Aaron's Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

Key Takeaways

  • The company generated $53 million in cash flow from operations in Q2 and reduced net debt by over $30 million, cutting net debt nearly in half over the past year.
  • In the Aaron’s segment, a larger-than-expected lease portfolio, ongoing cost reductions and lease decisioning enhancements drove strong bottom-line performance despite a 10% decline in leased merchandise deliveries.
  • Strategic initiatives at Aaron’s include 230 “Gen Next” stores (29% of lease revenues) and 101 hub-and-showroom conversions, both of which are outperforming legacy store averages.
  • BrandsMart comparable sales fell 20.9% in Q2 amid weaker traffic and trade-down, but gross margin improved by 50 basis points via procurement savings and pricing actions, and the first new store is set to open in Q4.
  • Management lowered full-year revenue guidance to $2.12–$2.22 billion but maintained adjusted EBITDA and non-GAAP EPS targets, while raising the adjusted free cash flow outlook and expecting stronger results in Q4.
AI Generated. May Contain Errors.
Earnings Conference Call
Aaron's Q2 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Ladies and gentlemen, welcome to the Aaron's Company Incorporation Second Quarter 2023 Earnings Conference Call. My name is Glenn, and I'll be the operator of today's call. I will now hand you over to your host, Mark Levy, VP, Finance and Investor Relations to begin. Mark, please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to our Q2 2023 earnings conference call. Joining me today are Aaron's Chief Executive Officer, Douglas Lindsey President, Steve Olson and Chief Financial Officer, Kelly Wall. After our prepared remarks, we will open the call for questions. Yesterday, after the market closed, we posted our earnings release on the Investor Relations section of our website at investor.

Speaker 1

Aarons.com. We also posted a slide presentation that provides additional information about our Q2 results and full year 2023 outlook. During today's call, certain statements we make may be forward looking, including those related to our outlook for this year. For more information, including important cautionary notes about these forward looking statements, please refer to the Safe Harbor provision that can be found at the end of the earnings release. The Safe Harbor provision identifies risks that may cause actual results to differ materially from the content of our forward looking statements.

Speaker 1

Also, please see our Form 10 ks for the year ended December 31, 2022, and other filings with the SEC for a description of the risks related to our business that may cause actual results to differ materially from our forward looking statements. On today's call, in the release and in the supplemental investor presentation, we refer to certain non GAAP financial measures, including EBITDA and adjusted EBITDA, Non GAAP net earnings, non GAAP EPS, adjusted free cash flow and net debt, which have been adjusted for certain items, which may affect the comparability of our performance with other companies. These non GAAP measures are detailed in the reconciliation tables included in our earnings release and the supplemental investor presentation posted on our website. With that, I will now turn the call over

Speaker 2

to our CEO, Douglas Lindsay. Thanks, Mark. Good morning, everyone. Thank you for joining us today and for your interest in The Aaron's Company. I'm pleased to report that we delivered consolidated company earnings We also benefited from a healthier lease portfolio, resulting from optimization of our lease decisioning model in prior quarters.

Speaker 2

Recurring revenue nature of our Aaron's business and its strong cash flow dynamics continue to be an advantage. During the quarter, we generated $53,000,000 in cash flow from operations and improved the strength of our balance sheet By reducing net debt by over $30,000,000 Over the last four quarters, we've cut our net debt nearly in half, while continuing to invest in our strategic growth initiatives. Now turning to the business segments. In the Aaron's business, I'm pleased to report that we ended the quarter with a larger than expected lease portfolio size. We've also made great progress on our market optimization initiatives by adding more Gen Next and Hub and Cheren stores.

Speaker 2

We are executing well on the cost reduction initiatives that we previously announced.

Speaker 3

And our lease decisioning enhancements continue to

Speaker 2

improve portfolio performance. Continue to improve portfolio performance. These items contributed significantly to our strong bottom line performance in the 2nd quarter, offsetting continued challenging customer demand trends. As we look to the back half of the year, We expect these demand trends to persist, but we expect to see sequential improvements as we begin to lap our lease decisioning cuts Made in the back half of last year. Now turning to BrandsMart.

Speaker 2

Macroeconomic factors continue to impact our customers' retail purchasing decisions at BrandsMart to a greater extent than in the Aaron's business. Meanwhile, we are focused on managing profitability Through enhanced cost controls and strategic procurement and pricing actions. We recently celebrated our 1 year anniversary The BrandSmart acquisition. We remain confident in BrandSmart's compelling value proposition and our long term strategic growth opportunities, including expanding into new markets and growing our e commerce channel. As we discussed, The customer demand environment remains challenging in both business segments.

Speaker 2

This is reflected in the updated outlook we provided yesterday in our earnings release. We lowered our consolidated revenues for the year, but maintained our adjusted EBITDA and non GAAP EPS outlook. We have also increased our adjusted free cash flow outlook for the year. As we look ahead, We remain focused on optimizing profitability in both businesses, and we continue to make progress on the execution of our multiyear strategic plan. We are confident that the investments we are making will continue to enhance our distinct competitive advantages And allows us to increase market share at both Aaron's and BrandsMart.

Speaker 2

Before I turn the call over to Steve, want to let you know that we've posted new videos on our investor website that showcase both our Aaron's Gen Next and BrandsMart stores. I encourage you to watch these videos. Our stores have a unique retail format, a broad product assortment And an enhanced in store shopping experience. We believe our Aaron's and BrandsMart stores provide the most compelling customer value proposition

Speaker 1

and the markets we serve.

Speaker 2

Now I'll turn the call over to Steve.

Speaker 1

Thanks, Douglas, and good morning, everyone. The Aaron's business delivered 2nd quarter earnings ahead of our internal expectations. As Douglas mentioned, we executed well on our cost reduction initiatives, This more than offset continued challenges in customer demand. Leased merchandise deliveries were down approximately 10% year over year. This was largely due to fewer lease applications in the quarter, actions we took to tighten lease decision in prior quarters And approximately 4% fewer company operated stores as compared to the beginning of the prior year quarter.

Speaker 1

Our lease portfolio size ended the quarter with a value of $119,600,000 This was 8.6% lower than the prior year quarter, but larger than we expected. Now moving to our key lease renewal metrics. The lease renewal rate for the quarter was 88.2% for our company operated Aaron Stores. This rate was down 30 basis points year over year, but in line with pre pandemic averages for the Q2. Our 32 plus day non renewal rate was 2.5% at the end of

Speaker 3

the 2nd quarter.

Speaker 1

This rate increased 10 basis points year over year and reflects a sequential increase of 90 basis points from Q1 of this year, primarily due to normal seasonal trends. We continue to be pleased with improvement in our write offs. The provision for lease merchandise write offs As a percentage of lease revenues, it was 5.4% for the 2nd quarter. This reflects a 30 basis point improvement year over year. Now let's talk about our important strategic growth initiatives for Yaron's business.

Speaker 1

Our Gen Next Door strategy Continue to deliver meaningful financial performance through the transformation of our in store customer experience and operating model. In the first half of the year, we opened 19 Gen X stores, bringing our total to 230 company operated Gen X stores. At the end of the quarter, these stores accounted for approximately 29% of lease revenues in retail sales. That compares to just over 17% in the prior year quarter. These originations in Gennect stores, open less than 1 year, Continue to grow at a rate of more than 20 percentage points higher than our legacy store average.

Speaker 1

Our Gen X stores have stronger revenue performance than our traditional stores, and we look forward to opening new Gen X stores in the future. In addition, we continue to execute our new hub and showroom program. So far this year, we have converted 72 showrooms, bringing the total number of converted locations to 101 since we launched the program last year. Now turning to the Aaron's e commerce channel. We continue to focus on improving our digital marketing strategies, enhancing the online shopping experience and expanding the assortment with over 10,000 products on annals.com.

Speaker 1

In the quarter, revenues generated from leases initiated on aarons.com increased 5.5% year over year And now represent 17.9 percent of total leads revenues as compared to 15.4% in the prior year quarter. We are also pleased that we experienced a year over year increase in both the volume of lease applications completed on arris.com and the conversion of these applications. However, recurring revenue written into the portfolio from e commerce decreased 10.7% compared to the prior year quarter. This decrease was the result of tighter lease decisioning in prior quarters and lower average ticket. During the quarter, we also launched a weekly payment option on aarons.com.

Speaker 1

As a reminder, we rolled out weekly payments in stores in Q3 of last year. We are pleased that we can now offer our customers the flexibility to choose a low weekly payment option wherever they prefer to shop. Now turning to BrandsMart. As Douglas mentioned, we recently celebrated our 1 year anniversary of operating the BrandsMart business. I'm proud of our team as we work to achieve our synergies and implement our strategic initiatives to drive future growth.

Speaker 1

Starting this quarter, we will be reporting a comparable sales metric, which reflects sales in stores opened for the last 15 months. Please see our 10 Q for a more detailed definition. Comparable sales for the Q2 were down 20.9% as compared to the prior year quarter. This is a result of ongoing weaker customer traffic and customer trade down to lower priced products across our major categories. Throughout the quarter, comparable sales improved, especially during Q promotional periods of Memorial Day in July 4.

Speaker 1

As we seek to attract new BrandsMart customers, we continue to invest in our e commerce channel and digital marketing strategies. Consistent with overall sales performance, we experienced pressure in the e commerce channel. E commerce product sales represented 8.1% of total product sales, down to 9.0% in the prior year quarter. Despite the demand challenges, we remain focused on optimizing the profitability of the business. For the Q2, our product gross margin improved by approximately 50 basis points as compared to the prior year quarter.

Speaker 1

This was a result of direct procurement savings and strategic pricing actions. Finally, I'm excited to report that we are on track to open our 1st new BrandsMart store in Augusta, Georgia in Q4. We are confident that our brand and customer value proposition will resonate in this new market. Now, I'll turn the call over to Kelly to provide further details on our financial performance. Thanks, Steve.

Speaker 1

We filed our Form 10 Q Earnings release and investor presentation yesterday after the market closed, and these documents can be found on our Investor Relations website. Please refer to these documents for additional detail regarding our financial performance and outlook for the consolidated company and the 2 business segments. Also, unless stated otherwise, any comparisons I make to prior periods will be on a year over year basis. Consolidated revenues for the Q2 of 2023 were $530,400,000 compared with $610,400,000 This year over year decrease is primarily due to lower lease revenues and fees And retail sales at the Aaron's business and lower retail sales at BrandsMart. Consolidated adjusted EBITDA was $42,400,000 Compared with $51,200,000 This year over year decrease is primarily due to the lower revenues at both business segments, partially offset by lower percent of cost and other operating costs.

Speaker 1

In addition, As Steve mentioned, write offs were lower at the Aaron's business. As a percentage of total revenues, adjusted EBITDA was 8% Compared to 8.4%. On a non GAAP basis, diluted earnings per share were $0.39 compared to $0.79 Despite the lower adjusted EBITDA in the quarter, we were very pleased with our adjusted free cash flow. It was $36,000,000 An increase of over $30,000,000 This increase was driven by higher cash provided by operations as we manage merchandise inventory levels at both businesses to reflect the current demand environment. Adjusted free cash flow also benefited from improvements to working capital efficiency And lower capital expenditures.

Speaker 1

During the quarter, we continued to return capital to shareholders, declaring $3,900,000 in dividends and purchasing 66,000 shares of the company's common stock. In addition, we ended the 2nd quarter with $38,400,000 of cash And $186,100,000 of debt. Our net debt balance at the end of the quarter was $147,700,000 A $30,200,000 reduction from the end of Q1 2023. Since the end of the Q2 of last year, We ended the quarter at less than one times. Turning to our updated outlook.

Speaker 1

In the 2nd quarter earnings release, We provided an update to our full year 2023 outlook. This updated outlook reflects our expectation The total revenues for the consolidated company will be between $2,120,000,000 $2,220,000,000 We have lowered revenues to reflect our consolidated results in the first half of twenty twenty two and to also reflect expected lower product sales at BrandsMart In the back half of the year as compared to our prior outlook. We have maintained our outlook for adjusted EBITDA and non GAAP EPS for the consolidated company. We've also maintained our adjusted EBITDA at both business segments as we continue to invest in our growth and cost efficiency initiatives. In addition, we currently expect that earnings in the second half of the year will be weighted more heavily in the 4th quarter.

Speaker 1

This is in part due to additional investments in marketing and other initiatives designed to further drive new lease origination activity in the Aaron's Business segment. And finally, we have increased our adjusted free cash flow outlook. This increase reflects our strong cash flow in the first half of the year And continued inventory and working capital efficiency improvements in the last two quarters of the year. And with that, I will now turn the call over to the operator for Q and A.

Operator

Thank If you change your mind, please press star followed by 2 to withdraw the questions. With our first question comes from Kyle Joseph from Jefferies. Kyle, your line is now open.

Speaker 4

Hey, good morning guys. Thanks for taking my questions. So I wanted to get a sense for So the consumer behavior during the quarter, I think last quarter you guys highlighted that there were fewer early buyouts and that benefited margins Despite that, you saw stable credit. Obviously, we saw stable credit continue this quarter. Can you give us A sense for what biotrans were and expectations for the rest of the year, you give us a sense where you think margins will go on the Aaron's business?

Speaker 2

Yes, I'll start. I mean demand I would say demand trends as you noted from our call have been challenging. We saw that in the Quarter, this down 10% at Aaron's and down 20% at BrandsMart. I think when you look within the Aaron's business, that 10% is really a real Like negative 5%, within that negative 10% is about half is real demand, half is decisioning in closed stores. And so what we're really encouraged about is the lease to own business is really holding up better than retail, I would say.

Speaker 2

And I think that's because of the Payment price points, which our customers are shopping, we're not seeing as much trade down in the lease to own business as we are in retail. And Steve can talk a little bit more about that. The customer continues to adjust to this inflationary environment. Early buyouts were lower in the Q1, And they continue to be slightly lower in the Q2. But as you know, the Q2 is not a huge early buyout quarter.

Speaker 2

I'd say generally in terms of the consumer, the consumer has remained resilient and I think is acclimating to this challenging economic environment. If you look at our renewal rate, the renewal rate was pretty strong relative to pre pandemic levels, coming out right where we would expect in Q2 for pre pandemic. And importantly, we really haven't seen any sign of a trade down yet. We are seeing a slightly higher quality customer coming into Aaron's, but we have not detected either through our BrandSmart waterfall or through our data at Aaron's So a significant trade down. We still continue to believe if that happens, it will benefit us.

Speaker 2

And last thing I would say, and I'll let Steve touch a little bit on BrandSmart is that we're really focused right now on getting our shop in order, rightsizing and innovating our cost structure. And we believe if we do that Going forward and the actions we've taken over the last 12 months, we've positioned ourselves really well, particularly with this direct to consumer high operating leverage business To enjoy the benefits of the rebound when that does occur. So challenging demand trends, pull forward to demand, Steve will talk about that a little bit, but we feel good about what we Can control and how we set up the business for the future.

Speaker 5

Great. Thanks, Douglas. And good morning, Kyle. Just quickly touch on BrandSmart. We believe that the retail customer, obviously, in these large ticket discretionary purchases, obviously, is more sensitive to macro trends.

Speaker 5

When you think about demand on the BrandSmart side, that negative 20%, it really can be broken down into About half that is related to just transactions, so transactions down approximately 10% and the other half is our average transaction value down about 50 Down about 10% as well. So what we're facing is not only a demand trend challenge truly on transactions, but just A step back in our average transaction value versus what we saw last year. Average transaction value is still well ahead of pre average is double digits well ahead of that. We're just facing a little bit step down, especially in appliances. In addition, I'd just say that we are really focused on profitability in the BrandsMart business and not chasing those unprofitable sales That sometimes happen especially in the consumer electronics category.

Speaker 5

So we still believe in the business and teams focused really hard to

Speaker 2

Yes. I mean, I'll just reiterate that we're super excited about the long term potential of BrandsMart. We are going through a cycle, and Steve and his team are doing a great job

Speaker 4

Got it. Very helpful. And then just a follow-up on BrandsMart. Can you give sense for what the 2 year stack of the comp looks like and then give us a sense for when you anticipate the Comp really easing, if I recall, Brandsport had a very strong 2Q 2022. Do those comps get a little bit easier in the back half of this year?

Speaker 6

Hey, Kyle. It's Kelly. I'll answer the first part of that. So as it relates to a 2 year comp, you may recall we've acquired the company just over a year ago. And so we've not provided detailed financials on The period prior to us owning them, so we don't have a 2 year stack comp to provide to you here.

Speaker 6

But what I would say as we think about going through Rest of this year, Steve, you want to speak to kind of the comps and what we'd expect to lap over as we go into Q3 and Q4?

Speaker 5

Sure. Yes. So as Douglas referenced and I referenced, we expect continued demand challenges in the back half of the year. With that said, we do believe we will see sequential improvement in comparable sales into Q3 into Q4 As we lap some numbers.

Speaker 4

Got it. Thanks a lot for answering my questions.

Operator

Thank you. Our next question comes from Vincent Catek from Stephens. Vincent, your line is now open.

Speaker 3

Good morning. Thank you for taking my question. Nice to see the additional counts of the hub and spoke model and the Gen X stores. I was just wondering from a productivity perspective, if you can talk about the benefits of that hub and spoke and Gen X model So when we think about, say, for example, EBITDA margins? Thank you.

Speaker 2

Yes. Thanks, Vincent. It's Douglas. So we opened 11 Gen X stores in the Q1 and 8 in the Q2. Our target is 50 for this year, and we're on track for that.

Speaker 2

And I believe we opened 72 showrooms, since the end of 2022, 59 of which were in this quarter. So We're right on track for 100 showrooms this year. The beauty of the hub and showroom model is all this innovation we've put in place over the last 5 years, building Larger, more relevant Gen X stores and then creating digital platforms for our customer to interact with us where they want to be served has allowed us to build this platform In which we can optimize the markets we serve, not and so we're serving the same markets, but we're doing it with a more efficient cost structure. I think at the time of spin, we articulated fewer larger stores and bigger e com. And I think what I'd add to that now is Potentially having further reach within the markets to these showrooms, showrooms are effectively just sales stores.

Speaker 2

They're typically staffed with Two people, they're smaller box. They don't have a warehouse. The hubs that feed them are larger stores. Many of them are Gen X, but there are some legacy stores. And those stores house our distribution, our logistics and delivery Returns, they also house all of our servicing for the market.

Speaker 2

And so we're able to put a central hub in place and a county seat, but then I have 1 or 2 showrooms around it to gain greater productivity in the market. In terms of cost The fact of this, it is EBITDA enhancing for that group of stores. We're typically taking out a few headcount when we do that, but it's $100,000 $120,000 a year per store that we showroom in terms of cost efficiency. So Some of what you're seeing coming through this quarter and our cost efficiency is the benefit of Hub and Showroom, but there's also obviously benefits of marketing analytics and Supply chains that are in there as well coming through.

Speaker 3

Okay, great. Thank you for that. And it's nice to see the expense efficiency in this quarter's results. The second question, just If so, you highlighted you're not really seeing the maybe trade down activity yet, but if you can maybe talk about how you expect That to play out over time and maybe what sort of consumer behaviors you expect to see as we go through the next couple of quarters in tough times?

Speaker 6

Thank you. Yes. Hey, Vincent, it's Kelly. I'll speak to the trade down and then how it impacts the outlook that we provided. So similar to last quarter, we've not assumed that we'll see any significant trade down in the numbers that we've put out.

Speaker 6

So that would be upside to our outlook If we do see that continue to happen, I mean, we do continue to believe that the customer is a bit constrained relative to What they were certainly during the pandemic, from a renewal rate perspective, we are seeing improvements Year over year are relevant, and we expect to see that in the back half of this year, so slightly better renewal rates than what we saw in Q3 and Q4 last year, But not quite back to the levels that we'd expect going into 2024?

Speaker 2

Yes. I would say that squarely on the back of the decisioning we put in place and then the customer acclimating, as I mentioned earlier. I do want to say one last thing. While we haven't assumed a trade down, and we're not prognosticating on that, but we do think it would benefit us. This pull forward of demand will release at some point.

Speaker 2

And particularly in the BrandSmart business, where we're down 20%, 55% of our sales mix is appliances, which is an important household category. It has a regular replacement cycle, and so that we expect to drive Future revenue, that has a little longer tail than the replacement cycle for computers and electronics, but we feel like both of those businesses will return. And we've got a competitive advantage in those brands. Okay, great.

Speaker 1

Thanks so much. Yes. Great. Thank you. Thank you.

Operator

Our next question comes from Scot Ciccarelli from Chorus. Scott, your line is now open.

Speaker 7

Hey guys, this is Joe on for Scott. Thanks for taking my questions. Given that you're seeing some of the demand hold up better in the LTO side of the business, Can you talk about integrating that solution into the Brands Smart channel?

Speaker 5

Sure. Hi. This is Keith Olsen. I'll be glad to answer that. So Just a reminder, we implemented our BrandSmart leasing solution last year in the May time period, and We continue to be very pleased with the results of that and the continued improvement growth on the team's integration, the Brand Smart Store team With the BrandSmart leasing team as well as process and technology improvements.

Speaker 5

From a performance standpoint, We continue to see the portfolio grow on the BrandsMart leasing side, as well as the customer payment activity. So It's a key focus for us and one that we hope and expect to drive further growth.

Speaker 7

Got you. Cool. And then just on the 5.5% to 6.5% write offs for the

Speaker 8

year, is that still

Speaker 7

what we should be thinking about? And if any color you can give on the cadence between 3Q and 4Q would be super helpful. Thanks.

Speaker 6

Yes. So We are still expecting write offs in the range of 5.5% to 6.5%. So no change there in what we had updated you on the last call. We're very happy with the performance in the Q4 and happy with the trends as we move into Q3 and beyond. As it relates to The write off trends in the back part of the year, there is seasonality in the business.

Speaker 6

So we would expect that write offs would increase, But we expect them to continue to be below write off levels that we experienced in the same quarters of 2022.

Speaker 7

Got it. Great. Thanks,

Speaker 1

guys. Thank you. Our

Operator

next question comes from Bobby Griffin from Raymond James. Bobby, your line is now open.

Speaker 9

Good morning. This is Allison Jimenez on for Bobby Griffin. Thank you for taking our questions. First, on the Aaron side of the business, Despite ending the quarter with a larger than expected lease portfolio size, you left the year unchanged. Is that primarily driven by some caution given the unknown on how customers that chose not to utilize the 90 day buyout will behave longer term or is there something else?

Speaker 1

Yes. I think what

Speaker 6

we're seeing there, Alessandra, it's Kelly, is we continue to expect demand to be Challenge going in the back half of the year. We talked about that earlier in the call. And so what we're seeing is as we go into Q3 and Q4 With the lower EPO activity, early payout activities in Q1 and Q2, those deals are rolling into Q3 and Q4 and paying off. So Higher levels of payoffs relative to the prior periods. And so that continues to impact demand in the second half of the year or the lease portfolio It's in the second half of the year.

Speaker 6

And again, we're focused on in Q3 and Q4 on growing that portfolio as we head into 2024.

Speaker 9

Okay. That's very helpful. And then maybe on the BrandsMart segment, can you walk us through the puts and takes to get to consistent

Speaker 5

And the puts and takes

Speaker 6

to get to consistent EBITDA, I would say that the on the BrandsMart side, what we're focused on is implementing The costs necessary to run the business and to set the company up for sustained growth going forward, 1. 2, the team has done a great job in a Planning revenue environment, managing the cost that we can control to preserve margin. And as we come out of the current Depressed demand environment returned to some level than normal. We feel very good about the leverage that we're going to pick up as the top line starts to grow And we continue to maintain between that and the addition of the new store going into next year and the new stores thereafter. Yes.

Speaker 6

As we grow top line, we would expect margin to expand as we're leveraging those fixed costs.

Speaker 2

Yes. This is Tycho. So the last thing I would say is Steve and his You've done a great job on both the purchasing side and on the pricing side of maintaining that business and preserving margin. As you know, it's sort of a mid-twenty percent margin business. And so while the revenue declines hurt, there are ways to offset that, and they've done a good job of that.

Speaker 2

Steve, I don't know if you want to

Speaker 5

Just mentioned, one of the key drivers of the BrandsMart value proposition is our ability to purchase great products and great deals. And the team continues to continue

Speaker 4

to see the opportunity to

Speaker 5

continue to grow. As we mentioned in the prepared remarks, We continue to focus on strategic pricing actions and manage the business where there's opportunity to Adjust pricing for a margin improvement, we do that, as well as obviously those that we want to focus really on a value price To make sure we're competitive in the market, we do that as well. So we will continue to focus both on the procurement side through continued improved purchasing power As well as the pricing side through strategic pricing actions. And then just a reference for Kelly, just further expense management As we move through this challenging demand environment, just continue to focus on any areas of the expense side of the business, including store labor to align it with the demand cycle.

Speaker 9

That's very helpful. And then lastly for me, it's a little bit hard to parse out Given the difference between consumer electronics and appliances in the BrandSmart segment, but do you believe that BrandSmart Comp was performing relatively in line with the industry average in 2Q.

Speaker 5

I don't really want to speak About the industry average, but I will tell I'll give you a little more context to break down our the BrandsMart comp in Q2. Appliances under pressure being 50% of our business and the majority of that pressure Is it in the average selling price, which was down approximately 10% versus the prior year, Where the overall average selling price for the business is that was down about 6%. We're facing headwinds in consumer electronics Across categories, especially in TVs and that more a result of the significant pull forward in demand that occurred in the prior few years. The categories that we're seeing slightly better performance in are small appliances and other household goods Seeing what we believe, obviously, lower ticket products, some improvement in trend, and the team has done a great job to continue to expand out that assortment and Ensure we have the right prices and the right inventory levels.

Speaker 9

Thank you so much, and best of luck in the back half of the year.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Anthony Chukumba from Loop Capital Markets. Anthony, your line is now open.

Speaker 10

Good morning, and thanks for I guess my first question was on the weekly payment option. You mentioned that you had rolled that out to aarons.com, I know you've had it in your stores for quite some time. I guess two questions related. First one, what have you seen in terms of A take on that weekly pricing option or weekly payment option. And then as far as you can tell, how much of that is Incremental customers as opposed to someone who would have paid monthly is instead taking advantage of the weekly payment option?

Speaker 10

Thank you.

Speaker 5

Sure, Anthony. Hi, this is Steve Olson. I'd be glad to answer that. First, I just want to say we're really excited about offering this weekly payment option across our channels, Both in store and online, we think it really gives the customer flexibility, and we know from research that flexibility is an Important decision driver as they decide what categories and products to lease. From a performance standpoint, really hard to break down what's truly incremental.

Speaker 5

And what we really look at This leasing business is what are the benefits of it? What do we call success? It's really allowing us to land and deliver our strong value message with very competitive lease rates across the business that we're using both on our e commerce channel As well as all of our traditional marketing. So, weekly is still a small piece of our overall business, less than 10%, But we think it's a key driver in landing our value proposition in our low price message.

Speaker 2

Yes. And Anthony, this is Douglas. I mean, we're not going This closed our penetration online or in stores, but it has been growing. And we do think that these weekly price points we put out are very competitive, particularly in our key Core assortment, and we're excited about that. I mean, as you know, this isn't about us trying to become a weekly shop.

Speaker 2

It's about us try Put together put forward the best price point we can in the market and show the customer our value. And so we believe over time we'll take share by doing that.

Speaker 10

Got it. And then just one quick clarification. Is the weekly payment option available For leases that are originated in BrandsMart stores?

Speaker 5

Not at this time. So, focused more on the 18 month 24 month lease options. But the pay frequency. Sorry, the 12 18 months. I apologize Yes.

Speaker 2

That's Tern, but the pay frequency, there is flexibility in pay frequency within the BrandSmart stores, Anthony.

Speaker 10

That's helpful. Thank you.

Speaker 1

You're welcome.

Operator

Thank you. We have our last question comes from Jason Haas from Bank of America. Jason, your line is now open.

Speaker 8

Hey, good morning and thanks for taking my questions. I'm curious to know how you're thinking about the lease portfolio size The remainder of the year, what are you expecting there from like where it should end the year at or what the growth looks like in the rest of the year?

Speaker 2

Hey, Jason. It's Douglas. I'll just give it to you at high level. As you know, we started the year down a little over 7 Lease portfolio size, and at the time we communicated that, that number would be more negative towards the middle of the year as we had more Churn in the 1st part of the year and because of the demand environment we were in, in the 1st part of the year and then would improve Throughout the rest of the year, but still to a negative number. We're still seeing that curve of sort of Dropping in the middle of the year and improving to the back part of the year, but it's not as much as before.

Speaker 2

So, we're still we're not giving a number for the end of the year, but we still expect The lease portfolio will be down at the back part of the year, but more influenced by incrementally softer demand in the second half of the year.

Speaker 8

Got it. That's helpful. Thank you. And then as a follow-up, I'm curious to get a sense for what happened with BrandSmart through the quarter because You had guided at the end of April for the BrandSmart, the prior BrandSmart revenue guidance. And then if I called the commentary right, Sounded like BrandSmart got better through the year, but now you're lowering the revenue guidance.

Speaker 8

So had you always been anticipating an Acceleration through the quarter, it just wasn't as much as you hoped for, which I guess, yes, what was the like, why did you expect an acceleration through the quarter? Or if it's not that, what's changing and how are you thinking about the back half of the year there?

Speaker 5

Yes. I'll be glad to answer that. This is Steve. So as we said in Q1, we were experiencing pressure in demand. As we Got into Q2, deep into Q2, obviously that demand pressure continued.

Speaker 5

We did see a slight improvement in demand as Q2 progressed, especially during our key promotional periods around the holidays. And with our original guidance, we were expecting improvement in demand throughout the back half of the year, really tied to replacement cycle of products. And as we've stated previously, using just consumer electronics as a base, that replacement cycle is typically in And when you look back, obviously at the pandemic years, you'd expect some of those purchases now that occurred a few years ago with So we're just trying to be a little cautious with the BrandsMart demand. We do believe the back half of the year will improve From the first half, as we lap some easier comps in the business going forward, but one is We just want to see some consistent improved trends in demand.

Speaker 8

Got it. That's helpful. Thank you.

Operator

Thank you. We have no further questions at the line. I will now pass back to Douglas Lindsay for closing remarks.

Speaker 2

Thank you, operator. We appreciate everyone who's joined us today. As we wrap up, I want to thank our team members, Aaron's and Brand Continuing to innovate our business and control costs. As a company, we remain focused on executing our multi year strategic Glen and by investing in our growth strategies before us. Thanks again for joining us today, and we'll talk to you soon.

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