Aaron's, Inc. (AAN)

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Aaron's Inc. (AAN)

Q2 2011 Earnings Conference Call

July 25, 2011 5:00 p.m. EDT

Executives

Gilbert Danielson – CFO, EVP, Director

Lee Wilder – Investor Relations

Robert C. Loudermilk Jr. – President and CEO

William "Ken" Butler Jr. – COO, Director

R. Charles Loudermilk – Chairman of the Board

Analysts

Brad Thomas – KeyBanc Capital Markets

TJ McConville – Raymond James & Associates

Arvind Bhatia – Sterne, Agee & Leach, Inc.

David Magee – SunTrust Robinson & Humphrey

Chuck Ruff – Insight Investments

John Baugh – Stifel Nicolaus

Laura Champine – Cowen & Company

John Rowan – Sidoti & Company

Presentation

Operator

Good afternoon and welcome to the Aaron's Second Quarterly Earnings Conference Call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end.

At this time, I would like to pass the conference over to your host, Gil Danielson, CFO of Aaron's Inc. Thank you and you may proceed, Mr. Danielson.

Gilbert Danielson

Thank you for joining us this evening. I'm going to turn the call over to Lee Wilder who does Investor Relations for the company and shall read our standard Safe Harbor Statement. And then we'll get started on the conference call.

So, Lee.

Lee Wilder

Good afternoon. My name is Lee Wilder and I assist in Investor Relations for Aaron's. The company's earnings release issued today and the related Form 8-K are available on our website, www.aaronsinc.com, in the Investor Relations section. And this webcast will be archived for replay there as well.

With us today, Charlie Loudermilk, Chairman; Robin Loudermilk, CEO; Ken Butler, COO; and Gil Danielson, CFO.

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

Robin, Ken and Charlie will have a few comments, and then Gil will add some further information. Robin?

Robert C. Loudermilk Jr.

Thank you, Lee, I appreciate it very much.

Obviously, we are pleased with our second quarter results, and excluding all suit-related charges, met expectations. And we have said over the year, we feel Aaron's is a recession-resilient business that has performed well in both good and bad economic times. We continue to expand our company and open new stores, and the Aaron's business model has more than proven to be successful throughout the years. We have plenty of growth remaining in our existing Aaron's model and we are very optimistic about the potential of our new HomeSmart weekly pay concept which we are beginning to roll out. Ken will talk more about this later in the call.

Aaron's sales and lease ownership business continues to grow in revenues and customers. In the quarter, revenues were up 9% in the division, and our company-operated store had same-store revenue growth of 5% and customer growth of 6.2%. In addition, although not revenue of Aaron's Inc, our franchise stores experienced a 2% growth in same-store revenues and a 3.9% increase in same-store customer royalty. The total of corporate franchise customers were up 9% over the same period of last year. These growth results are once again excellent, especially in these economic conditions. We expect these trends to continue throughout the remainder of the year.

In the second quarter, we unfortunately recorded charge to earnings of $36.5 million related to a sexual harassment judgment, as outlined in our earnings release. We strongly believe that the award in this case does not accurately reflect the evidence presented, and we are preparing to file post-trial motion with the court to reduce the size of the award, or otherwise appeal the verdict. The charge to earnings this quarter reflects our estimated worst-case scenario, if we are not [inaudible] successful in reducing the dollar amount of the judgment.

On a positive note, our Woodhaven furniture manufacturing plant increased production in dollars 46% in the quarter and 25% for the year, a reflection of the increased demand -- increasing demand by both Aaron's and HomeSmart stores for our furniture and bedding products. Woodhaven is on track for a record year of shipments, approaching $100 million at cost, which is an exciting achievement for all of our associates.

Thanks for your support of the company, and I'll turn the call over to Ken for a few comments, and then Charlie.

William "Ken" Butler Jr.

Okay. Well, thank you, Robin.

Once again, like the first quarter, we got out of the gate with the tremendous issues in the month of April and May with a record number of tornadoes across the Midwest, South and even the Northeast, plus the threat of flooding in the Mississippi River that resulted in not only interruptions to our day-to-day operations but also store closings and write-off to merchandise as a result of the disruption caused by these events.

There were many acts of heroism from our associates, particularly in Tuscaloosa, as [inaudible] tornado destroyed the store and the shopping center during normal business hours. Not only did our associates manage to find a safe place in the store, but immediately went to the rescue of others in the center after the tornado passed. Shortly after, I had the opportunity to visit with our associates in Tuscaloosa and Joplin, Missouri, and can only tell you the words nor pictures can describe the devastation which went through these towns and communities.

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