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Aaron's (NYSE:AAN)
Q4 2019 Earnings Call
Feb 20, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Carrie, and I will be your conference coordinator. At this time, I would like to welcome everyone to the Aaron's, Inc. fourth-quarter 2019 earnings conference call.

[Operator instructions] Please note, this event is being recorded. I will now turn the call over to Mr. Michael Dickerson, vice president of corporate communications and investor relations for Aaron's, Inc. You may begin your conference.

Michael Dickerson -- Vice President of Corporate Communications and Investor Relations

Thank you, and good morning, everyone. Welcome to the Aaron's, Inc. fourth-quarter 2019 earnings conference call. Joining me this morning are John Robinson, Aaron's, Inc.

president and chief executive officer; Ryan Woodley, chief executive officer of progressive leasing; Douglas Lindsay, president of the Aaron's business; and Steve Michaels, Aaron's, Inc. chief financial officer and president of strategic operations. Many of you have already seen a copy of our earnings release issued this morning. For those of you who have not, it is available on the investor relations section of our website at 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 which will be filed later this morning, for a description of the risks related to our business that may cause the 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.

Lastly, effective as of the first quarter of 2019, the company adopted ASC 842, a new standard related to accounting for leases. In our press release, we have added additional information to the revenue table to provide you a year-over-year comparison on an equivalent basis. Throughout our call today, we will make comments related to the comparability of certain items with the prior year and have assumed in these comments that the adoption of this new standard was made at the beginning of each period compared. With that, I will now turn the call over to John Robinson.

John Robinson -- President and Chief Executive Officer

Thanks, Mike, and thank you all for joining us today. I'm pleased 2019 ended on such a positive note. Progressive's invoice growth in the fourth quarter, as expected, accelerated nicely. The Aaron's business collections performance also improved which contributed to positive same-store revenues in the quarter and strong adjusted EBITDA.

On a consolidated basis, we achieved revenue growth of 8.4% over the same quarter in 2018. This increase is primarily a result of continued strong invoice growth at progressive, partially offset by the closure of underperforming Aaron's stores in the first half of 2019. Adjusted EBITDA and diluted non-GAAP EPS were $125.2 million and $1.15 per share, respectively, both up low double digits from the fourth quarter of 2018. The progressive team delivered another record quarter for both revenue and earnings.

Invoice volume grew 34.4% over the prior year fourth quarter due to the recent rollout of additional locations from retailers added in 2019 and increased productivity from existing retailers. The Aaron's business same-store revenues and adjusted EBITDA increased from the prior year as a result of the improvement in collections performance throughout the quarter, expense management and gains on real estate sales. As we enter 2020, I'm encouraged by progressive's prospects for continued strong results and the progress of the transformational initiatives in the Aaron's business. Given our optimism, we continue to invest in people and technology to deliver future growth.

We remain conservatively capitalized with a net debt-to-adjusted EBITDA ratio of less than one turn and ended the fourth quarter with available liquidity of approximately $440 million. Our strong balance sheet and disciplined approach to capital allocation provide us flexibility to continue to invest in our businesses, pursue M&A opportunities and return capital to shareholders. Finally, as we disclosed in our earnings release this morning, progressive has also reached an agreement in principle with FTC staff which we expect will result in progressive paying 175 million to the FTC and agreeing to a consent order with respect to compliance-related activities such as monitoring, disclosure and reporting. We have agreed to this proposed settlement to avoid the distraction and uncertainty caused by protracted litigation.

Taking great care of customers is the centerpiece of progressive's business philosophy and the reason the company has had so much success. For many years, progressive has led significant innovation in a lease-to-own marketplace on behalf of the customer. There are several other capable competitors also driving innovation, but as the leader in the industry, progressive is subject to more scrutiny. Ultimately, our objective has always been for every customer to be fully informed about their transaction and have an exceptional customer experience.

The team is constantly looking at new and innovative ways to meet this objective and are always willing to incorporate feedback on how to better serve customers. Responding to the FTC's inquiry has required a significant amount of company resources and management attention. Over an 18-month period, the team provided millions of records and answered numerous questions regarding progressive's offerings and business practices. While this inquiry has been difficult, we believe progressive is stronger and in a better competitive position, having been through this process.

Now, I'll turn the call over to Ryan to discuss progressive's outstanding fourth-quarter performance and plans for 2020.

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Thanks, John. I'm very pleased with the team's execution in the quarter and for all of 2019. We continue to deliver on key objectives, including the launch of large national retailers and investments in people and infrastructure which will help contribute to growth in future periods. Net revenues rose 22.3% in the quarter as compared to the fourth quarter of 2018 to a record 559.5 million.

The revenue performance was driven by consistently strong invoice growth throughout the year, capped by a 34.4% increase in the fourth quarter. The growth in the fourth quarter was a result of a 9% increase in active doors driven by rollouts of new retail partner locations and a 23.3% increase in invoice per active door. Adjusted EBITDA increased 17.6% as compared to the same period last year, driven by the strong growth in revenue, offset by slightly higher-than-expected onboarding costs for national retailers and a year-over-year increase in write-offs. As anticipated, accelerating invoice growth in the fourth quarter drove an increase in our initial impairment reserve on newly originated leases.

As a result, write-offs were 6.6% of revenues in the fourth quarter of 2019, up from the 5.8% reported in the year ago period. We ended the full-year 2019 at 7.2% of revenues compared to 7% in 2018, demonstrating consistent performance within our targeted annual range of 6% to 8% of revenues. As we look to our growth plan for 2020 and beyond, we expect to benefit from the continued ramp of newly on-boarded retailers, as well as from incremental growth opportunities across our existing partnerships. Historically, we've exhibited a trend of productivity improvement over time with many of our long-standing partners, supported by a strong and increasing rate of repeat business from existing customers.

We expect that trend to continue. 2019 was an exceptionally successful year in terms of pipeline conversion. That said, the available addressable market remains large, and we plan to continue our investment in people and technology to attract and convert new opportunities. Consistent with past practice, our outlook for 2020 includes anticipated growth from our existing retail partners, as well as the expected conversion of a portion of our retail partner pipeline where we have near-term visibility.

EBITDA margin in 2020 is expected to be below 2019 but well within our long-term annual target range of 11 to 13% of revenues. The lower EBITDA margin is primarily due to pressure on gross margin from the rapid acceleration in invoice growth and the resulting younger portfolio which we expect will increase 90-day buyout activity in the first half of 2020. In addition, our plan for this year includes approximately 15 million of incremental investments to support enhanced compliance initiatives related to our tentative agreement with the FTC. We believe these investments will further enhance the customer experience and strengthen progressive's competitive position.

Again, I'm tremendously proud of the team's performance in the quarter and the highly productive relationships we forged with our retail partners. We believe our investments in people and technology position us well to continue to grow existing partnerships, as well as attract, convert and profitably scale new retail partner opportunities. I'll now turn the call over to Douglas to discuss the Aaron's business fourth-quarter results and the plan for 2020.

Douglas Lindsay -- President, Aaron's Business

Thanks, Ryan. I'm happy to report that in the fourth quarter, the Aaron's business successfully returned collections to normalized levels and generated growth in both adjusted EBITDA and same-store revenues. We achieved these results by rebalancing our sales and collection efforts, as well as by reducing operating expenses. Same-store revenues increased 0.4% in the quarter primarily due to the sequential improvement in collections performance.

For the full year of 2019, same-store revenues were flat, an improvement of 143 basis points from 2018. Recurring revenue written into the portfolio declined 3.3% in the quarter as lead originations were negatively impacted by the rebalancing of our sales and collection efforts and by ongoing weakness in consumer electronics which was 20% of lease revenues in 2019. Excluding consumer electronics, recurring revenue written into the portfolio increased 4% in the quarter, with growth occurring in our highest margin categories. Recurring revenue written is a leading indicator of same store revenues which would have been low-single-digit positive in both 2019 and 2018, excluding the impact of consumer electronics.

E-commerce continues to be a bright spot for the business, representing 14.3% of overall recurring revenue written in the fourth quarter of 2019, up from 10.2% in the fourth quarter of 2018. E-commerce recurring revenue written was up 35.3% compared to the fourth quarter of 2018. E-commerce remains one of our key growth initiatives in an area of continued investment. Adjusted EBITDA increased $1.7 million or 3.6% compared to the year ago quarter.

Adjusted EBITDA increase is a result of a sequential improvement in collections performance, gains on real estate sales and expense management which were partially offset by higher write-offs. Write-offs were 7.3% of revenues in the fourth quarter, down slightly from the 7.4% in the third quarter, and as expected, elevated compared to the 5.1% reported in the same period last year. The increase in write-offs was primarily driven by the negative impact on collections performance created by our new sales initiatives in the third quarter, the closure of 155 stores in 2019 and an increasing mix of e-commerce revenues. We expect the sequential improvement in write-offs to continue going forward as we return to normalized collections performance.

As a result of the reduction in recurring revenue written into the portfolio and the elevated write-offs in the fourth quarter, we entered 2020 with a lower portfolio balance than 2019. As we look to our 2020 outlook, we expect the business to be challenged by the lower portfolio size, continued pressure from consumer electronics, partially offset by continued cost savings throughout the business and lower write-offs. As you know, over the last few years, we've been testing various formats to develop our next-generation store concept. In 2019, we opened nine new stores across several states.

Thus far, these next-generation stores are achieving significant lift in lease originations and are attracting a newer and younger customer. Given that success, we expect to open approximately 25 next generation stores this year. We will continue to monitor the results of these stores and continue to take a measured approach to future investment decisions. I'll now turn the call over to Steve to discuss our fourth-quarter financial results and 2020 outlook.

Steve Michaels -- Chief Financial Officer and President of Strategic Operations

Thanks, Douglas. On a consolidated basis, revenues for the fourth quarter of 2019 were 1 billion, an increase of 8.4% over the same period a year ago when calculated on a basis consistent with the 2019 adoption of ASC 842. Adjusted EBITDA for the company was 125.2 million for the fourth quarter of this year compared to 112.7 million for the same period last year, an increase of 12.5 million or 11.1%. Adjusted EBITDA was 12.5% of revenue in the fourth quarter of 2019, up 30 basis points from the 12.2% in the fourth quarter of 2018 on a constant accounting basis.

Adjusted EBITDA includes approximately 5.6 million of gains from real estate sales related to certain Aaron's business locations. Diluted EPS on a non-GAAP basis for the quarter increased 12.7% and to $1.15 versus $1.02 in the prior year quarter. Operating expenses decreased approximately 48.5 million. On a constant accounting basis, operating expenses would have increased 18.6 million in the fourth quarter of 2019 compared to the year ago period.

Increases in write-offs in both businesses and increased investments in personnel and progressive account for more than the year-over-year increase in operating expenses, partially offset by reductions in occupancy costs and advertising expenses in the Aaron's business. During the fourth quarter, the company recorded a $175 million charge and 4 million for fourth-quarter legal expenses related to an agreement in principle to settle the progressive FTC matter. Cash generated from operating activities was 317.2 million for the full-year 2019, and we ended the year with 57.8 million in cash compared to 15.3 million at the end of 2018. During the quarter, we repurchased 513,900 shares of the company's common stock at an average price of $58.05 per share, returning approximately 32.2 million to our shareholders through these repurchases and our quarterly cash dividend.

For the full-year 2019, the company returned approximately 78.7 million related to the purchase of approximately 1,156,000 common shares at approximately $59.90 per share and 9.4 million in dividends. We remain conservatively capitalized and ended the fourth quarter with available liquidity of $444 million and a net debt-to-adjusted EBITDA ratio of 0.65. On January 21st, 2020, the company completed an amendment to its credit facilities, which, among other changes, extends the maturity date to January of 2025 and increases the maximum revolver commitment from 400 million to 500 million. For 2020, we have included our initial outlook in the earnings release issued this morning.

Cash flows from operating activities before the impact of the charge related to the tentative agreement with the FTC are expected to be approximately 375 million to 425 million in 2020. We will continue to evaluate the use of our excess cash, prioritizing investments in our businesses, followed by potential M&A activity and returning capital to shareholders through share buybacks and dividends. As of December 31st, 2019, the company had approximately 262 million of availability on its 500 million share repurchase authorization. On a consolidated basis, we expect lower gross margin, and therefore, lower adjusted EBITDA margin in the first half of 2020 due to the rapid acceleration in invoice growth and the resulting younger portfolio at progressive which we expect will increase 90-day buyout activity.

Due to the higher buyout activity at progressive and lower year-over-year results in the Aaron's business, first quarter adjusted EBITDA and non-GAAP EPS is expected to be the lowest quarter of the year. Consolidated revenues are expected to be split roughly 50-50 between the first half and the second half of 2020, while adjusted EBITDA, adjusted EBITDA margin and non-GAAP EPS are expected to trail the prior year in the first half and exceed the prior year in the second half. These estimates are based on an assumed annual effective tax rate of approximately 24% which will trend similarly to the quarterly effective tax rates in 2019. We are also assuming approximately 68 million shares outstanding throughout the year.

Our 2020 outlook incorporates the expected impact of progressive's agreement in principle with the FTC staff. Because this matter is still pending final approval, we are unable to comment beyond what is in our fourth-quarter earnings release, Form 10-K and our prepared comments. With that, I will now turn the call over to the operator, who will assist with the question and answer period.

Questions & Answers:


Operator

[Operator instructions] The first question will come from Bill Chappell of SunTrust.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Thanks, good morning.

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Good morning, Bill.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Hey, two questions. I guess, first, on progressive, I appreciate the color kind of on the 90-day payoffs affecting kind of 1Q, but trying to understand how you get some relief as you move to the back half or into even 2021 just as I assume these two big new customers are still at early stages on, in terms of percentage of transactions. And as they get bigger throughout the year and they ramp, won't you continue to have them? It will keep the portfolio fairly new. And so, help me understand how, as we move to the back half and into 2021, that is alleviated.

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Yes, Ryan here. Thanks for the question, Bill. If you look back, what's interesting is we saw similar trends play out in 2018. And if you look back to the latter part of 2017, later quarters of that year, we're generating 30-plus percent growth rates.

You saw the same thing happen in the first half of 2018 where you experienced higher 90-day buyout rates because you had a younger average portfolio, so we're just expecting that same trend to play out in 2020. And I know you know the dynamic, but just to sort of state it here. When you generate those high levels of invoice growth, you blend in younger leases. And younger leases, by definition, are in the period of their lease, where they're eligible for those discounted early buyout options as opposed to older and older portfolio on average which may be outside of that window, so we're just expecting similar trends to play out in 2020 that we saw in 2018.

And as you pointed out, we're very excited about those opportunities. We think they represent great long-term growth potential. Obviously, all of which won't be realized in year one, but we're excited about the results we've delivered thus far and pretty optimistic for what they'll do in 2020 which is incorporated in the plan and certainly expect them to be big contributors going forward.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

OK. And then, Doug, just back to the kind of the same-store sales outlook for this year, I mean, it looked like, over the past couple of years, we were nearing more kind of a flat or maybe even up same-store sales performance, especially with the closure of doors and so it's kind of negative 2% to negative 4%. Is that kind of the new long-term algorithm for the business? Or is there something else pressuring it that I'm missing? Just a little more color there would be great.

Douglas Lindsay -- President, Aaron's Business

Yes, Bill, thanks for the question. As you recall, we've had consistently had delivery pressure on the business, kind of down the mid-single digits, and we've overcome that over the last few years by raising ticket in our merchandising strategy which has allowed us to get to positive comps which we saw several quarters in 2019. You may also recall, in the third quarter, we rolled out a sales initiative that got great lift in sales, but we came under collection pressure. Really proud of the team in the fourth quarter for scrambling, and particularly in the portfolio of business, to get collections back where they need to be and delivering positive comps in the fourth quarter.

As part of that, in the fourth quarter, we had some high churn in the portfolio. We're writing off deals that were originated in Q3 that churned out of the portfolio in Q4. On top of that, as I mentioned in my remarks, we had continued pressure in consumer electronics, that put pressure on the revenue we're putting into the portfolio. The net-net of both of those things, as we ended the year with a lower portfolio size, into 2019 with lower portfolio size than we did in 2018, and that impact carries through the course of the year.

As we look into 2020, not only are we entering with lower portfolio size. We'll also have some additional charge-offs or write-offs that'll happen in the first quarter related to Q3. We expect that to churn through the portfolio early in the year and for our write-offs to lessen over the course of the year and the full year write-offs next year to be better than they were in 2019. We're also expecting, over the course of the year, to see pressure in consumer electronics continue.

The good news is, consumer electronics, despite being down, we're seeing growth in both furniture and appliances which, over the course of the year, and those are higher-margin products, as I mentioned, over the course of the year, will begin to improve margin despite the lessening of consumer electronics. So, net-net, the lower beginning balance, the trends in consumer electronics are causing our same-store comps to be in that 2 to 4% negative range. We do expect improvement over the course of the year in collections, write-offs and margin as we see a lessening of that CE component.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Got it. Thanks so much. I'll turn it over.

Operator

The next question will come from Brad Thomas of KeyBanc Capital Markets.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Thanks, good morning, everyone. I guess, just to dovetail – good morning. Just to dovetail off the last question. Douglas, with the CE underperforming, obviously, I think that seems to be pretty widespread industry dynamic and declining ASP is a headwind for you.

But I'd just be curious as you try to look at the ramp that occurred out of Best Buy that coincided with the CE business slowing down, what's your latest assessment of how the cannibalization dynamic is affecting you on the core side?

Douglas Lindsay -- President, Aaron's Business

Yes. I'm sorry, Brad. I didn't catch the middle word there. Could you just repeat that last part?

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Oh, a question around how the cannibalization is evolving as partners like Best Buy ramp up in consumer electronics?

Douglas Lindsay -- President, Aaron's Business

Oh, I see. Yes, we're not hearing much on that at all, actually, in the business. We've been facing these headwinds in consumer electronics for a long time. If I look back, and by the way, we define consumer electronics as television, audio and gaming.

We've been seeing that as a lessening part of our business. If you look at the pie chart in our 10-K, you'll see seven years ago, it represented about 35% of revenue in 2019. It's down to about it's down to, at 20% of revenue, so we've been seeing this lessening over time. To us, it's all about commoditization of these electronics.

As you know, there's been significant price compression in the market, generally a lack of innovation, and then we have these new providers of lower-cost products entering the market. We expect that to continue. We are not seeing any cannibalization per se. This is just a continuation of a trend.

As a matter of fact, as you look at purchasing TVs, we're challenged to purchase TVs in the Aaron's business at any lower cost and you could buy them over the holidays at Walmart or any place else. So, when you're in the leasing business, when a 65-inch TV is selling for under $400, it becomes very challenging to put it on a lease. In addition to that, as you know, consumer preferences are changing, the way people consume content and everything else, so we expect this to continue to be under pressure. What we're doing about it is really testing various things to drive volume, whether it be price tests, remerchandising of CE in our stores and bundling with other products.

But over the long term, we think CE is a declining category, and we need to replace it with new products which we're working on actively right now, and you should expect to see those in our show rooms this coming year.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Great. And then, I guess, a question about thinking about the core, for John and Steve, if you want to chime in. Just given the step down in EBITDA, we're looking for the core in 2020. Some of these headwinds may be transitory, some may be items that persist.

Does it change your thinking at all on how big the core should be? And potentially, any strategic options that you might have for it?

John Robinson -- President and Chief Executive Officer

Yes, Brad, it's John. Thanks for the question. Yes, we really believe in the Aaron's business and the direct-to-consumer channel. There's a lot of advantages for us to control that channel to the customer, and we still believe it's an attractive investment for us to make.

With Aaron's business, it has been a leader for decades, and we believe it will continue to be in that direct to consumer model. We think the model has to be a robust e-com platform, and probably, over time, fewer, better looking, better located and ultimately, higher-volume stores. And those two channels will support, we believe, the same markets or even perhaps some new ones, and we're fortunate to be able to execute on that because we've got the supply chain in place and last-mile delivery already in place, so we feel like we have the right assets. The team is doing a really good job of trying to manage transformation toward that model while also managing near term profitability, and they've done a good job.

Douglas and the team really have done a good job on that, but it's tough. They've discovered some new kind of faster-moving water with e-comm and with these new store concepts, and we believe they're on the right track in terms of transforming them, but we're going to keep taking a prudent approach to how much capital we put in the business, and we'll continue to evaluate results as we go, and I think that's one of the benefits. One of the good news about the IRS business is that as we move to that model, it does generate quite a bit of cash as you take working capital out of the system, so that's a very attractive aspect of the business model that helps with that. In terms of kind of bigger picture, strategic thinking, Steve has a strategy team.

He and I work with that team all the time, thinking about how we optimize the assets we have and then looking outside the company for opportunities that could enhance what we have, and that's kind of an ongoing process that we're constantly thinking about. And we understand it's our job to do that and to figure out the best ways to create long-term value, so we're certainly always thinking about those sorts of things.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

That's helpful, John. And if I could squeeze one more in here for Ryan. I'll let you get off here. Really impressive invoice growth here in the fourth quarter, the 34% number.

That's usually a good indicator of what revenues may look like in the next quarter, at least directionally. Can you help us think about how to model progressive revenues in the next few quarters, what that cadence might look like? And I guess, if I try to push you a little bit here, you're guiding full-year revenue up 19 to 24%, even though we're coming off of this great 34% number. And obviously, you should have Lowe's ramping up, too, this year. Any more color on how to think about revenue guidance would be great.

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Yes, happy to share some thoughts on that, Brad. Thanks for the question. I appreciate you mentioned in Q4, it was a very strong quarter at 34% growth, very excited about that. Obviously, the team worked really hard to deliver those results.

As that translates into 2020, I'll just offer sort of a few ways to think about it. First, a meaningful portion of that growth that we experienced in Q4 was obviously related to the holiday shopping season and the seasonality of consumer electronics in particular, and that trend doesn't extend similarly to other verticals necessarily or quarters, so that's one thing, I'd say. The second thing is, as we've seen previously, and I mentioned this a bit earlier, with other national launches, improving productivity is really more of a multiyear opportunity. We're obviously very happy with where we're at and the opportunity in 2020, but also happy with the years ahead and the opportunity that lies there.

And we're seeking -- no, we're working hard with our partners to realize that opportunity. And the other thing I would mention is that while we believe it continues to be a very large market that is the vast majority of which remains unserved in keeping with past practice. We've really only factored in pipeline conversion where we have near-term visibility. So, that's just how we think about it, that's just the approach we take and sort of blend all those in with where we're at.

We're very bullish about the year. We're guiding to a midpoint that assumes accelerating revenue growth on 2.5 billion of net revenue, so it's becoming a very large business. To generate accelerating range of revenue growth on that has us very excited, and I think we're on the trajectory we expected to be on.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Gotcha. Thanks so much.

Operator

The next question will come from Bobby Griffin of Raymond James.

Bobby Griffin -- Raymond James -- Analyst

Good morning, everybody. Thank you for taking my questions. Not to stay on the core, and I appreciate all the details you guys have given so far, but I'm still struggling to understand the moving parts on the profitability aspect. It seems like consumer electronics has been pretty weak all year.

We're calling outright higher-margin business on other areas in the category. So, what exactly has really changed since the end of 3Q to have the core profitability go from flattish to slightly down? So all of a sudden, down 35 plus million in EBITDA for next year?

Douglas Lindsay -- President, Aaron's Business

Yes, Bobby. This is Douglas. So, if you look at our EBITDA last year, right, we came in at 166. There was a little bit of hurricane benefit in that number, and we're now guiding down to 125 to 135.

100% or more than 100% of that delta has to do with this beginning balance decline that we're coming into the year on, and that has to do with, as I mentioned before, on same-store comps, churning out of the portfolio of some deals in the third quarter and fourth-quarter related to lower collections and softness in CE. The good news is that we are growing in three of our other major categories that are higher-margin categories. But despite that growth and the offsetting we see over the course of the year, that lower beginning balance has put pressure on the overall earnings. And as you know, we're a high operating leverage business and high fixed costs, so we're working actively to take expenses out.

We are expecting lower write-offs over the course of the year and we are making some investments in our e-comm and real estate strategy over the course of the year, but the main delta year over year is the beginning balance and slight and impact to CE.

Bobby Griffin -- Raymond James -- Analyst

OK. Was the holiday quarter itself just weaker around that than originally anticipated? Or how we are trending to end 3Q? And then, I guess, the second part of my question, completely unrelated, but is there, what is the opportunity on the real estate side of things? If this is kind of the new normal for the core, is there any initiatives or kind of first thinking of pulling out stores where we could have less stores but more volume per stores to try to improve where this profitability is in the core business?

Douglas Lindsay -- President, Aaron's Business

Sure. First of all, the holiday season was softer than we had anticipated. Again, the team was spending a lot of energy in the early fourth quarter and actually through the quarter, getting collections back in line which they did a great job. Our collections went up 350 basis points from where they were in the third quarter, and we were able to post positive comps because of that.

We saw softness, really, primarily in CE in the fourth quarter, but we saw strength in our other three categories which are furniture, appliance and outdoor. All of them were positive growth in the quarter. I think they were a bit dampened by our collection efforts and sort of rebalancing the portfolio, but I feel we came out of Q4 fully balanced and ready to sort of attack the New Year. And so, we're expecting growth in those three categories, our highest-margin categories, but not enough to offset this continued decline in CE.

In terms of real estate, John mentioned this, but we're going to be constantly looking at our real estate portfolio. One thing we've done, I think, well over the last three years is shortened the term of our real estate leases, so we have a lot of flexibility in our portfolio. We have a real estate committee regulated to meet, solutions for store profitability, see where there are opportunities for closed mergers, but we're really excited about that in combination with our new store concept. This new store concept, just our renovates in place, are getting lift, and we believe those are good investments.

But when you combine that with repositioning our real estate and potentially merging customers into one box, we think we get leverage on our fixed cost base and a higher return, so we're going to start doing a little bit more of that in 2020. You should expect continued store closures over the course of the year, but many of those will be into boxes or sort of mergers of stores into bigger boxes with our new store concept. We're really excited about that. We've hired a real estate team and are building capabilities to do that faster than we have in the past, and with these shortened lease terms, it's going to allow us to pivot the portfolio and drive profitability.

Bobby Griffin -- Raymond James -- Analyst

OK. I appreciate the details. Thank you again for answering my questions.

Operator

The next question will come from Kyle Joseph of Jefferies.

Kyle Joseph -- Jefferies -- Analyst

Hey, good morning, guys. Thanks for taking my questions. Ryan, I just want to get your outlook for credit performance in 2020, particularly given sort of the more immature portfolio and the higher 90-day buyout activity, and what sort of impact that has on loss rates?

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Thanks, Scott. Happy to. Yes, we're happy with what we see in our lease portfolio metrics. Obviously, we explained the delta in Q4 relative to Q4 of 2018 by talking a little bit about the impact of growth and the provisioning.

I think you know this, but the nuance and how we booked that is that you have an initial reserve that you book on leased assets, and growth doesn't do any favors there. And so, the strong growth in the quarter really drove increased provisioning which is the primary driver of that delta, but happy with where we sit looking into the New Year. And obviously, when you see higher rates of 90-day buyouts that tends to be accompanied by lower write-offs, so it's kind of a healthy dynamic when it comes to portfolio metrics -- portfolio performance metrics.

Kyle Joseph -- Jefferies -- Analyst

Got it. That's helpful. And a follow-up for you as well, Ryan, just could you touch on the competitive environment in the virtual lease to own segment? And you talked about your pipeline and your overall conversion. But given the competitive dynamics, can you give us a sense for your pipeline in terms of whether it's regional or more nationwide retailers?

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Yes, it remains very competitive. I'm sorry to be a broken record on that one, but it's been intensely competitive for years now. There's a lot of competitors in this market. We have new folks who have entered, folks who've been around for a while sort of changing their strategy, and we're constantly innovating and evolving kind of in our own right but also in response to what we're seeing in the marketplace.

I expect that trend will continue. Invariably, those competitors that exist will become larger as they execute their strategies, and I expect they'll be more of a threat as we sort of go into the future. And we're -- that's how we've been thinking about the business, that's why we've been making the investments we have in people and technology, people and systems to continue to kind of lead out when it comes to the customer and retailer offer. Our teams are working very hard in that regard.

I'm very happy with how we're positioned today. I think we're positioned for a lot of success. And if you just -- I go back to it a lot, but we believe it's a $25 billion market, 5 to 6 billion of which is currently being served today, so the vast majority of what we're talking about is greenfield rather than share shift among existing competitors.

Kyle Joseph -- Jefferies -- Analyst

Sure. And then, last one for me. Sorry, also for Ryan, but so just talked about consumer electronics and the impact on the Aaron's business. Can you give us any color or any sort of impacts you're seeing on the progressive side of the business related to consumer electronics?

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Yes, yes, obviously, we're experiencing growth in that vertical given sort of recent opportunities that we've on-boarded, and we're pleased with the activity that we're seeing there. We're sort of on the front end of that given that dynamic of having introduced new partners, so less exposed to a variance on an existing trend in that regard.

Kyle Joseph -- Jefferies -- Analyst

Got it. That's it for me. Appreciate the time. Thanks, guys.

Operator

The next question will come from John Baugh of Stifel.

John Baugh -- Stifel Financial Corp. -- Analyst

Good morning. Thank you for taking my questions. I know you don't want to talk about the FTC settlement, and I'm not really talking about that. But I'm curious, and you called out the $15 million expense.

My question is simple. What are there any changes to the economics of the progressive transaction from whatever the FTC is asking you to do other than what I presume is a sort of a $15 million one-time expense to monitor or track or do whatever you have to do?

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Thanks, John. I'll respond to the question about the investment in the business because I'm excited about the work we're doing there, that we've got a lot of teams who are doing great work, I think, that will benefit our customers and our retail partners. Generally speaking, I'll say we've got a lot of people in our product and tech departments working on enhancing the application process, and that's where the bulk of that spend is, is in those people and a bit of the systems, trying to get more information directly into the hands of customers as possible. We know this will help facilitate a frictionless process both online and at the point of sale.

A big part of that is innovating new ways to continue to provide a fully transparent experience for our customers, presenting disclosures to them throughout the process, and we spent a lot of time on innovation there. We expect to continue to spend a lot of time on that. We think it'll result in a very seamless, strong experience for our customers and our -- again, our product, our tech, our compliance teams are doing some excellent work there.

John Baugh -- Stifel Financial Corp. -- Analyst

OK. And then, staying with you, Ryan, on the progressive side. We're well into the first quarter and I haven't heard any commentary around tax refunds in general. But the question that's specific to you, your new accounts, Best Buy and Lowe's.

Are you seeing early buyout activity that is in line with your expectations with those accounts, or is it materially off? And maybe a broader question. As you look at those two accounts, you obviously had some assumptions at the start of where they come out on an annual basis on profitability and did approvals or pricing or whatever you do in terms for them to account for that. Is that outlook changed at all based on the pattern you're seeing so far?

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Yes, I appreciate the question. I'll comment generally on what we expect to see from national accounts rather than sort of expectations on specific opportunities, but I'll say your intuition is right there. I know you didn't state it exactly, but I think what you'd expect from national accounts is a slightly different application profile than you would generally, one that's more predisposed toward 90-day buyouts, but also with the sort of lower incidence of write-offs that sort of compensates for that, and that's one of the dynamics that you see playing through our P&L in 2020. We obviously expected that trend, and that it's playing out in line with how we thought it would.

John Baugh -- Stifel Financial Corp. -- Analyst

OK. And then, lastly, on the store side, appreciate all the color and the reasons why '19 -- '20 will be lower than ' 19 on EBITDA. And I don't know if this is for Douglas or John, but as we think about the pressures on CE and the expectations to continue, until that business gets to be a minor percent of your business, could we not be still looking at an environment next year where the progress in furniture, appliances, whatever, continues to get outweighed by CE? Or do you expect an inflection point even if CE just continues to shrink significantly?

John Robinson -- President and Chief Executive Officer

Yes, I mean, this is John. I'll give it a shot, and Douglas, you can correct me where I'm wrong, but it's a good question, John. And as Douglas said, CE was much more important to the business, five and seven years ago than it is today. Although it's still important at 20%, but 20% and shrinking as the other categories grow, so our expectation is there will be an inflection point.

Our goal is to offset the decline with new product introductions, as Douglas talked about. But while we still expect it to be a headwind, we aren't going to kind of estimate when there might be an inflection point. But if you look at the trends that we've experienced, you would certainly and if those continued, you could kind of figure out there is an inflection point that catches and from a margin standpoint, it probably happens even faster than from a same-store sales perspective, so that is kind of the thinking. But we're kind of not just sitting around waiting on that.

We're trying to innovate to find ways to offset it in the near term. But 20% and shrinking and the other categories growing, it definitely leads you to think that that could be the case.

John Baugh -- Stifel Financial Corp. -- Analyst

So are you thinking in terms of new products, new CE products? Or are we talking different verticals here? Or what are you looking at?

Douglas Lindsay -- President, Aaron's Business

Yes. I mean, John, we're looking at mobility devices which are sort of ways to get people around, particularly elderly people. Fitness, gaming, power tools, equipments, sporting goods, things like that. As you know, in the past, we've tested multiple things.

I think our franchisees are great sources of innovation and where we could go with product offerings, and the technology that we put in place in our direct procurement activity allows us to get product in much more efficiently than we have in the past.

John Robinson -- President and Chief Executive Officer

The other thing I'd add just to Douglas is that that I just kind thought of afterward, is the fact that the new store concept that the team has developed is definitely more furniture-centric. It's a static showroom in the front with kind of more and better furniture, so I think it probably accelerates the dynamic as that as those stores become more prominent in the system from a store count perspective.

John Baugh -- Stifel Financial Corp. -- Analyst

Thank you. Good luck.

John Robinson -- President and Chief Executive Officer

Thank you.

Operator

The next question will come from Anthony Chukumba of Loop Capital Markets.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Thank you for taking my question. So, I had a question about the Aaron's business and progressive in terms of like how integrated are those two businesses? I mean, it seems like the Aaron's business is largely headquartered in Atlanta, and progressive is largely headquartered in Utah. I'm not sure how much reverse logistics that progressive uses from the Aaron's business. I'm just trying to get a sense for how integrated those two businesses are at this time.

John Robinson -- President and Chief Executive Officer

Anthony, it's John. Thanks for the question. It's a good question. And I'll tell you, going back to the acquisition, progressive's been on such a tear for a number of years and had such a strong team led by Ryan Woodley, that we've really not integrated them as much as we could have, certainly from a back-office perspective.

There's a lot of learnings we've passed between the companies. For example, e-com at Aaron's is largely enabled by a lot of the know-how that came from progressive from a decisioning standpoint. A lot of the customer service hubs that progressive built out, a lot of the knowledge for that came from the Aaron's business. So, there's been, I would say, integration of ideas.

But from an operational perspective, the companies are largely independent. That's why we have, CEO of the progressive business, Ryan, runs very much a separate business. We try to share where we can, but we're firewalled from a lot of other perspectives, from a data sharing, that sort of perspective. There are some shared services, of course, when you think about financial reporting and some of those type of functions, but generally and largely, the businesses run separately.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Got it. And then, just one quick follow-up, and I know you sort of touched on this before, and I know you don't want to talk specifically about large retail partners, but I guess, I was just wondering, if you could just talk about some of your more recent large retail partners, like how have those businesses ramped up just relative to your original expectations?

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Anthony, Ryan here. I, we're really happy with those relationships. We've worked hard. And as you know, those aren't the relationships themselves really preexist the pilots in the business.

In both cases, they extended years prior to our first transactions occurring in those locations, so we've worked hard to build good relationships. We're happy with the results we delivered in Q4, very excited about the opportunity in 2020 and really excited about the fact that they represent multiyear growth opportunities. We're not just focused on 2020, and the team is working hard already on incremental opportunities within those for periods out into the future. So, I'd say we're happy with them.

I'm happy with the work the team has done to set us up for success there. There's a lot of collaboration that's going on, and we treat them like we do each of our other partnerships which is we just have to work hard every day to earn those relationships, and that's the good work that's happening right now.

Anthony Chukumba -- Loop Capital Markets -- Analyst

OK. That's very helpful. Thank you.

Operator

The next question will come from Jason Haas of Bank of America.

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my question. You'd called out higher onboarding cost than you had initially expected. Could you describe what those were?

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Sure, happy to. We, as we approached Q4, we obviously knew it would be a really big growth period for us, especially with the onboarding of some of those larger opportunities, as well as growth across our existing book of business. And sort of set a big goal for preparedness for Q4, and just ended up with a good Q4 hiring season, took on a bit more labor than we had planned, invested maybe a bit more in infrastructure to make sure that we had plenty of bandwidth to support growth during that period. And I'd say the results were pretty, pretty exceptional that the service levels were extremely strong.

We got high marks from all of our partners for how we delivered smoothly throughout the holiday shopping season, so our operations and tech teams did a great job there. Now, obviously, that performance came at a slightly higher expense than we had planned. But on the margin, made the decision to err on the higher side in exceeding service levels at those high rates of growth, obviously, rather than the alternatives, so it was it was an investment in people, and I think it paid off well for us and sets us up well for 2020.

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Great. And then, for my follow-up, there's been some proposed changes to the regulatory environment for rent-to-own in California. I'm curious if you could comment if the proposed changes that they went through, if that would have any impact on your business.

John Robinson -- President and Chief Executive Officer

Yes, I'm not going to comment on that, in particular, at this time, but I can tell you that we've talked about it for a while, and it's been in our filings that our business is subject to regulatory scrutiny, really, given that we serve credit-challenged customers. So, and being the leader in those spaces, with Aaron's business and progressive. We're going to get even our company more attention. So, it's kind of an expectation that we have that there will be regulatory activity from time to time.

It's our job to be very compliant, follow all the rules and also to tell our story because we have a great story as an industry and as a company. We provide a great service to customers, get their families, products that they need. Whether it's a bed to sleep on, a stove to cook with or a sofa to sit on, we provide more of that to more people than anybody. So, that's just part of what we have to do as an industry and as a company, and we'll continue to work on that.

We'll continue to innovate to make it better for our customer. I'm really proud of the innovation that has gone on across all our businesses for the customer, and we'll keep working on that to make the offer even better for our customers. And if we can keep doing that, I think we'll be better positioned relative to our competition and the industry will be better positioned, so that's kind of how we think about it.

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

The next question will come from Vincent Caintic of Stephens.

Vincent Caintic -- Stephens Inc. -- Analyst

Hey. Thanks, good morning. First on the Aaron's business. So, there's been a lot of volatility here over the past couple of years, up and down.

And it seems like now, kind of looking into 2020, there's a lot of cleanup of, say, what happened in the third quarter of '19 on collections. I guess, maybe just taking a step back though, when you think about this business and what's kind of the right ongoing industry growth, where you think your core same-store sales should be? Where you think your core profitability margin should be? If you could kind of remind us of how you think about the business on an ongoing basis?

John Robinson -- President and Chief Executive Officer

Yes, I mean, Vince, it's a great question. We've had tremendous growth for decades in the Aaron's business without a lot of changes to the model. And I think customer preferences started changing pretty rapidly for us, five- or six-plus years ago, and so we've got to adapt to that. We think it's a big market, and that should allow us to have a growing business, but we've got to adapt the business to get back to a growth platform.

And Douglas and his team have done a really good job on that. They're kind of trying to do that while they maintain near-term profitability which is challenging. But I mean, we certainly think if we could get to this model of having a robust e-com platform, better-located, better-looking, better-experience stores for our customers, supported by our supply chain that can be a business that can sustainably grow again, but it's going to take some time and some investment, and we're just trying to do that prudently. We've been trying to do it prudently for a number of years, and it's just a balancing act that we've been trying to keep.

But honestly, if you look forward into the future, there's a lot of customers and there's to be served, and there's a unique position that we can occupy in the market with the Aaron's business to serve that, so we're optimistic it can be a sustainable grower going forward.

Vincent Caintic -- Stephens Inc. -- Analyst

OK, great. And then, on the progressive business, so two parts. When you're thinking about 2020, I'm just wondering if there's any business practice changes that you'd foresee? So maybe this FTC investigation which you won't talk about specifically, and then there's some investments in the business, but if you could talk about, say, if there's any selling or business practices changes that might happen. And then, also for revenue guidance, what are you assuming for sort of the bad debt or write-off expense forward?

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Thanks for the question. Apologies, if I'm repeating something that I've said earlier. But we're very happy with our plan for 2020. Obviously, the midpoint of the range implies accelerating growth for the business which we're all excited about.

It's a result of a lot of hard work last year setting up, onboarding new accounts, setting up our existing accounts for continued success through identifying incremental growth opportunities. We've done a good job of that. I think that's how we're able to generate accelerating rates of revenue growth. We explained a bit of the dynamic coming out of Q4 with some of the trends that don't necessarily translate directly into every quarter, but we're very excited about where we sit for 2020.

And as I mentioned, that's the trajectory that we expected to be on, so all of that is sort of factored into the outlook that we provided. And then, what? Can you -- sorry, this -- what was your second question?

Vincent Caintic -- Stephens Inc. -- Analyst

Just in terms of bad debt or write-off expense. If maybe 6 to 8% is still the right range that you're thinking about for 2020, if there's any difference there because you have a lot of new customers?

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

No, no, definitely expect to be -- continue to be well within that range of 6 to 8%. Again, happy with the metrics we're seeing coming out of the lease portfolio and reiterating the guidance that we provided on that range.

Vincent Caintic -- Stephens Inc. -- Analyst

OK. And then, last quick one for me. But if you could remind us of your share buyback appetite and your aggressiveness. The stock is kind of indicating down 11% free markets.

And I just wanted your thoughts there.

John Robinson -- President and Chief Executive Officer

Yes. So, the -- obviously, share buybacks have been a major component of our return of capital to shareholders over the years. We still have over 260 million of availability on our existing buyback program. We've been active, so we aren't changing anything about the way we think about our capital allocation strategy, so my expectations there would be buybacks going forward.

Vincent Caintic -- Stephens Inc. -- Analyst

Thanks so much.

Operator

And this concludes our question and answer session. I would now like to turn the conference back over to John Robinson for any closing remarks.

John Robinson -- President and Chief Executive Officer

Thank you very much for joining us today. I'd like to thank our team members, franchisees and retail partners for all of your hard work, providing millions of families life-enriching products. Thanks to all your efforts. 2019 was another record year for the company.

Thank you again for your interest in Aaron's, and we look forward to updating you on our first quarter results on our next call.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Michael Dickerson -- Vice President of Corporate Communications and Investor Relations

John Robinson -- President and Chief Executive Officer

Ryan Woodley -- Chief Executive Officer of Progressive Leasing

Douglas Lindsay -- President, Aaron's Business

Steve Michaels -- Chief Financial Officer and President of Strategic Operations

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Bobby Griffin -- Raymond James -- Analyst

Kyle Joseph -- Jefferies -- Analyst

John Baugh -- Stifel Financial Corp. -- Analyst

Anthony Chukumba -- Loop Capital Markets -- Analyst

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Vincent Caintic -- Stephens Inc. -- Analyst

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