Aaron's, Inc. (AAN)

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Aaron’s, Inc. (AAN)

Q4 2011 Earnings Conference Call

February 10, 2012 10:00 AM ET

Executives

Gil Danielson – Executive Vice President, Chief Financial Officer

Lee Wilder – Investor Relations

Ron Allen – Interim President and Chief Executive Officer

Ken Butler – Chief Operating Officer

Charlie Loudermilk – Chairman of the Board

Analysts

John Rowan – Sidoti & Company

Brad Thomas – KeyBanc Capital Markets

David Magee – SunTrust Robinson Humphrey

Matt McCall – BB&T Capital Markets

TJ McConville – Raymond James

Rohan Juneja – Seawolf Capital

Laura Champine – Cowen & Co.

John Baugh – Stifel Nicolaus

Arvind Bhatia – Stern Agee & Leach, Inc.

Presentation

Operator

Good morning, and welcome to the Aaron’s Inc. fourth quarter earnings conference call. All lines will be muted during the presentation process of the call with the opportunity for questions and answers at the end. At this time, I would like to introduce your host, Gil Danielson with Aaron’s, Inc. Thank you, and enjoy your conference. You may proceed, Mr. Danielson.

Gil Danielson

Okay. Thank you. Thank you, everybody, for joining us this morning. As our standard procedure, I’m going to turn it over to Lee Wilder to read our Safe Harbor statement and then we’ll have some opening comments, and then after the comments were done, we’ll certainly take some questions and answers. So, Lee?

Lee Wilder

Good morning. My name is Lee Wilder and I assist in Investor Relations for Aaron’s. The company’s earnings release issued last night 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; Ron Allen, 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 conditions, 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 activities for future periods.

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

Ron Allen

Thank you, Lee. And good morning, ladies and gentlemen. Thank you for joining us. It’s certainly a pleasure for me to be a part of my first Aaron’s earning call as a member of the management team. While I’ve been a board member since 1997, I’m enjoying being hands-on at learning about the business from the inside and what a great company Charlie Loudermilk has built.

We had a very dedicated, knowledgeable and experienced management team. And as I learn more about this sales and lease ownership business, I have a much clear understanding of how Aaron’s has been so successful and has consistently outperformed our competitors over the years. Also, I’m very encouraged about the future growth and earnings opportunities that lay ahead for us.

In addition to getting around to visit our stores and operations over the last three months, much of my focus has been working with the management team on developing a plan to allow us to grow in a more efficient, better structured and focused way, which would result in even better financial performance and great returns to our shareholders. With those comments, now I’d like to turn the meeting over to Ken. And after Charlie speaks, Gil Danielson will go into more detail and then we’ll be happy to answer your questions. Ken?

Ken Butler

Yes. Well, thanks, Ron. I’d like to first of all share our core business results. We continue to prove on our outstanding model as we netted a net gain of 84,452 new company and franchise customers in the fourth quarter of the year. And for the year, we gained a net of 151,359 new customers. This record result represents a total increase of 11% over last year. Consequently, revenues in company-operated stores increased 8% for the year, allowing us to exceed our internal goal of $2 billion in revenue for 2011.

Our franchise revenue goal of $1 billion fell a little bit short primarily as a result of lower same-store revenues than in previous years. Many of our franchisees have attempted to raise their average income per customer, we call that AIC, over the last couple of years by shortening the term of their agreements and raising the lease rate to the consumer. This is proven to be flawed as their delivery activity went down as the customers saw prices beyond their budget.

As you can recall, our company-operated stores began packaging to a longer term 24-month agreements a couple of years ago in order that we would have pricing that could fit our customers’ budgets. As a result, our company-operated stores have continued to show positive same-store comps even though it’s economically challenged environment. As a result, our franchisees then began following this lead at the beginning of the fourth quarter and responded with their greatest increase in customer gain in their history.

Opportunity for improvement lies in increasing our AIC in the future. And we are launching several initiatives in 2012 that should bring about favorable results. We are very pleased with the customer acceptance of our new HomeSmart brand. We still see no significant cannibalization of the brand with the Aaron’s store that competes in the market.

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