PROG Holdings, Inc. (PRG) Q3 2020 Earnings Report, Transcript and Summary

Good morning. My name is Brandon, and I will be your conference coordinator. At this time, I would like to welcome everyone to the Aaron's Holdings Company Third Quarter 2020 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Mr. Michael Dickerson, Vice President of Corporate Communications and Investor Relations of Aaron's Holdings. You may begin your conference.

Thank you, and good morning, everyone. Welcome to the Aaron's Holdings Third Quarter 2020 Earnings Conference call. Joining me this morning are John Robinson, Aaron's Holden's President and Chief Executive Officer; Steve Michaels, Chief Executive Officer of Progressive Leasing; Douglas Lindsay, Chief Executive Officer of the Aaron's Business; Kelly Wall, Aaron's Holdings Interim Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning. For those of you that have not, it is available on the Investor Relations section of our website at investor.aarons.com. During this call, certain statements we make will be forward-looking. I want to call your attention to our safe harbor provision for forward-looking statements that can be found at the end of our earnings release. The safe harbor provision identifies risks that may cause actual results to differ materially from the content of our forward-looking statements. Also, please see our Form 10-K for the year ended December 31, 2019, and other periodic filings with the SEC for a description of the risks related to our business that may cause actual results to differ materially from our forward-looking statements. Listeners are cautioned not to place undue emphasis on forward-looking statements and we undertake no obligation to update any such statements. On today's call, we will be referring to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, non-GAAP net earnings and non-GAAP EPS, which have been adjusted for certain items which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows, and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance. With that, I will now turn the call over to John Robinson.

Thanks, Mike. And thank you all for joining us today. Third quarter performance was outstanding across our businesses, especially in the face of a very difficult operating environment. Consolidated revenues of $1.052 billion was the highest third quarter revenue we've ever reported. Adjusted EBITDA and non-GAAP earnings per share of $178.3 million and $1.80, respectively, were also record quarterly results. While we believe that strong customer payment activity has been aided by the COVID-related government stimulus, our businesses' recurring revenue models continue to demonstrate their strength in this period of economic volatility. I've never been prouder of the teams at each of our businesses. Our team members at Progressive Leasing, the Aaron's Business, Vive and Woodhaven have demonstrated extraordinary commitment, resilience, resourcefulness and compassion throughout 2020. Since the onset of the pandemic, we have taken significant actions to protect our team members and customers while maintaining business continuity, managing expenses and driving portfolio performance. It is a dynamic environment and our leadership has risen to the occasion. I would like to express my sincere gratitude to all our team members for your commitment to serving our customers during this difficult time. In just a minute, Steve and Douglas will take you through their respective businesses' financial performance but before that, let me update you on the status of our spin transaction. The team led by our Interim Chief Financial Officer, Kelly Wall, has made tremendous progress thus far. On October 16, we completed the holding company legal structure change. Our Form-10 has been through a couple of rounds with the SEC, and we expect the document to go effective sometime over the next few weeks. In short, we expect to complete the transaction by the end of the fourth quarter or perhaps sooner. I expect that between the time the Form-10 goes effective and when issued trading begins, each business will hold a webcast with investors to discuss each of their businesses' stand-alone strategies. The anticipated business separation will be the culmination of a successful 6-year period, highlighted by tremendous growth at Progressive Leasing and transformation of the Aaron's Business. Over this period, consolidated revenues have grown at a high single-digit compound annual growth rate with adjusted EBITDA and non-GAAP EPS growing at low double digits and high teens, respectively. Progressive Leasing has performed exceptionally well since Aaron's acquired it in 2014, growing annual revenue more than 4x to approximately $2.5 billion, with attractive and growing profitability. The Progressive team executed the strategy of growing invoice volume with existing and new retail partners, improving the customer experience through continuous product development, building a deep bench of talent and developing the business processes and controls to stand-alone as a public company. I can't thank the Progressive Leasing team enough, including Ryan Woodley, Blake Wakefield, Curt Doman, Brian Garner, Marvin Fentress, Ben Hawksworth, Ryan Ray, Tanner Barney, Trevor Thatcher, Nate Roe, Kurtis Hilton, Michelle Parker and many more, for your tremendous contributions to Progressive's success. On the Aaron's side of the business, I'm equally proud of the progress that has been made to transform the business into a digitally enabled omnichannel lease-to-own retailer. The Aaron's Business team, led by Douglas Lindsay and including Steve Olsen, Ryan Malone, Rob O'Connell, Russ Falkenstein, Cory Voglesonger, Tommy Meek, Manjush Varghese, and John Trainor have done tremendous work overhauling strategy in many of the key functional areas of the business, all the while maintaining strong profitability. The fact that the Aaron's Business is once again well positioned for success as a stand-alone company is a direct result of their efforts, their teams and many others. We appreciate shareholders standing by us during this transformation and I believe the best is yet to come. Following the separation, I look forward to serving as Chairman of the Aaron's Business. Since 2014, we had a continued Aaron's history of rewarding our shareholders by returning nearly $400 million of capital in the form of dividends and share repurchases, reducing our net debt position by more than $700 million and growing our market capitalization by approximately $2 billion. We believe separating these businesses at this time is another example of actions taken by the Aaron's Board and management to maximize value for customers, team members and shareholders. As I mentioned earlier, the management teams from Progressive and the Aaron's Business are preparing to share their strategies with investors prior to the completion of the spin. We believe Progressive has the strategy, management team and scale to continue capturing the large unserved virtual lease-to-own market with its profitable and capital-light business model. The Aaron's Business, having been significantly transformed over the past 5 years, is well positioned to continue consolidating and repositioning its store footprint, which coupled with the aarons.com e-commerce platform, is expected to provide a foundation for future earnings growth and strong free cash flow. In conclusion, it's an exciting time for our company due to our recent performance, but more importantly, because of the future opportunity for both businesses. I'll now turn the call over to Steve Michaels to provide more detail on Progressive's third quarter performance.

Thanks, John. The strength of Progressive's recurring revenue model and variable cost structure, along with strong portfolio performance, drove outstanding results in the third quarter. We reported record revenues for the quarter of just over $600 million, up 13.7%. And gross margin improved 80 basis points as elevated levels of 90-day buyout volume were more than offset by a strong payment performance in the period, which we believe is partially a result of government stimulus. Adjusted EBITDA of $115.2 million represents an increase of 83.4% from the prior year and a margin improvement of 730 basis points. Invoice volume for the third quarter grew 3.4% from the prior year, sequentially higher than the slight decline we experienced in the second quarter. While invoice volume did rebound from the second quarter, the retail market continues to face a challenging environment, primarily due to the ongoing supply chain shortages in furniture, electronics and appliances. We believe as macroeconomic conditions and the global supply chain improve over the next few quarters, inventory levels at our retail partners will normalize. In addition, many of our retail partners are focusing on their e-commerce capabilities and are adding Progressive Leasing's offering as part of their e-commerce platforms. We expect to see a material lift in our online channel over the next 6 to 12 months from these partnerships. Write-offs, which have historically ranged between 6% to 8% on an annual basis, were 2.1% in the quarter due to fewer delinquencies and strong portfolio performance. Over time, we expect macroeconomic conditions to normalize and invoice growth to accelerate, resulting in write-offs returning to historical ranges. Currently, customer payment activity and key portfolio metrics are continuing to perform very well into the fourth quarter. However, we have maintained our COVID-specific reserves recorded in the first quarter of 2020 due to the ongoing economic uncertainty associated with the pandemic and believe our reserves are adequate. SG&A expenses were 11.5% of revenues in the quarter compared to 12.1% in the prior year period. Until we have better visibility into the broader economic outlook, we will continue to manage costs and reduce discretionary spending while preserving our ability to continue to execute at high levels across all areas of the business. Adjusted EBITDA for the quarter was a record $115.2 million, an 83.4% increase year-over-year and a 19% margin, well above our normal expected annual range of 11% to 13%. The margin performance was primarily driven by improved portfolio performance and managed costs. One of the great strengths of Progressive over the years has been its talented and tenured senior leadership team. One role that we did need to fill as a result of the expected separation transaction was Chief Financial Officer. I'm pleased to announce that Brian Garner, Progressive's current Senior Vice President of Finance and Accounting, will be appointed Chief Financial Officer of Progressive Leasing in conjunction with the spin. Brian has held financial leadership positions at Progressive since 2012 and has led the finance organization since 2016. His previous experience includes public accounting at Ernst & Young as well as senior leadership positions at technology companies. Over the years, Brian's knowledge of the business and his team's track record of providing financial insight in a strong internal control environment has been instrumental in contributing to Progressive's profitable growth. I am pleased to have his experience and leadership to help guide this organization as a stand-alone public company. Overall, I'm extremely proud of how the team has navigated a very challenging environment. And the quarter's results reflect a high degree of execution. I remain optimistic about the opportunity ahead and believe our performance during this difficult economic period speaks to the resiliency of the Progressive business model. Finally, and I speak for everyone on the call today, this is likely the last time this group will be together as one company speaking to you. We would like to express our gratitude to John Robinson. We appreciate his vision, his leadership, and most importantly, his friendship. John's commitment to his team, to our customers and to the communities we serve is unmatched and speaks volume about his character. Speaking personally, I've learned so much and benefited immeasurably from John's guidance and friendship over the last 6 years, and the Aaron's Business will be fortunate to have John serve as its Chairman. Now I'll turn the call over to Douglas.

Thanks, Steve. I'd like to echo Steve's comments and express my thanks to John for his leadership and friendship over the years, and we look forward to continuing to work closely with him as Chairman of Aaron's. Moving on to the performance of our business. I cannot be more proud of our team's performance this year. The Aaron's Business is operating at a very high level, as was evidenced by our third quarter results. The third quarter same-store revenue growth and collections performance are the best the team has delivered in my tenure. We believe that higher customer payment activity, pure returns and lower write-offs experienced in the quarter, were partially as a result of government stimulus. Additionally, our businesses remain nimble in response to the COVID-19 pandemic. And investments we've made in decisioning, e-commerce and store operations are yielding higher productivity and improved portfolio health as compared to a year ago period. For the third quarter ended September 30, 2020, revenues in the Aaron's Business were $441 million, an increase of 3.4% from the third quarter of 2019 despite having 77 pure stores in the system. Same-store revenues rose 7.3% in the third quarter, primarily due to stronger customer payment activity and higher retail sales. The third quarter represents the fifth out of the last 7 quarters with positive comps and the highest level we've experienced since 2009. Recurring revenue written into the portfolio declined 14% in the quarter. This performance was in line with our expectations and a result of more conservative lease decisioning, continued supply chain disruption and a difficult comparison to last year when we launched our field sales training program. As you may recall, in April of this year, we rolled out centralized lease decisioning in all U.S. company-owned stores. We expect this rollout to negatively impact recurring revenue written through the first half of 2021 due to lower approval rates. However, over time, we expect revenues and margins to increase as a result of improved customer payment activity, longer customer retention and lower write-offs. E-commerce revenues grew 44% in the quarter and represented 12.5% of total lease revenue versus 9.4% last year. Traffic to our aarons.com site continues to increase year-over-year as our customers are increasingly going online in search of affordable products for their homes. Revenue written into the e-commerce portfolio declined 19.4%, primarily due to COVID-related inventory shortages and more conservative decisioning. At the end of the third quarter, inventory in our stores and fulfillment centers was approximately 20% lower than the prior year quarter due to the inventory management actions we took in the second quarter of 2020 in response to COVID-19, as well as recent supply chain disruptions across our major product categories. We've seen continued improvements in the supply chain in the last 30 days and expect conditions to improve over the next few quarters. Adjusted EBITDA for the third quarter of 2020 was $65 million, an increase of 153% over the third quarter of 2019 and marks the highest quarter in 5 years. Adjusted EBITDA margin was 14.8% as compared to 6% last year as strong customer payments, lower write-offs and continued cost controls drove margin improvements. SG&A expenses before the impact of the spin-related costs were down $7.2 million or 3.1% in the third quarter compared to the prior year period. Permanent reductions, mostly due to store closures over the past 15 months, were partially offset by increased marketing expenses deferred from the second quarter. Write-offs in the third quarter were 2.4%, down 500 basis points from the prior year third quarter and the lowest we've experienced in several years. Write-off improvements were driven by strong customer payment activity and more conservative lease decisioning in our stores and on aarons.com. I'm pleased by these results and I'm encouraged about the future in our next chapter as a stand-alone public company. None of this would have been possible without the extraordinary dedication and hard work of the entire Aaron's organization, from our leadership team, to our dedicated team members in our stores, our store support centers and Woodhaven. As we look forward, we believe we have a large market opportunity, a compelling customer value proposition and the right strategy and team in place to drive future earnings growth and strong free cash flow. I could not be more excited about our competitive positioning and continued transformation. Finally, I'd like to announce that Kelly Wall, currently, our interim Chief Financial Officer of Aaron's Holdings, has agreed to join my team as Chief Financial Officer of the Aaron's Business, immediately following the spin. Over the last several years in his role as SVP of Finance and Corporate Treasurer, Kelly has led the company's Corporate Finance, Investor Relations, Treasury and M&A activities and more recently has helped lead the organization through the spin transaction. Kelly and I have worked closely for the last 4 years, and I'm thrilled to have his experience and leadership to help guide this organization as a stand-alone public company. I'll now turn the call over to Kelly to discuss our consolidated third quarter financial results.

Thanks, Douglas. On a consolidated basis, revenues for the third quarter of 2020 were a record $1.052 billion, an increase of 9.2% over the same period a year ago. Adjusted EBITDA for the company was also a record $178.3 million for the third quarter of this year compared to $87.1 million for the same period last year, an increase of $91.3 million or 104.8%. Adjusted EBITDA was 16.9% of revenues in the third quarter of 2020 compared to 9% in the same period a year ago, an increase of 790 basis points. You have heard John, Steve and Douglas describe the continued strong customer payment activity at each of our businesses. However, given the continued uncertainties with respect to future government stimulus and related economic conditions, we have made no changes to the incremental COVID-specific reserves established in the first quarter of 2020. While the portfolios have performed well and are in good shape today, we believe these reserves represent our best estimate of the potential impact we may experience in future periods. We will continue to evaluate this stance each quarter and adjust as necessary. Diluted earnings per share on a non-GAAP basis for the quarter increased 147% to $1.80 versus $0.73 in the prior year quarter, primarily due to the continuing strength of customer payment activity and reduced inventory write-offs. Operating expenses decreased $40.4 million from the third quarter last year, primarily due to a $47 million reduction in write-offs across the businesses. Cash generated from operating activities was $552 million for the 9 months ended September 30, 2020. At the end of the quarter, the company had a cash balance of $470 million and debt of $285 million. During the quarter, we maintained our quarterly cash dividend and did not repurchase any shares of the company's common stock. In March of this year, as a result of the uncertainty caused by the COVID-19 pandemic, we withdrew our full year 2020 outlook. In early June and again in August, we provided a mid-quarter update. We want to continue being helpful to our shareholders and analyst community by providing consolidated revenues and non-GAAP diluted EPS outlook for the fourth quarter. We expect consolidated revenues in the quarter between $1.025 billion and $1.045 billion, and non-GAAP diluted earnings per share between $1.20 and $1.30. This outlook assumes no significant deterioration in the current retail environment or in the state of the U.S. economy and a gradual improvement in global supply chain conditions. Estimated fourth quarter non-GAAP diluted earnings per share assumes no reduction in the COVID-specific reserves established at the end of the first quarter of 2020. Now I'll turn the call back over to John for some additional remarks.

Thanks, Kelly. It's always been about the team at Aaron's. It's the culture and the reason the business has had success. The team includes an amazing group of colleagues, Board members, advisers, retail partners, franchisees and suppliers. The list of people who have made significant contributions to Aaron's success during my tenure is long. It starts with our fantastic Board of Directors led by our Chairman, Ray Robinson, along with Cynthia Day, Doug Curling, Kathy Betty, Herky Harris, Wal Ehmer, Kelly Barrett and Curt Doman. In addition to our Board, there are many others, including Ryan Woodley, Steve Michaels, Douglas Lindsay, Robbie Kamerschen, Robert Sinclair, Carl Smith, Gil Danielson, Susan Hudson, Tommy Harper, Mike Jarnagin, David Kolb, Leo Benatar, Ron Allen, and the company's founder and long-time CEO, Charlie Loudermilk. It takes an army to operate a business of Aaron's scale and complexity and through tremendous skill, commitment and perseverance, the Aaron's Army has delivered for our customers, communities and shareholders. It has been a real honor for me to be a part of it. In closing, I'd like to remind you what a great purpose Aaron serves. Both Progressive and the Aaron's Business provide access to products that change customers' lives in very positive ways. The businesses serve customers ethically and at a consistently lower cost and with better service than anyone else in the market. In addition, both businesses provide a great place for hard-working team members to build a career. Aaron's has many amazing success stories of team members who have spent their entire careers at the company. Lastly, the company has a long history of giving back to the communities we serve through partnerships with world-class organizations focused at-risk youth. At Aaron's, we understand the importance of building up our communities and take great pride in the work the company has done to do just that. With that, I will now turn the call over to the operator, who will assist with the question-and-answer period.

[Operator Instructions] Our first question comes from Anthony Chukumba with Loop Capital.

Congrats on a great quarter. And I really appreciate your comments there at the end, John. I feel like it's the end of an era. But rest assured, I will still be covering both companies. So you're not going to get rid of me that quickly.

We don't want to get rid of you, Anthony.

So quick question for -- I guess, a couple of questions. First question, so when you reported your second quarter, you guided to $0.80 to $0.90, which is well above consensus at the time. Then in early September, mid-September, you guided to $1.40 to $1.50, so you hiked up that guidance. And now you're coming in well above that, $1.80. And I would think that from the time that you gave that guidance to -- the revised guidance now, any sort of fiscal stimulus, tailwinds would have dissipated. So I guess my question is, what do you attribute the upside to your revised guidance, $1.40 to $1.50 to be? Because that certainly was very surprising to me.

Yes, Anthony, I'll take a shot at it. I mean, this is John, and I certainly appreciate your comments to begin the question. But generally, we have -- it's just been a very uncertain period, and we've had great results, and we can attribute part of that, certainly, to stimulus in probably a large part, although there's a number of other factors, customer behaviors changed, we believe, in terms of where customers are spending money, where they're focused. We've also done a lot of things internally in terms of levers with Douglas and Steve have pulled to manage the businesses through this. But even having said that, the visibility is just is poor going forward. It's been that way for us throughout the summer and it was that way. And we've tried to maintain kind of conservatism in how we're managing the business. And we have been surprised to the upside, which is a positive surprise, obviously, but we've maintained a pretty conservative approach to managing the business. And I would just say it's been better than we expected through the third quarter. And we've tried to give guidance -- despite the limited visibility, we've tried to get guidance as we've -- a quarter ahead, but no more just because of that limited visibility. But it wasn't a certain outcome for sure. It's just been a lot of hard work by a lot of team members across both businesses to deliver and they really have exceeded our expectations. Kind of since this COVID crisis hit, frankly, they've just done an outstanding job.

Got it. That's helpful. And then just one follow-up. I know it's probably kind of hard to answer this, but just love any thoughts that you have. I mean, clearly, as you talked about in the Progressive business, there were some inventory shortages in consumer electronics, in furniture, in appliances and it sounds like there were even some inventory issues on the -- sorry, on the Aaron's Business, the core business as well. So I guess, how do you think about how much you left on the table because of that, right? I mean, I would almost think that you're -- that not only could your third quarter performance but still in your guidance for the fourth quarter could have been even higher or even better if it wasn't for those shortages. Kind of how do you sort of think about that?

Yes. I mean, that's a good point. I'm going to let Douglas answer after me because he has certainly more specific data around the Aaron's Business. But your point is good. I mean, we definitely feel like we left them on the table. You've heard that in Douglas' comments around e-commerce. I think across some of our retail partners on the Progressive side, we've also experienced that. So in terms of the supply chain disruption. And I don't know that I have a number for you, Douglas can maybe give you a little more detail around the Aaron's Business. But I think your point is a good one, which is we do believe we've left some on the table. We left some on the table there. We've also left some on the table in terms of our decisioning. We took a more conservative approach to that across our businesses at the onset of the pandemic and we've been very careful about changing that. We've made a few changes Steve may talk about. But they would be small, and we're still I would say, a more conservative stance than we were this time last year. So all of those things, I think, have led to that. But we're conservative management teams in kind of how we've managed the business historically. And we kind of taken that approach through this, but we definitely left some on the table. If we've known in March how strong customer payments were going to be, we might have done something different, but we just didn't have that visibility. And so we have probably left some on the table. I'll let Douglas answer about the supply chain.

In terms of -- we definitely pulled back on our purchasing in March with sort of unclear outlook. That really created deficits in our fulfillment centers. At our stores, we were able to -- we get return product, and we were able to scramble and get products in our stores, which was very resourceful for our teams, both on the merchandising side and the operations side. So less so an impact in the stores, maybe an assortment issue versus an absolute inventory issue. But we were definitely lighter in our fulfillment centers because of ordering new products. And you saw that translate in the numbers into our e-com business probably more heavily than our storefront business. But the good news is we're improving every day. Merchandising team is doing a great job pretty much across all product categories. We're improving. I think I mentioned at the end of the quarter, we're about 20% down on a per-store basis versus last year. Our stores actually have a lot of inventory right now and we're pulling out the fulfillment centers. And we're seeing considerable improvement going into October. So we're feeling really good about the holiday season, but it definitely had an impact on Q3.

Anthony, at the risk of repeating some of that. This is Steve. I would just say, on the Progressive side, we have seen, especially in furniture, but in electronics and appliances as well some disruption in the supply chain, and that's more pronounced in the small and medium-sized businesses, as you would imagine as they are probably in -- last in line to get their POS fulfilled. But we've also seen some change in behaviors at our retail partners as it relates to inventory shortages in that they're not being as promotional, and that's a smart decision on their part because they're not wanting to take a short margin if they're tight on inventory. But we're even hearing from some of our retail partners that they -- much of their product is sold on the truck before it even gets to the retail showroom. And in that instance, they're really only holding for cash sales or for personal credit card sales, not necessarily point-of-sale finance or point-of-sale payment options. So it's leaving less kind of inventory available for us to drive invoice volume for our retailers. And we expect that to improve over the next several quarters, but it was an impact in Q3, and it will be a lingering impact in Q4, hopefully not to the same extent.

Got it. And not to bogart the Q&A, but just one real quick question. Any update in terms of the filing of the Form-10?

That -- generally, the spin process is going well, I would say. We're on a good trajectory. It's been going smoothly thus far. We still feel like we're on track for the spin by the end of the year or maybe even earlier. And obviously, for that to happen, the Form 10 has got to be completed in the pretty near future. And so that's all going well. And you'll expect that over the next few weeks or so.

Our next question comes from Kyle Joseph with Jefferies.

I echo Anthony's thoughts, congrats on the quarter. Steve, I think I'll start with you. I really want to get into what's going on with invoice volumes. Obviously, there's a lot going on. You have the pullback of traditional providers of credit, some of your own underwriting tightening and then some supply chain issues. Can you give us a sense for how invoice volumes trended throughout third quarter? And then just how they looked in October?

Yes. I mean, you hit it, Kyle. Thank you as far as kind of some of the dynamics that we're dealing with and John alluded to it earlier as well. I mean we're not giving kind of monthly insight on the months at this time, and we haven't closed at October yet. And I would be remiss if I didn't remind you, we were up against a very strong Q3 last year and even stronger, 34% increase in Q4 of 2019. But having said that, we are expecting to see a modest sequential improvement from the 3.4% we reported in Q3 -- in Q4. So a modest sequential improvement. And we did look for -- we're always looking for opportunities on the decisioning side to make good decisions for us. As John said, we're a conservative team. We want to make good profitable decisions, but we also want to look for opportunities to use data to say yes to more customers and be a better partner to our retail partners. So we did tighten back in March and that certainly had an impact on invoice volumes. And we used the pool data and the performance data over the summer to learn and to look for opportunities to improve more effectively. And so we have made some of those moves here subsequent to the end of the third quarter in October. And we expect that to help in the invoice in Q4. However, I would say, as John already said, even after those moves, we're still in a more conservative posture than we were prepandemic or this time last year.

Got it. That's very helpful. And then in the third quarter, we saw gross profit margins recover. I know you highlighted that 90-day buyout activity is still up year-over-year. But in terms of sequentially, did you see fewer 90-day buyouts than you did in the second quarter? And what's your outlook for the fourth quarter?

Yes. 90-day continues to be elevated. It was flat to slightly down compared to Q2. In Q3, what you're seeing in the gross margin line is really the margin compression from 90-day being more than offset by the strength of the customer payment activity and the portfolio performance that, as you know, for the last couple of years, that expense is above the line up in revenue now as opposed to down in OpEx. So that was the story on the 80 basis point gross margin improvement. We continue to see elevated 90 days. Even after the stimulus mostly dried up at the end of July, we continue to see elevated 90 days, and we're predicting similar -- certainly elevated levels from last year going on into Q4.

Got it. And then last question from me. I think you talked about the share of e-commerce and Progressive accelerating from here. And I know it's still a relatively small percentage of business, but can you talk about, from a long-term perspective, how you see the balance for Progressive going forward?

Yes. Thank you. Yes, we're super excited about e-comm. And you're right, the numbers are small, but they're getting bigger, and they're growing fast. Certainly, COVID has accelerated many of our retail partners' investment into e-comm. I mean traditionally, our application has been available on most of our retail partners' websites. And our -- that app channel has been strong and growing. But more recently, as you alluded to, we've been partnering with our retailers to add Progressive as a payment type in their checkout carts. And we're continuing to invest in those capabilities because those retailers that have an e-commerce site and those that are investing in those sites are going to be the winners over time. It's my expectation. And certainly, our teams and our retail partners teams are working hard to have Progressive Leasing as a payment type in all of our top retail partners' online checkout experiences during 2021, if it's not there already.

Understood. And sorry, one more from me. I'll pivot to you, Douglas. Don't want to forget about you, Douglas. One thing that -- so I get a lot of questions on the sustainability of the positive results. But can you walk us through how you're thinking about the business, the Aaron's Business, specifically if there is more stimulus, if there's no more stimulus, if there's less stimulus and how you're just positioning the business into '21, given the uncertainty there?

Sure. I mean, obviously, the business is a high operating leverage business, so we've enjoyed the benefits of that over the last 3 quarters. I mean, we've seen really strong collections in Q3 of this year. We attribute some of that to stimulus and changes in customer spending habits. But Ryan Malone, our Chief Operator and the team have done a remarkable job. We've also gotten better centralized decisioning and I think we haven't talked about that this quarter yet. But we've now got that rolled out. It allows us to really control risk and drive sort of retention of our customer base and lower write-offs. So that's exciting. As we think about going forward, certainly, some of these external factors will normalize, and we will get back to normalized levels of comps and write-offs. And we expect our write-offs and comps to revert back to a more normal range, but we're not sure when that's going to be and it will probably be sometime in early 2021, but that's all dependent on what's going to happen with stimulus, further stimulus in the economy and how this all plays out with COVID and customers' spending habits. So I mean, I think as we look at outlook, it's really hard to say. We're just taking it quarter-by-quarter. We believe in the fourth quarter, we will have positive comps. But gap written will still be under pressure, probably negative pressure just because of our restricted lease decisioning, primarily. And as we look into next year, we're going to be controlling cost and just looking at what's going on with stimulus and collections in the marketplace. I will say the health of the customer in terms of payments appears strong and the things we can control, we're controlling. So we're very optimistic about the tailwinds in the business. And we think there's a lot of demand and a lot of advancements we've made, and that's coupled with stronger customer dynamic. We think it's positive. Ultimately, we look at the business in terms of EBITDA margin, not write-offs. And we will continue to optimize our decisioning and expected write-offs around that to drive profitability at the bottom line.

Our next question comes from Brad Thomas with KeyBanc Capital Markets.

Great quarter and nice to catch up with you all. Sorry that the band has to break up, but looking forward to working with you all separately. I want to ask about the write-offs, really just an exceptionally low number here for 3Q, as we knew from your pre-announcement in the quarter. I was hoping that Ryan and Douglas, can you just talk about how much the low write-offs are a function of the decisioning tightening that you guys have done versus more of the environmental factors?

Yes, I mean, I'll go first, Brad, it's John, and I'll try to give a kind of overarching comment. I think this kind of reverts back to what I said earlier with Anthony. But there's no question, stimulus has helped both businesses through the summer. And no question that's been a tailwind for customer payments. I will say there's probably also a dynamic there that's been related to customer behavior changes, and you've actually written about the idea that customers are spending more probably on their home, less on other things like entertainment, and -- for example, sporting events or travel, that sort of thing or eating out. And so we may be getting more kind of focus and share of wallet from that perspective. And then also, the teams have made a lot of changes. We went to a more conservative stance on decisioning at the onset of the pandemic. The teams have both done a great job of digitizing kind of the payment process for customers, making it easier and easier for customers to pay how they'd like to pay as conveniently as possible. And so it's kind of a lot of variables that are at play, and it's really hard to decipher, which have made what impact. It's almost impossible to know. But we do think it's kind of a confluence of all those things that have resulted in this good performance and continued in the third quarter even as we got further from stimulus. So just hard to know exactly how much each piece played. But we do believe that over time, as stimulus wanes and who knows what comes in the future, but if there is no future stimulus, we would expect it to return to more normalized levels. But there are some improvements we've made and maybe some customer behavior changes that may result in it being better longer. So we'll just have to wait and see.

That's helpful. And if we just try and connect the dots from that commentary, John, to your guidance, obviously, encouraging fourth quarter guidance going above where the Street is. But it would seem to me that you're -- you may be modeling a pretty big reversion back to what the write-off trends would look like before. What are you assuming in terms of write-off trends as we triangulate that to your earnings guidance?

Yes. So Kyle (sic) [ Brad ], it's Kelly. I think as we outlined in our guidance, right, we -- first of all, I just want to call out that we're not assuming any additional significant deterioration in the retail environment, for the U.S. economy, right, and supply chain will be better. We're also assuming here, there's no new stimulus. So with that, we just start to revert back some towards more normalized levels. But this level still continue to be better than they have been in the past. So again, better than historic levels, but not quite as good as they were last quarter.

And Brad, that really just gets to the lack of visibility that we have -- continue to have. And we just -- we don't really -- we're doing the best we can to give some guidance to investors to -- based on what we know. But assuming they stay at the same rate, we just don't feel like it's probably the right thing to do. But hopefully, they stay that level. We just don't know.

That's great. And just one last housekeeping, if I could. John, last quarter, the commentary about separating the 2 businesses was that there was really very minimal, immaterial cost associated with separating the 2 businesses. As you guys dot Is and cross Ts here, is that still the case? Could you just give us an update about how you're thinking about operationally these 2 being separate businesses?

Yes. I mean, I think the way to think about it is, they have been operated independently as we -- and that's really helpful from a kind of operationally splitting these businesses. The teams were largely already in place. We did have some promotions in the CFO roles on both sides, but both teams are very substantially built out. But there are some additional back-office costs we'll have to replicate to set these businesses free as public companies, and there will be some additional cost. But maybe the longer-term way to think about it, we don't think that those additional costs will materially change the EBITDA margin profile of these businesses as you go forward. So we won't probably give any more guidance than that at this point. But that's kind of the way to think about it. And then when I talk about the margin profile, I really mean the more historic levels that we've seen over a number of years. Obviously, this quarter was higher than normal. But that's kind of the way to think about it, I believe.

Our next question comes from Jason Haas with Bank of America.

And congratulations to everyone on their new roles. So I wanted to ask a little bit more about invoice volumes for Progressive. So I understand the cause about there being some inventory shortages. But our understanding is that some of those categories that you compete in, like consumer electronics, furniture appliances, those are still doing pretty well for the retailers. So I'm curious if there's anything that's maybe hurting your penetration at the retailers related to what's going on with the pandemic if it's like just employees wearing masks or the fact that some retailers have these like plexiglass shields up, or maybe there's just been more turnover, kind of the focus is elsewhere. So I'm curious if you think any of that isn't maybe making it, so that what we're seeing right now is not your long-term run rate for invoice volumes?

Yes, Jason, thank you. I mean those are interesting theories, I guess. I have to say I haven't heard that. There certainly have been turnover. I mean, we've had retail partners shut down showrooms and furloughed sales associates and not all of them have come back, I assume. So there would be turnover, maybe in excess of what there normally is in the retail environments. So -- and it's part of our program to get out into free train and redevelop those sales with their knowledge of our program. We are hindered a little bit in that because we're not traveling as much as we do normally in our field-based sales team. So that could be an impact. I mean, I think the -- I mentioned that we are hearing anecdotally that there's more kind of cash and personal card usage than historical levels in the retailers' finance stack as opposed to the point-of-sale financing options that they've developed. I think that has an impact. Inventory continues -- does continue to be an impact in -- especially in furniture at our retail partners. But I guess, ultimately, what I would wrap it up with is we do not expect this to be the long-term run rate. There's definitely dislocations and disruptions due to COVID that we don't expect to be with us forever. And we do expect to get back to the growth that we've enjoyed over the last number of years from an invoice growth standpoint.

Great, that's helpful. And then as a follow-up question, I also wanted to ask if you could talk a little bit more about just the overall tightening that you've seen in the general credit environment. And it sounds like, at least for you guys, you are planning to maybe loosen up a little bit given the consumers performed a little better than I guess one had expected. So I'm curious if you're starting to see that at all from some of the higher tier credit providers out there, if they're also starting to loosen?

Yes, that's a good question. We've seen the first part of your question, the tightening in the form of the average profile of the applicant and average profile of the approvals that we've done, that's been in conjunction with tightening actions that we've taken on our own. As we've said on previous calls, it's very difficult for us to understand exactly what's happening above us in the credit stack because in many cases, there's a primary and secondary that has taken a look before it gets to us. So we do have some visibility into what's happening there. And we hear and we read in the press just like you do, that there's still some -- the prime providers and supply is still tight. I can't predict whether they're having the same kind of discussions internally about this prolonged customer strength and whether they're loosening or not. But we are using the data that we have to make sure that we can drive as much business and still hit our targets as possible. But we have seen the tightening, and we'll continue to look at the data sources that are available to us to see what those trends look like in Q4 and into 2021.

Our next question comes from Bill Chappell with Truist Securities.

I guess first more housekeeping, you may have covered this, but would you reverse some of the accruals in the fourth quarter if it doesn't match with what you'd reserved for?

Bill, this is Steve. Are you referring to the COVID-specific reserve that we have or...

Yes.

Obviously -- we evaluate our reserves. And the way we've been looking at this, this is on the Progressive side, obviously. The way we've been looking at this is we run our normal reserve calculations each month and each quarter and really study them very detailed, as you can imagine. And the fact that there has been fewer delinquencies and just great customer payment activity, it's difficult to reserve for something that's not there, right? You can't reserve for a non-past due AR. So we're constantly reviewing that. Whether -- and we've got this kind of nonaccounting term sidecar, special reserve for COVID that we established in the first quarter, and we continue to look at it and decide each quarter whether it's appropriate or not. And we haven't released anything to date. We will continue to evaluate it. But at the same time, we look at the uncertainty that currently exists, and we believe can continue into 2021, and that will be a big factor into our determination of whether that reserve is appropriate in all or in part, as we finish 2020. We did say, I think, specifically, the guidance that we put out for Q4 at the consolidated level, did not assume any reversal or relief of that COVID-specific reserve.

Got it. Got it. And then kind of following up on the last question. I mean, is there any sense or is it too early to tell that the tightening of credit standards you're getting maybe a higher credit customer. Is that affecting 90-day payoffs? I mean, would that continue to affect it as we move into the new year?

Well, I mean, I think, certainly, our -- the profile of the customer and as John talked about, the change in behavior of our customer, whether it be our normal customer or slightly higher profile customer, has impacted 90-day buyouts. And it's been -- I have to tell you, we expect that into August and September, to see 90-day buyouts decrease a little bit from the Q2 levels, and they have stayed elevated. And so it's difficult to determine how much of that, like the composition of that from a better credit quality customer or if it's just changing payment behaviors and more liquidity from not spending money on other things, difficult to understand exactly what's driving that. But we are planning for elevated 90-day buyouts in the next several quarters.

Got it. And then last one, Douglas. Any sense that -- or concern if it would be that the strong -- especially demand for home furnishings since the start of the pandemic pulled forward some potential holiday type sales or would impact anyway? Or is it still that people are spending more time in their houses, more things are breaking down or they need more. And so they coming back and so it's pretty steady. How do you look at going into December, especially?

Yes. I mean, I think we've got a good plan going into the November, December time frame. I mean, nothing that we know of, but really sort of alter what we -- how we feel about demand for -- everything I read and I think the analyst reports that have been out, demand for home goods is strong. There's a lot of discretionary income out there that's going towards that. And so we're super optimistic about that. We've got -- as you know, we're moving more of our marketing in towards the end of the year. We've got promotions that will go to the whole month of November and December to sort of spread out the benefit over that time period. So we're expecting normal behavior going into November, December. Black Friday is our first big event, and we believe our inventory is in a good position for that. So we're expecting, as I mentioned, to have slightly lower revenue written into the portfolio because of decisioning but for inventory to be in a much better place.

Our next question comes from Bobby Griffin with Raymond James.

This is Alessandra Jimenez on for Bobby Griffin. First, I would just want to start on the Progressive side of the business. Operating expenses, excluding write-offs, showed impressive leverage in Progressive. Can you talk about some of the drivers behind this leverage? And what portion of the cost savings might be sustainable going forward?

Sure. Thank you. We -- yes, we -- in the early part of the pandemic, we took some pretty decisive cost actions. Obviously, the Progressive is a highly variable model. So from an activity base standpoint, the activity-driven costs have been -- are down, but we also looked to reduce discretionary spend and just be generally tighter on spend, while not -- and this is an important point, while not cutting into the investment layer of our e-comm and mobile app and all the growth drivers for the future. So we saw about 60 bps of operating leverage in the quarter. We expect to see, for the full year, substantial SG&A leverage. 2021, we haven't given guidance on yet, but we would expect that some of these costs will come back. But -- and -- but -- and we'll continue to invest in the future drivers. So we're basically still comfortable and confident with that 11% to 13% EBITDA margin goalpost that we put out there several years ago because we are continuing to invest ahead of the growth and are not optimized for margin while there's this big unserved opportunity out there that we think we're well positioned to go out and get.

Okay. That's helpful. And then circling back to an earlier question. Could you quantify the percentage of retail partners that have added the Progressive Leasing to the e-commerce platform as the payment type? And have you seen any difference in invoice volumes when they do add it?

Yes. We don't really talk about retail partners and their particular initiatives unless they do. And certainly, Best Buy was one has talked about adding e-comm this year, and that's been very successful, great partnership. And we do see very good applications and kind of composition of invoice volume from that channel. And it's important to note, we think certainly, e-comm is a big driver of the future, but it's not completely incremental. There's some channel shift, which we believe is perfectly appropriate because we want to be where the customers are and where they want to prefer to shop. So we have done e-comm integrations with a number of customers and really just let the retailers speak for us, and we follow their lead.

Our next question comes from Alexander Maroccia with Berenberg.

Despite the strong numbers at Aaron's doors, we did see a dip in the customer traffic on a same-store basis. Can you help us understand the foot and web traffic trends at Aaron's as the quarter progressed, especially after those enhanced unemployment benefits that ended in July?

Sure. Are you referring to our customer counts being down?

Correct, yes.

Yes, yes, yes. So our customer count was down about -- I think it was 3.7%, which is actually one of the better quarters we've had in the last 3 years. We have seen traffic soften through COVID. Fewer people were going into stores. There're more targeted visits. But the good news is our e-comm traffic is at record levels, and seeing a lot more people shopping online, but also paying us online. So our online payments spiked considerably, and that's benefited us in a number of different ways, being more efficient in our operations and having higher collections. So we don't necessarily think that lower traffic in our stores, which is many times attributable to payments, is necessarily a bad thing. And in terms of demand, what we're seeing is strong demand. I think that demand is being dampened a little bit in the numbers you're seeing, as I mentioned before, by the decisioning cuts we've made in April. Those cuts will be comping over themselves or lapping over themselves for the next 12 months, and we should see the second half of '21 that comping stop. So we're overall optimistic. I think we've got a great plan for the holidays and not concerned about customer traffic specifically.

Okay. Understood. And secondly, just for modeling purposes, can you give us any sense on the restructuring separation charges you expect for Q4?

Yes. So we haven't provided any guidance on those specific costs, Alex. But we did in the earnings release, provide some information on the expense in Q3, which is about $8 million. What I'd say is that if you think about the transaction, the expenses that we incur there will be consistent with what you'd normally see for a spin like this. I wanted to point out, as you can see in our earnings that we do add that back as part of our non-GAAP guidance -- or non-GAAP EPS that we reported for the quarter. So we'll continue to do that in future quarters as well.

Our next question comes from Vincent Caintic with Stephens.

John, congratulations on all you've achieved at Aaron's in the past several years. I missed talking to you on these calls.

Thank you, Vincent.

On the -- so question on invoice volume for both progressive and the Aaron's Business. Understanding there's been some headwind from the shortage of rentable products. But just kind of wondering if there's anything you can do there just to improve or incentivize invoice volume growth. So it sounds like, for example, maybe penetration rate is lower just because there's more cash sales. And then maybe if the early payoff is being used more frequently, I'm guessing that, actually, origination volume might be high, but a headwind and offset from early payoffs. So maybe if you could break that out. And then if there's anything outside of just loosening credit that you could do to improve invoices?

Yes. Vincent, I'll start. This is Steve, and Douglas can take over. But I mean, we're obviously always looking for ways to drive more invoice with our partners. And we have partnered with them in marketing and other promotional campaigns and we'll -- and stand ready to do that continually. This will be an interesting holiday season in that it won't be -- at least from most retailers, we're hearing won't be kind of an acute Black Friday type packet all in there on Friday, but it will be more spread out over the November and December time frame. So we'll see how that plays out for us. But we're -- as far as 90 days, yes, it's not 90-day -- it doesn't necessarily -- I mean, it doesn't necessarily have an impact on invoice. It will have an impact on portfolio size and on gross margin. And then to the extent that we can get a customer to repeat with us, that would be -- that would drive invoice, and we're doing a lot of great things to increase repeat business and drive our repeat customers into our retailers and have the benefit from that preferred partnership and relationship. But 90-day doesn't necessarily just directly correlate with invoice. We're definitely looking at the decisioning, but we want to be measured and careful in that. So we're just -- we've got great plans with our retail partners. We're in great communication with them on how to be a successful partner in this holiday season and in 2021 and beyond, but nothing specific.

Yes. On the Aaron's Business, 90-day is a much less material part of our business. We did see some increase in 90-day, but it was offset -- more than offset by retention of our customer in the lease portfolio and higher payment activity and lower return rates on our products, which is strong. In terms of like our origination number, which is our revenue written into the portfolio, that was down 14%. As I mentioned in my comments, the biggest piece of that was a tough comp to last year against our sales training program. And that was really a third quarter, part of fourth quarter type initiative. We should see that normalize. I did mention that we believe that it will be negative again in Q4 and probably through April of next year, mainly due to centralized decisioning. So the supply chain has had an impact, but we see that normalizing in the fourth quarter. And so really, everything you see down has really less to do with external factors and more to do with what we're doing in the portfolio.

This concludes our question-and-answer session as well as today's conference. Thank you for attending today's presentation. You may now disconnect.