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YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.09pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.36pp
Lean -
Net-tone change vs last year's 10-K.
MD&A
+0.55pp
Lean +
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
weakness+4
incidents+3
incident+3
ineffective+3
adversely+2
Positive rising
successfully+1
successful+1
Risk Factors (Item 1A)
13,396 words
ITEM 1A. RISK FACTORS
The Company’s business is subject to certain risks and uncertainties. Any of the following risk factors to one or more of our business segments could cause our actual results to differ materially from historical or anticipated results. These risks and uncertainties are not the only ones we face, but represent the risks that we believe are material. There may be additional risks that we currently consider not to be material or of which we are not currently aware, and any of these risks could cause our actual results to differ materially from historical or anticipated results.
Summary of Risk Factors
Risks Related to Our Business
• In addition to being subject to various existing federal, state and provincial laws and regulations, we may be subject to new or additional laws and regulations that could expose us to government investigations, pricing restrictions, fines, penalties or other government-required payments, significant additional costs or compliance-related burdens that could have a material adverse effect on our business, results of operations or financial condition.
• From time to time we are subject to regulatory and legal proceedings which seek material or seek to place significant restrictions on our business operations. These proceedings may be perceived by the public and materially and affect our business, liquidity and financial condition.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
critical+2
against+1
conflict+1
unfavorable+1
fail+1
Positive rising
better+2
improved+2
enhanced+1
enable+1
enhance+1
MD&A (Item 7)
10,274 words
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis ("MD&A") should be read in conjunction with other documents filed by The Aaron's Company, Inc. ("the Company") with the Securities and Exchange Commission (the "SEC") and the audited Consolidated Financial Statements and corresponding notes thereto included in Item 8 of this Annual Report on Form 10-K. A review of the Company’s fiscal 2023 performance compared to fiscal 2022 appears below under "Results of Operations," "Overview of Financial Position," and "Liquidity and Capital Resources." A review of the Company’s fiscal 2022 performance compared to fiscal 2021 can be found in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023, which is hereby incorporated by reference.
This MD&A contains forward-looking statements and the matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see "Risk Factors" and "Cautionary Statement Concerning Forward-Looking Statements" for a discussion of the uncertainties, risks, and assumptions associated with these statements included in Item 1A of this Annual Report on Form 10-K.
Business Overview
The Company is a leading, technology-, omni-channel provider of lease-to-own ("LTO") and retail purchase solutions of furniture, appliances, electronics, and other home goods across its brands: Aaron's, BrandsMart U.S.A., BrandsMart Leasing, and Woodhaven Furniture Industries ("Woodhaven").
• Judicial or regulatory decisions may restrict or eliminate the enforceability of certain types of contractual provisions designed to limit costlylitigation, such as mandatory arbitration clauses and class action waivers as dispute resolution methods, which could have a material adverse effect on our business.
• Product safety and quality control issues, including product recalls, could harm our reputation, divert resources, reduce sales and increase costs.
• The current inflationary environment has adversely impacted, and could continue to adversely impact, our business through increased costs and the acceleration of prices beyond the norm resulting in lower lease volumes.
• Our inability to recruit, select, train and retain qualified team members or violations by us of employment or wage and hour laws or regulations could have a material adverse effect on our business, results of operations or financial condition.
• The loss of the services of our key executives, or our inability to attract, develop and retain key talent could have a material adverse effect on our business and operations.
• If we do not maintain the privacy and security of customer, employee or other confidential information, due to cybersecurity-related risks or otherwise, we could incur significant costs, litigation, regulatory enforcement actions and damage to our reputation.
• If our IT systems are impaired as of a ransomware incident or other cyber incident, our business could be interrupted, our reputation could be harmed and we may experience lost revenues and increased costs and expenses.
• We may incorporate artificial intelligence ("AI") solutions into our platforms, decisioning technology, products, productivity tools, services, and features, and these applications may become more important in our operations over time. Our competitors or other third parties may incorporate AI into their products more quickly or more successfully than us, which could impair our ability to compete effectively and adversely affect our results of operations. Additionally, if our AI applications are based on data, algorithms, or other inputs that are flawed, or if they assist in producing content, analyses, or recommendations that AI applications assist in producing are or are alleged to be deficient, inaccurate, or biased, our business, financial condition, and results of operations may be adversely affected. The use of AI applications has resulted in, and may in the future result in, cybersecurity incidents that implicate the personal data of end users of such applications. Any such cybersecurity incidents related to our use of AI applications
could adversely affect our reputation and results of operations. AI also presents emerging ethical issues, and if our use of AI becomes controversial, we may experience brand or reputational harm, competitive harm, or legal liability. The rapid evolution of AI, including the potential regulation of AI by government or other regulatory agencies, will require significant resources to develop, test, and maintain our platforms decisioning technology, products, productivity tools, services, and features in order to implement AI ethically and minimize any unintended or harmful impacts.
Risks Related to the BrandsMart U.S.A. Acquisition
• The BrandsMart U.S.A. acquisition may create risks and uncertainties which could materially and adversely affect our business and results of operations.
• We may be unable to realize the anticipated synergies from the BrandsMart U.S.A. acquisition or may incur additional and/or unexpected costs in order to realize them.
Risks Related to Operations and Strategy
• The commoditization of certain product categories, increasing competition, a decentralized, high-fixed-cost operating model, adverse consequences to our supply chain function from decreased procurement volumes, and lower lease volumes could have a material adverse effect on our results of operations.
• We are implementing a multi-year strategic plan within our business designed to strengthen and grow our business and generate capital for investment by growing revenue, further reducing costs and strengthening operating margins, and there is no guarantee that such plan will be successful.
• Our growth strategies may be unsuccessful if we are unable to identify and complete future acquisitions and successfully integrate acquired businesses or assets.
• We could lose our access to third-party data sources, including, for example, those sources that provide us with data that we use as inputs into our centralized decisioning tools, which could cause us competitive harm.
• We must successfully order and manage our inventory to reflect customer demand and anticipate changing consumer preferences and buying trends or our revenue and profitability will be adversely affected.
• Our competitors could impede our ability to attract new customers, or cause current customers to cease doing business with us.
• Our proprietary algorithms and customer lease decisioning tools used to approve customers depend, in part, on customer behavior, and unexpected changes in such behavior could cause such algorithms and decisioning tools to no longer be indicative of our customers' ability to perform under their lease agreements with us.
• Our business and operations are subject to risks related to climate change.
Risk Related to the LTO Industry
• The transactions offered to consumers by our businesses may be negatively characterized by consumer advocacy groups, the media and government officials, and if those negative characterizations become increasingly accepted by consumers, demand for our services and the transactions we offer could decrease.
Risks Related to our Franchisees
• We may engage in, or be subject to, litigation with our franchisees.
• Operational compliance and other failures by our franchisees may adversely impact us.
• Our ability to enforce our rights against our franchisees may be adversely affected by applicable laws, which could impair our growth strategy and cause our franchise revenues to decline.
• Changes to current law with respect to the assignment of liabilities in the franchise business model could materially and adversely affect our profitability.
Risks Related to Ownership of Our Common Stock
• We cannot guarantee the timing, amount or payment of dividends on our common stock.
• As a public company, we are required to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and our failure to do so could materially and adversely affect us.
• Our amended and restated bylaws designate the Georgia State-wide Business Court in the State of Georgia as the exclusive forum for certain litigation, which may limit our shareholders’ ability to choose a judicial forum for disputes with us.
• Certain provisions in our articles of incorporation and bylaws, and of Georgia law, may deter or delay an acquisition of us.
General Risks
• The success of our business is dependent on factors impacting consumer spending that are not under our control, including general economic conditions, and unfavorable economic conditions in the markets where we operate could result in increases in lease merchandise write-offs, among other things, which could materially and adversely affect our financial performance.
• The geographic concentration of our store locations may have an adverse impact on our financial performance due to economic downturns and severe weather events in regions where we have a high concentration of stores.
• Our current insurance program may expose us to unexpected costs, including casualty and accident-related self-insured losses, and negatively affect our financial performance.
Risks Related to Our Business
Legal and Regulatory Risks
Federal and state regulatory authorities are increasingly focused on consumer-facing industries, including LTO and retail, and in addition to being subject to various existing federal, state and provincial laws and regulations, we may be subject to new or additional federal, state and provincial laws and regulations (or changes in interpretations of existing laws and regulations) that could expose us to government investigations, pricing restrictions, fines, penalties or other government-required payments by us, significant additional costs or compliance-related burdens that could have a material adverse effect on our business, results of operations or financial condition.
Federal regulatory authorities such as the Federal Trade Commission (the "FTC") and the Consumer Financial Protection Bureau are increasingly focused on the subprime financial marketplace in which the LTO industry operates, and these federal agencies, as well as state regulatory authorities, may propose and adopt new regulations, or interpret existing regulations in a manner, that could result in significant adverse changes in the regulatory landscape for businesses such as our Aaron's and BrandsMart Leasing businesses that include LTO. In addition, we believe federal and state regulators are increasingly holding LTO businesses to higher standards of monitoring, disclosure and reporting, regardless of whether new laws or regulations governing the LTO industry have been adopted. We expect this increased focus by federal and state regulatory authorities to continue to intensify. Regulators and courts may apply laws or regulations to our businesses in inconsistent or unpredictable ways that may make compliance more difficult, expensive and uncertain. This increased attention at the federal and state levels, as well as the potential for scrutiny by certain municipal governments, could increase our compliance costs significantly and materially and adversely impact the manner in which we operate. For more information, see "Business—Government Regulation."
Nearly every state, the District of Columbia, and most provinces in Canada specifically regulate LTO transactions. Furthermore, certain aspects of our business segments, such as the content of our advertising and other disclosures to customers about our LTO transactions, our lease renewal and collection practices (as well as those of third parties), the manner in which we contact our customers, our customer lease decisioning process regarding whether to lease merchandise to customers, and any payment information we may decide to furnish to consumer reporting agencies are subject to federal and state laws and regulatory oversight.
In addition, the manner in which we process and store certain customer, employee and other information are subject to federal and state laws and regulatory oversight. For example, the California Consumer Privacy Act of 2018 (the "CCPA"), has changed the manner in which our LTO and retail transactions with California residents are regulated with respect to the manner in which we collect, store and use consumer data, and has resulted in increased regulatory oversight and litigation risks and increased our compliance-related costs in California. In addition, the California Privacy Rights Act ("CPRA"), significantly modified the CCPA, by expanding consumers’ rights with respect to certain personal information and creating a new state agency to oversee implementation and enforcement efforts. Many of the CPRA’s provisions became effective on January 1, 2023. Moreover, other states have adopted or may adopt privacy-related laws whose restrictions and requirements differ from those of the CCPA and CPRA, requiring us to design, implement and maintain different types of state-based, privacy-related compliance controls and programs simultaneously in multiple states, thereby further increasing the complexity and cost of compliance.
Many of these laws and regulations are evolving, creating unclear and inconsistent requirements across various jurisdictions, and complying with them is difficult, expensive and uncertain. Furthermore, legislative or regulatory proposals regarding our industry, or interpretations of them, may subject us to "headline risks" that could negatively impact our business in a particular market or in general and, therefore, may adversely affect our share price. New laws and regulations (or differing interpretations of existing regulations), if adopted, could also adversely impact or current operations and the regulatory landscape for businesses such as ours.
We have incurred and will continue to incur substantial costs to comply with federal, state and provincial laws and regulations. In addition to compliance costs, we may incur substantial expenses to respond to federal, state and provincial government investigations and enforcement actions, proposed fines and penalties, criminal or civil sanctions, and private litigation, including those arising out of our or our franchisees’ allegedviolations of existing laws and/or regulations.
Additionally, as we execute on our strategic plans, we may continue to expand into complementary businesses that engage in retail, financial or lending services, or LTO or rent-to-rent transactions involving products that we do not currently offer our customers, all of which may be subject to a variety of statutes and regulatory requirements in addition to those regulations currently applicable to our legacy operations, which may impose significant costs, limitations or prohibitions on the manner in which we currently conduct our businesses as well as those we may acquire in the future.
From time to time we are subject to regulatory and legal proceedings which seek material damages or seek to place significant restrictions on our business operations. These proceedings may be negatively perceived by the public and materially and adversely affect our business, liquidity and financial condition.
We are subject to legal and regulatory proceedings from time to time which may result in material damages or place significant restrictions on our business operations, and/or divert our management’s attention from other business issues and opportunities and from our ongoing strategic plan to improve our performance. There can be no assurance that we will not incur material damages or penalties in a lawsuit or other proceeding in the future and/or significant defense costs related to such lawsuits or regulatory proceedings. Significant adverse judgments, penalties, settlement amounts, amounts needed to post a bond pending an appeal or defense costs could materially and adversely affect our liquidity and financial condition. It is also possible that, as a result of a present or future governmental or other proceeding or settlement, significant restrictions will be placed upon, or significant changes made to, our business practices, operations or methods, including pricing or similar terms. Any such restrictions or changes may adversely affect our profitability or increase our compliance costs.
Judicial or regulatory decisions may restrict or eliminate the enforceability of certain types of contractual provisions designed to limit costlylitigation, such as mandatory arbitration clauses and class action waivers as dispute resolution methods, which could have a material adverse effect on our business.
To attempt to limit costly and lengthy consumer, employee and other litigation, including class actions, we require customers entering into LTO transactions and team members across all business segments to sign arbitration agreements and class action waivers, many of which offer opt-out provisions. Recent judicial and regulatory actions have attempted to restrict or eliminate the enforceability of such agreements and waivers. If we are not permitted to use arbitration agreements and/or class action waivers, or if the enforceability of such agreements and waivers is restricted or eliminated, we could incur increased costs to resolve legal actions brought by customers, team members and others, as we would be forced to participate in more expensive and lengthy dispute resolution processes, any of which could have a material adverse effect on our business.
Product safety and quality control issues, including product recalls, could harm our reputation, divert resources, reduce sales and increase costs.
The products we lease and sell through our business segments are subject to regulation by the United States Consumer Product Safety Commission and similar state regulatory authorities, as well as regulatory authorities in Canada. Such products could be subject to recalls and other actions by these authorities. Such recalls and voluntary removal of products can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs, which could have a material adverse effect on our business, results of operations or financial condition. In addition, given the terms of our lease agreements with our customers, in the event of such a product quality or safety issue, customers who have leased the defective merchandise from us could terminate their lease agreements for that merchandise and/or not renew those lease agreements, which could have a material adverse effect on our business, results of operations or financial condition, if we are unable to recover those losses from the vendor who supplied the defective merchandise.
Inflation Risk
The current inflationary environment has adversely impacted and could continue to adversely impact our business through increased costs to attract and retain talent, increased raw materials costs, increased logistical costs to get product from suppliers to customer’s homes and the acceleration of prices beyond the norm resulting in lower lease volumes.
Our financial performance has been adversely impacted and could continue to be adversely impacted by relative rates of inflation, which are subject to market conditions. The ongoing labor shortages have increased the costs to attract and retain talent. Sign-on bonuses, enhanced wages and other inducements related to labor rates have increased our costs and are expected to continue to increase our costs, which could have an adverse effect on our margins and profitability. Commodities and other raw goods used in some of our products, including our Woodhaven manufactured products, can be subject to availability constraints and price volatility caused by supply conditions, government regulations and general economic conditions and other unpredictable factors, which may further increase our costs. Our logistical costs related to both domestic and overseas freight
transporting and shipping our merchandise to our distribution centers and store locations and delivery to our customers may increase. Additionally, the cost of construction materials we use to build and remodel our stores is also subject to price volatility based on market and economic conditions. Higher construction material prices could increase the capital expenditures needed to construct our new store concept or for re-engineering or remodeling an existing store and, as a result, could increase the investment required.
We have limited or no control over many of these inflationary forces on our costs. These inflationary pressures could impact our net sales and earnings. If the price of goods changes as a result of inflation, we may be unable to adjust our retail prices and lease payments accordingly, which could adversely impact our earnings. Changes in prices could also negatively impact our sales and earnings if our competitors react more aggressively or if our customers curtail entering into sales and lease agreements for the merchandise we offer or enter into agreements that generate less revenue for us, resulting in lower lease volumes.
Talent Management Risks
We depend on hiring an adequate number of hourly team members to run our business and are subject to government laws and regulations concerning these and our other team members, including wage and hour regulations. Our inability to recruit, select, train and retain qualified team members or violations by us of employment or wage and hour laws or regulations could have a material adverse effect on our business, results of operations or financial condition.
Our workforce is comprised primarily of team members who work on an hourly basis. To grow our operations and meet the needs and expectations of our customers, we must attract, select, train, and retain a large number of hourly team members, while at the same time controlling labor costs. These positions have historically had high turnover rates, which can lead to increased training, retention and other costs. In certain areas where we operate, there has historically been significant competition for team members, including from retailers distribution centers, delivery services and restaurants. In addition, the competitive nature of the hourly labor market, including an increasing number of jobs, whether in-person or remote work, and increasing wage rates for those jobs, may make it more difficult for us to attract candidates for our open hourly positions. The lack of availability of an adequate number of hourly team members, or our inability to attract and retain them, or an increase in wages and benefits to attract and retain current team members, could adversely affect our business, results of operations or financial condition. We are subject to applicable rules and regulations relating to our relationship with our team members, including wage and hour regulations, health benefits, unemployment and payroll taxes, overtime and working conditions and immigration status. Accordingly, federal, state or local legislated increases in the minimum wage, as well as increases in additional labor cost components such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines, would increase our labor costs, which could have a material adverse effect on our business, results of operations or financial condition.
The loss of the services of our key executives, or our inability to attract, develop and retain key talent could have a material adverse effect on our business and operations.
We believe that we have benefited substantially from our current executive leadership and that the unexpectedloss of their services in the future could adversely affect our business and operations. We also depend on the continued services of the rest of our management team. The loss of certain of these individuals without adequate replacement could adversely affect our business. Further, we believe that the unexpectedloss of certain key talent in the future could have a material adverse effect on our business and operations. We do not carry key business person life insurance on any of our key business personnel. The inability to attract, develop and retain qualified individuals, or a significant increase in the costs to do so, could have a material adverse effect on our operations.
Cyber-Security and Technology Risks
If we do not maintain the privacy and security of customer, employee or other confidential information, due to cybersecurity-related "hacking" attacks, ransomware, intrusions into our systems by unauthorized parties or otherwise, we could incur significant costs – including the loss of some or all of our IT systems, litigation, regulatory enforcement actions and damage to our reputation, any of which could have a material adverse effect on our business, results of operations or financial condition.
Our business involves the collection, processing, transmission and storage of customers’ personal and confidential information, as well as confidential information about our team members, among others. Much of this data constitutes confidential personally identifiable information ("PII") which, if unlawfully accessed, either through a "hacking" attack or otherwise, could subject us to significant liabilities as further discussed below.
Companies like us that possess significant amounts of PII and/or other confidential information have experienced a significant increase in cybersecurity risks in recent years from increasingly aggressive and sophisticated cyberattacks, including hacking, computer viruses, malicious or destructive code, ransomware, social engineering attacks (including phishing and impersonation), denial-of-service attacks and other attacks and similar disruptions from the unauthorized use of or access to IT
systems. Our IT systems are subject to constant attempts to gainunauthorized access in order to disrupt our business operations and capture, destroy or manipulate various types of information that we rely on, including PII and/or other confidential information. In addition, various third parties, including franchisees, team members, contractors or others with whom we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently cause a breach involving such information. Any significant compromise or breach of our data security, whether external or internal, or misuse of PII and/or other confidential information may result in significant costs, litigation and regulatory enforcement actions and, therefore, may have a material adverse impact on our business, results of operations or financial condition. Further, if any such compromise, breach or misuse is not detected quickly, the effect could be compounded.
While we have implemented information security systems and processes (including engagement of third-party security services) to protect againstunauthorized access to or use of secured data and to prevent data loss and theft, there is no guarantee that these procedures are adequate to safeguard against all data security breaches or misuse of the data. In addition, certain of our confidential information, and information regarding our customers, may be gathered, processed, and or/stored through, or on, the networks or other systems of third-party vendors or service providers whom we have engaged. While we endeavor to conduct due diligence on those third parties regarding their data security and protection policies and procedures, and the methods they use to safeguard such information, we ultimately do not, and are unable to, manage or control those third parties' efforts to safeguard against data security breaches or misuse of data, or data loss or theft, that may involve our confidential information or the confidential information of our customers. We maintain private liability insurance intended to help mitigate the financial risks of such incidents, but there can be no guarantee that insurance will be sufficient to cover all losses related to such incidents, and our exposure resulting from any seriousunauthorized access to, or use of, secured data, or serious data loss or theft, could far exceed the limits of our insurance coverage for such events. Further, a significant compromise of PII and/or other confidential information could result in regulatory penalties and harm our reputation with our customers and others, potentially resulting in a material adverse effect on our business, results of operations or financial condition.
The regulatory environment related to information security, data collection and use, and consumer privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs. For example, the CCPA (as amended by the CPRA), has changed the manner in which our transactions with California residents are regulated with respect to the manner in which we collect, store and use consumer and employee data; exposed our operations in California to increased regulatory oversight and litigation risks; and increased our compliance-related costs. Moreover, other states have adopted or may adopt privacy-related laws whose restrictions and requirements differ from those of the CCPA and CPRA. Compliance with changes in consumer privacy and information security laws may result in significant expense due to increased investment in technology, the development of new operational processes and oversight. Failure to comply with these laws subjects us to potential regulatory enforcement activity, fines, private litigation including class actions, and other costs. We also have data privacy and security-related contractual obligations that might be breached if we fail to comply. A significant privacy breach or failure to comply with privacy and information security laws could have a material adverse effect on our reputation, business, results of operations or financial condition.
We also believe successful data breaches or cybersecurity incidents at other companies, whether or not we are involved, could lead to a general loss of customer confidence that could negatively affect us, including harming the market perception of the effectiveness of our security measures or financial technology in general.
If our or third-party IT systems are impaired or we otherwise lost the ability to utilize our or third-party IT systems, our business could be interrupted, our reputation could be harmed and we may experience lost revenues and increased costs and expenses, any of which could have a material adverse impact on our business, results of operations and financial condition.
We rely on our and third-party IT systems to carry out our in-store and e-commerce customer lease decisioning process and to process lease and retail transactions with our customers, including tracking and processing lease payments on merchandise, processing retail transactions and lease or credit applications, and other important functions of our business. Failures of our systems, such as "bugs", crashes, internet failures and outages, operator error, or catastrophic events such as a cybersecurity incident or ransomware, could seriouslyimpair our ability to operate our business, and our business continuity and contingency plans related to such IT failures may not be adequate to prevent that type of seriousimpairment. If our or third-party IT systems are impaired, our business (and that of our franchisees) could be interrupted, our reputation could be harmed, we may experience lost revenues or sales, including due to an interruption to our data-enabled customer lease decisioning and lease renewal and collection functions, and we could experience increased costs and expenses to remediate the problem. As we continue to centralize more of our operations, the risks and potential unfavorable impacts of systems failures will become more significant, and there can be no assurances that we can successfully mitigate such heightened risks.
Risks Related to BrandsMart U.S.A. Acquisition
The BrandsMart U.S.A acquisition may create risks and uncertainties which could materially and adversely affect our business and results of operations.
Since the consummation of the BrandsMart acquisition, we have experienced significantly more sales, and have more assets and employees than we did prior to the transaction. The integration process requires us to expend significant capital and significantly expand the scope of our operations and financial systems. Our management is required to devote a significant amount of time and attention to the process of integrating the operations of our business with that of the BrandsMart business. There is a significant degree of difficulty and management involvement inherent in that process.
These difficulties include:
• integrating the operations of the BrandsMart business while carrying on the ongoing operations of the Aaron's and Woodhaven businesses;
• developing, launching, and managing an in-house LTO purchase solution, BrandsMart Leasing;
• managing a significantly larger company than before consummation of the BrandsMart business;
• the possibility of faulty assumptions underlying our expectations regarding the integration process, including, among other things, unanticipateddelays, costs or inefficiencies;
• the effects of unanticipated liabilities;
• operating a more diversified business;
• integrating two separate business cultures;
• attracting and retaining the necessary personnel associated with the BrandsMart business;
• maintaining relationships with suppliers;
• the challenge of integrating complex systems, IT systems, data privacy and security systems and our ability to maintain the privacy and security of BrandsMart's customer, employee or other confidential information;
• creating uniform standards, controls, procedures, policies and information systems and controlling the costs associated with such matters;
• integrating information, purchasing, accounting, finance, sales, billing, payroll and regulatory compliance systems; and
• integrating compliance with the Sarbanes-Oxley Act, including implementing internal controls over financial reporting.
If any of these factors limit our ability to integrate the BrandsMart business into our operations successfully or on a timely basis, the expectations of future results of operations, including certain run-rate synergies expected to result from the BrandsMart U.S.A. acquisition, might not be met. As a result, we may not be able to realize the expected benefits that we seek to achieve from the BrandsMart U.S.A acquisition, which could also affect our ability to service our debt obligations. In addition, we may be required to spend additional time or money on integration that otherwise would be spent on the development and expansion of our larger Aaron's Business, including efforts to further expand our product selection.
We may be unable to realize the anticipated synergies from the BrandsMart U.S.A. acquisition or may incur additional and/or unexpected costs in order to realize them.
There can be no assurance that we will be able to realize the anticipated synergies from the BrandsMart U.S.A. acquisition in the anticipated amounts or within the anticipated timeframes or costs expectations or at all. We have implemented a series of initiatives that we expect to result in recurring, annual run-rate synergies. We have incurred, and expect to incur, one-time, non-recurring costs to achieve such synergies. These or any other cost savings or operational improvements that we realize may differ materially from our estimates. We cannot provide assurances that these anticipated synergies will be achieved or that our programs and improvements will be completed as anticipated or at all. In addition, any cost savings that we realize may be offset, in whole or in part, by reductions in revenues or through increases in other expenses.
Risks Related to Operations and Strategy
We face many challenges which could have a material adverse effect on our overall results of LTO and retail operations, including the commoditization of certain product categories, increasing competition from a growing variety of sources, a decentralized, high-fixed-cost operating model, adverse consequences to our supply chain function from decreased procurement volumes and from supply chain disruptions, and with respect to the LTO business, lower lease volumes, and thus, less recurring revenues written into our customer lease portfolio.
Our business currently faces and may face new challenges relating to the commoditization of certain product categories. For example, due to an increasing supply of electronics, and retail strategies that include implementing frequent price-lowering sales and using certain electronics as “loss leaders” to increase customer traffic in stores, there is significant price-based competition or “commoditization” of electronics, particularly for televisions. We do not expect the commoditization of the electronics category to subside and it may expand to other product categories with increasing frequency in the future, including
appliances and furniture. We also face competition from national, regional and local operators of direct-to-consumer LTO stores and websites, virtual LTO and rent-to-rent companies, Buy Now, Pay Later companies, traditional and e-commerce retailers (including many that offer layaway programs, point of sale financing, and title or installment lending), traditional and online sellers of used merchandise, and various types of consumer finance companies that may enable our customers to shop at traditional or online retailers, as well as with rental stores that do not offer their customers a purchase option. We also compete with retail stores for customers desiring to purchase merchandise for cash or on credit. This increasing competition from these sources may reduce our market share as well as our operating margins, and may have a material adverse effect on our overall results of operations. Many of the competitors discussed above have more advanced and modern e-commerce, logistics and other technology applications and systems that offer them a competitive advantage in attracting and retaining customers for whom we compete, especially with respect to younger customers. In addition, those competitors may offer a larger selection of products and more competitive prices.
We believe the significant increase in the amount and type of competition, as discussed above, may result in LTO customers curtailing entering into sales and lease ownership agreements for the types of merchandise we offer, or entering into agreements that generate less revenue for us, resulting in lower revenue and profits, or entering into lease agreements with our competitors.
Our business has a decentralized, high fixed cost operating model due to, among other factors, our significant labor related to our selling and lease renewal and collections functions, the costs associated with our last-mile delivery, our fulfillment centers and related logistics functions, and our manufacturing operations. That model may result in negative operating leverage in a declining revenue environment, as we may not be able to reduce or "deleverage" those fixed costs in proportion to any reduction in the revenues of our business, if at all, and our failure to do so may adversely affect our overall results of operations.
In addition, our supply chain function and financial performance may sufferadverse consequences related to the decreases we have experienced, and may continue to experience, in the volume of merchandise we purchase from third party suppliers, due to, among other factors, our store closures, declining sales of merchandise to franchisees, and lower lease volumes. Those consequences may include, for example, smaller discounts from our vendors, or the elimination of discount programs previously offered to us, which may have an adverse impact on our results of operations. Declining merchandise purchase volumes have caused us to rationalize and consolidate, and may result in us further rationalizing and consolidating, vendors for certain product categories, and we may not effectively implement those vendor consolidation initiatives, which could lead to disruptions to our supply chain, including delivery delays or unavailability of certain types of merchandise for our stores and our franchisees’ stores.
We have experienced and may continue to experience increases in the costs we incur to purchase certain merchandise that we offer for sale or lease to our customers, due to tariffs, increases in prices for certain commodities, supply chain disruptions, and increases in the costs of transportation and shipping the merchandise to our distribution centers and store locations. We have limited or no control over many of these inflationary forces on our costs. In addition, we may not be able to recover all or even a portion of such cost increases by increasing our merchandise prices, fees, or otherwise, and even if we are able to increase merchandise prices or fees, those cost increases to our customers could result in the customers curtailing entering into sales and lease ownership agreements for the types of merchandise we offer, or entering into agreements that generate less revenue for us, resulting in lower revenues and profits.
If we are unable to successfully address these challenges, our overall business, results of operations or financial condition may be materially and adversely affected as well.
We are implementing a multi-year strategic plan within our business designed to strengthen and grow our business and generate capital for investment by growing revenue, further reducing costs and strengthening operating margins, and there is no guarantee such plan will be successful.
Our multi-year strategic plan for our business includes a number of key initiatives to grow revenue, further reduce costs and improveprofitability, and operating margins, including centralizing and investing in key processes, such as customer lease decisioning and payments, rationalizing and repositioning real estate, enhancing our e-commerce platforms and digital optimization channels, enhancing and growing BrandsMart, achieving BrandsMart synergies announced at the acquisition date, and optimizing our cost structure. There is no guarantee that these initiatives will be successful. For example, we may not be successful in our attempts to attract new customers to our brand, develop the technology needed to further enhance our customers’ experiences with us, or align our store footprint with market opportunities due to an inability to secure new store locations, or otherwise.
With respect to centralizing key processes, we have implemented a data-enabled customer lease decisioning process in all of our company-operated Aaron's stores and within our BrandsMart Leasing business, and in the franchised Aaron's stores as well. We may not execute the procedural and operational changes and systems necessary to successfully implement the centralized decisioning initiative, and it is possible that data-enabled customer lease decisioning will not be as effective or accurate as the decentralized, store-based decisioning process we historically used in our business.
Regarding our real estate strategy, the buildout of our new Aaron's store concept and operating model includes geographically repositioning a significant number of our store locations into larger buildings and/or into different geographic locations that we believe will be more advantageous, and also re-engineering and remodeling certain existing stores, to provide for larger selections of merchandise and other more complex features. We expect to incur significant capital costs, including build-out or remodeling costs for this new store concept and operating model and exit costs from the termination of current leases and sale of current properties. We have not historically managed or operated stores with larger footprints or more complex, reengineered stores and operating models, and thus, we expect that our management team and store team members for those locations will need to adjust to managing and operating larger, more complex stores, and there can be no assurances that those stores will be successful. In addition, we are exploring a new "Hub and Showroom" model to improve operational efficiencies in select markets. This is a new strategy and we have not historically managed and operated stores in this capacity and thus there can be no assurances that this "Hub and Showroom" model will be successful.
Our BrandsMart U.S.A. strategy consists of maintaining our current store locations and expanding our reach to additional markets by opening one or two new stores per year. With each store, we expect to incur significant capital costs, including building and development costs, and to enter into a multi-year lease.
There can be no assurance that the real estate component of our strategy will be successful. For example, we may not be successful in transitioning the customers of our stores that are closed or repositioned to other stores that remain open or to our new store concept and operating model, and thus, could experience a reduction in revenue and profits associated with such a loss of customers. In addition, we may not be able to identify and secure a sufficient number of store locations that are able to support our new Aaron's store concept and/or our new BrandsMart U.S.A. stores, at reasonable lease rates and terms, or at all.
Our e-commerce platforms also are a significant component of our strategic plan and we believe they will drive future growth of both segments. However, to promote our products and services and allow customers to transact online and reach new customers, we must effectively maintain, improve and grow our e-commerce platforms and digital acquisition channels. While we believe our aarons.com e-commerce platform currently is superior to those of our traditional LTO competitors, many of the traditional, virtual and "big-box" retailers and other companies with whom we compete have more robust e-commerce platforms and logistics networks than ours, and have more resources to dedicate to improving and growing their e-commerce platforms. In addition, although we continue to make improvements to our BrandsMart U.S.A. e-commerce platform, we may not have the same e-commerce platforms and logistics as our larger nationwide competitors. For both our business segments, there can be no assurance that we will be able to effectively compete against those companies’ e-commerce platforms and logistics networks, or maintain, improve or grow our e-commerce platform in a profitable manner.
There can be no guarantee that our strategy for our business, and our current or future business improvement initiatives related thereto, will yield the results we currently anticipate (or results that will exceed those that might be obtained under prior or other strategies). We may fail to successfully execute on one or more elements of our current strategy, even if we successfully implement one or more other components. In addition, the estimated costs and charges associated with these initiatives may vary materially and adversely based upon various factors.
If we cannot address these challengessuccessfully, or overcome other criticalobstacles that may emerge as we continue to pursue our current strategy, it may adversely impact our business, results of operations or financial condition.
Our growth strategies may be unsuccessful if we are unable to identify and complete future acquisitions and successfully integrate acquired businesses or assets.
We will consider potential acquisitions on a selective basis. From time-to-time we may approach, or may be approached by, other public companies or large privately-held companies to explore consolidation opportunities. There can be no assurance that we will be able to identify suitable acquisition opportunities in the future or that we will be able to consummate any such transactions on terms and conditions acceptable to us.
In addition, it is possible that we will not realize the expected benefits from any completed acquisition over the timeframe we expect, or at all, or that our existing operations will be adversely affected as a result of acquisitions. Acquisitions entail certain risks, including:
• unrecorded liabilities of acquired companies and unidentified issues that we fail to discover during our due diligence investigations or that are not subject to indemnification or reimbursement by the seller;
• greater than expected expenses such as the need to obtain additional debt or equity financing for any transaction;
• unfavorable accounting treatment and unexpected increases in taxes;
• adverse effects on our ability to maintain relationships with customers, team members, suppliers or other key stakeholders;
• inherent risk associated with entering a geographic area or line of business in which we have no or limited experience;
• difficulty in assimilating the operations and personnel of an acquired company within our existing operations, including the consolidation of corporate and administrative functions;
• the challenge of integrating complex systems, IT systems, data privacy and security systems and our ability to maintain the privacy and security of customer, employee or other confidential information;
• difficulty in conforming standards, controls, procedures and policies, business cultures and compensation structures;
• difficulty in identifying and eliminating redundant and underperforming operations and assets;
• loss of key team members of the acquired company;
• operating inefficiencies that have a negative impact on profitability;
• impairment of goodwill or other acquisition-related intangible assets;
• failure to achieve anticipated synergies or receiving an inadequate return of capital; and
• strains on management and other personnel time and resources to evaluate, negotiate and integrate acquisitions.
Our failure to address these risks or other problems encountered in connection with any future acquisition could cause us to fail to realize the anticipated benefits of the acquisitions, cause us to incur unanticipated liabilities and harm our business generally. In addition, if we are unable to successfully integrate our acquisitions with our existing business, we may not obtain the advantages that the acquisitions were intended to create, which may materially and adversely affect our business, results of operations, financial condition, cash flows, our ability to introduce new services and products and the market price of our stock.
We would expect to pay for any future acquisitions using cash, capital stock, indebtedness and/or assumption of indebtedness. To the extent that our existing sources of cash are not sufficient, we would expect to need additional debt or equity financing, which involves its own risks, such as the dilutive effect on shares held by our stockholders if we financed acquisitions by issuing convertible debt or equity securities, or the risks associated with debt incurrence.
Acquisitions place strains on our management and other personnel time and resources, and require timely and continued investment in facilities, personnel and financial and management systems and controls. We may not be successful in implementing all of the processes that are necessary to support any of our growth initiatives, which could result in our expenses increasing disproportionately to our incremental revenues, causing our operating margins and profitability to be adversely affected.
We could lose our access to third-party data sources, including, for example, those sources that provide us with data that we use as inputs into our centralized decisioning tools, which could cause us competitive harm and have a material adverse effect on our business, results of operations or financial condition.
Our Aaron's Business and BrandsMart Leasing businesses are heavily dependent on data provided by third-party providers such as customer attribute data provided by external sources, including for use as inputs in our centralized decisioning tools. Our centralized decisioning tools rely on these third-party data providers for data inputs that are a critical part of our centralized decisioning processes. Our data providers could experience outages or otherwise stop providing data, provide untimely, incorrect or incomplete data, or increase the costs for their data for a variety of reasons, including a perception that our systems are insecure as a result of a data security breach, regulatory concerns or for competitive reasons. We could also become subject to increased legislative, regulatory or judicial restrictions or mandates on the collection, disclosure, retention or use of such data, in particular if such data is not collected by our providers in a way that allows us to legally use the data. If we were to lose access to this external data or if our access or use were restricted or were to become less economical or desirable, our business, and our centralized decisioning processes in particular, would be negatively impacted, which could have a material adverse effect on our business, results of operations or financial condition. We cannot provide assurance that we will be successful in maintaining our relationships with these external data source providers or that we will be able to continue to obtain data from them on acceptable terms or at all. Furthermore, we cannot provide assurance that we will be able to obtain data from alternative sources if our current sources become unavailable.
We must successfully order and manage our inventory to reflect customer demand and anticipate changing consumer preferences and buying trends or our revenue and profitability will be adversely affected.
The success of our business depends upon our ability to successfully manage our inventory and to anticipate and respond to merchandise trends and customer demands in a timely manner. We cannot always accurately predict consumer preferences and they may change over time. We must order certain types of merchandise, such as electronics, well in advance of seasonal increases in customer demand for those products. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing product trends or changes in prices. If we misjudge either the market for our merchandise, our customers’ product preferences or our customers’ leasing or buying habits, our revenue may decline significantly, and we may not have sufficient quantities of merchandise to satisfy customer demand or we may be required to mark down excess inventory, either of which would result in lower profit margins. In addition, our level of profitability and
success in the LTO business depends on our ability to successfully re-lease or sell our inventory of merchandise that is returned by customers that are unwilling or unable to continue making their lease renewal payments, or otherwise.
Our competitors could impede our ability to attract new customers, or cause current customers to cease doing business with us, which could have a material adverse effect on our business, results of operations or financial condition.
The industries in which we operate are highly competitive and highly fluid, particularly in light of the sweeping new regulatory environment we are witnessing from regulators such as the FTC, among others, as discussed above.
Our competitors include national, regional and local operators of direct-to-consumer LTO stores and websites, virtual LTO and rent-to-rent companies, Buy Now, Pay Later companies, traditional and e-commerce retailers (including many that offer layaway programs, point of sale financing, and title or installment lending), traditional and online sellers of used merchandise, and various types of consumer finance companies that may enable our customers to shop at traditional or online retailers, as well as with rental stores that do not offer their customers a purchase option. We also compete with retail stores for customers desiring to purchase merchandise for cash or on credit. Our competitors in the traditional and virtual sales and lease ownership and traditional retail markets may have significantly greater financial and operating resources and greater name recognition in certain markets. Greater financial resources may allow our competitors to grow faster than us, including through acquisitions. This in turn may enable them to enter new markets before we can, which may decrease our opportunities in those markets. Greater name recognition, or better public perception of a competitor’s reputation, may help them divert market share away from us, even in our established markets. Some competitors may be willing to offer competing products on an unprofitable basis in an effort to gain market share, which could compel us to match their pricing strategy or lose business. In addition, some of our competitors may be willing to lease certain types of products that we will not agree to lease, enter into customer leases that have services, as opposed to goods, as a significant portion of the lease value, or engage in other practices related to pricing, compliance, and other areas that we will not, in an effort to gain market share at our expense. Our inability to attract new customers, or loss of current customers, could have a material adverse effect on our business, results of operations or financial condition.
Our proprietary algorithms and customer lease decisioning tools used to approve customers depend, in part on customer behavior, and unexpected changes in such behavior could cause such algorithms and decisioning tools to no longer be indicative of our customers' ability to perform under their lease agreements with us.
We assume behavior and attributes observed for prior customers, among other factors, are indicative of performance by future customers. Unexpected changes in behavior caused by macroeconomic conditions, including, for example, the United States economy experiencing a prolongedrecession and job losses related to the global pandemic, the reduction of any government stimulus programs, the impacts of a prolonged inflationary period, the impacts from, and governmental responses to, the resumption of any eviction proceedings, the resumption of student loan payments, availability of alternative products or other factors, and changes in consumer behavior relating thereto, could lead to increased incidence and costs related to lease merchandise write-offs. Due to the nature of the inherent risk in modeling customer behavior, our customer lease decisioning process may require adjustments and the application of greater management judgment in the interpretation and adjustment of the results produced by our decisioning tools and we may be unable to accurately predict and respond to the impact of a prolonged economic downturn or changes to consumer behaviors, which in turn may limit our ability to manage risk, avoid lease merchandise write-offs and could result in our accounts receivable allowance being insufficient.
Our business and operations are subject to risks related to climate change.
The long-term effects of global climate change present both physical risks (such as extreme weather conditions or rising sea levels) and transition risks (such as regulatory or technology changes), which are expected to be widespread and unpredictable. These changes could over time affect, for example, the availability and costs of products, commodities and energy (including utilities), which in turn may impact our ability to procure goods or services required for the operation of our business at the quantities and levels we require. Our stores, distribution centers and fulfillment centers may be impacted by the physical risks of climate change, and we face the risk of losses incurred as a result of physical damage, loss or spoilage of inventory and business interruption caused by such events. In addition, consumers leaving coastal areas and those areas most impacted by climate change and relocating could cause greater concentration of our customers in certain markets potentially increasing our costs relating to our store relocation strategy if we have to relocate additional stores. We also use natural gas, diesel fuel, gasoline and electricity in our operations, all of which could face increased regulation as a result of climate change or other environmental concerns. Regulations limiting greenhouse gas emissions and energy inputs may also increase in coming years, which may increase our costs associated with compliance and merchandise. These events and their impacts could adversely affect our business, results of operations or financial condition.
Risks Related to the LTO Industry
The transactions offered to consumers by our LTO business may be negatively characterized by consumer advocacy groups, the media and certain federal, state, provincial and local government officials. If those negative
characterizations become increasingly accepted by consumers, demand for our services and the transactions we offer could decrease and our business, results of operations or financial condition could be materially and adversely affected.
Certain consumer advocacy groups, media reports, federal and state regulators, and certain candidates for political offices have asserted that laws and regulations should be broader and more restrictive regarding LTO transactions. These consumer advocacy groups and media reports generally focus on the total cost to a consumer to acquire an item, which is often alleged to be higher than the interest typically charged by banks or similar lending institutions to consumers with better credit histories. This "cost-of-rental" amount, which is generally defined as the amount paid for lease ownership in excess of the "retail" price of the goods, is from time to time characterized by consumer advocacy groups and media reports as predatory or abusive without discussing the benefits associated with our LTO programs or the lack of viable alternatives for our customers’ needs. Although we strongly disagree with these characterizations, if the negative characterization of these types of LTO transactions becomes increasingly accepted by consumers, demand for our products and services could significantly decrease, which could have a material adverse effect on our business, results of operations or financial condition. Additionally, if the negative characterization of these types of transactions is accepted by regulators and legislators, or if political candidates who have a negative view of the LTO industry are ultimately elected, we could become subject to more restrictive laws and regulations and more stringent enforcement of existing laws and regulations, any of which could have a material adverse effect on our business, results of operations or financial condition. The vast expansion and reach of technology, including social media platforms, has increased the risk that our reputation could be significantly impacted by these negative characterizations in a relatively short amount of time. If we are unable to quickly and effectively respond to such characterizations, we may experience declines in customer loyalty and traffic, which could have a material adverse effect on our business, results of operations or financial condition. Additionally, any failure by our competitors, including smaller, regional competitors, or our franchisees, for example, to comply with the laws and regulations applicable to the traditional and/or e-commerce models, or any actions by those competitors that are challenged by consumers, advocacy groups, the media or governmental agencies or entities as being abusive or predatory could result in our business being mischaracterized, by implication, as engaging in similar unlawful or inappropriate activities or business practices, merely because we operate in the same general industries as such competitors.
Risks Related to Our Aaron's Business Franchisees
We may engage in, or be subject to, litigation with our franchisees.
Although we believe we generally enjoy a positive working relationship with our franchisees, the nature of the franchisor-franchisee relationship may give rise to litigation with our franchisees. In the ordinary course of business, we are the subject of complaints or litigation from franchisees, usually related to allegedbreaches of contract or wrongfultermination under the franchise arrangements. We may also engage in future litigation with franchisees to enforce the terms of our franchise agreements and compliance with our brand standards as determined necessary to protect our brand, the consistency of our products and the customer experience. In addition, we may be subject to claims by our franchisees relating to our franchise disclosure documents, including claims based on financial information contained in those documents. Engaging in such litigation may be costly, time-consuming and may distract management and materially adversely affect our relationships with franchisees. Any negative outcome of these or any other claims could materially adversely affect our business, results of operations or financial condition and may damage our reputation and brand. Furthermore, existing and future franchise-related legislation could subject us to additional litigation risk in the event we terminate or fail to renew a franchise relationship.
Operational and other failures by our franchisees may adversely impact us.
Qualified franchisees who conform to our standards and requirements are important to the overall success of our business. Our franchisees, however, are independent businesses and not team members, and consequently we cannot and do not control them to the same extent as our company-operated stores. Our franchisees may fail in key areas, or experience significant business or financial difficulties, which could slow our growth, reduce our franchise revenues, damage our reputation, expose us to regulatory enforcement actions or private litigation and/or cause us to incur additional costs. If our franchisees experience business or financial difficulties, including, for example, in connection with inflation, rising interest rates, the slowing of consumer demand, labor shortages, and business disruptions due to the ongoing Russia-Ukraine conflict and the conflict in Israel, Palestine and surrounding areas, we could suffer a loss of franchisee fees, royalties, and revenues and profits derived from our sales of merchandise to franchisees, and could suffer write-downs of outstanding receivables those franchisees owe us if they fail to make those payments to us. If we fail to adequately mitigate any such future losses, our business, results of operations or financial condition could be adversely impacted.
We are subject to laws that regulate franchisor-franchisee relationships. Our ability to enforce our rights against our franchisees may be adversely affected by these laws, which could impair our growth strategy and cause our franchise revenues to decline.
As a franchisor, we are subject to regulation by the FTC, state laws and certain Canadian provincial laws regulating the offer and sale of franchises. Our failure to comply with applicable franchise regulations could cause us to lose franchise fees and ongoing royalty revenues. Moreover, state and provincial laws that regulate substantive aspects of our relationships with
franchisees may limit our ability to terminate or otherwise resolveconflicts with our franchisees or enforce contractual duties or rights we believe we have with respect to our franchisees.
Changes to current law with respect to the assignment of liabilities in the franchise business model could materially and adversely affect our profitability.
As of December 31, 2023, we have 55 franchisees that operate a total of 224 stores. One of the legal foundations fundamental to the franchise business model has been that, absent special circumstances, a franchisor is generally not responsible for the acts, omissions or liabilities of its franchisees. In recent years, established law has been challenged and questioned by the plaintiffs’ bar and certain regulators, and the outcome of these challenges and new regulatory positions remains unknown. If these challenges and/or new positions are successful in altering currently settled law, it could significantly change the relationship between us and our franchisees and the way we and other franchisors conduct business and adversely impact our profitability.
For example, a determination that we are a joint employer with our franchisees or that franchisees are part of one unified system with joint and several liability under the National Labor Relations Act, statutes administered by the Equal Employment Opportunity Commission, OSHA regulations and other areas of labor and employment law could subject us and/or our franchisees to liability for the unfair labor practices, wage-and-hour law violations, employment discrimination law violations, OSHA regulation violations and other employment-related liabilities of one or more franchisees. Furthermore, any such change in law would create an increased likelihood that certain franchised networks would be required to employ unionized labor, which could impact franchisors like us through, among other things, increased labor costs and difficulty in attracting new franchisees. In addition, if these changes were to be expanded outside of the employment context, we could be held liable for other claimsagainst franchisees. If such changes occur, our operating expenses may increase as a result of required modifications to our business practices, increased litigation, governmental investigations or proceedings, administrative enforcement actions, fines, penalties and civil liability, which could materially and adversely affect our results of operations.
Risks Related to Ownership of Our Common Stock
We cannot guarantee the timing, amount or payment of dividends on our common stock.
Although we expect to continue to pay a regular quarterly cash dividend, the timing, declaration, amount and payment of future dividends to shareholders will fall within the discretion of our Board. Our Board regularly evaluates our capital allocation strategy and dividend policy, and any future determination regarding the payment of dividends will depend on many factors, including financial condition, liquidity, earnings, our ability to retain future earnings in order to fund operations and future growth, capital requirements, debt service obligations, corporate strategy, regulatory constraints, industry practice, statutory and contractual restrictions and other factors deemed relevant by our Board. No assurance can be given that cash dividends will continue to be declared and paid, and, if declared and paid, the amount of such dividends.
As a public company, we are required to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and our failure to do so could materially and adversely affect us.
We are subject to the reporting requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), the Sarbanes-Oxley Act and the Dodd-Frank Act and are required to prepare our financial statements according to the rules and regulations required by the SEC. In addition, the Exchange Act requires that we file annual, quarterly and current reports. Our failure to prepare and disclose this information in a timely manner or to otherwise comply with applicable law could subject us to penalties under federal securities laws, expose us to lawsuits and restrict our ability to access financing. In addition, the Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting and disclosure purposes. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules.
As more fully disclosed in Item 9A. "Controls and Procedures", management has concluded that, because of a material weakness in internal controls within the BrandsMart segment, which we acquired on April 1, 2022, our disclosure controls and procedures were not effective as of December 31, 2023. The material weakness related to the design of information technology general controls ("ITGCs") related to user access, program change or appropriate segregation of duties for certain IT applications within the segment that were deemed ineffective. This ineffective design impacted controls over the completeness and accuracy of information used in the segment's business process controls resulting in the impacted controls also being deemed ineffective. The material weakness did not result in any errors, however it was not remediated as of December 31, 2023. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We cannot be certain that these measures will be successful or that we will be able to prevent future material weaknesses.
Failure to remediate any material weakness in our internal control over financial reporting or other matters affecting our internal controls may cause us to be unable to report our financial information on a timely basis or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations
by the SEC, violations of applicable stock exchange listing rules, and litigation brought by our shareholders and others. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements could also suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could have a material and adverse effect on us by, for example, leading to a decline in our share price and impairing our ability to raise additional capital, and also could result in litigation brought by our shareholders and others.
Our amended and restated bylaws designate the Georgia State-wide Business Court in the State of Georgia as the exclusive forum for certain litigation, which may limit our shareholders’ ability to choose a judicial forum for disputes with us.
Pursuant to our amended and restated bylaws, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for any shareholder (including a beneficial owner) to bring (a) any derivative action or proceeding brought on behalf of The Aaron's Company, (b) any action asserting a claim of breach of a fiduciary or legal duty owed by any current or former director, officer, employee, shareholder, or agent of The Aaron's Company to The Aaron's Company or The Aaron's Company shareholders, including a claim alleging the aiding and abetting of any such breach of fiduciary duty, (c) any action asserting a claim against the Company, its current or former directors, officers, team members, shareholders, or agents arising pursuant to any provision of the Georgia Business Code or our articles of incorporation or bylaws (as either may be amended from time to time), (d) any action asserting a claim against us, our current or former directors, officers, team members, shareholders, or agents governed by the internal affairs doctrine, or (e) any action against us, our current or former directors, officers, team members, shareholders, or agents asserting a claim identified in O.C.G.A. § 15-5A-3 shall be the Georgia State-wide Business Court. Our amended and restated bylaws also provide that, to the fullest extent permitted by law, if any action the subject matter of which is within the scope of the foregoing exclusive forum provisions is filed in a court other than the Georgia State-wide Business Court, such shareholder shall be deemed to have consented to (i) the personal jurisdiction of the Georgia State-wide Business Court in connection with any action brought in any such foreign court to enforce these exclusive forum provisions and (ii) having service of process made upon such shareholder in any such action by service upon such shareholder’s counsel in the foreign action as agent for such shareholder. Our amended and restated bylaws also provide that the foregoing exclusive forum provisions do not apply to any action asserting claims under the Exchange Act or the Securities Act. These exclusive forum provisions will require our shareholders to bring certain types of actions or proceedings in the Georgia State-wide Business Court in the State of Georgia and therefore may prevent our shareholders from bringing such actions or proceedings in another court that a shareholder may view as more convenient, cost-effective, or advantageous to the shareholder or the claims made in such action or proceeding, and may discourage the actions or proceedings covered by these exclusive forum provisions.
Certain provisions in our articles of incorporation and bylaws, and of Georgia law, may deter or delay an acquisition of us.
Our articles of incorporation and bylaws, and Georgia law, contain provisions that are intended to detercoercive takeover practices and inadequate takeover bids by making such practices or bids more expensive to the acquiror and to encourage prospective acquirors to negotiate with our Board rather than to attempt a hostile takeover. These provisions include rules regarding how shareholders may present proposals or nominate directors for election at shareholder meetings and the right of our Board to issue preferred stock without shareholder approval. Georgia law also imposes some restrictions on mergers and other business combinations between any holder of 10 percent or more of our outstanding common stock and us.
We believe that these provisions will help to protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board and by providing our Board with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some shareholders and could deter or delay an acquisition that our Board determines is not in our best interests or the best interests of our shareholders. Accordingly, in the event that our Board determines that a potential business combination transaction is not in the best interests of us and our shareholders but certain shareholders believe that such a transaction would be beneficial to us and our shareholders, such shareholders may elect to sell their shares in us and the trading price of the Company's common stock could decrease.
In addition, an acquisition or further issuance of our stock could trigger the application of Section 355(e) of the Code. Under the November 29, 2020 Tax Matters Agreement entered into in connection with the spin-off transaction, the Company would be required to indemnify PROG Holdings, Inc. for the resulting tax, and this indemnity obligation might discourage, delay or prevent a change of control that may be considered favorable.
Shareholders’ percentage of ownership in us may be diluted in the future.
In the future, shareholders' percentage ownership in us may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity and stock-based awards that we will be granting to our directors, officers and
team members. Such awards have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.
In addition, our amended and restated articles of incorporation allow us to issue, without approval of our shareholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as our Board generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of our common stock.
General Risks
The success of our business is dependent on factors impacting consumer spending that are not under our control, including general economic conditions, and unfavorable economic conditions in the markets where we operate could result in increases in lease merchandise write-offs, among other things, which could materially and adversely affect our financial performance.
The success of our business is dependent on factors impacting consumer spending that are not under our control, including general economic conditions in the markets where we operate, such as levels of employment, consumer disposable income, rising interest rates, consumer debt and availability of credit, cost of food, energy, and housing and inflationary trends related thereto, recessions and fears of economic downturns, business disruptions due to political or economic instability, including global conflicts such as the Russia-Ukraine conflict and related economic sanctions and the conflict in Israel, Palestine and surrounding areas, domestic civil unrest, and consumer confidence in general, all of which are beyond our control. Unfavorable general economic conditions, due to any one or more of these or other factors, could cause our customers and potential customers to forego purchasing or leasing merchandise from us, or to decrease the amount of merchandise that they otherwise may purchase or lease from us, especially with respect to merchandise considered to be discretionary items. Such unfavorable economic conditions and their related impact on our customers’ confidence could result in lower lease renewal rates, fewer new leases being entered into, increases in product returns, decreases in collections, and increases in lease merchandise write-offs, which could materially and adversely affect our business and financial results, including our revenue and profitability.
The geographic concentration of our store locations may have an adverse impact on our financial performance due to economic downturns and severe weather events in regions where we have a high concentration of stores.
The concentration of our stores in certain regions or limited markets may expose us to increased risk of adverse economic developments compared to a more geographically diverse store portfolio. In addition, our store operators are subject to the effects of adverse acts of nature, such as winter storms, hurricanes, hail storms, strong winds, extreme heat, earthquakes and tornadoes. Such events have previously caused flooding and other damage, particularly in specific geographic areas, including in Florida and Texas, two of our large markets. In addition to the occurrence of natural disasters, acts of violence, terrorism or civil unrest could result in physical damage to our properties (some of which may be excluded from insurance coverage), the temporary closure of stores or distributions centers and/or temporary disruptions to our business. Such events may, depending upon their location and severity, unfavorably impact our business continuity.
Our current insurance program may expose us to unexpected costs, including casualty and accident-related self-insured losses, and negatively affect our financial performance.
Our insurance coverage is subject to deductibles, self-insured retentions, limits of liability, policy exclusions and the related terms and conditions underlying such policies, and similar provisions that we believe are prudent based on our overall operations. We may incur certain types of losses that we cannot insure or which we believe are not economically reasonable to insure, such as theft, damage or destruction of merchandise that is on-lease to our customers and not in our possession, and pandemic diseases. If we incur these losses and they are material, our business could suffer. Certain material events may result in sizable losses for the insurance industry and adversely impact the availability of adequate insurance coverage or result in excessive premium increases. To offset negative cost trends in the insurance market, we may elect to self-insure, accept higher deductibles or reduce the amount of coverage in response to these market changes. In addition, we self-insure a portion of expected losses under our workers’ compensation, general liability, and group health insurance programs. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these self-insured losses, including potential increases in medical and indemnity costs, could result in significantly different expenses than expected under these programs, which could have an unfavorable effect on our financial condition and results of operations. Although we continue to maintain insurance for certain types of catastrophic events, including property loss and cybersecurity incidents, we are self-insured for losses up to the amount of our deductibles and self-insured retentions.
We are subject to sales, income and other taxes, which can vary by jurisdiction and be difficult and complex to calculate due to the nature of our business. A failure to correctly calculate and pay such taxes could result in substantial tax liabilities and a material adverse effect on our results of operations.
The application of indirect taxes, such as sales tax, is a complex and evolving issue. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the e-commerce industry and, therefore, in many cases it is not clear how existing statutes apply to us. In addition, governments are increasingly looking for ways to increase revenues, which has resulted in evolving interpretations of existing tax laws, discussions about tax reform and other legislative actions to increase tax revenues, including through indirect taxes. This also could result in other adverse changes in interpretations of existing sales, income and other tax regulations. For example, from time to time, some taxing authorities in the United States have notified us that they believe we owe them certain taxes imposed on transactions with our customers. Although these notifications have not resulted in material tax liabilities to date, there is a risk that one or more jurisdictions may be successful in the future, which could have a material adverse effect on our results of operations.
Employee misconduct could harm us by subjecting us to monetary loss, significant legal liability, regulatory scrutiny, and reputational harm.
Our reputation is critical to maintaining and developing relationships with our existing and potential customers and third parties with whom we do business. There is a risk that our team members could engage in misconduct that adversely affects our reputation and business, or fail to follow our compliance policies and procedures related to business operations, including with respect to lease originations and lease renewal and collections. For example, if one of our team members engages in discrimination or harassment in the workplace, or if an employee were to engage in, or be accused of engaging in, illegal or suspicious activities including fraud or theft of our customers’ information, we could suffer direct losses from the activity and, in addition, we could be subject to regulatory sanctions and sufferseriousharm to our reputation, financial condition, customer relationships and ability to attract future customers. Employee misconduct could prompt regulators to allege or to determine based upon such misconduct that we have not established adequate supervisory systems and procedures to inform team members of applicable rules or to detect violations of such rules. The precautions that we take to prevent, detect, and remediate misconduct may not be effective in all cases. Misconduct by our team members who are directly or indirectly associated with our business, or even unsubstantiatedallegations of misconduct, could result in a material adverse effect on our reputation and our business.
enabled
As of December 31, 2023, the Company's operating and reportable segments are the Aaron's Business and BrandsMart, each as described below.
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 BrandsMart U.S.A. (excluding BrandsMart Leasing) comprise the BrandsMart segment (collectively, "BrandsMart").
Aaron's Business Segment
Since its founding in 1955, Aaron's 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 1,240 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 a significant portion of the upholstered furniture leased and sold in Company-operated and franchised Aaron's stores.
Launched in 2022, BrandsMart Leasing offers LTO purchase solutions to customers of BrandsMart U.S.A.
BrandsMart Segment
Founded in 1977, BrandsMart U.S.A. is one of the leading appliance and consumer electronics retailers in the southeast United States and one of the largest appliance retailers in the country with 11 stores in Florida and Georgia and a growing e-commerce presence on brandsmartusa.com.
BrandsMart U.S.A. Acquisition
On April 1, 2022, the Company completed the previously announced transaction to acquire a 100% ownership of Interbond Corporation of America, doing business as BrandsMart U.S.A. The Company paid total consideration of $230 million in cash under the terms of the agreement and additional amounts for working capital adjustments and transaction related fees. Consideration transferred also included the off-market value associated with certain operating leases entered into in
conjunction with the transaction. The results of BrandsMart, which is presented as a separate reportable segment, have been included in the Company's consolidated results from the April 1, 2022 acquisition date.
Management believes that the BrandsMart U.S.A. 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 provide BrandsMart 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.
Multi-Year Strategic Plan
Our management team is committed to executing against the following multi-year strategic priorities to further transform and grow the overall business:
• Transform the Aaron's Business
• Promote our Value Proposition to Retain and Attract New Customers to our Brand – We continue to invest in e-commerce, innovative marketing campaigns, and our lease decisioning and digital platforms to illustrate our value proposition to new and existing customers. Such initiatives and investments include:
◦ Making investments to drive growth and consumer traffic through our e-commerce customer acquisition channel by investing in enhancements that provide a fully transactional, mobile, and seamless shopping experience that includes broader product selections, all of which are intended to attract new and younger customers.
◦ Utilizing a broad spectrum of traditional and digital marketing communications in both English and Spanish, ranging from direct mail, social media, display, and local market media, all allowing us to customize messages around price, value, and payment flexibility. The Company is also increasing its local marketing and promotions focus on weekly payment offerings to attract more customers and gain market share.
◦ Continuing investments in lease decisioning and other digital platforms that allow us to optimize lease portfolio performance and lease renewal rate through analytics, machine learning, and operational practices. Other digital investments, aimed at enhancing the customer's experience and improving customer payment activity, include digital payment and servicing platforms.
• Align the Aaron's Store Footprint to our Customer Opportunity – We continue to invest in our market strategy capabilities to make better-informed, evidence-driven decisions around store location and the optimization of operating expenses. We regularly review our Aaron's real estate portfolio, which we expect will increase profitability through repositioning, remodeling, and consolidating our existing stores via our next-generation store concept ("GenNext"). The GenNext store concept features include larger showrooms and/or re-engineered store layouts, updated signage, expanded product assortment, enhanced technology-enabled shopping and checkout, and an innovative operating model. We have also enhanced our market optimization strategy with a new "Hub and Showroom" model which leverages existing infrastructure to more efficiently serve markets by combining servicing capabilities of multiple stores into a "hub" store while converting other nearby stores into "showrooms" that focus exclusively on sales activities.
We expect that our market optimization program, together with our aarons.com e-commerce platform and increased use of technology to better serve our customers, will continue to enable us to reduce store operating costs and lower working capital requirements while better serving our existing markets, and attracting new customers through expansion into new markets in the future. As of December 31, 2023, we have 254 GenNext stores in our portfolio with plans to open up to an additional 20 GenNext concept stores and 10 showrooms during 2024.
• Enhance and Grow BrandsMart
• Grow Addressable Market - The acquisition of BrandsMart U.S.A. broadens our customer reach and significantly expands our total addressable market. Our BrandsMart growth initiatives include:
◦ Capturing share in adjacent geographic markets by opening new BrandsMart stores. In 2023, we opened one new store, and we expect to open 1-2 new stores each year going forward.
◦ Making investments to drive growth and customer traffic by investing in enhanced customer payment and financing programs, improved online shopping experience, enhanced digital marketing strategies, and expanded product selection.
• Achieve Transaction Synergies - We continue to make progress in executing our synergy initiatives in connection with the acquisition of BrandsMart U.SA. in order to drive meaningful value-creation opportunities for the business.
• Enterprise Initiatives
• Strengthen Operational Efficiencies and Optimize Cost Structure - During the third quarter of 2022, the Company initiated an operational efficiency and optimization restructuring program intended to reduce the Company’s overall costs. This program includes the optimization of store support center functions, multi-unit
store oversight, store labor and operations, supply chain, the expansion of the Hub and Showroom model, as well as other reductions in real estate and third party spend. Management believes that implementing this program will help the Company optimize its cost profile, allocate capital resources towards long-term strategic objectives, and generate incremental value for shareholders.
• Further environmental, social, and governance initiatives ("ESG") - We continue to invest in building a people-focused workplace culture and in opportunities to make a positive impact on the environment and the communities where our customers and team members live and work. To do this, we continued to enhance our compliance, enterprise risk management, corporate governance, diversity and inclusion, and environmental management programs and have developed roadmaps for continuing to enhance these programs in 2024 and beyond.
Restructuring Programs
As management continues to execute on its long-term strategic plan, additional benefits and charges are expected to result from our restructuring programs. The extent of any future charges related to our restructuring programs are not currently estimable and depend on various factors including the timing and scope of future cost optimization initiatives.
Real Estate Repositioning and Optimization Restructuring Program
During the first quarter of 2020, the Company initiated a real estate repositioning and optimization program 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. We expect that this strategy, together with our aarons.com e-commerce platform and increased use of technology to better serve our customers, will enable us to reduce store operating costs while continuing to better serve our existing markets, as well as attract new customers and expand into new markets in the future.
Since initiation, the program has resulted in the closure, consolidation or relocation of a total of 250 Company-operated Aaron's stores through 2023. This program also resulted in the closure of one administrative store support building and a further rationalization of our store support center staff, which included a reduction in employee headcount in those areas to more closely align with current business conditions.
During 2023, the Company opened 43 new GenNext locations. Combined with the 211 locations open at the beginning of the year, total GenNext stores contributed 29.7% of total lease revenues and fees and retail revenues for the Aaron's Business segment in 2023. As of December 31, 2023, we have identified approximately 12 remaining stores for closure, consolidation, or relocation that have not yet been closed and vacated, which are generally expected to close in 2024. We will continue to evaluate our Company-operated Aaron's store portfolio to determine how to bestrationalize and reposition our store base to better align with marketplace demand.
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 two to three 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.
Since inception of the real estate repositioning and optimization program, the Company has incurred charges of $70.8 million under the plan. These cumulative charges are primarily comprised of operating lease right-of-use asset and fixed impairment charges, losses recognized related to contractual lease obligations, and severance related to reductions in store support center and field support staff headcount. We expect future restructuring expenses (reversals) due to potential future early buyouts of leases with landlords, as well as continuing variable occupancy costs related to closed stores.
Operational Efficiency and Optimization Restructuring Program
During the third quarter of 2022, the Company initiated an operational efficiency and optimization restructuring program intended to reduce the Company’s overall costs. Management believes that implementing this restructuring program will help the Company sharpen its operational focus, optimize its cost profile, allocate capital resources towards long-term strategic objectives, and generate incremental value for shareholders through investments in technological capabilities, and fulfillment center and logistics competencies. The program resulted in the closure or consolidation of 38 Company-operated Aaron's stores during the year ended December 31, 2023. This program also includes the Hub and Showroom model to optimize labor in markets, store labor realignments, optimization of the Company's supply chain, the centralization and optimization of store support center, operations, and multi-unit store oversight functions, as well as other real estate and third party spend costs reductions.
Total net restructuring expenses under the Operational Efficiency and Optimization Restructuring Program related to the initiatives described above were $6.4 million during the year ended December 31, 2023. Such expenses were recorded within the Unallocated Corporate category for segment reporting and were comprised mainly of professional advisory fees, severance, operating lease right-of-use asset impairment charges, fixed asset impairment charges and continuing variable occupancy costs incurred related to closed stores. Management expects future restructuring expenses (reversals) due to potential early buyouts of leases with landlords, as well as continuing variable occupancy costs related to closed stores.
In January 2024, the Company completed a headcount reduction of its store support center to more closely align with current business conditions resulting in the recognition of $2.1 million in severance charges. Additional cost saving initiatives are planned to improve earnings in 2024 and later years.
Operating Segment Performance
As discussed above, the Company conducts its operations through two primary operating business segments: the Aaron’s Business and BrandsMart. Effective April 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, goodwill impairment 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 (loss) 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 to BrandsMart Leasing, are completed at retail prices. Since the intersegment profit affects cost of goods sold, depreciation and lease merchandise 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.
Fiscal Year 2023 Highlights
We have been actively monitoring the impact of the current challenging macroeconomic environment, including inflation, rising interest rates, the slowing of consumer demand, labor shortages, and business disruptions due to political or economic instability, including global conflicts such as the Russia-Ukraine conflict and related economic sanctions and the conflict in Israel, Palestine and surrounding areas, on all aspects of our business. We anticipate that demanding market conditions, including reduced consumer demand and elevated levels of inflation, will continue throughout 2024 and beyond. We anticipate that these headwinds will be partially mitigated by our cost cutting and real estate repositioning and optimization strategies further described above.
The following summarizes significant highlights from the year ended December 31, 2023:
• Consolidated revenues were $2.14 billion in 2023 compared to $2.25 billion in 2022, a decrease of 4.9%. This decrease is primarily due to a year over year decline in the Aaron's Business segment of $157.0 million, partially offset by a full-year inclusion of BrandsMart in the Company's consolidated results.
• Total revenues for the Aaron's Business were $1.55 billion in 2023 compared to $1.70 billion in 2022, a decrease of 9.2%. This decrease is primarily driven by a lower lease portfolio size throughout the year, as well as a lower exercise of early purchase options and lower retail and non-retail sales.
• The lease portfolio size, excluding BrandsMart Leasing, began 2023 at $126.5 million, down 7.2% compared to the beginning of 2022, and ended 2023 at $117.7 million, down 7.0% compared to the end of 2022.
• E-commerce revenues, increased 6.6% at the Aaron's Business and by 2.9% at BrandsMart during the year ended December 31, 2023.
• During the year ended December 31, 2023, the Company opened 43 new GenNext locations. Combined with the 211 locations open at the beginning of the year, total GenNext stores contributed 29.7% of total lease and retail revenues for the Aaron's Business during the year ended December 31, 2023.
• The loss before income taxes was $1.1 million during the year ended December 31, 2023 and was negatively impacted by restructuring charges of $15.6 million, BrandsMart U.S.A. acquisition-related costs of $3.6 million, and acquisition-related intangible amortization expense of $10.3 million.
• Diluted earnings per share for the year ended December 31, 2023 were $0.09 compared with diluted losses per share of $0.17 in 2022.
• The Company repurchased 608,007 shares of common stock for $6.5 million during the year ended December 31, 2023.
Key Performance Metrics
The following table presents store activity by ownership type:
Company-operated Aaron's Stores 1
Company-operated Aaron's stores open at January 1,
Opened
Added through acquisition
Closed, sold or merged
Company-operated Aaron's stores open at December 31,
GenNext (included in Company-Operated)
Franchised Aaron's Stores
Franchised Aaron's stores open at January 1,
Purchased by the Company
Closed, sold or merged
Franchised Aaron's stores open at December 31,
BrandsMart U.S.A. Stores 2
BrandsMart U.S.A. stores open at January 1,
Purchased by the Company
Opened following the acquisition
BrandsMart U.S.A. stores open at December 31,
1 The typical layout for a Company-operated Aaron's store is a combination of showroom, customer service and warehouse space, generally comprising 6,000 to 15,000 square feet. Certain Company-operated Aaron's stores consist solely of a showroom.
2 BrandsMart U.S.A. stores average approximately 96,000 square feet and have been included in this table subsequent to the acquisition date of April 1, 2022.
The following table presents Company-operated Aaron's stores by type:
Company-operated Aaron's Store Types as of December 31, 2023
GenNext
Legacy
Total
Store
Hub
Showroom
Total
Aaron's Business
Lease Portfolio Size. Our lease portfolio size for the Aaron's Business, excluding BrandsMart 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 primarily as a result of customer agreements that reach full ownership, customer early purchase option exercises, lease merchandise returns, and write-offs. Lease portfolio size provides management insight into expected future collectible lease payments. The Company ended the fourth quarter of 2023 with a lease portfolio size for all Company-operated Aaron's stores of $117.7 million, a decrease of 7.0% compared to the lease portfolio size as of December 31, 2022.
Lease Renewal Rate. Our lease renewal rate for the Aaron's Business, excluding BrandsMart 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 lease revenues collected or renewed 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 2023 was 87.1%, compared to 87.5% for 2022.
BrandsMart
Comparable Sales. We believe that changes in comparable sales is a key performance indicator for the BrandsMart operating segment as it provides management insight into the performance of existing stores and e-commerce business by measuring the change in sales for a particular period over the comparable prior period. Comparable sales includes retail sales generated at BrandsMart stores (including retail sales to BrandsMart Leasing), e-commerce sales initiated on the website or app, warranty revenue, gift card breakage, and sales of merchandise to wholesalers and dealers, as applicable. Comparable sales excludes service center related revenues.
Comparable sales for the year ended December 31, 2023 have not been provided, as a comparable period was not included in the prior period consolidated results as of December 31, 2022, due to the completion of the BrandsMart acquisition on April 1, 2022.
Key Components of Loss Before Income Taxes
In this management’s discussion and analysis section, we review our consolidated results. The financial statements for the year ended December 31, 2023 and comparable prior year period are consolidated financial statements of the Company and its wholly-owned subsidiaries, and are 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 the April 1, 2022 acquisition date.
For the year ended December 31, 2023 and the comparable prior year period, some of the key revenue, cost and expense items that affected loss 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 brands and fees from our Aaron'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 pre-leased 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 revenue 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 and BrandsMart Leasing, as well as the costs associated with the Aaron's Club program.
Retail Cost of Sales . Retail cost of sales includes cost of merchandise inventories sold through our BrandsMart U.S.A. stores and the depreciated cost of merchandise sold through our Company-operated Aaron's stores. Retail cost of sales for the BrandsMart segment during the year ended December 31, 2022 includes a one-time $23.1 million non-cash charge for a fair value adjustment to the acquired merchandise inventories.
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 with the exception of compensation costs that are eligible for capitalization.
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. Other operating expenses, net excludes costs that have been capitalized or that are a component of the Company's restructuring programs.
Provision for Lease Merchandise Write-offs. Provision for lease merchandise write-offs represents charges incurred related to estimated and actual lease merchandise write-offs.
Restructuring Expenses, Net. Restructuring expenses, net are comprised principally of closed store operating lease right-of-use asset impairment and operating lease charges, fixed asset impairment charges, professional advisory fees, and expenses related to workforce reductions. Such costs are recorded within the Unallocated Corporate category of segment reporting. Refer to Note 11 of the accompanying consolidated financial statements for further discussion of restructuring expenses, net.
Impairment of Goodwill. Impairment of goodwill is the full write-off of the goodwill balance at the Aaron's Business reporting unit that occurred during the year ended December 31, 2022. Refer to Note 3 of the accompanying consolidated financial statements for further discussion of the interim goodwill impairment assessment and the resulting impairment charge. This impairment charge was recorded within the Unallocated Corporate category of segment reporting.
Separation Costs . Separation costs represent employee-related expenses associated with the 2020 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 to operate 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 BrandsMart U.S.A. in April 2022. Such costs are recorded within the Unallocated Corporate category of segment reporting.
Interest Expense. Interest expense 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 Income (Expense), Net. Other non-operating income (expense), net includes the impact of foreign currency remeasurement, as well as gains and losses resulting from changes in the cash surrender value of Company-owned life insurance related to the Company’s deferred compensation plan. This activity also includes earnings on cash and cash equivalent investments.
Consolidated Results of Operations – Years Ended December 31, 2023 and 2022
The results of BrandsMart, which is presented as a separate reportable segment, have been included in the Company's consolidated results from the April 1, 2022 acquisition date.
Change
Year Ended December 31,
(In Thousands)
REVENUES:
Lease Revenues and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Other Revenues
COSTS OF REVENUES:
Depreciation of Lease Merchandise and Other Lease Revenue Costs
Retail Cost of Sales
Non-Retail Cost of Sales
GROSS PROFIT
Gross Profit %
OPERATING EXPENSES:
Personnel Costs
Other Operating Expenses, Net
Provision for Lease Merchandise Write-Offs
Restructuring Expenses, Net
Impairment of Goodwill
Separation Costs
Acquisition-Related Costs
OPERATING PROFIT (LOSS)
nmf
Interest Expense
Other Non-Operating Income (Expense), Net
nmf
LOSS BEFORE INCOME TAXES
INCOME TAX BENEFIT
NET EARNINGS (LOSS)
nmf
nmf—Calculation is not meaningful
Revenues. Total consolidated revenues were $2.14 billion during the year ended December 31, 2023, a $109.5 million decrease compared to the year ended December 31, 2022. This decrease was primarily due to a $157.0 million decrease in revenues at the Aaron's Business segment during the year ended December 31, 2023, as further discussed in the "Segment Performance" section below. This decrease was partially offset by full year results from the BrandsMart segment in 2023.
Gross Profit. Consolidated gross profit for the Company was $1.12 billion during the year ended December 31, 2023, a $42.5 million decrease compared to the prior year period. This decrease was primarily driven by an $84.7 million decrease in gross profit at the Aaron's Business segment during the year ended December 31, 2023, as further discussed in the "Segment Performance" section below. This decrease was partially offset by full year results from the BrandsMart segment in 2023. Gross profit for the BrandsMart segment during 2022 includes a one-time $23.1 million non-cash charge for a fair value adjustment to the acquired merchandise inventories.
As a percentage of total consolidated revenues, consolidated gross profit increased to 52.3% during 2023 compared to 51.6% in 2022 primarily due to higher gross profit margin on non-retail sales in the Aaron's Business segment and the non-cash charge in the BrandsMart segment mentioned above.
Personnel Costs. Personnel costs decreased by $7.3 million due primarily to the optimization of store labor, store support, and operational oversight functions at both business segments, partially offset by an increase in incentive based compensation and the BrandsMart segment contributing a full year of personnel cost expense in 2023.
Other Operating Expenses, Net. Information about certain significant components of other operating expenses, net for the consolidated Company is as follows:
Change
Year Ended December 31,
(In Thousands)
Occupancy Costs
Other Miscellaneous Expenses, net
Shipping and Handling
Advertising Costs
Bank and Credit Card Related Fees
Professional Services
Intangible Amortization
Gains on Dispositions of Store-Related Assets, net
Other Operating Expenses, net
As a percentage of total revenues, other operating expenses, net increased to 23.3% for the year ended December 31, 2023 from 21.8% for the same period in 2022.
Occupancy costs increased during the year ended December 31, 2023 primarily due to the acquisition of BrandsMart U.S.A., which resulted in occupancy costs of $41.1 million in the BrandsMart segment during the year ended December 31, 2023, as compared to $31.1 million for the nine months ended December 31, 2022. Occupancy costs were also impacted by higher rent and depreciation of property, plant, and equipment associated with newer Company-operated Aaron's store locations under our repositioning and optimization initiatives. These increases were partially offset by lower maintenance and utility costs as well as lower occupancy costs due to the net reduction of 55 Company-operated Aaron's stores during the 24-month period ended December 31, 2023.
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 decrease in this category during the year ended December 31, 2023 is primarily due to the receipt in January 2023 of a $3.8 million settlement of a class action lawsuit related to alleged anti-competitive conduct by several manufacturers of cathode ray tubes, partially offset by the acquisition of BrandsMart U.S.A, which included a full year of results for the year ended December 31, 2023.
Shipping and handling costs decreased during the year ended December 31, 2023 primarily due to lower fuel and distribution costs driven by inflationary and other economic pressures that were present during the year ended December 31, 2022, as well as lower product deliveries and returns during the year ended December 31, 2023 as compared to the same period in 2022.
Advertising costs increased primarily due to higher spend to support the new store opening at BrandsMart U.S.A., partially offset by a decrease in advertising spend at the Aaron's Business, including an increase in vendor marketing credits eligible to be applied as a reduction of advertising costs.
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 $13.3 million in the BrandsMart segment during the year ended December 31, 2023, as compared to $9.8 million for the nine months ended December 31, 2022.
Intangible amortization increased primarily due to the amortization of intangible assets acquired in the BrandsMart U.S.A. acquisition for the full year ended December 31, 2023, as compared to only nine months during the year ended December 31, 2022.
Gains on dispositions of store-related assets, net decreased primarily due to gains of $8.5 million recognized during the year ended December 31, 2022 related to sale and leaseback transactions for seven Company-owned Aaron's store properties. During year ended December 31, 2023, the Company recognized gains of $5.4 million related to sale and leaseback transactions for five Company-owned Aaron's store properties.
Provision for Lease Merchandise Write-offs . The provision for lease merchandise write-offs as a percentage of lease revenues and fees for the Aaron's Business was 5.8% for the year ended December 31, 2023 compared to 6.4% for the comparable period in 2022. Although economic pressures within the broader macroeconomic environment continued to impact the liquidity of our customers which resulted in lower lease renewal rates, decisioning enhancements made prior to 2023 contributed to lower write-offs of lease merchandise and a lower provision for lease merchandise write-offs, as compared to the year ended December 31, 2022.
Restructuring Expenses, Net. Restructuring activity for the year ended December 31, 2023 resulted in expenses of $15.6 million, which were primarily comprised of $7.1 million of continuing variable occupancy costs incurred related to previously closed stores, $4.1 million of operating lease right-of-use asset and fixed asset impairment for Company-operated Aaron's stores identified for closure in 2023, and $2.4 million of professional advisory fees and other charges. Restructuring expenses for the year ended December 31, 2022 were $32.7 million, which were primarily comprised of $16.2 million of operating lease right-of-use asset and fixed asset impairment for Company-operated Aaron's stores identified for closure in 2022 as well as an administrative building in Kennesaw, Georgia, $7.2 million of continuing variable occupancy costs incurred related to previously closed stores, $4.9 million of professional advisory fees related to costs optimization initiatives, and $3.1 million of severance charges related to reductions in store support center staff.
Separation Costs . Separation costs recognized during the years ended December 31, 2023 and December 31, 2022 were $0.2 million and $1.2 million, respectively, and 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 2020 spin-off transaction and other one-time expenses incurred by the Company to operate as an independent, separate public entity. These costs will be fully expensed in the first quarter of 2024.
Acquisition-Related Costs . Acquisition-related costs recognized during the years ended December 31, 2023 and December 31, 2022 were $3.6 million and $14.6 million, respectively, and primarily represent third-party consulting, banking and legal expenses associated with the acquisition of BrandsMart U.S.A.
Operating Profit (Loss)
Interest Expense. Interest expense increased to $15.5 million for the year ended December 31, 2023 from $9.9 million for the year ended December 31, 2022. Interest expense for the year ended December 31, 2023 and December 31, 2022 consists primarily of interest on the Company's variable rate borrowings under the Credit Facility (defined below) and commitment fees on unused balances, as well as the amortization of debt issuance costs.
Other Non-Operating Income (Expense), Net. Other non-operating income (expense), 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 gains of $1.9 million and net losses of $2.3 million during the years ended December 31, 2023 and 2022, respectively. Foreign currency remeasurement net losses resulting from changes in the value of the U.S. dollar against the Canadian dollar and earnings on cash and cash equivalent investments were not significant in 2023 or 2022.
Income Tax (Benefit) Expense
The Company recorded a net income tax benefit of $3.9 million during the year ended December 31, 2023 compared to an income tax benefit of $9.5 million for the same period in 2022. The effective tax rate increased to 366.8% for the year ended December 31, 2023 compared to 64.2% for the same period in 2022. The net income tax benefit recognized in 2023 and resulting increase in the effective tax rate was primarily due to a loss before income taxes of $1.1 million during the year ended December 31, 2023 as a result of the factors further described above, as well as the impact of a deferred income tax benefit of $5.3 million generated by the remeasurement of state deferred tax assets and liabilities in connection with an election to file a
consolidated state income tax return and a change in the expected state apportionment percentages related to the election to treat Aaron's, LLC, a subsidiary of the Company, as a corporation for income tax purposes effective January 1, 2023.
Segment Performance – Years Ended December 31, 2023 and 2022
Aaron's Business Segment Results
Revenues . The following table presents revenue by source for the Aaron's Business segment for the years ended December 31, 2023 and 2022:
Year Ended December 31,
Change
(In Thousands)
Lease Revenues and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Other
Total Revenues - Aaron's Business
The decreases in lease revenues and fees and retail sales during the year ended December 31, 2023 were primarily due to a lower average lease portfolio size during the period, a lower lease renewal rate, lower exercise of early purchase options, and lower retail sales during the year ended December 31, 2023 compared to the prior year period.
E-commerce revenues increased 6.6% compared to the prior year period and were 18.7% and 15.9% of total lease revenues and fees during the years ended December 31, 2023 and 2022, respectively.
The decrease in non-retail sales is primarily due to comparatively lower lease merchandise inventory purchases by Aaron's franchisees stemming from lower customer demand during 2023. Non-retail sales also decreased due to the reduction of 12 franchised stores during the 24-month period ended December 31, 2023.
The decrease in franchise royalties and fees is primarily the result of a lower lease portfolio size at Aaron's franchisees during the period, due in part to the reduction of 12 franchised stores during the 24-month period ended December 31, 2023, lower early purchase options, and lower retail sales.
Gross Profit and Earnings Before Income Taxes
Year Ended December 31,
Change
(In Thousands)
Gross Profit
Earnings Before Income Taxes
As a percentage of total revenues, gross profit for the Aaron's Business increased to 63.1% during the year ended December 31, 2023 compared to 62.3% for the comparable period in 2022. The factors impacting the change in gross profit are discussed below.
Gross profit for lease revenues and fees for the Aaron's Business was $0.9 billion and $1.0 billion during the years ended December 31, 2023 and 2022, respectively, which represented a gross profit margin of 66.6% and 66.4% for the respective periods. The increase in gross profit margin is primarily due to a decreasing mix of lower margin early payout revenue in 2023 as compared to 2022.
Gross profit for retail sales for the Aaron's Business was $7.1 million and $10.7 million during the years ended December 31, 2023 and 2022, respectively, which represented a gross profit margin of 26.2% and 27.0% for the respective periods. The decline in gross profit margin is primarily an unfavorable mix shift from retail sales of new merchandise to retail sales of returned merchandise in 2023 as compared to 2022.
Gross profit for non-retail sales for the Aaron's Business was $14.7 million and $11.4 million during the years ended December 31, 2023 and 2022, respectively, which represented a gross profit margin of 15.2% and 10.3% for the respective periods. The increase in gross profit percentage is primarily due to a reduction in inventory costs during the year ended December 31, 2023, combined with pricing initiatives implemented by the Company.
Earnings before income taxes for the Aaron's Business segment decreased by $23.2 million during the year ended December 31, 2023 compared to the prior year period primarily due to the $84.7 million decrease in gross profit, partially offset by lower personnel costs and other operating expenses at the Aaron's Business.
BrandsMart Segment Results
Year Ended December 31,
Change
(In Thousands)
Retail Sales
Gross Profit
Loss Before Income Taxes
Revenues . BrandsMart segment revenues, entirely comprised of retail sales, have been included in the Company's consolidated results from the April 1, 2022 acquisition date and were $604.4 million and $552.5 million during the years ended December 31, 2023 and 2022, respectively. This increase was primarily driven by a full year of results being reflected for the year ended December 31, 2023, including the impact of a new BrandsMart store that opened in the third quarter of 2023, compared to only nine months for the year ended December 31, 2022, partially offset by a decline in average ticket and transaction volume.
Gross Profit. Gross profit for retail sales for the BrandsMart segment has been included in the Company's consolidated results from the April 1, 2022 acquisition date and was $143.7 million and $101.4 million during the years ended December 31, 2023 and 2022, respectively. As a percentage of revenues, gross profit for the BrandsMart segment was 23.8% and 18.3% during the years ended December 31, 2023 and 2022, respectively. The increase in gross profit margin was primarily driven by a one-time $23.1 million non-cash charge for a fair value adjustment to the acquired merchandise inventories during the year ended December 31, 2022.
Loss Before Income Taxes. The BrandsMart segment reported a loss before income taxes of $5.0 million and $11.2 million during the years ended December 31, 2023 and 2022, respectively. The results for the BrandsMart segment during the year ended December 31, 2022 reflect a one-time $23.1 million non-cash charge for a fair value adjustment to the acquired merchandise inventories.
Overview of Financial Position
The primary changes in the consolidated balance sheets from December 31, 2022 to December 31, 2023 include:
• Cash and cash equivalents increased $31.3 million to $59.0 million at December 31, 2023. For additional information, refer to the "Liquidity and Capital Resources" section below.
• Debt decreased $48.5 million primarily due to repayments of $119.7 million on the Company's outstanding borrowings, partially offset by $71.1 million in proceeds from the Company's Revolver and Term Loan during the year ended December 31, 2023. Refer to the "Liquidity and Capital Resources" section below for further details regarding the Company’s financing arrangements.
• Treasury shares increased $9.0 million due primarily to the Company's repurchase of 608,007 shares of common stock for $6.5 million during the year ended December 31, 2023.
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 acquisitions. The Company also periodically repurchases common stock and pays quarterly cash dividends. In 2023, uses of capital have included purchases, including leasehold improvements and merchandise inventory, associated with the opening of a new BrandsMart store.
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 (defined below) 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 of December 31, 2023, the Company had $59.0 million of cash and $331.0 million of availability under its $375.0 million Revolving Facility which is further described in Note 8 to the accompanying consolidated financial statements.
Cash Provided by Operating Activities
Cash provided by operating activities was $180.4 million and $170.4 million during the years ended December 31, 2023 and 2022, respectively. The increase in operating cash flows was primarily driven by improved consolidated earnings results as well as lower lease merchandise purchases for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increases in cash provided by operating activities were partially offset by a lower average lease portfolio size and a lower lease renewal rate during the year ended December 31, 2023 compared to 2022. Other changes in cash provided by operating activities are discussed above in our discussion of results for the year ended December 31, 2023.
Cash Used in Investing Activities
Cash used in investing activities was $76.9 million and $351.4 million during the years ended December 31, 2023 and 2022, respectively.
The $274.5 million decrease in investing cash outflows was primarily due to the purchase consideration of $265.6 million in 2022 related to the BrandsMart U.S.A. acquisition, as well $13.6 million lower cash outflows for purchases of property, plant and equipment primarily related to GenNext initiatives in 2023 compared to 2022, partially offset by $4.2 million lower proceeds from the sale of property, plant and equipment during the year ended December 31, 2023, compared to the prior year period.
Cash (Used in) Provided by Financing Activities
Cash used in financing activities was $72.2 million during the year ended December 31, 2023 compared to cash provided by financing activities of $185.9 million during the year ended December 31, 2022. The $258.1 million change in financing cash flows during the year ended December 31, 2023 was primarily due to the Company's borrowings under the Term Loan (defined above) and the Revolving Facility (defined above) that occurred during April 2022 to finance the BrandsMart U.S.A. acquisition, as well as a higher amount of repayments on the Company's outstanding borrowings during the year ended December 31, 2023, compared to 2022. This was partially offset by $6.9 million lower outflows related to the repurchase of the Company's common stock during the year ended December 31, 2023 compared to 2022, net repayments of $15.5 million under the Company's inventory financing agreement during the year ended December 31, 2022, and debt issuance costs of $2.8 million being paid in 2022.
Share Repurchases
During the year ended December 31, 2023, the Company repurchased 608,007 shares of the Company's common stock for a total purchase price of $6.5 million. The total shares outstanding as of December 31, 2023 were 30,361,434 compared to 30,619,658 as of December 31, 2022. On March 2, 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 to December 31, 2024. As of December 31, 2023, we have the authority to purchase additional shares of $127.0 million up to our remaining authorization limit.
Dividends
At its November 2023 meeting, our Board approved a quarterly dividend of $0.125 per share, which was paid to shareholders on January 4, 2024. Aggregate dividend payments for the year ended December 31, 2023 were $15.0 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.
On February 26, 2024, our Board declared a regular cash dividend of $0.125 per share, payable on April 3, 2024, to shareholders on record as of March 14, 2024.
Debt Financing
As of December 31, 2023, the total available credit under our $375.0 million Credit Facility (defined below) was $331.0 million, which reflects borrowings of $169.5 million under the Term Loan, $25.0 million of outstanding borrowings under the Revolving Facility and $19.0 million for our outstanding letters of credit.
On April 1, 2022, the Company entered into a new unsecured credit facility (the "Credit Facility") which replaced its previous $250 million unsecured credit facility. The 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 the BrandsMart 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 on April 1, 2027. The Term Loan amortizes in quarterly installments, commencing on December 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 on April 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 at December 31, 2023.
On February 23, 2024, the Company amended its revolving credit and term loan agreement (the "Credit Facility") to, among other things: (i) decrease the Revolving Facility commitment from $375 million to $275 million, (ii) include a Security Agreement consisting of a first priority lien (subject to Permitted Liens) on certain agreed upon assets of the Borrower and Guarantors, including a pledge of the capital stock of all existing and future Material Subsidiaries of Holdings and excluding Real Property, and (iii) amend the existing Fixed Charge Coverage Ratio to lower the required minimum threshold.
Commitments
During the year ended December 31, 2023, we made net income tax payments of $11.7 million. During the year ending December 31, 2024, we anticipate making estimated cash payments of $9.0 million for federal income taxes and $1.0 million for state income taxes.
The Tax Cuts and Jobs Act of 2017, which was enacted in December 2017, provides for 100% expense deduction of certain qualified depreciable assets, including lease merchandise inventory, purchased by the Company after September 27, 2017 (but would be phased down starting in 2023). Because of our sales and lease ownership model, in which the Company remains the owner of merchandise on lease, we benefit more from bonus depreciation, relatively, than traditional furniture, electronics and appliance retailers.
We estimate the deferred tax liability associated with bonus depreciation from the Tax Act and the prior tax legislation is approximately $118.0 million as of December 31, 2023, of which approximately 70% is expected to reverse as a deferred income tax benefit in 2024 and most of the remainder during 2025. These amounts exclude bonus depreciation the Company will receive on qualifying expenditures after December 31, 2023.
Leases . We lease retail store and warehouse space for most of our store-based operations, as well as corporate office space for store and e-commerce supporting functions, under operating leases expiring at various times through 2038, and our stores have an average remaining lease term of approximately six years. Most of the leases contain renewal options for additional periods ranging from one to 20 years. Approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 2023 are disclosed in Note 7 to the accompanying consolidated financial statements in this Annual Report.
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 8 to the accompanying consolidated financial statements, a new Franchise Loan Facility agreement was entered into by the Company on April 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 to March 31, 2023. As of December 31, 2023, the Franchise Loan Facility has a total commitment amount of $10.0 million and a maturity date of March 30, 2024, due to amendments executed in 2023. On February 23, 2024, the Company amended its Franchise Loan Facility to conform to the changes resulting from the amendment to its Credit Facility (described above), and to extend the maturity date to March 29, 2025. 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. At December 31, 2023, the maximum amount that the Company
would be obligated to repay in the event franchisees defaulted was $4.9 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 the Company's franchisees resulting in an event of default or impendingdefaults 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 consolidated balance sheets and was $1.0 million and $1.3 million as of December 31, 2023 and December 31, 2022, respectively. The liability for both periods included qualitative consideration of potential losses, including uncertainties impacting the operations and liquidity of our franchisees. Uncertainties include inflationary pressures in the macroeconomic environment.
Purchase Obligations. The Company has non-cancellable purchase obligations of $18.0 million primarily related to certain advertising and marketing programs, software licenses, and hardware and software maintenance. Payments under these commitments are scheduled to be $11.3 million in 2024, $5.6 million in 2025 and $1.1 million in 2026. These amounts include only those purchase obligations for which the timing and amount of payments is certain. We have no long-term commitments to purchase merchandise nor do we have significant purchase agreements that specify minimum quantities or set prices that exceed our expected requirements for three months.
Critical Accounting Estimates
Our critical accounting estimates are estimates made in accordance with U.S. generally accepted accounting principles ("GAAP") that involve a significant level of management estimation and have had or are reasonably likely to have a material impact on our consolidated financial statements. Accordingly, the actual results may differ materially from such estimates. For a discussion of the Company’s significant accounting policies, see Note 1 to the accompanying consolidated financial statements.
Insurance
We retain a substantial portion of the risk related to employee health, workers’ compensation and general liability claims. However, we maintain stop-loss coverage to limit the exposure related to certain insurance risks. We base our health insurance liability estimation trends in claim payment history, historical trends in claims incurred but not yet reported and other components such as expected increases in medical costs, projected premium costs and the number of plan participants. Additionally, we base our estimates for workers’ compensation, general and product liability on an actuarial analysis performed by an independent third-party actuary. We review our insurance liability on a regular basis and adjust our accruals accordingly.
Changes in facts and circumstances may lead to a change in the estimated liability due to revisions of the estimated ultimate costs that affect our liability insurance coverage. Our liabilities could be significantly affected if actual results differ from our expectations or prior actuarial analyses.
Goodwill and Other Intangible Asset Impairment
We review goodwill and other intangible assets for impairment annually, or when events or circumstances indicate it is more-likely-than-not that the value of the asset may be impaired. In assessing these types of assets for impairment, there are significant estimates and assumptions used to determine the fair value, including relevant market and economic conditions, anticipated future revenues and cash flows, royalty rates, and discount rates.
During a quantitative assessment, we use a weighted guideline public company method and/or a discounted cash flow method to determine an estimated fair value. If it is determined that the fair value of a reporting unit is less than its carrying value, an impairment charge is recorded to bring the carrying value down to its fair value.
We conducted a quantitative assessment at October 1, 2023. The analysis requires management to make estimates and assumptions, which may differ significantly from actual results, particularly if there are significant adverse changes in our operating environment.
Based on a weighted guideline public company method and discounted cash flow method analysis, we estimated that the fair value for our BrandsMart reporting unit to be more than its carrying value and based on a discounted cash flow method analysis, we estimated that the fair value for our BrandsMart Leasing reporting unit to be more than its carrying value at October 1, 2023, respectively. Goodwill allocated to the BrandsMart and BrandsMart Leasing reporting units at October 1, 2023 were $29.2 million and $26.5 million, respectively.
BrandsMart Reporting Unit. The critical assumptions used as part of the weighted guideline public company method were last twelve months, enterprise value to revenue multiples, and next fiscal year enterprise value to revenue multiples. The critical assumptions used as part of the weighted discounted cash flow method were a projected long-term revenue growth rate and a discount rate based on a weighted-average cost of capital analysis (adjusted for company specific risk).
BrandsMart Leasing Reporting Unit. The critical assumptions used as part of the discounted cash flow method were a projected long-term growth rate and a discount rate based on a weighted average cost of capital analysis (adjusted for company specific risk).
We performed sensitivity analyses for the BrandsMart and BrandsMart Leasing reporting units during the annual assessment, including considering reasonably possible alternative assumptions for long-term growth or decline rates and weighted-average cost of capital rates. The sensitivity analyses performed supported our conclusion of no impairment for either reporting unit as of October 1, 2023.
We may be required to recognize material impairments to the BrandsMart or BrandsMart Leasing goodwill balances in the future if: (i) we fail to successfully execute on one or more elements of the BrandsMart strategic plan; (ii) actual results are unfavorable to our estimates and assumptions used to calculate fair value; (iii) the BrandsMart or BrandsMart leasing carrying values increase without an associated increase in the fair value; and/or (iv) BrandsMart or BrandsMart Leasing is materially impacted by further deterioration of macroeconomic conditions, including inflation and rising interest rates.
Recent Accounting Pronouncements
Refer to Note 1 to the accompanying consolidated financial statements for a discussion of recently issued accounting pronouncements.
