our customers in the first quarter of federal and state income tax refunds. Our customers will more frequently exercise the early purchase option on their existing lease agreements or purchase merchandise off the showroom floor during the first quarter of the year. 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 as discussed above, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. 25 -------------------------------------------------------------------------------- Key Components of Earnings (Loss) Before Income Taxes In this management's discussion and analysis section, we review our condensed consolidated and combined results. The financial statements for periods prior to and through the date of the separation and distribution,November 30, 2020 , were prepared on a combined standalone basis and were derived from the consolidated financial statements and accounting records of PROG Holdings. The financial statements for the periods subsequent toDecember 1, 2020 and throughMarch 31, 2021 are 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 as a standalone company. The combined financial statements prepared throughNovember 30, 2020 include all revenues and costs directly attributable to the Company and an allocation of expenses of the Aaron's Business related to certain PROG Holdings corporate functions. These expenses have been allocated to the Company based on direct usage or benefit where specifically identifiable, with the remaining expenses allocated primarily on a pro rata basis using an applicable measure of revenues, headcount or other relevant measures. The Company considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. The combined financial statements include assets and liabilities specifically attributable to the Company. All intercompany transactions and balances within the Company have been eliminated. Transactions between the Company and PROG Holdings that took place prior to the separation and distribution have been included as invested capital within the condensed consolidated and combined financial statements. For the three months endedMarch 31, 2021 and the comparable prior year period, some of the key revenue, cost and expense items that affected earnings (loss) 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 merchandise sold to our franchisees. Personnel Costs. Personnel costs represents total compensation costs incurred for services provided by employees of the Company, as well as an allocation of personnel costs for PROG Holdings' corporate and shared function employees for the periods prior to the separation and distribution date. 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, an allocation of general corporate expenses from PROG Holdings for the periods prior to the separation and distribution date, 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, gains or losses on other transactions involving property, plant and equipment, and gains related to property damage and business interruption insurance claim recoveries. Provision for Lease Merchandise Write-offs. Provision for lease merchandise write-offs represents charges incurred related to estimated lease merchandise write-offs. 26 -------------------------------------------------------------------------------- Restructuring Expenses, Net. Restructuring expenses, net primarily represent the cost of real estate optimization efforts and cost reduction initiatives related to the Company home office and field support 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. Impairment ofGoodwill . There were no impairments of goodwill recorded during the first quarter of 2021. Impairment of goodwill is the write-off of our existing goodwill balance atMarch 31, 2020 that was recorded in the first quarter of 2020. Refer to Note 1 to these condensed consolidated and combined financial statements for further discussions of the interim goodwill impairment assessment and resulting impairment charge. Separation Costs. Separation costs represent 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 operate as an independent, standalone public entity. Interest Expense. Interest expense consists primarily of interest incurred on the fixed and variable rate debt agreements ofAaron's, Inc. All of the interest expense for the historical debt obligations of Aaron's, LLC have been included within the condensed consolidated and combined financial statements of The Aaron'sCompany, Inc. for the periods prior to the separation and distribution date because Aaron's, LLC was the primary obligor for the external debt agreements and is one of the legal entities forming the basis of The Aaron'sCompany, Inc. Other Non-Operating Income (Expense), Net. Other non-operating income (expense), 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 included earnings on cash and cash equivalent investments. 27 --------------------------------------------------------------------------------
Results of Operations - Three months ended
Three Months Ended
March 31, Change
(In Thousands) 2021 2020 $ %
REVENUES:
Lease and Retail Revenues $ 444,087 $ 398,910 $ 45,177 11.3 %
Non-Retail Sales 29,949 26,846 3,103 11.6
Franchise Royalties and Other Revenue 7,018 7,075 (57) (0.8)
481,054 432,831 48,223 11.1
COSTS OF REVENUES
Cost of Lease and Retail Revenues 151,495 142,003 9,492 6.7
Non-Retail Cost of Sales 26,491 23,581 2,910 12.3
177,986 165,584 12,402 7.5
GROSS PROFIT 303,068 267,247 35,821 13.4
Gross Profit % 63.0 % 61.7 %
OPERATING EXPENSES:
Personnel Costs 124,863 115,746 9,117 7.9
Other Operating Expenses, Net 108,366 123,065 (14,699) (11.9)
Provision for Lease Merchandise Write-Offs 13,417 23,960 (10,543) (44.0)
Restructuring Expenses, Net 3,441 22,286 (18,845) (84.6)
Impairment of Goodwill - 446,893 (446,893) nmf
Separation Costs 4,390 - 4,390 nmf
254,477 731,950 (477,473) (65.2)
OPERATING PROFIT (LOSS) 48,591 (464,703) 513,294 nmf
Interest Expense (344) (3,799) (3,455) (90.9)
Other Non-Operating Income (Expense), Net 402 (1,759) 2,161 nmf
EARNINGS (LOSS) BEFORE INCOME TAXES 48,649 (470,261) 518,910 nmf
INCOME TAX EXPENSE (BENEFIT) 12,326 (146,487) 158,813 nmf
NET EARNINGS (LOSS) $ 36,323 $ (323,774) $ 360,097 nmf
nmf-Calculation is not meaningful
Revenues
The following table presents revenue by source for three months ended March 31,
2021 and 2020:
Change
Three Months Ended
March 31, 2021 vs. 2020
(In Thousands) 2021 2020 $ %
Lease Revenues and Fees $ 427,641 $ 389,379 $ 38,262 9.8 %
Retail Sales 16,446 9,531 6,915 72.6
Non-Retail Sales 29,949 26,846 3,103 11.6
Franchise Royalties and Fees 6,710 6,723 (13) (0.2)
Other 308 352 (44) (12.5)
Total Revenues $ 481,054 $ 432,831 $ 48,223 11.1 %
28
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Lease revenues and fees increased during the three months ended March 31, 2021
primarily due to a 14.8% increase in same store revenues, inclusive of lease
revenues and fees and retail sales, and the acquisition of franchised stores
during the 15-month period ended March 31, 2021 , which resulted in increases of
$32.7 million and $5.0 million , respectively. The increase in same store
revenues was driven by a larger same store lease portfolio size and strong
customer payment activity, including retail sales and early purchase option
exercises. We believe this was due in part to (a) operational investments
including the national rollout of our centralized digital decisioning platform
and digital customer onboarding; (b) new direct to consumer marketing programs
in both in-store and e-commerce channels; (c) government stimulus payments and
supplemental federal unemployment benefits received by a significant portion of
our customers; and (d) lower prior period revenues caused by the temporary
closure of our showrooms and a shift to e-commerce and curbside service only for
all of our company-operated stores as described above in March of 2020.
E-commerce revenues increased 42% compared to the prior year quarter and were
approximately 14% and 11% of total lease revenues and fees during the three
months ended March 31, 2021 and 2020, respectively.
The increase in non-retail sales is due to higher product demand from
franchisees primarily as a result of government stimulus and unemployment
benefits received by franchisee customers during the period as well as improved
advertising and operational focus, partially offset by a $4.9 million decrease
related to the reduction of 88 franchised stores during the 15-month period
ended March 31, 2021 .
In March 2020 , the Company voluntarily closed the showrooms for all of its
company-operated stores, and moved to an e-commerce and curbside only service
model to protect the health and safety of our customers and associates, while
continuing to provide our customers with the essential products they needed such
as refrigerators, freezers, mattresses and computers. Since that time, we have
reopened all of our store showrooms. There can be no assurances that some
portion or all of those showrooms will not close in the future, whether due to
COVID-19 pandemic-related government orders or voluntarily by us where we
determine that such closures are necessary to protect the health and safety of
our customers and associates during the COVID-19 pandemic. Any such closures or
restrictions may have an unfavorable impact on the revenues and earnings in
future periods, and could also have an unfavorable impact on the Company's
liquidity, as discussed below in the "Liquidity and Capital Resources" section.
Although nearly all of the showrooms of company-operated stores had reopened by
the end of the second quarter of 2020, changing consumer behavior, such as
consumers voluntarily refraining from shopping in-person at those store
locations during the COVID-19 pandemic, and ongoing supply chain disruptions,
particularly in appliance, furniture, and electronics, could continue to
challenge new lease originations in future periods.
Cost of Revenues and Gross Profit
Information about the components of the cost of lease and retail revenues and
non-retail sales is as follows:
Change
Three Months Ended
March 31, 2021 vs. 2020
(In Thousands) 2021 2020 $ %
Depreciation of Lease Merchandise and Other
Lease Revenue Costs $ 140,976 $ 135,141 $ 5,835 4.3 %
Retail Cost of Sales 10,519 6,862 3,657 53.3
Non-Retail Cost of Sales 26,491 23,581 2,910 12.3
Total Costs of Revenues $ 177,986 $ 165,584 $ 12,402 7.5 %
Depreciation of lease merchandise and other lease revenue costs. Depreciation of
lease merchandise and other lease revenue costs increased primarily due to a
$8.0 million increase related to higher early purchase options exercised and a
$2.8 million increase due to higher inventory purchase costs, partially offset
by a $3.1 million decrease driven by the planned net reduction of 78
company-operated stores during the 15-month period ended March 31, 2021 and a
$1.9 million decrease related to lower levels of idle inventory.
Retail cost of sales. Retail cost of sales increased due to an increase in
retail sales primarily driven by government stimulus and unemployment benefits
received by a significant portion of our customers during the COVID-19 pandemic.
Non-retail cost of sales. The increase in non-retail cost of sales during the
three months ended March 31, 2021 and 2020 is primarily attributable to the
increase in non-retail sales, resulting from higher product demand from
franchisees as a result of government stimulus and unemployment benefits
received by franchisee customers during the period as well as improved
advertising and operational focus, partially offset by the reduction of 88
franchised stores during the 15-month period ended March 31, 2021 .
29
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Gross Profit
Gross profit for lease revenues and fees was $286.7 million and $254.2 million
during the three months ended March 31, 2021 and 2020, respectively, which
represented a gross profit margin of 67.0% and 65.3% for the respective periods.
The improvement in gross profit percentage was primarily driven by strong
customer payment activity, product mix shift, and lower depreciation on idle
inventory, partially offset by lower franchise royalties.
Gross profit for retail sales was $5.9 million and $2.7 million during the three
months ended March 31, 2021 and 2020, respectively, which represented a gross
profit margin of 36.0% and 28.0% for the respective periods. The improvement in
gross profit percentage is primarily due to a favorable mix shift from retail
sales of returned merchandise to retail sales of new merchandise.
Gross profit for non-retail sales was $3.5 million and $3.3 million during the
three months ended March 31, 2021 and 2020, respectively, which represented a
gross profit percentage of 11.5% and 12.2% for the respective periods. The
decline in gross profit percentage was driven by higher inventory purchase costs
in 2021 compared to the prior year comparable period.
As a percentage of total revenues, gross profit improved to 63.0% during the
three months ended March 31, 2021 compared to 61.7% for the comparable period in
2020. The factors impacting the change in gross profit are discussed above.
Operating Expenses
Personnel costs. As a percentage of total revenues, personnel costs decreased to
26.0% during the three months ended March 31, 2021 compared to 26.7% during the
comparable period in 2020. Personnel costs increased by $9.1 million during the
first quarter of 2021 due primarily to higher performance-based incentive
compensation, partially offset by the reduction of store support center and
field support staff as part of our restructuring actions throughout 2020 and
2021, a larger mix of e-commerce, and driving greater efficiencies and use of
technology in our store operating model.
Other Operating Expenses, Net. Information about certain significant components
of other operating expenses, net is as follows:
Three Months Ended
March 31, Change
(In Thousands) 2021 2020 $ %
Occupancy Costs 43,309 44,263 (954) (2.2)
Shipping and Handling 13,265 12,973 292 2.3
Advertising Costs 17,385 11,042 6,343 57.4
Intangible Amortization 1,684 1,842 (158) (8.6)
Professional Services 3,035 19,041 (16,006) (84.1)
Bank and Credit Card Related Fees 5,382 4,684 698 14.9
Gains on Insurance Recoveries (39) - (39) nmf
Gains on Asset and Store Dispositions and Assets
Held For Sale, net (1,223) 115 (1,338) nmf
Other Miscellaneous Expenses, net 25,568 29,105 (3,537) (12.2)
Other Operating Expenses, net $ 108,366 $ 123,065 $ (14,699) (11.9) %
nmf-Calculation is not meaningful
As a percentage of total revenues, other operating expenses, net decreased to
22.5% for the first quarter of 2021 from 28.4% in the same period in 2020.
Occupancy costs decreased primarily due to the planned net reduction of 78
company-operated stores during the 15-month period ended March 31, 2021 ,
partially offset by higher maintenance costs.
Advertising costs increased primarily due to a shift towards brand-focused
digital advertising spend, which reduced vendor marketing contributions.
Professional services decreased during the first quarter of 2021 compared to the
same period in 2020 due primarily to an early termination fee of $14.1 million
for a sales and marketing agreement that was recorded during the first quarter
of 2020.
Bank and credit card related fees increased during the first quarter of 2021
compared to the same period in 2020 primarily due to higher utilization of
credit and debit cards by our customers, more payments due to strong customer
payment activity, and more leases in our portfolio as of March 31, 2021 .
Gains on asset dispositions increased primarily due to a $1.1 million gain
related to the sale of Company-owned vehicles.
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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 decrease was
related to the reduction in the provision for franchisee-related losses during
the first quarter of 2021 as compared to the prior period. The remaining
expenses did not fluctuate significantly 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 decreased to 3.1% for the
three months ended March 31, 2021 compared to 6.2% for the comparable period in
2020. This decrease was primarily driven by strong customer payment activity,
strong operational focus, and the impact of improved decisioning technology.
During the first quarter of 2020, the Company recorded an incremental provision
of $2.7 million due to potential adverse impacts of the COVID-19 pandemic.
Restructuring expenses, net. Restructuring activity for the three months ended
March 31, 2021 resulted in expenses of $3.4 million , which were primarily
comprised of $2.2 million of operating lease right-of-use asset and fixed asset
impairment for company-operated stores identified for closure during 2021, $1.1
million of common area maintenance and other variable charges and taxes incurred
related to closed stores, and $0.1 million of other restructuring related
charges. Restructuring expenses for the three months ended March 31, 2020 were
$22.3 million , primarily due to the identification of 105 stores for closure
during the quarter as well as a change in estimates of future sublease activity
for vacant properties which resulted in incremental expense.
Impairment of goodwill. During the first quarter of 2020, we recorded a loss of
$446.9 million to fully write-off our existing goodwill balance as of March 31,
2020 . Refer to Note 1 of these condensed consolidated and combined financial
statements for further discussion of the interim goodwill impairment assessment
and resulting impairment charge.
Separation costs. Separation costs represent expenses associated with the
separation and distribution, 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 operate as an independent, separate publicly traded
Company.
Operating Profit (Loss)
Interest expense. Interest expense decreased to $0.3 million for three months
ended March 31, 2021 from $3.8 million for the three months ended March 31,
2020 , which is the result of the full repayment of the outstanding borrowings of
$285.0 million under the previous Aaron's, Inc. revolving credit and term loan
agreement and senior unsecured notes in conjunction with the separation and
distribution in the fourth quarter of 2020.
Other non-operating income (expense), net. Other non-operating income (expense),
net includes (a) the impact of foreign currency remeasurement; (b) 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; and (c) earnings
on cash and cash equivalent investments. Foreign currency remeasurement net
losses resulting from changes in the value of the U.S. dollar against the
Canadian dollar and earnings on cash and cash equivalent investments were not
significant during the three months ended March 31, 2021 or 2020. The changes in
the cash surrender value of Company-owned life insurance resulted in net gains
of $0.4 million and net losses of $1.9 million for the three months ended March
31, 2021 and 2020, respectively.
Income Tax Expense (Benefit)
The Company recorded income tax expense of $12.3 million during the three months
ended March 31, 2021 compared to a net income tax benefit of $146.5 million for
the same period in 2020. The net income tax benefit recognized in the first
quarter of 2020 was primarily the result of losses before income taxes of $470.3
million during the period as well as discrete tax benefits generated by the
provisions of the CARES Act. The CARES Act, among other things, (a) waived the
80% taxable income limitation on the use of net operating losses which was
previously set forth under the Tax Cuts and Jobs Act of 2017 and (b) provided
that net operating losses arising in a taxable year beginning after December 31,
2017 and before January 1, 2021 may be treated as a carryback to each of the
five preceding taxable years. Aaron's, Inc. elected to carryback its 2018 net
operating losses of $242.2 million to 2013 which resulted in a discrete income
tax benefit of $34.2 million recognized during the three months ended March 31,
2020 . The discrete tax benefit is the result of the federal income tax rate
differential between the current statutory rate of 21% and the 35% rate
applicable to 2013. The effective tax rate decreased to 25.3% for the first
quarter of 2021 compared to 31.2% for the same period in 2020 due primarily to
the impact of the discrete income tax benefit on our 2020 book loss as described
above.
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Overview of Financial Position
The major changes in the condensed consolidated balance sheet from December 31,
2020 to March 31, 2021 include:
•Cash and cash equivalents decreased $15.1 million to $61.1 million at March 31,
2021 . For additional information, refer to the "Liquidity and Capital Resources"
section below.
•Operating lease right-of-use assets decreased $9.5 million due to impairment
charges recorded in connection with restructuring actions, the early buyout of
approximately 800 leased delivery vehicles, and regularly scheduled amortization
of right-of-use assets.
Liquidity and Capital Resources
General
Our primary uses of capital consist 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 acquisitions, including franchisee acquisitions. Prior
to the separation and distribution transaction, our capital requirements were
financed through:
•cash on hand;
•cash flows from operations;
•Aaron's, Inc. private debt offerings;
•Aaron's, Inc. bank debt; and
•Aaron's, Inc. stock offerings.
As of March 31, 2021 , the Company had $61.1 million of cash and $234.4 million
of availability under its $250.0 million senior unsecured revolving credit
facility (the "Revolving Facility"). We currently expect to finance our primary
capital requirements through cash flows from operations, and as necessary,
borrowings under our Revolving Facility.
Cash Provided by Operating Activities
Cash provided by operating activities was $20.2 million and $56.8 million during
the three months ended March 31, 2021 and 2020, respectively. The $36.6 million
decrease in operating cash flows was primarily driven by higher lease
merchandise purchases, partially offset by improved lease portfolio performance
resulting from strong customer payment activity. Other changes in cash provided
by operating activities are discussed above in our discussion of results for the
three months ended March 31, 2021 .
Cash Used in Investing Activities
Cash used in investing activities was $23.4 million and $21.7 million during the
three months ended March 31, 2021 and 2020, respectively. The $1.7 million
increase in investing cash outflows was primarily due to $5.3 million higher
cash outflows for purchases of property, plant and equipment, partially offset
by $1.8 million higher proceeds from the sale of property, plant and equipment
during the first quarter of 2021 compared to the prior year period.
Cash (Used in) Provided by Financing Activities
Cash used in financing activities was $11.8 million during the three months
ended March 31, 2021 compared to cash provided by financing activities of $394.7
million during the three months ended March 31, 2020 , respectively. The $406.6
million change in financing cash flows was primarily due to cash inflows during
the three months ended March 31, 2020 from (i) net borrowings of debt of $305.7
million and (ii) net transfers from Former Parent of $90.5 million , compared to
cash outflows during the three months ended March 31, 2021 of (i) $5.7 million
in share repurchases and (ii) $3.4 million in dividends paid.
Share Repurchases
At management's request, during its March 2021 meeting the Board of Directors
authorized management to purchase the Company's common stock up to an aggregate
amount of $150.0 million . This authorization expires on December 31, 2023 .
During the three months ended March 31, 2021 , the Company purchased 252,200
shares for $6.3 million . As of March 31, 2021 , we have the authority to purchase
additional shares up to our remaining authorization limit of $143.7 million .
32
--------------------------------------------------------------------------------Dividends
At itsMarch 2021 meeting, our Board of Directors approved a quarterly dividend of$0.10 per share. Aggregate dividend payments for the three months endedMarch 31, 2021 were$3.4 million . We expect to continue paying this quarterly cash dividend, subject to further approval from our Board of Directors. Debt Financing As ofMarch 31, 2021 , the Company did not have any outstanding borrowings under the Revolving Facility, under which all borrowings and commitments will mature or terminate onNovember 9, 2025 . The total available credit under our revolving credit facility as ofMarch 31, 2021 was$234.4 million , which was reduced by approximately$15.6 million for our outstanding letters of credit. The Revolving Facility contains financial covenants, which include requirements that we maintain ratios of (a) fixed charge coverage of no less than 1.75:1.00 and (b) total net leverage of no greater than 2.50:1.00. 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 Revolving Facility and Franchise Loan Facility, 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, 2021 . Commitments Income Taxes During the three months endedMarch 31, 2021 , we made net income tax payments of$0.9 million . Within the next nine months, we anticipate making estimated cash payments of$4.0 million forU.S. federal income taxes,$9.0 million for state income taxes, and$0.4 million for Canadian income taxes. The Tax Cuts and Jobs Act, 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 Act and the prior tax legislation is approximately$129.0 million as ofDecember 31, 2020 , of which approximately 75% is expected to reverse as a deferred income tax benefit in 2021 and most of the remainder during 2022. These amounts exclude bonus depreciation the Company will receive on qualifying expenditures afterDecember 31, 2020 . Franchise Loan Guaranty 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. The Franchise Loan Facility has a total commitment of$25.0 million and expires onNovember 16, 2021 . We are able to request additional 364-day extensions 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 would expect to include a franchise loan facility as part of any extension or renewal of our Revolving Facility thereafter. AtMarch 31, 2021 , the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was$17.0 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 immaterial. However, there can be no assurance that the Company will not incur future losses on outstanding franchisee borrowings under the Franchise Loan Facility in the event of defaults 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$2.2 million and$2.4 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. The liability for both periods included qualitative consideration of potential losses due to uncertainties related to current and forecasted business trends including, but not limited to, the impacts of the COVID-19 pandemic and the corresponding unknown effect on the operations and liquidity of our franchisees. 33
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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. There were no material changes outside the normal course of business in our material cash commitments and contractual obligations from those reported in the 2020 Annual Report. 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 2020 Annual Report. Recent Accounting Pronouncements Refer to Note 1 to the condensed consolidated and combined financial statements for a discussion of recently issued accounting pronouncements, including pronouncements that were adopted in the current year.
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