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,", "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) factors impacting consumer spending, including the current inflationary environment and general macroeconomic conditions; (ii) 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; (iii) 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; (iv) the failure of that separation to qualify for the expected tax treatment; (v) the risk that the Company may fail to realize the benefits expected from the acquisition ofBrandsMart U.S.A. , including projected synergies; (vi) risks related to the disruption of management time from ongoing business operations due to the acquisition: (vii) failure to promptly and effectively integrate theBrandsMart U.S.A. acquisition; (viii) 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; (ix) 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; (x) 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; (xi) 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; (xii) risks associated with the challenges faced by our business, including the commoditization of consumer electronics, our high fixed-cost operating model and the ongoing labor shortage; (xiii) increased competition from traditional and virtual lease-to-own competitors, as well as from traditional and online retailers and other competitors; (xiv) financial challenges faced by our franchisees; (xv) 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; (xvi) the availability and prices of supply chain resources, including products and transportation; (xvii) business disruptions due to political or economic instability due to the ongoing conflict betweenRussia andUkraine ; and (xviii) 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 and six months endedJune 30, 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 Spin-off Transaction
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 "Pre-Spin 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 Pre-Spin 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 (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 Company. Unless the context otherwise requires or we specifically indicate otherwise, references to "we," "us," "our," and "the Company," refer to The Aaron'sCompany, Inc. , which holds, directly or indirectly, the Pre-Spin Aaron's Business and all other subsidiaries of the Company, which are wholly owned, as well as other lines of business described in the "Description of Business" section in Note 1 to these condensed consolidated financial statements.
Further details of the spin-off transaction are discussed in Part I, Item 1, of the 2021 Annual Report.
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--------------------------------------------------------------------------------Business Overview
The Company is a leading, technology-enabled, omni-channel provider of
lease-to-own ("LTO") and retail purchase solutions of furniture, electronics,
appliances, and other home goods across its brands: Aaron's, BrandsMart U.S.A. ,
BrandsMart Leasing , and Woodhaven Furniture Industries ("Woodhaven").
As of
The Aaron's Business segment is comprised of (i) Aaron's branded
Company-operated and franchise operated stores; (ii) its e-commerce platform
("Aarons.com"); (iii) Woodhaven; and (iv) BrandsMart Leasing (collectively, the
"Aaron's Business").
The operations of
Aaron's Business Segment
Since its founding in 1955, the Company has been committed to serving the overlooked and underserved customer with a dedication to inclusion and improving the communities in which it operates. Through a portfolio of approximately 1,300 stores and its Aarons.com e-commerce platform, Aaron's, together with its franchisees, provide consumers with LTO and retail purchase solutions for the products they need and want, with a focus on providing its customers with unparalleled customer service, high approval rates, lease plan flexibility, and an attractive value proposition, including competitive monthly payments and total cost of ownership, as compared to other LTO providers.
Woodhaven manufactures and supplies the majority of the bedding and a significant portion of the upholstered furniture leased and sold in Company-operated and franchised Aaron's stores.
Launched in 2022,
BrandsMart Segment Founded in 1977,BrandsMart U.S.A. 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 operations ofBrandsMart U.S.A. (other thanBrandsMart Leasing ) comprise the BrandsMart segment.
OnApril 1, 2022 , the Company completed the previously announced transaction to acquire a 100% ownership ofInterbond Corporation of America , doing business as BrandsMartU.S.A. 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. Refer to Note 2 to these condensed consolidated financial statements for additional information regarding the acquisition. The Company's financial results for the three and six months endedJune 30, 2022 include the results ofBrandsMart U.S.A. subsequent to theApril 1, 2022 acquisition date. Management believes that the acquisition will strengthen the Company'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 also believes that value creation opportunities include leveraging the Company's lease-to-own expertise to provideBrandsMart U.S.A.'s customers enhanced payment options and offering a wider selection of products to millions of Aaron's customers, as well as generating procurement savings and other cost synergies.
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 Aaron's 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 337 Company-operated Aaron's store locations during 2019, 2020, 2021 and the first six months of 2022. During the second quarter of 2022, the Company opened 36 new GenNext locations. Combined with the 135 locations open at the beginning of the quarter, total GenNext stores contributed 17.4% of total lease revenues and fees and retail revenues for the Aaron's Business segment during the three months endedJune 30, 2022 . As ofJune 30, 2022 , we have identified approximately 54 remaining Aaron's 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 Aaron's store portfolio to determine how to best rationalize and reposition our store base to better align with marketplace demand. 31 -------------------------------------------------------------------------------- OnJuly 15, 2022 , the Company announced its plans to permanently cease use of its remaining administrative building inKennesaw, Georgia and also to reduce in its store support center employee headcount to more closely align with current business conditions. Total restructuring charges related to these actions are approximately$6.6 million and will be recognized in the third quarter of 2022. 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 Aaron's 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, outside of theJuly 2022 restructuring actions described above, is not estimable at this time, as specific Aaron's store locations to be closed and/or consolidated, beyond the stores noted above, have not yet been identified by management.
Recent Developments and Operational Measures Taken by Us in Response to the COVID-19 Pandemic
Our business has been, and may continue to be, impacted by the COVID-19
pandemic. While we have reopened our store showrooms following temporary
closures of our showrooms in
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.
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 ofJune 30, 2022 the Company has a remaining liability of$10.6 million related to 2020 payroll taxes eligible for deferral throughDecember 31, 2022 . 32 --------------------------------------------------------------------------------
Segment Performance
As discussed above, the Company conducts its operations through two primary operating business segments: the Aaron's Business and BrandsMart. EffectiveApril 1, 2022 , the Company changed its composition of reportable segments to align the reportable segments with the current organizational structure, which includes separate segments for the Aaron's Business and BrandsMart, along with an Unallocated Corporate category for remaining unallocated costs including equity-based compensation, interest income and expense, information security, executive compensation, legal and compliance, corporate governance, accounting and finance, human resources and other corporate functions. The Unallocated Corporate category also includes acquisition-related costs, restructuring charges and separation costs for which the individual operating segments are not being evaluated. The Company evaluates segment performance based primarily on revenues and earnings (losses) from operations before unallocated corporate costs, which are evaluated on a consolidated basis and not allocated to the Company's business segments. Intersegment sales between BrandsMart and the Aaron's Business pertaining toBrandsMart Leasing , are completed at retail price. Since the intersegment profit affects cost of goods sold, depreciation and inventory valuation, they are adjusted when intersegment profit is eliminated in consolidation. The Company has retroactively adjusted, for all periods presented, its segment disclosures to align with the current composition of reportable segments. The discussion of the results of operations for segment performance measures within the "Segment Performance" sections throughout this Management's Discussion and Analysis do not include unallocated corporate expenses.
Highlights
We have been actively monitoring the impact of the current challenging macroeconomic environment, including the COVID-19 pandemic, inflation and slowing of consumer demand, business disruptions due to political or economic instability due to the ongoing conflict betweenRussia andUkraine , and the ongoing labor shortages, on all aspects of our business. We anticipate that demanding market conditions will continue throughout the remainder of 2022 and beyond, including elevated levels of inflation. We anticipate that these headwinds will be partially mitigated by cost cutting initiatives including continuing to execute on our real estate repositioning and optimization restructuring program, improving operating efficiency, and reducing our inventory purchases.
The following summarizes significant financial highlights from the three months
ended
•The Company completed the previously announced acquisition ofBrandsMart U.S.A. onApril 1, 2022 . The results of BrandsMart, which is presented as a separate reportable segment, have been included in the Company's consolidated results from theApril 1, 2022 acquisition date. •We reported consolidated revenues of$610.4 million in the second quarter of 2022 compared to$467.5 million for the second quarter of 2021, an increase of 30.6%. This increase was primarily driven by the acquisition ofBrandsMart U.S.A. onApril 1, 2022 , which reported revenues of$181.4 million in the BrandsMart segment during the second quarter of 2022. These additional revenues were partially offset by a$37.3 million decrease in the Aaron's Business segment, which is primarily due to a 6.7% decrease in same store revenues, which contributed to a$23.4 million decrease in lease revenues and fees and retail sales. The decrease in same store revenues was primarily driven by a lower lease renewal rate, lower exercise of early purchase options, and lower retail sales, partially offset by a larger average lease portfolio size during the quarter. The same store lease portfolio size ended the first quarter of 2022 at$106.3 million , up 2.9% compared to the end of the first quarter of 2021, and ended the second quarter of 2022 at$105.8 million , down 1.0% compared to the second quarter of 2021. E-commerce revenues increased 4.0% compared to the prior year quarter and were 15.4% and 13.9% of total lease revenues and fees during the three months endedJune 30, 2022 and 2021, respectively. •During the second quarter of 2022, the Company opened 36 new GenNext locations. Combined with the 135 GenNext locations open at the beginning of the quarter, total GenNext stores contributed 17.4% of total lease revenues and fees and retail revenues for the Aaron's Business during the three months endedJune 30, 2022 . •Losses before income taxes were$13.5 million in the second quarter of 2022 compared to earnings before income taxes of$44.3 million during the prior comparable period. The Company's results for the second quarter of 2022 were negatively impacted byBrandsMart U.S.A. acquisition-related costs of$8.0 million , restructuring charges of$5.6 million and separation-related costs of$0.2 million . Additionally, the second quarter results for the BrandsMart segment reflect a$23.0 million one-time, non-cash charge for a fair value adjustment to the acquired merchandise inventories. Earnings before income taxes for the second quarter of 2021 were negatively impacted by separation-related costs of$1.2 million and restructuring charges of$1.8 million . 33 -------------------------------------------------------------------------------- •Losses before income taxes in the second quarter of 2022 were also impacted by the provision for lease merchandise write-offs as a percentage of lease revenues and fees, which increased to 5.7% for the three months endedJune 30, 2022 compared to 2.9% for the comparable period in 2021. •Net losses for the second quarter of 2022 were$5.3 million compared to net earnings of$33.0 million in the prior year period. Diluted losses per share for the second quarter of 2022 were$0.17 compared with diluted earnings per share of$0.95 in the prior year period. •The Company repurchased 516,140 shares of common stock for$11.1 million during the six months endedJune 30, 2022 . The total shares outstanding as ofJune 30, 2022 were 30,777,065, compared to 33,093,668 as ofJune 30, 2021 . SinceJune 30, 2021 , we repurchased 2.7 million shares, which represents 8.1% ofJune 30, 2021 stock outstanding. Key Metrics Lease Portfolio Size. Our lease portfolio size for the Aaron's Business, excludingBrandsMart Leasing , 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, customer early purchase option exercises, and lease merchandise returns and write-offs. Lease portfolio size provides management insight into expected future collectible lease payments. The Company ended the second quarter of 2022 with a lease portfolio size for all Company-operated Aaron's stores of$130.8 million , a decrease of 1.5% compared to the lease portfolio size as ofJune 30, 2021 . Lease Renewal Rate. Our lease renewal rate for the Aaron's Business, excludingBrandsMart Leasing , 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 second quarter of 2022 was 88.5%, compared to 92.4% in the second quarter of 2021. Same Store Revenues. We believe that changes in same store revenues are a key performance indicator for the Aaron's Business, excludingBrandsMart Leasing , 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 Aaron's Business' success in writing new leases into and retaining current customers within our customer lease portfolio. For the three months endedJune 30, 2022 , we calculated this amount by comparing revenues for the three months endedJune 30, 2022 to revenues for the comparable period in 2021 for all Company-operated Aaron's stores open for the entire 15-month period endedJune 30, 2022 , excluding stores that received lease agreements from other acquired, closed or merged stores. For the six months endedJune 30, 2022 , we calculated this amount by comparing revenues for the six months endedJune 30, 2022 to revenues for the six months endedJune 30, 2021 for all Company-operated Aaron's stores open for the entire 24-month period endedJune 30, 2022 , excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues decreased 6.7% and 5.5% during the three and six months endedJune 30, 2022 compared to the prior year comparable period.
BrandsMart. Key metrics for BrandsMart will be excluded until prior year comparable periods are included in the financial results.
Seasonality
Our revenue mix for the Aaron's Business 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 the Aaron's 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 well
as the extent of the impact of macroeconomic inflationary pressures on our
customers, 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.
34
--------------------------------------------------------------------------------Discussion regarding seasonality trends for BrandsMart will be excluded until prior year comparable periods are included in the financial results.
Key Components of (Losses) Earnings Before Income Taxes
In this management's discussion and analysis section, we review our condensed consolidated results. The financial statements for the three and six months endedJune 30, 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. The results of BrandsMart, which is presented as a separate reportable segment, have been included in the Company's consolidated results from theApril 1, 2022 acquisition date. For the three and six months endedJune 30, 2022 and the comparable prior year periods, some of the key revenue, cost and expense items that affected (losses) earnings before income taxes were as follows: Revenues. We separate our total revenues into four components: (a) lease revenues and fees; (b) retail sales (c) non-retail sales; and (d) franchise royalties and other revenues. Lease revenues and fees primarily include all revenues derived from lease agreements at both our Aaron's and BrandsMart Leasing LTO brands and fees from ourAaron's Club program. Lease revenues and fees are recorded net of a provision for uncollectible accounts receivable related to lease renewal payments from lease agreements with customers. Retail sales primarily include the sale of merchandise inventories from our BrandsMart operations and the related warranty revenues, as well as the sale of both new and returned lease merchandise from our Company-operated Aaron's stores. Non-retail sales primarily represent new merchandise sales to our Aaron's 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. Depreciation of Lease Merchandise and Other Lease Revenue Costs. Depreciation of lease merchandise and other lease revenues costs is comprised of the depreciation expense associated with depreciating merchandise held for lease and leased to customers by our Company-operated Aaron's stores, Aarons.com andBrandsMart Leasing , as well as the costs associated with theAaron's Club program.
Retail Cost of Sales. Retail cost of sales includes cost of merchandise
inventories sold through our
Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost of merchandise sold to our Aaron's franchisees and, to a lesser extent, the cost of Woodhaven's manufactured products sold to third-party retailers.
Personnel Costs. Personnel costs represents total compensation costs incurred for services provided by team members of the Company.
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 Lease Merchandise Write-Offs. Provision for lease merchandise write-offs represents charges incurred related to estimated lease merchandise write-offs.
35
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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. Such costs are recorded within the
Unallocated Corporate category of segment reporting.
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. Such costs are recorded within the Unallocated
Corporate category of segment reporting.
Acquisition-Related Costs. Acquisition-related costs primarily represent
third-party consulting, banking and legal expenses associated with the
acquisition of
Interest Expense. Interest expense for the six months endedJune 30, 2022 consists primarily of interest on the Company's variable rate borrowings, commitment fees on unused balances of the Credit Facility (as defined below), as well as the amortization of debt issuance costs. Such costs are recorded within the Unallocated Corporate category of segment reporting. 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. 36 --------------------------------------------------------------------------------
Consolidated Results of Operations - Three months ended
The results of BrandsMart, which is presented as a separate reportable segment, have been included in the Company's consolidated results from theApril 1, 2022 acquisition date. Three Months Ended June 30, Change (In Thousands) 2022 2021 $ % REVENUES: Lease Revenues and Fees$ 386,513 $ 411,621 $ (25,108) (6.1) % Retail Sales 190,848 16,877 173,971 nmf Non-Retail Sales 27,042 32,455 (5,413) (16.7) Franchise Royalties and Other Revenues 5,981 6,542 (561) (8.6) 610,384 467,495 142,889 30.6 COSTS OF REVENUES Depreciation of Lease Merchandise and Other Lease Revenue Costs 127,772 132,319 (4,547) (3.4) Retail Cost of Sales 165,228 10,887 154,341 nmf Non-Retail Cost of Sales 24,237 29,609 (5,372) (18.1) 317,237 172,815 144,422 83.6 GROSS PROFIT 293,147 294,680 (1,533) (0.5) Gross Profit % 48.0% 63.0% OPERATING EXPENSES: Personnel Costs 130,257 121,426 8,831 7.3 Other Operating Expenses, Net 136,387 114,046 22,341 19.6 Provision for Lease Merchandise Write-Offs 22,113 12,117 9,996 82.5 Restructuring Expenses, Net 5,582 1,794 3,788 211.1 Separation Costs 230 1,246 (1,016) (81.5) Acquisition-Related Costs 8,033 - 8,033 nmf 302,602 250,629 51,973 20.7 OPERATING (LOSSES) PROFIT (9,455) 44,051 (53,506) (121.5) Interest Expense (2,463) (451) (2,012) (446.1) Other Non-Operating (Expense) Income, Net (1,556) 744 (2,300) nmf (LOSSES) EARNINGS BEFORE INCOME TAXES (13,474) 44,344 (57,818) (130.4) INCOME TAX (BENEFIT) EXPENSE (8,132) 11,369 (19,501) (171.5) NET (LOSSES) EARNINGS$ (5,342) $ 32,975 $ (38,317) (116.2) %
nmf-Calculation is not meaningful
Revenues. Total consolidated revenues were$610.4 million during the three months endedJune 30, 2022 , a$142.9 million increase compared to the prior year period. This increase was primarily driven by the acquisition ofBrandsMart U.S.A. onApril 1, 2022 , which resulted in revenues of$181.4 million in the BrandsMart segment during the second quarter of 2022. This increase was partially offset by a$37.3 million decrease in revenues in the Aaron's Business segment during the three months endedJune 30, 2022 , as discussed further in the "Segment Performance" section below. 37 -------------------------------------------------------------------------------- Gross Profit. Consolidated gross profit for the Company was$293.1 million during the three months endedJune 30, 2022 , a$1.5 million decrease compared to the prior year period. This decrease was primarily driven by a$24.1 million decrease in gross profit at the Aaron's Business segment during the three months endedJune 30, 2022 , as discussed further in the "Segment Performance" section below, partially offset by the acquisition ofBrandsMart U.S.A. onApril 1, 2022 , which resulted in gross profit of$22.9 million in the BrandsMart segment during the second quarter of 2022. Gross profit for the BrandsMart segment during the three months endedJune 30, 2022 includes a one-time$23.0 million non-cash charge for a fair value adjustment to the acquired merchandise inventories. As a percentage of total revenues, gross profit declined to 48.0% during the three months endedJune 30, 2022 compared to 63.0% for the comparable period in 2021 primarily due to the non-cash charge described above as well as the increasing proportion of BrandsMart retail sales as a percentage of overall consolidated revenues. Operating Expenses Personnel Costs. Personnel Costs increased by$8.8 million during the second quarter of 2022 due primarily to the acquisition ofBrandsMart U.S.A. , which resulted in personnel costs of$19.1 million during the second quarter of 2022, partially offset by lower performance-based incentive compensation in the Aaron's Business segment and Unallocated Corporate category. Other Operating Expenses, Net. Information about certain significant components of other operating expenses, net for the consolidated Company is as follows: Three Months Ended June 30, Change (In Thousands) 2022 2021 $ % Occupancy Costs$ 56,803 $ 42,316 $ 14,487 34.2 Shipping and Handling 20,717 15,353 5,364 34.9 Advertising Costs 12,645 18,997 (6,352) (33.4) Intangible Amortization 2,878 1,599 1,279 80.0 Professional Services 5,356 4,332 1,024 23.6 Bank and Credit Card Related Fees 8,535 5,287 3,248 61.4 Gains on Dispositions of Store-Related Assets, net (2,717) (895) (1,822) 203.6 Other Miscellaneous Expenses, net 32,170 27,057 5,113 18.9 Other Operating Expenses, net$ 136,387 $ 114,046 $ 22,341 19.6 %
As a percentage of total revenues, other operating expenses, net decreased to 22.3% for the second quarter of 2022 from 24.4% in the same period in 2021.
Occupancy costs increased during the three months endedJune 30, 2022 primarily due to the acquisition ofBrandsMart U.S.A. , which resulted in occupancy costs of$10.4 million during the second quarter as well as higher rent, maintenance and utility costs at Aaron's stores, and higher depreciation of leasehold improvements associated with newer Company-operated Aaron's store locations under our repositioning and optimization initiatives. These increases were partially offset by lower occupancy costs due to the planned net reduction of 29 Company-operated Aaron's stores during the 15-month period endedJune 30, 2022 . Shipping and handling costs increased primarily due to higher fuel and distribution costs driven by inflationary pressures as well as the acquisition ofBrandsMart U.S.A. , which resulted in additional shipping and handling costs of$0.2 million during the second quarter, partially offset by a 14.1% decrease in product deliveries during the three months endedJune 30, 2022 as compared to the same period in 2021. Advertising costs decreased primarily due to lower advertising spend and an increase in vendor marketing contributions eligible to be applied as a reduction to advertising costs during the three months endedJune 30, 2022 as compared to the same period in 2021, partially offset by the acquisition ofBrandsMart U.S.A. , which resulted in an increase in advertising costs of$1.4 million during the second quarter.
Intangible amortization increased primarily due to the amortization of
intangible assets acquired in the
Bank and credit card related fees increased primarily due to the acquisition ofBrandsMart U.S.A. , which resulted in bank and credit card related fees of$2.9 million in the BrandsMart segment during the three months endedJune 30, 2022 . Gains on dispositions of store-related assets, net increased primarily due to a$1.9 million gain related to a sale and leaseback transaction of two Company-owned Aaron's store properties during the three months endedJune 30, 2022 . 38 -------------------------------------------------------------------------------- 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 increases in this category during the three months endedJune 30, 2022 were primarily driven by the acquisition ofBrandsMart U.S.A. , which resulted in other miscellaneous expenses of$2.2 million as well as 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 5.7% for the three months endedJune 30, 2022 compared to 2.9% for the comparable period in 2021. During the second quarter of 2022, inflationary pressures within the broader macroeconomic environment began to more significantly impact the liquidity of our customers, which resulted in lower lease renewal rates, higher write-offs of lease merchandise and an elevated provision for lease merchandise write-offs compared to the second quarter of 2021. Restructuring Expenses, Net. Restructuring activity for the three months endedJune 30, 2022 resulted in expenses of$5.6 million , which were primarily comprised of$4.4 million of operating lease right-of-use asset and fixed asset impairment for Company-operated stores identified for closure as well as an administrative building inKennesaw, Georgia and$0.9 million of continuing variable occupancy costs incurred related to previously closed stores. Restructuring expenses for the three months endedJune 30, 2021 were$1.8 million and were primarily comprised of$0.5 million of operating lease right-of-use asset and fixed asset impairment for Company-operated stores identified for closure during 2021 and$1.7 million of common area maintenance and other variable charges and taxes incurred related to closed stores. Separation costs. Separation costs for the three months endedJune 30, 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 consulting, banking and legal expenses associated with the
acquisition of
Operating (Losses) Profit
Interest Expense. Interest Expense increased to$2.5 million for three months endedJune 30, 2022 from$0.5 million for the three months endedJune 30, 2021 . Interest expense for the three months endedJune 30, 2022 consists primarily of interest on the Company's variable rate borrowings under the Credit Facility and commitment fees on unused balances, as well as the amortization of debt issuance costs. Interest expense for the three months endedJune 30, 2021 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$1.6 million and net gains of$0.7 million during the three months endedJune 30, 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 endedJune 30, 2022 or 2021.
Income Tax (Benefit) Expense
The Company recorded a net income tax benefit of$8.1 million during the three months endedJune 30, 2022 compared to income tax expense of$11.4 million for the same period in 2021. The net income tax benefit recognized in 2022 was primarily the result of losses before income taxes of$13.5 million during the three months endedJune 30, 2022 , as well as the impact of a deferred income tax benefit of$4.8 million generated by the remeasurement of state deferred tax assets and liabilities in connection with theBrandsMart U.S.A. acquisition during the three months endedJune 30, 2022 . The effective tax rate increased to 60.4% in 2022 from 25.6% in 2021 primarily due to the impact of the deferred income tax benefit on our book loss during the three months endedJune 30, 2022 . 39 --------------------------------------------------------------------------------
Segment Performance - Three months ended
Aaron's Business Segment Results
Revenues. The following table presents revenue by source for the Aaron's
Business segment for the three months ended
Three Months Ended
June 30, Change
(In Thousands) 2022 2021 $ %
Lease Revenues and Fees $ 386,513 $ 411,621 $
(25,108) (6.1) %
Retail Sales 10,709 16,877 (6,168) (36.5)
Non-Retail Sales 27,042 32,455 (5,413) (16.7)
Franchise Royalties and Fees 5,792 6,253 (461) (7.4)
Other 189 289 (100) (34.6)
Total Revenues - Aaron's Business
The decreases in lease revenues and fees and retail sales during the three months endedJune 30, 2022 were primarily due to a 6.7% decrease in same store revenues, inclusive of both in-store and e-commerce originated lease revenues and fees and retail sales, which represented$23.4 million of the decrease. The decrease in same store revenues was driven primarily by a lower lease renewal rate, lower exercise of early purchase options, and lower retail sales, partially offset by a larger lease portfolio size during the quarter. The same store lease portfolio size ended the first quarter of 2022 at$106.3 million , up 2.9% compared to the end of the first quarter of 2021, and ended the second quarter of 2022 at$105.8 million , down 1.0% compared to the second quarter of 2021. E-commerce revenues increased 4.0% compared to the prior year quarter, primarily driven by a larger lease portfolio size offset by lower lease renewal rates, and were 15.4% and 13.9% of total lease revenues and fees during the three months endedJune 30, 2022 and 2021, respectively. The decrease in non-retail sales is primarily due to comparatively lower product demand from Aaron's franchisees than in the second quarter of 2021. Non-retail sales also decreased by$1.2 million due to the reduction of 13 franchised Aaron's stores during the 15-month period endedJune 30, 2022 .
The decrease in franchise royalties and fees is primarily the result of the
reduction of 13 franchised Aaron's stores during the 15-month period ended
Gross Profit and Earnings Before Income Taxes.
Three Months Ended
June 30, Change
(In Thousands) 2022 2021 $ %
Gross Profit $ 270,611 $ 294,680 $ (24,069) (8.2) %
Earnings Before Income Taxes 29,520 61,665 (32,145) (52.1)
As a percentage of total revenues, gross profit for the Aaron's Business
declined to 62.9% during the three months ended June 30, 2022 compared to 63.0%
for the comparable period in 2021. The factors impacting the change in gross
profit are discussed below.
Gross profit for lease revenues and fees for the Aaron's Business was $258.7
million and $279.3 million during the three months ended June 30, 2022 and 2021,
respectively, which represented a gross profit margin of 66.9% and 67.9% for the
respective periods. The decline in gross profit percentage is primarily driven
by a $15.8 million decrease due to a lower lease renewal rate and a $7.2 million
decrease due to lower exercise of early purchase options.
Gross profit for retail sales for the Aaron's Business was $3.1 million and $6.0
million during the three months ended June 30, 2022 and 2021, respectively,
which represented a gross profit margin of 28.8% and 35.5% for the respective
periods. The decline in gross profit percentage is primarily due to a
normalization of product mix and availability in the second quarter of 2022 as
compared to the second quarter of 2021, as well as higher inventory purchase
costs in 2022 as compared to 2021.
Gross profit for non-retail sales for the Aaron's Business was
40
--------------------------------------------------------------------------------
Earnings before income taxes for the Aaron's Business segment decreased by $32.1
million during the three months ended June 30, 2022 primarily due to the $24.1
million decrease in gross profit and higher provision for lease merchandise
write-offs, partially offset by lower personnel costs, as described above.
BrandsMart Segment Results
Three Months Ended
June 30, Change
(In Thousands) 2022 2021 $ %
Retail Sales $ 181,442 $ - $ 181,442 nmf
Gross Profit 22,875 - 22,875 nmf
(Losses) Earnings Before Income Taxes (15,919) - (15,919) nmf
nmf-Calculation is not meaningful
Revenues. BrandsMart segment revenues, entirely comprised of retail sales, have been included in the Company's consolidated results from theApril 1, 2022 acquisition date and were$181.4 million during the three months endedJune 30, 2022 . Gross Profit. Gross profit for the BrandsMart segment has been included in the Company's consolidated results from theApril 1, 2022 acquisition date and was$22.9 million during the three months endedJune 30, 2022 . As a percentage of revenues, gross profit for the BrandsMart segment was 12.6% during the three months endedJune 30, 2022 . Gross profit for the BrandsMart segment during the three months endedJune 30, 2022 includes a one-time$23.0 million non-cash charge for a fair value adjustment to the acquired merchandise inventories. (Losses) Earnings before Income Taxes. The BrandsMart segment reported a loss before income taxes of$15.9 million during the three months endedJune 30, 2022 . The second quarter results for the BrandsMart segment reflect a one-time$23.0 million non-cash charge for a fair value adjustment to the acquired merchandise inventories. 41 --------------------------------------------------------------------------------
Consolidated Results of Operations - Six months ended
The results of BrandsMart, which is presented as a separate reportable segment, have been included in the Company's consolidated results from theApril 1, 2022 acquisition date. Six Months Ended June 30, Change (In Thousands) 2022 2021 $ % REVENUES Lease Revenues and Fees$ 795,831
$ 839,262 $ (43,431) (5.2) % Retail Sales 203,455 33,323 170,132 nmf Non-Retail Sales 54,869 62,404 (7,535) (12.1) Franchise Royalties and Other Revenues 12,311 13,560 (1,249) (9.2) 1,066,466 948,549 117,917 12.4 COSTS OF REVENUES Depreciation of Lease Merchandise and Other Lease Revenue Costs 264,436 273,296 (8,860) (3.2) Retail Cost of Sales 174,343 21,405 152,938 nmf Non-Retail Cost of Sales 49,593 56,100 (6,507) (11.6) 488,372 350,801 137,571 39.2 GROSS PROFIT 578,094 597,748 (19,654) (3.3) Gross Profit % 54.2% 63.0% OPERATING EXPENSES Personnel Costs 251,367 246,289 5,078 2.1 Other Operating Expenses, Net 240,746 222,412 18,334 8.2 Provision for Lease Merchandise Write-Offs 44,070 25,534 18,536 72.6 Restructuring Expenses, Net 8,917 5,235 3,682 70.3 Separation Costs 770 5,636 (4,866) (86.3) Acquisition-Related Costs 11,497 - 11,497 nmf 557,367 505,106 52,261 10.3 OPERATING PROFIT 20,727 92,642 (71,915) (77.6) Interest Expense (2,813) (795) (2,018) (253.8) Other Non-Operating (Expense) Income, Net (2,483) 1,146 (3,629) (316.7) EARNINGS BEFORE INCOME TAXES 15,431 92,993 (77,562) (83.4) INCOME TAX (BENEFIT) EXPENSE (759) 23,695 (24,454) (103.2) NET EARNINGS$ 16,190 $ 69,298 $ (53,108) (76.6)
nmf-Calculation is not meaningful
42
--------------------------------------------------------------------------------
Revenues. Total consolidated revenues were $1.07 billion during the six months
ended June 30, 2022 , a $117.9 million increase compared to the prior year
period. This increase was primarily driven by the acquisition of BrandsMart
U.S.A. on April 1, 2022 , which reported revenues of $181.4 million in the
BrandsMart segment during the six months ended June 30, 2022 . This increase was
partially offset by a $62.2 million decrease in revenues in the Aaron's Business
segment during the six months ended June 30, 2022 , as discussed further in the
"Segment Performance" section below.
Gross Profit. Consolidated gross profit for the Company was $578.1 million
during the six months ended June 30, 2022 , a $19.7 million decrease compared to
the prior year period. This decrease was primarily driven by a $42.2 million
decrease in gross profit at the Aaron's Business segment, as discussed further
in the "Segment Performance" section below, partially offset by the acquisition
of BrandsMart U.S.A. on April 1, 2022 , which resulted in gross profit of
$22.9 million in the BrandsMart segment during the six months ended June 30,
2022 . Gross profit for the BrandsMart segment during the six months ended June
30, 2022 includes a one-time $23.0 million non-cash charge for a fair value
adjustment to the acquired merchandise inventories. As a percentage of total
revenues, gross profit declined to 54.2% during the six months ended June 30,
2022 compared to 63.0% for the comparable period in 2021 primarily due to the
non-cash charge described above as well as the increasing proportion of
BrandsMart retail sales as a percentage of overall consolidated revenues.
Operating Expenses
Personnel Costs. Personnel costs increased by$5.1 million during the six months endedJune 30, 2022 due primarily to the acquisition ofBrandsMart U.S.A. , which resulted in personnel costs of$19.1 million in the BrandsMart segment during the second quarter of 2022, partially offset by lower performance-based incentive compensation in the Aaron's Business segment and the Unallocated Corporate category. Other Operating Expenses, Net. Information about certain significant components of other operating expenses, net for the consolidated Company is as follows: Six Months Ended June 30, Change (In Thousands) 2022 2021 $ % Occupancy Costs$ 102,485 $ 85,625 $ 16,860 19.7 Shipping and Handling 35,970 28,619 7,351 25.7 Advertising Costs 23,345 36,382 (13,037) (35.8) Intangible Amortization 3,642 3,283 359 10.9 Professional Services 8,844 7,368 1,476 20.0 Bank and Credit Card Related Fees 14,097 10,669 3,428 32.1 Gains on Dispositions of Store-Related Assets, net (7,167) (2,118) (5,049) 238.4 Other Miscellaneous Expenses, net 59,530 52,584 6,946 13.2 Other Operating Expenses, net$ 240,746 $ 222,412 $ 18,334 8.2 % As a percentage of total revenues, other operating expenses, net decreased to 22.6% for the six months endedJune 30, 2022 from 23.4% in the same period in 2021. Occupancy costs increased primarily due to the acquisition ofBrandsMart U.S.A. , which resulted in occupancy costs of$10.4 million during the six months endedJune 30, 2022 as well as higher rent, maintenance and utility costs at Aaron's stores and higher depreciation of leasehold improvements associated with newer Company-operated Aaron's store locations under our repositioning and optimization initiatives. These increases were partially offset by lower occupancy costs due to the planned net reduction of 38 Company-operated Aaron's stores during the 24-month period endedJune 30, 2022 . Shipping and handling costs increased during the six months endedJune 30, 2022 primarily due to higher fuel and distribution costs driven by inflationary pressures as well as the acquisition ofBrandsMart U.S.A. , which resulted in additional shipping and handling costs of$0.2 million during the six months endedJune 30, 2022 , partially offset by a 13.9% decrease in product deliveries during the six months endedJune 30, 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 six months endedJune 30, 2022 as compared to the same period in 2021, partially offset by the acquisition ofBrandsMart U.S.A. , which resulted in advertising costs of$1.4 million during the second quarter of 2022.
Intangible amortization increased primarily due to the amortization of
intangible assets acquired in the
43
--------------------------------------------------------------------------------
Bank and credit card related fees increased primarily due to the acquisition of
BrandsMart U.S.A. , which resulted in bank and credit card related fees of $2.9
million in the BrandsMart segment during the six months ended June 30, 2022 .
Gains on dispositions of store-related assets, net increased primarily due to
gains of $5.7 million recognized during the six months ended June 30, 2022
related to sale and leaseback transactions for five Company-owned Aaron's store
properties.
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 increases in this category
during the six months ended June 30, 2022 were primarily driven by the
acquisition of BrandsMart U.S.A. , which resulted in other miscellaneous expenses
of $2.2 million as well as 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 5.5% for the
six months ended June 30, 2022 compared to 3.0% for the comparable period in
2021. During the second quarter of 2022, inflationary pressures within the
broader macroeconomic environment began to more significantly impact the
liquidity of our customers, which resulted in an elevated provision for lease
merchandise write-offs compared to the second quarter of 2021.
Restructuring Expenses, Net. Restructuring activity for the six months ended
June 30, 2022 resulted in expenses of $8.9 million , which were primarily
comprised of $5.8 million of operating lease right-of-use asset and fixed asset
impairment for Company-operated Aaron's stores identified for closure as well as
an administrative building in Kennesaw, Georgia and $2.4 million of continuing
variable occupancy costs incurred related to previously closed stores.
Restructuring expenses for the six months ended June 30, 2021 were $5.2 million
and were primarily comprised of $2.7 million of operating lease right-of-use
asset and fixed asset impairment for Company-operated stores identified for
closure during 2021 and $2.8 million of common area maintenance and other
variable charges and taxes incurred related to closed stores.
Separation Costs. Separation costs for the six months ended June 30, 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 consulting, banking and legal expenses associated with the
acquisition of
Operating Profit
Interest Expense. Interest Expense increased to$2.8 million for the six months endedJune 30, 2022 from$0.8 million for the six months endedJune 30, 2021 . Interest expense for the six months endedJune 30, 2022 consists primarily of interest on the Company's variable rate borrowings under the Credit Facility and commitment fees on unused balances, as well as the amortization of debt issuance costs. Interest expense for the six months endedJune 30, 2021 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$2.5 million and net gains of$1.1 million for the six months endedJune 30, 2022 and 2021, respectively. Foreign currency remeasurement net 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 six months endedJune 30, 2022 or 2021.
Income Tax (Benefit) Expense
The Company recorded a net income tax benefit of$0.8 million during the six months endedJune 30, 2022 compared to income tax expense of$23.7 million for the same period in 2021. The effective tax rate decreased to (4.9)% for the six months endedJune 30, 2022 compared to 25.5% for the same period in 2021. The net income tax benefit recognized in 2022 and resulting effective tax rate was primarily due to a deferred income tax benefit of$4.8 million generated by the remeasurement of state deferred tax assets and liabilities in connection with theBrandsMart U.S.A. acquisition that exceeded the income tax expense recognized on our book income during the six months endedJune 30, 2022 . 44 --------------------------------------------------------------------------------
Segment Performance - Six months ended
Aaron's Business Segment Results
Revenues. The following table presents revenue by source for the Aaron's
Business segment for the six months ended
Six Months Ended
June 30, Change
(In Thousands) 2022 2021 $ %
Lease Revenues and Fees $ 795,831 $ 839,262 $
(43,431) (5.2) %
Retail Sales 23,316 33,323 (10,007) (30.0)
Non-Retail Sales 54,869 62,404 (7,535) (12.1)
Franchise Royalties and Fees 11,910 12,962 (1,052) (8.1)
Other 401 598 (197) (32.9)
Total Revenues - Aaron's Business
The decreases in lease revenues and fees and retail sales during the six months endedJune 30, 2022 were primarily due to a 5.5% decrease in same store revenues, inclusive of both in-store and e-commerce originated lease revenues and fees and retail sales, which represented$37.7 million of the decrease. The decrease in same store revenues was driven primarily by a lower lease renewal rate, lower exercise of early purchase options, and lower retail sales, partially offset by a larger lease portfolio size during the six months endedJune 30, 2022 . E-commerce revenues increased 4.0% compared to the prior year period and were 15.4% and 14.1% of total lease revenues and fees during the six months endedJune 30, 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 first half of 2021. Non-retail sales also decreased by$2.2 million due to the reduction of 82 franchised stores during the 24-month period endedJune 30, 2022 .
The decrease in franchise royalties and fees is primarily the result of the
reduction of 82 franchised stores during the 24-month period ended
Gross Profit and Earnings Before Income Taxes.
Six Months Ended
June 30, Change
(In Thousands) 2022 2021 $ %
Gross Profit $ 555,558 $ 597,748 $ (42,190) (7.1) %
Earnings Before Income Taxes 81,681 132,918 (51,237) (38.5)
As a percentage of total revenues, gross profit for the Aaron's Business
declined to 62.7% during the six months ended June 30, 2022 compared to 63.0%
for the comparable period in 2021. The factors impacting the change in gross
profit are discussed above.
Gross profit for lease revenues and fees for the Aaron's Business was $531.4
million and $566.0 million during the six months ended June 30, 2022 and 2021,
respectively, which represented a gross profit margin of 66.8% and 67.4% for the
respective periods. The decline in gross profit percentage is primarily driven
by a $27.8 million decrease due to a lower lease renewal rate and a $15.0
million decrease due to lower exercise of early purchase options.
Gross profit for retail sales for the Aaron's Business was $6.6 million and
$11.9 million during the six months ended June 30, 2022 and 2021, respectively,
which represented a gross profit margin of 28.2% and 35.8% for the respective
periods. The decline in gross profit percentage is primarily due to a
normalization of product mix and availability in the first half of 2022 as
compared to the first half of 2021, as well as higher inventory purchase costs
in 2022 as compared to 2021.
Gross profit for non-retail sales for the Aaron's Business was $5.3 million and
$6.3 million during the six months ended June 30, 2022 and 2021, respectively,
which represented a gross profit percentage of 9.6% and 10.1% 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.
Earnings before income taxes for the Aaron's Business segment decreased by $51.2
million during the six months ended June 30, 2022 primarily due to the $42.2
million decrease in gross profit and higher provision for lease merchandise
write-offs, partially offset by lower personnel costs, as described above.
45
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BrandsMart Segment Results
Six Months Ended
June 30, Change
(In Thousands) 2022 2021 $ %
Retail Sales $ 181,442 $ - $ 181,442 nmf
Gross Profit 22,875 - 22,875 nmf
(Losses) Earnings Before Income Taxes (15,919) - (15,919) nmf
nmf-Calculation is not meaningful
Revenues. BrandsMart segment revenues, entirely comprised of retail sales, have been included in the Company's consolidated results from theApril 1, 2022 acquisition date and were$181.4 million during the six months endedJune 30, 2022 . Gross Profit. Gross profit for retail sales for the BrandsMart segment has been included in the Company's consolidated results from theApril 1, 2022 acquisition date and was$22.9 million during the six months endedJune 30, 2022 . As a percentage of revenues, gross profit for the BrandsMart segment was 12.6% during the six months endedJune 30, 2022 . Gross profit for the BrandsMart segment during the six months endedJune 30, 2022 includes a one-time$23.0 million non-cash charge for a fair value adjustment to the acquired merchandise inventories. (Losses) Earnings before Income Taxes. The BrandsMart segment reported a loss before income taxes of$15.9 million during the three months endedJune 30, 2022 . The second quarter results for the BrandsMart segment reflect a one-time$23.0 million non-cash charge for a fair value adjustment to the acquired merchandise inventories.
Overview of Financial Position
The Company's condensed consolidated balance sheet as ofJune 30, 2022 includes the impact of BrandsMart, which was acquired onApril 1, 2022 . The major changes in the condensed consolidated balance sheet fromDecember 31, 2021 toJune 30, 2022 , most of which are the result of theBrandsMart U.S.A. acquisition, include: •Cash and cash equivalents increased$5.4 million to$28.2 million atJune 30, 2022 . For additional information, refer to the "Liquidity and Capital Resources" section below. •Operating lease right-of-use assets and operating lease liabilities increased$181.7 million and$186.3 million , respectively, primarily due to the addition of BrandsMart's operating leases as well as additional real estate lease agreements and amendments executed for Company-operated Aaron's stores during the six months endedJune 30, 2022 . The increase in the Company's operating lease right-of-use assets was partially offset by regularly scheduled amortization of right-of-use assets and impairment charges recorded in connection with restructuring actions. •Goodwill increased$62.1 million due primarily to the addition of estimated BrandsMart-related goodwill of$62.3 million . Refer to Note 2 to these condensed consolidated financial statements for further details regarding the preliminary acquisition accounting. •Other intangibles increased$105.2 million due primarily to recording the estimated fair value of identifiable BrandsMart-related intangible assets of$109.0 million . Refer to Note 2 to these condensed consolidated financial statements for further details regarding the preliminary acquisition accounting. •Debt increased$300.3 million primarily due to the Company's borrowings under the Credit Facility that occurred duringApril 2022 to finance the purchase price for theBrandsMart U.S.A. acquisition, other customary acquisition and financing-related closing costs and adjustments. Refer to the "Liquidity and Capital Resources" section below for further details regarding the Company's financing arrangements.
•Treasury shares increased
46
--------------------------------------------------------------------------------Liquidity and Capital Resources
General
Our primary uses of capital have 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. 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. As ofJune 30, 2022 , the Company had$28.2 million of cash and$245.2 million of availability under its$550.0 million unsecured credit facility (the "Credit Facility") which is further described in Note 4 to the condensed consolidated financial statements.
Cash Provided by Operating Activities
Cash provided by operating activities was$57.1 million and$60.2 million during the six months endedJune 30, 2022 and 2021, respectively. The decrease in operating cash flows was primarily driven by a lower lease renewal rate during the six months endedJune 30, 2022 as inflationary pressures within the broader macroeconomic environment began to impact the liquidity of our customers, partially offset by lower lease merchandise purchases and the inclusion of BrandsMart operating results subsequent to theApril 1, 2022 acquisition date. Other changes in cash provided by operating activities are discussed above in our discussion of results for the six months endedJune 30, 2022 .
Cash Used in Investing Activities
Cash used in investing activities was$314.2 million and$37.2 million during the six months endedJune 30, 2022 and 2021, respectively. The$277.0 million increase in investing cash outflows was primarily due to the purchase consideration of$266.8 million related to theBrandsMart U.S.A. acquisition and$11.9 million higher cash outflows for purchases of property, plant and equipment, partially offset by$1.9 million higher proceeds from the sale of property, plant and equipment during the six months endedJune 30, 2022 compared to the prior year period.
Cash Provided by (Used in) Financing Activities
Cash provided by financing activities was$262.6 million during the six months endedJune 30, 2022 compared to cash used in financing activities of$51.1 million during the six months endedJune 30, 2021 . The$313.7 million change in financing cash flows during the six months endedJune 30, 2022 was primarily due to (i) the Company's borrowings under the Term Loan and the Revolving Facility that occurred duringApril 2022 to finance theBrandsMart U.S.A. acquisition; (ii) net borrowings of$8.1 million under the Company's inventory financing agreement; and$31.6 million lower outflows related to the repurchase of the Company's common stock during the six months endedJune 30, 2022 compared to the prior year period. Share Repurchases During the six months endedJune 30, 2022 , the Company repurchased 516,140 shares of the Company's common stock for a total purchase price of approximately$11.1 million . The total shares outstanding as ofJune 30, 2022 were 30,777,065, compared to 33,093,668 as ofJune 30, 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 Company's remaining share repurchase authorization was$135.8 million as ofJune 30, 2022 .
Dividends
InMay 2022 , the Board approved a quarterly dividend of$0.1125 per share, which was paid to shareholders onJuly 5, 2022 . Aggregate dividend payments for the six months endedJune 30, 2022 were$6.6 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 falls 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 ofJune 30, 2022 , the total available credit under our$550.0 million Credit Facility (defined below) was$245.2 million , which reflects borrowings of$175.0 million under the Term Loan,$112.5 million of outstanding borrowings under the Revolving Facility and approximately$17.3 million for our outstanding letters of credit. 47 -------------------------------------------------------------------------------- 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 to 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 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 atJune 30, 2022 .
Commitments
Income Taxes
During the six months endedJune 30, 2022 , we made net income tax payments of$4.3 million . Within the next six months, we anticipate making estimated cash payments of$2.0 million for state income taxes and$0.3 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 Guaranty
We have guaranteed the borrowings of certain independent franchisees under a franchise loan agreement (the "Franchise Loan Facility") with a bank that is a party to our Revolving Facility. As further described in Note 4 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. AtJune 30, 2022 , the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was$7.0 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 insignificant. However, such losses could be significant in a future period due to potential adverse trends in the liquidity and/or financial performance of Aaron'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 48 --------------------------------------------------------------------------------
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Inventory Financing Agreement
The Company maintains an inventory financing agreement for its BrandsMart segment with a lender that provides financing up to$65.0 million for the BrandsMart segment to purchase merchandise inventories from certain vendors as defined in the agreement. Amounts borrowed by the Company under the inventory loan are to be repaid based on the payment terms (pay-as-sold or scheduled payment program) as defined in the agreement, with all borrowings due within 50 days. The inventory loan is collateralized by all personal property of the BrandsMart segment, including merchandise inventories, equipment and other goods. Interest is due monthly on the outstanding principal based on the higher of prime-rate, 1 month LIBOR or 3-month LIBOR, commencing typically and only after 30 days of the borrowing or the free floor period as defined in the agreement. The inventory financing agreement is terminable with 30 days prior written notice from one party to the other. The inventory loan contains certain affirmative and negative covenants, which, among other things, restricts encumbrances of certain corporate assets and obtaining additional debt. As ofJune 30, 2022 ,$23.7 million was outstanding on the inventory loan.
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.
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 that were adopted in the current year.
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