Aarons Inc (AAN) Q3 2021 Earnings Call Transcript

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Aarons Inc (AAN -1.47%)
Q3 2021 Earnings Call
Oct 26, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, my name is Brika and I will be your conference coordinator. At this time, I would like to welcome everyone to The Aaron's Company Third Quarter 2021 Earnings Conference Call.

[Operator Instructions] I will now turn the call over to Mr. Michael Dickerson, Vice President of Corporate Communications and Investor Relations for Aaron's. You may begin your conference.

Michael P. Dickerson -- Vice President, Corporate Communications & Investor Relations

Thank you and good morning everyone. Welcome to The Aaron's Company third quarter 2021 earnings conference call.

Joining me this morning are Douglas Lindsay, Aaron's Chief Executive Officer; Steve Olsen, Aaron's President; and Kelly Wall, Aaron's Chief Financial Officer. After our prepared remarks, we will open the call for questions. 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, including our financial performance outlook for 2021. 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, 2020, and other subsequent 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.

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 in our earnings release.

With that, I will now turn the call over to our CEO, Douglas Lindsay.

Douglas A. Lindsay -- Chief Executive Officer

Thanks, Mike, and thank you for joining us today to discuss our third quarter results. I'm pleased to report another quarter of strong operating performance and continued positive momentum at the Aaron's Company. In the nearly one year since our separation, we have significantly strengthened our leadership position in the direct-to-consumer lease end market and are tracking well ahead of our long-term strategic plan. Continued investments in our best-in-class e-commerce channel, predictive lease decisioning engine and our high performing GenNext stores are driving greater productivity and growth in our business. Through the tremendous efforts of our team, we continue to transform Aaron's go-to-market strategy by delivering customer friendly digital solutions, easy lease approvals and an enhanced shopping experience.

Since 1955, Aaron's has been committed to serving a customer base that has too often been overlooked or excluded from preferred retail experiences. Today, we are leveraging our long and deep understanding of this customer segment to say yes when others say no; to provide our customers with access to great products on flexible and affordable terms and to deliver a seamless customer experience not only across our distributed store network but also digitally through our award winning e-commerce platform. Whether our customers interact with us in one of our beautiful new GenNext stores or via their mobile device, we continue to provide a growing assortment of products they want and need with low monthly payments that fit their budget and best-in-class customer service.

I'm pleased to announce that our third quarter 2021 results have again exceeded our expectations through continued growth in the size of our lease portfolio same-store revenues and e-commerce revenues. As a result, we returned another $37.5 million to shareholders in the quarter in the form of share repurchases. This brings us to a total of nearly $100 million of capital returned to shareholders thus far this year. The strong third quarter results, we are again raising our revenue and earnings outlook for the full year 2021. In the third quarter, same-store revenues grew 4.6% compared to the prior year, the sixth consecutive quarter of positive same-store revenue growth. The improvement was primarily driven by an 8.7% larger lease portfolio size entering the third quarter partially offset by a lower level of customer payment activity compared to the prior year.

Our same-store lease portfolio size continues to grow at a healthy pace ending the third quarter up 6.1% compared to the prior year. We attribute this growth primarily to strong demand for our products, higher average ticket, the favorable impact of centralized lease decisioning and the residual impact of government stimulus on the portfolio. As discussed previously, our predictive lease decisioning engine is working very well and enables us to better match the customers' lease payment with their financial position with the goal of helping more customers achieve ownership and lowering our overall cost to serve. In addition, our lease decisioning algorithms allow us to be flexible in responding to changes in the macroeconomic environment and to optimize outcomes that drive profitability.

As of the end of the third quarter, more than 83% of our total lease portfolio is comprised of lease agreements that were originated through our centralized decisioning platforms. This compares to approximately 60% at the beginning of 2021. As I mentioned last quarter, lease payment activity in 2021 has exceeded historical levels due to the government stimulus provided to our customer leading to higher lease renewal rates and lower write-offs as we saw in the third quarter and expect to see over the next three to four quarters, customer payment activity continues to normalize. Because of investments we've made in centralized decisioning and lease servicing technologies, we expect 2022 lease renewal rates to ultimately settle above pre-pandemic levels but below the level we expect for the full year 2021. We also expect lease merchandise write-offs in 2022 to settle below pre-pandemic levels but above the level we expect for full year 2021.

In addition to investments in our decisioning technology, we also continue to invest in our e-commerce channel and our GenNext strategy. Our e-commerce channel continues to grow at double-digit rates representing 14.3% of total lease revenues in the quarter. The growth in our portfolio of leases generated online is driving improvements to our overall margin performance as we leverage the fixed cost structure of our store and supply chain assets to serve customers that are seeking a virtual shopping experience, low monthly payments and free delivery. Ongoing investments in digital marketing and our customers' online experience are driving growth in this important channel, specifically e-commerce investments are leading to an enhanced shopping experience driven by personalization and richer product content improved customer visibility into products that are available for same or next day delivery and a broader assortment that includes new product categories. Today we have more than 3,000 products on aaron's.com, which is double from a year ago. And our express delivery program accounts for approximately 30% of e-commerce volume. Because of this, we're generating a higher customer conversion rate, lowering our effective acquisition costs and delivering higher customer satisfaction.

I could not be happier with the efforts of our team and the growing marketplace we're creating on aaron's.com. As we discussed last quarter, our GenNext stores continue to perform at a high level. During the third quarter, we increased the size of our GenNext store set by 22 to end the quarter with 86 locations. And we believe we remain on track to have more than 100 GenNext stores by the end of the year. To date, our portfolio of GenNext stores is generating results that are exceeding our targeted 25% internal rate of return and 5-year payback period. Equally as encouraging, monthly lease originations in GenNext stores open for less than one year again grew at a rate of more than 20 percentage points higher than our average legacy stores. As we accelerate the rollout of new GenNext

Stores, we continue to maintain a disciplined approach around our execution of the strategy.

Before I turn the call over to Kelly, let me reiterate how pleased I am with the company's strong performance in the third quarter. Our merchandising and supply chain teams have performed exceptionally well by getting ahead of market disruptions, by procuring inventory and expanding output from our Woodhaven manufacturing facilities. As a result, we are entering the holiday season with strong inventory levels in both our stores and distribution centers and we have been increasing prices to respond to inflationary pressures and maintain product margins. I remain encouraged by the underlying performance of both our store and e-commerce channels as we're tracking well ahead of our 5-year plan on revenue and earnings.

I'll now turn the call over to Kelly to discuss our financial results.

C. Kelly Wall -- Chief Financial Officer

Thank you, Douglas. For the third quarter of 2021, total revenues were $452.2 million compared with $441 million for the third quarter of 2020, an increase of 2.5%. The increase in revenues was primarily due to the increased size of our lease portfolio, partially offset by the expected lower customer payment activity during the quarter and the reduction of 79 franchise stores during the 15-month period ended September 30, 2021. Lease revenues in the third quarter of this year also benefited by an increase in ticket size or monthly rent for agreement, that is offsetting the inflation we are experiencing in the cost of lease merchandise.

On a same-store basis, lease and retail revenues increased 4.6% in the third quarter compared to the prior year quarter. As Douglas mentioned, this is our sixth consecutive positive quarter of same-store revenue growth. Leases originated in both our e-commerce and in-store channels contributed to our revenue growth, which was primarily driven by a larger same-store lease portfolio size, partially offset by the expected lower customer payment activity in the quarter. More specifically, in the third quarter of this year, our customer lease renewal rate was 89.7%, which was approximately 230 basis points higher than the 3-year third quarter pre-pandemic average but was approximately 130 basis points lower than the third quarter of last year. For any period, the customer lease renewal rate is calculated by dividing the amount of customer payments recorded on an accrual basis as of the end of such period by the amount of total customer lease payments due for renewal during that period.

As discussed on our last earnings call, the benefits to our customer from government stimulus programs declined in the third quarter and as expected, resulted in lower customer payment activity as compared to the prior year. We expect customer payment activity to continue to decline year-over-year for the next three or four quarters. And I will point out that a 100 basis point change up or down in customer lease renewal rates or write-offs on a $1.6 billion annual portfolio of total collectible customer lease payments results in a $16 million change in EBITDA.

Additionally, we continue to expect that customer payment activity will benefit from our investments in centralized decisioning. We estimate that this technology has improved lease renewal rates by over 100 basis points compared to the pre-pandemic levels, while also materially improving the customer experience and simplifying the day-to-day activities at our stores. E-commerce revenues increased 13.3% versus the third quarter of 2020 and represented 14.3% of overall lease revenues compared to 13.1% in the third quarter of the prior year. We continue to make investments in this important channel that we believe will continue to drive long-term growth for the company. The company ended the third quarter of 2021 with a lease portfolio size for all company-operated stores of $132.2 million, an increase of 5.8% compared to a lease portfolio size of $125 million on September 30 of last year. As a reminder, lease portfolio size represents the next month's total collectible lease payments from our aggregate outstanding customer lease agreements. Management believes this is one of the metrics that is important in understanding the drivers of future lease revenue.

Total operating expenses, excluding restructuring expenses and spin-related costs were up $15.7 million in the quarter as compared to the third quarter of last year. This increase is due primarily to higher personnel costs and a higher provision for lease merchandise write-offs. Personnel costs increased $5.1 million in the third quarter of 2021 as compared to the prior year, primarily due to higher wages in our stores, additional personnel to support our key strategic initiatives and higher stand-alone public company costs. Additionally, personnel costs were lower-than-anticipated during the third quarter this year as staffing levels in our stores remain below our operational targets due to the current challenges in the US labor market for retail-based hourly employees. Other operating expenses were relatively flat to the prior year period due to higher occupancy, shipping and handling costs, professional services and bank and credit card-related fees. These increases were partially offset by lower advertising costs in the third quarter of 2021 versus the prior year period.

The provision for lease merchandise write-offs as a percentage of lease revenues and fees was 4.9% for the three months ended September 30, 2021, compared to an all-time low of 2.4% in the comparable period in 2020. The increase in write-offs in the third quarter of this year compared to last year was primarily due to lower customer payment activity following several quarters where our customers received financial assistance in the form of government stimulus payments and supplemental federal unemployment benefits. This normalization in write-offs was partially offset by the continued favorable impact of our technology investments, which include decisioning algorithms and customer payment platforms as well as our team's strong operational execution. As we discussed on prior earnings calls, we continue to expect that annual write-offs will be between 4% to 5% of lease revenues and fees.

Adjusted EBITDA for the company was $53.6 million for the third quarter of 2021 compared with $64.3 million for the same period in 2020, a decrease of $10.7 million or 16.6%. As a percentage of revenues, adjusted EBITDA margin was 11.9% in the third quarter of 2021 compared to 14.6% for the same period in 2020. This expected decline in adjusted EBITDA and adjusted EBITDA margin was due to lower customer payment activity, higher lease merchandise write-offs and higher personnel costs compared to the prior year levels.

On a non-GAAP basis, diluted earnings per share were $0.83 in the third quarter of 2021 compared with non-GAAP diluted earnings per share of $1.10 for the same quarter in 2020. Cash generated from operating activities was $30.2 million for the third quarter of 2021, a decline of $92.6 million compared to the third quarter of 2020. This decline was primarily due to incremental purchases of lease merchandise to meet increased customer demand and to mitigate the impact of anticipated supply chain challenges ahead of the upcoming holiday season. In addition, the cost of our lease merchandise was adversely impacted by inflationary pressure.

During the third quarter, the company purchased approximately 1,333,000 shares of Aaron's common stock for a total purchase price of approximately $37.5 million and through a 10b5-1 plan continue to repurchase shares into the first month of the current quarter. For the year-to-date period ended October 22, 2021, the company has repurchased 3,034,000 shares for approximately $90.4 million. As of October 22, we had approximately $60 million remaining under the company's $150 million share repurchase program that was approved by our Board in March of this year and ends December 31, 2023.

Additionally, the company's Board of Directors declared a regular quarterly cash dividend in August of $0.10 per share, which was paid on October 5. As of September 30, 2021, the company had a cash balance of $15 million, no outstanding debt and total available liquidity of $248 million, which includes $233 million available under our unsecured revolving credit facility.

As Douglas highlighted in his remarks, we have again raised our full year revenue and adjusted EBITDA outlook for 2021. For the full year, we have increased our outlook for total revenues to between $1.82 billion and $1.83 billion. We also increased our outlook for adjusted EBITDA to between $225 million and $230 million.

For the full year 2021, we have maintained our outlook for an effective tax rate of 26%; we expect depreciation and amortization of approximately $70 million, and we expect the diluted weighted average share count for full year 2021 to be 34 million shares. We have not assumed any additional shares repurchased beyond what has been discussed earlier on the call.

We have also increased our full year same-store revenues outlook from a range of 6% to 8% to a range of 7.5% to 8.5%. This increase is primarily a result of the continued year-over-year growth in our lease portfolio size. We have maintained our expected capital expenditure range of $90 million to $100 million. We have reduced our free cash flow outlook for 2021 to $30 million to $40 million, primarily to reflect the significant investment in lease merchandise inventory the company has made to mitigate the impact of global supply chain challenges and the related inflationary pressures. Based on our current inventory levels, we do not anticipate any material challenges in meeting our customers' product demand as we end 2021 and head into 2022.

As I have previously described, benefits to our customer from government stimulus programs have moderated in the third quarter. Our revised outlook continues to assume customer lease payment activity remains higher in the fourth quarter of 2021 when compared to pre COVID-19 pandemic levels, but lower than the fourth quarter of 2020. At the same time, we believe the favorable impact of centralized lease decisioning, our digital servicing platforms and other operational enhancements are contributing to a sustainable improvement in customer payment and write-off activity. Additionally, we expect write-offs will continue to be lower in the fourth quarter of 2021 when compared to pre COVID-19 pandemic levels but higher than the fourth quarter of 2020.

Finally, our updated outlook assumes no significant deterioration in the current retail environment, state of the US economy or global supply chain as compared to their current conditions.

With that, I will now turn the call over to the operator, who will assist with your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We have the first question on the phone lines from Kyle Joseph of Jefferies. So Kyle, please go ahead.

Kyle Joseph -- Jefferies -- Analyst

Hey, good morning guys. Thanks for having me on. Congratulations on a good quarter. I just wanted to talk about your outlook for payment levels. I think -- I'm sorry, I missed it but I think you gave the write-off levels for the quarter. And then you talked about kind of the long-term outlook and just remind us about where that long-term outlook is versus kind of the historical range kind of before centralized underwriting.

C. Kelly Wall -- Chief Financial Officer

Yes. Kyle, it's Kelly. It's a great question. As we talked about, write-offs were up in the quarter as we expected, customer payment activity in the quarter, soft and not as strong as what we saw in the back half of last year and the first half of this year. Again, we covered that on our earlier call. As it relates to kind of what we expect going forward, we did include some language in the earnings release, and we've also covered this in prior discussions and on the call last quarter.

As we move forward, and the customer is no longer benefiting from the customer stimulus that they've enjoyed for the last FOUR quarters. They're going to be less liquid. And as we've talked about in the past, where our customer is less liquid, our customer payment activity is lower. So we do expect over the next three to four quarters that the customer payment activity will be lower than what we've seen in the last four quarters, but higher than what we experienced pre pandemic. And the real driver there is centralized decisioning and the other operational changes that we've made.

The centralized decisioning we estimate has added 100 basis points or better to our customer payment activity. And as a reminder, I mentioned this in my prepared remarks, right, 100 basis point improvement is worth about $16 million on a $1.6 million annual lease portfolio size. So as we move forward coming out of this, we'd expect to see just that, right, customer payment activity lower, and that reflected in lower lease renewal rates as well as higher write-offs. But we're encouraged, again, by the impact of centralized lease decisioning and the other operational changes we've made, which are having long-term positive benefits on the business.

Douglas A. Lindsay -- Chief Executive Officer

Kyle, it's Douglas. I will just add one thing to that. And just this metric that we've provided this quarter renewal rates at 89.7%, as we look at that historically, those rates have been pre pandemic in kind of the 87%, 88% range. And so we renewed about that many of our customers. The remaining balance up to 100% of what we could collect would be a product that we return and charge-offs, and then that's working with the customer and ultimately sort of get them the ownership, and that's kind of what we do every month when we get to work.

When the pandemic hit and stimulus began to roll out after the pandemic, we saw those renewal rates increase roughly 200 to 300 basis points in the second half of 2020. That elevated even further in the first half of 2021. And now what we're seeing in the third quarter, what Kelly just described, is a normalizing of our renewal rates, albeit to a higher level we believe ultimately, because of centralized decisioning, once we return to normalized levels over the next 3 to 4 months. So I just want to give you the time line of kind of how that played out and what we're seeing as we move forward to support Kelly's comments.

Kyle Joseph -- Jefferies -- Analyst

Got it. I appreciate the color. And then a follow-up on that. How you see demand for new leases trending as we kind of -- with stimulus in the rearview, obviously an inflationary environment on consumer goods and broadly a normalizing credit environment out there as well?

C. Kelly Wall -- Chief Financial Officer

Sure. I mean, in the quarter, we've seen strong demand both in our stores and our e-commerce channel. Our e-comm channel, in particular, because of our inventory position, has returned to normal. We comped up in e-comm at 13%, and that was comping over prior year almost 44%. So we're really happy with that on the revenue side of things. In terms of demand, obviously, there's been strong demand over the last few quarters as people are investing in their homes. We continue to see steady demand going into the fourth quarter. And while we don't have a crystal ball, we're optimistic about our inventory position and where we stand entering the fourth quarter. But in terms of forecasting demand, we'll wait and see in the fourth quarter.

Kyle Joseph -- Jefferies -- Analyst

Got it. And one last one from me. It sounds like the GenNext stores are doing very well. Has the performance there kind of shifted the outlook for the overall store count you guys provided when -- at the initial spin time?

Douglas A. Lindsay -- Chief Executive Officer

It's interesting. The stores are doing really well. As I said, we're exceeding our pro forma as we compare to control groups, our sales or what we deliver into our portfolio are up 20 points above our control group with a larger population of stores, now 86 stores in GenNext. So that's really, really encouraging. We've got a full pipeline. We're going to do roughly 100 stores this year. I would expect we do roughly the same next year. I think what's changed is maybe our outlook on store closures, the pace of store closures or what we've merged into other stores has slowed a bit as we continue to watch the normalizing environment out there. I suspect as the environment -- the renewals environment continues to normalize, we'll go back to our same pace of store closures. Ultimately, we think we can serve our 700 markets with fewer stores, bigger e-comm and a more efficient cost structure. And so that's still our long term objective, but we're very encouraged about the demand trends and the overall progress against our strategic plan.

Kyle Joseph -- Jefferies -- Analyst

Got it. Thanks very much for answering my questions and congrats on this quarter.

C. Kelly Wall -- Chief Financial Officer

Thanks, Kyle.

Operator

Thank you. The next question comes from Vincent Caintic from Stephens. So, Vincent, please go ahead. I've opened your line.

Vincent Caintic -- Stephens Inc. -- Analyst

Thank you. Good morning. Thanks for taking my questions. So first, two questions. So first kind of a broad question and then second on the fourth quarter expectations. So first, maybe if you could talk about and touch again on the inflationary pressures and how that's -- how you think that might affect your business and how you're handling it going forward? It's nice to see that you've placed those orders and built your inventory ahead of the holiday sales season. But just sort of how you're thinking about it broadly in terms of how we should think about gross profit margins and then also labor costs and anything of that nature? Thank you.

Douglas A. Lindsay -- Chief Executive Officer

Sure. Vince, I'll kick off then we will pass it to Steve Olson to talk about specific product and supply chain issues. But we're experiencing the same economic impact as everyone else. We're seeing price increases in our products, components, fuel, transportation, wages. Our merchandising group has done a phenomenal job of getting ahead of it, keeping pace with cost increases through price increases and our lease rates and so in the effort to preserve margin, and we've done a great job with that. As we commented, we're also -- our fulfillment centers are full, and our stores are full of inventory going into the holiday season. So we've overcome a lot of that disruption activity, which I'll let Steve talk about.

As inflation rolls through the economy in the home sector, the number of customers, we believe, who are looking for payment plans will increase because of a retail product like a washer dryer or sofa will go up. And because of that, that upfront cost, particularly for our customers is sometimes unachievable or undoable and so they look for a lease option instead. And we can start having in a $1,000 product, an increase of $150 of retail. We can pass a $10 increase to that customer that they can manage within their budgets over a 24-month period. So we think based on our experience, credit tightening and inflation expands our market as our customers seek an offering other than a cash offering upfront. So we think it's a net-net positive as we move forward, and we feel like we've begun to see some of that in the demand trend. So I'll kick it to Steve just on what he's seeing on the product side of things.

Steve Olsen -- President

Great. Thanks, Douglas. Good morning, Vincent. First on the supply chain side. So we've been very proactive as Douglas referenced in his prepared remarks. We transitioned early away from direct import as we saw those container and ocean freight costs going up and really transitioned to more domestic supplies with our existing suppliers and then went out and found these suppliers. So the merchant team has done a great job on that. We have Woodhaven, which gives us a great view into raw material costs from a furniture standpoint, but allows us to pivot quickly and move to products that you may need to fill our core merchandise.

Secondly, I'll talk on, call it, the pricing side. The team has done a nice job. We're very proactive with our suppliers. We have ongoing daily, weekly conversations with them about what they're seeing and what are trends around raw material costs and we're taking that information. And as we see price increases as Douglas said, like everyone has, we quickly look at our lease rates not only in the products that may have received the cost increases, but across the entire assortment and we balance those prices across the entire price ladder to ensure we're maintaining our margins. So we continue to work through it, but I'm pleased so far with how the merchandising teams, supply chain teams are handling these inflationary environment.

C. Kelly Wall -- Chief Financial Officer

Yes. And lastly, Vincent, on the labor question you had, we're seeing hourly wage rates increase. It's a very competitive market. But the wage rates that we've experienced thus far are consistent with inflationary trends that we're seeing in the overall economy. So nothing in excess.

Vincent Caintic -- Stephens Inc. -- Analyst

Okay. Perfect. Okay. That's very detailed and very helpful. Thank you. Just a quick follow-up. So when I think about the fourth quarter, so normally a busy holiday sales season, some competitors, normal times would be doing, I guess, some sales, like Friday sales up and things. So -- but still not being a normal season and I know, of course, last year, we were in normal season, but anything that -- how you're thinking about the competitive landscape or how basically retail is going to look for the fourth quarter? Thank you.

Steve Olsen -- President

Vincent, this is Steve again. No, we're not going to comment on other retailers. But I will say, as Douglas mentioned in his prepared remarks, and I mentioned a few minutes ago, we're in a great inventory position. We're pleased with the demand across our categories, whether it's furniture, appliances or electronics. We've put together a great marketing plan to really drive our visits in the fourth quarter, which really includes a further investment in digital marketing. Those investments really go out and find new customers, engage with them and then drive them to our websites to experience that great user experience over our website as well as drive them into our stores. So we're ready for the fourth quarter, and we think we've put the necessary plans in place to make that happen.

Vincent Caintic -- Stephens Inc. -- Analyst

Perfect. Very helpful. Thanks so much.

Operator

Thank you. We now have the next question from Anthony Chukumba from Loop Capital Markets. So Anthony, please go ahead when you are ready.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Thank you so much for taking my question. Congrats on the strong quarter as well. So couple questions. First one, very nitpicky, but I have in my notes, at one point, you said lease portfolio was up 6.1% year-over-year ending the fourth quarter then somewhere else I have it up 5.8%. I'm trying to reconcile the two. Maybe I just misheard what you said.

C. Kelly Wall -- Chief Financial Officer

Yes. Hey, Anthony, it's Kelly. I'll clarify that for you. So the 5.8%, that's the total lease portfolio size, right? Well, the 6.1% that is on the same-store set.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Got it. Okay. That's helpful. And then just in terms of -- I was wondering if you were seeing any -- in terms of lease originations, any sort of significant variation between your different major product categories? In other words, like there is appliance is really strong, consumer electronics, furniture. Just wondering is the strength kind of broad based? Are you seeing any particular outperformance or underperformance from a product category perspective?

Steve Olsen -- President

Hi Anthony, this is Steve again. I'll be glad to answer that. So we did see strong results across all three major categories. But to give you a little more specifics, in furniture, upholstery had a really nice Q3. Appliances, laundry, laundry continues to be a strong category with great demand, it has been that way throughout the last year. And then on the electronics side, saw some rebound in TVs and continued performance in gaming.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Got it. That's helpful. And then if I can just sneak one last one in. I know in the past, you've talked about some of the new product categories that you've been testing in your stores and rolling out of your stores. Just wondering if we could get a quick update on that.

Steve Olsen -- President

Sure, Anthony. It's Steve again. We continue to expand our product assortment. As Douglas mentioned in his prepared remarks, our e-commerce business in this growing marketplace is over 3,000 items, but specifically about what new categories. Those new categories include exercise equipment, small appliances, power tools, home office and electric bikes. But with that, I'll say, we're constantly testing new categories, new items, and you'll see us going forward continue to expand out our assortment and into new categories that even we are not in today. So we're pleased with the results in these two categories, but we're really focused on the long-term in this growing marketplace position.

Anthony Chukumba -- Loop Capital Markets -- Analyst

That's helpful. Good luck with the holiday selling season and keep up the good work.

Steve Olsen -- President

Thanks, Anthony.

Operator

We now have a question from Brad Thomas of KeyBanc Capital Markets. Sir, please go ahead when you are ready.

Bradley B. Thomas -- KeyBanc Capital Markets -- Analyst

Hi, good morning everybody and congrats on a good quarter. I wanted to ask a few follow-up questions here. Maybe first, just starting with the inventory. I apologize if I missed it, but just wondering if you could give us a little bit more color on maybe in percentage terms, how much inventory will be up here as you head into the fourth quarter into the holiday season? And how you're thinking about that sort of at a per-store level, how you're thinking about at the unit level, given that we have seen some inflation? Just more color on that investment in inventory would be great.

C. Kelly Wall -- Chief Financial Officer

Yes. So Brad, it's Kelly. So as we mentioned, we did buy ahead, right? So we're running at higher than normal inventory levels at both our FCs and in our stores. I'd say that on a percentage basis, we're probably running about 15% higher than our target levels, and we really manage it across both our FCs and our stores because as we talked about in the past, our stores serve as many distribution hubs across the US. And so right now, we're pretty full. And we anticipated, as we mentioned, there be some challenges in the fourth quarter. We've had some opportunities to buy inventory kind of ahead of our typical cycle. That combined with the inflationary comments we talked about before, has put us in this higher position. And we expect that will normalize over time.

But we're in a really good position from a balance sheet perspective and a liquidity position. So we've taken advantage of that here. We were able to flex up and we were able to buy. We're going to kind of err[Phonetic] on the side of being a bit heavy going into the end of the fourth quarter. And as we see our customer payment activity and the world hopefully start to normalize a little bit more, then we'll look at optimizing those levels going forward.

Steve Olsen -- President

Hey, Brad, this is Steve. Just to add a little more color. That strong inventory position is across our key categories. So we feel good about where we stand in appliances, where we stand in electronics and where we stand in upholstery -- excuse me, furniture. So we're ready for the fourth quarter. And as we look into the end of the fourth quarter and into Q1, we'll see how we -- what our inventory position will look like as we get into the holiday season. But seems very proactive. And as Kelly said, we're pleased with our inventory position.

Bradley B. Thomas -- KeyBanc Capital Markets -- Analyst

Great. And just to follow-up on all that is connecting the dots. And I think your implied guidance for the fourth quarter would have revenues flat to slightly down year-over-year, down about 2%, if my math is right and inventory is now up a lot. You just mentioned its core categories, they shouldn't have a lot of markdown risk. But just to connect these dots, was this more catch up on inventory, just strategic investments because of how tough the world is to get things for an investor that might ask, are we concerned that we may have risk of discounting in the future? How would you address those questions?

C. Kelly Wall -- Chief Financial Officer

Yes. So Brad, it's Kelly again. It's really the normalization of our customer payment activity, right? So as we go from -- return back to kind of the 87% to 80% range plus the benefit of the centralized decisioning that we're enjoying, it's going to be the decline from what we've seen over the last four quarters. So that's really the driving impact of this, as you think about the impact on the top line as we continue to kind of manage the cost of goods and the flow-through there.

Douglas A. Lindsay -- Chief Executive Officer

Yes. And Brad, just to say another way, is we're not expecting a significant decline in the overall size of our portfolio. It's the rate at which we're renewing that portfolio each month, where the pressure will be on the top line.

Bradley B. Thomas -- KeyBanc Capital Markets -- Analyst

If I could ask one more question just around expenses. Obviously, 2021 has been a year where you're growing against a year where expenses were really lean. And Kelly, can you help us get a better sense of what opex should grow at as we look out to next year in kind of a more normal environment?

C. Kelly Wall -- Chief Financial Officer

Yes. So from the opex perspective, right, the key driver there is going to be labor, right? We continue to run pretty tight, right? And that -- not too kind of our optimal levels. I think a lot of folks in the retail environment are facing these types of challenges. So as we look forward, right now, Brad, it's difficult to estimate kind of into next year specifically, what that's going to look like through a combination of getting our stores back to normal staffing levels combined with, we expect to continue to see some wage pressure, right? But that's going to be a big driver next year as we think about guidance that we'll provide here at the next call.

Steve Olsen -- President

Yes, one additional comment on labor. If you leave the personnel increase we've experienced in this quarter versus prior year quarters, most of that is wage rate, not hours in our stores. Really proud of what we've been able to do over the last few years of making investments to streamline our store labor costs, centralized decisioning has taken a lot of the burden off of our team members in our stores and a lot of the hours that we would spend sort of manually validating. We've also put in servicing platforms. We're now taking over 77% of our payments outside of the store. And so that's really saved on labor. And then we've had other operational efficiencies through self-service and our e-comm site that are allowing us to be more efficient and more productive in the way we go about business. So while we expect to see more hours in our store, particularly next year, as payments normalize, customer payments normalize, there's more effort put into that. We do not believe we'll return to historical levels of store staffing.

Bradley B. Thomas -- KeyBanc Capital Markets -- Analyst

Thanks. Very helpful. Thank you so much.

Operator

We have another question in the phone lines from Jason Haas of Bank of America. Hey, Jason, please go ahead. Awaiting your line.

Jason Haas -- BofA Securities -- Analyst

Great. Thanks. Good morning and thanks for taking my question. So the first one I wanted to ask about is just on the cadence that you saw through the quarter, both in terms of originations and write-offs. I'm curious to know what you saw as it relates to the child tax credit continuing to go out? And then also as the extra unemployment insurance was stopped at the beginning of September?

C. Kelly Wall -- Chief Financial Officer

Yes. Hey, Jason, it's Kelly. So I'd say we did expect to see kind of a slowdown in the customer payment activity through the course of the quarter tied to, as you mentioned, the end of the unemployment stimulus that was provided. And that was offset to some degree by the child tax credit. But as you play through the quarter, as we look at our lease renewal rates, it appears that there was a benefit, clearly at the beginning of the quarter, but that benefit continued to tail, alright, as we moved through Q3.

As we somewhat expected because, again, you've got our customer as we're coming out of a very heavy stimulus hitting environment, right? It wasn't just the checks that they were receiving from the state and federal government, it's also where they haven't paid in other forms of assistance then received through that period of time. So as their life is returning back to somewhat normal from a financial perspective they are seeing other challenges as well and we continue to see our customer payment activity normalize.

Jason Haas -- BofA Securities -- Analyst

Great. Thanks. And then as a follow-up question. I'm curious, it sounds like you're in a pretty good position in terms of inventory, all things considered. So I'm curious if you're thinking about maybe potentially picking up some share, maybe some other retailers are less in stock. You see like there's some opportunity there in fourth quarter and maybe even beyond?

Douglas A. Lindsay -- Chief Executive Officer

Yes. This is Douglas, Jason. We definitely think it's opportunity, like anytime you can have products in your stores, particularly our customers who wants or needs that that product that day, there's an advantage. So I'm really happy with the fact that we've got a lot of product to offer, particularly during our peak season in the fourth quarter. But I'm equally as optimistic about is the inventory levels that we have in our fulfillment centers, which serve our e-comm business. I think we're up, last year's supply chain was very challenging this time, we're up over 80% in our fulfillment centers in terms of inventory levels over last year, and we are ready for the holidays with plenty on our e-com site, 3,000 SKUs and full warehouses. So that bodes well for the demand side of the business.

Jason Haas -- BofA Securities -- Analyst

Good to hear. Thank you.

Operator

We now have the next question from Bobby Griffin from Raymond James. So, I've opened your line. Please go ahead when you are ready.

Bobby Griffin -- Raymond James -- Analyst

Thank you and good morning everybody. Hope everybody is doing well. Regarding -- Kelly, I just kind of want to talk maybe high level and a little bit more long term, but you guys called out at few different times that you're tracking well ahead of the long-term strategy that our plan that we laid out. And when you think about, for instance, merchandise loss ratios normalizing in the next year, are they normalizing better than you would have expected when you kind of spun out when we originally talked?

And I guess what I'm getting at is, is the long-term EBITDA guidance or target out there now maybe more conservative as we sit here and look at the business today with some of the progress you've made.

C. Kelly Wall -- Chief Financial Officer

Yes. Hey, Bobby, it's Kelly. What I'd say is that from that write-off perspective, we continue to expect on the same levels of write-offs this 4% to 5% that we've talked about pretty consistently since just kind of the pre-spin roadshow, right? So there's no changes there. I'd say where we're really ahead is we've grown the business pretty significantly. So our lease portfolio size as we go into 2022 is well ahead of where we had anticipated in that longer-term outlook we provided before. We'll also continue to see really good results out of GenNext, right? And so the performance in those stores are -- as Douglas has mentioned on a few different occasions, that we're exceeding our expectations, repeating our performance. And as that continues, that gives us even more confidence, right, in that longer-term strategy and plan that we laid out.

So those are really the kind of key drivers as we think about getting ahead of the plan from a financial performance perspective. Yes. I'd say that from a margin standpoint, we're still kind of -- I believe that longer term, we're in this 11.5% to 12.5% range. So there's no change there, but it's really kind of accelerating the growth and the overall kind of revenue and EBITDA we're going to achieve in the earlier[Phonetic] years here.

Douglas A. Lindsay -- Chief Executive Officer

And Bobby, one other thing I'd say is our centralized decisioning platform has been a huge asset for us, and we continue to sort of optimize outcomes in that area. And so while the 4.5%, Kelly is exactly right, 4.5% to 5%, we think is the normalized state of our charge offs, we continue to be able to find opportunities to optimize our customer and react to market conditions, which has been a huge, huge asset for us over the last 12 months.

Bobby Griffin -- Raymond James -- Analyst

Okay. That's helpful. And Kelly, just to make sure I kind of understand, the size of the portfolio is getting to your target level quicker than you originally anticipated? Or is the reason the margin is not potentially a little bit higher, just that the labor cost or somewhere else in the P&L has increased a little bit faster given our current environment. I mean I don't think any of us would predict labor the way it was is today 18 months ago or 12 months ago.

C. Kelly Wall -- Chief Financial Officer

Yes, Bobby, great question. So I'd say it's really more of the growth in the business, not the increase in our cost of labor. As Douglas mentioned, right, through centralized decisioning and other investments we've made from a technology perspective, we're seeing that we can operate the stores with less hours than what we have done kind of pre rolling out of RCO[Phonetic]. So while wage pressure will continue to impact the business going forward and right now, we're not seeing -- expecting it to have any material impact relative to what we were thinking kind of pre spin. So it's the growth in the business. It's not changes in margins at this point.

Bobby Griffin -- Raymond James -- Analyst

Okay. Very helpful. And then, I guess, lastly, as I understand you guys will price and then the advantage of your businesses, it's low monthly payment, so it doesn't hit the consumer as much. You can spread it out. Has that started to show up in the comps yet? Or is that more going to be a 4Q, 1Q 2022 type benefit the comps where more products are going to be getting repriced a little bit higher monthly payments.

Douglas A. Lindsay -- Chief Executive Officer

Bobby, this is Douglas. So we hear you, do see in our revenue line and what we're writing into the portfolio, higher ticket this year versus last, we're probably up 3% to 4% in ticket year-over-year. And so that translates. But remember, what we write into our portfolio is only a fraction of what's in our portfolio. So the revenue we recognize is the overall portfolio's ticket versus what we're experiencing now. So you'll begin to see more and more of that sort of translating through to revenue and the same-store revenues as we move forward.

Bobby Griffin -- Raymond James -- Analyst

Okay. Very helpful. I appreciate the detail on the 3% to 4%, Doug. Best of luck here in 4Q and on into 2022.

Douglas A. Lindsay -- Chief Executive Officer

Alright. Thanks, Bobby.

Operator

Thank you. We have no further questions. So I hand it back to Douglas Lindsay to close.

Douglas A. Lindsay -- Chief Executive Officer

Well, thank you for joining us today. Our outstanding performance would not be possible without the hard work and dedication of our entire Aaron's family. As we continue to navigate the ever-changing macro environment, our team members remain focused on continuous innovation, which I hope you heard today, and delivering exceptional value and service to our customers. I remain confident in the execution of our strategy, and we're excited to enter our peak fourth quarter season. So thank you all for joining us today. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Michael P. Dickerson -- Vice President, Corporate Communications & Investor Relations

Douglas A. Lindsay -- Chief Executive Officer

C. Kelly Wall -- Chief Financial Officer

Steve Olsen -- President

Kyle Joseph -- Jefferies -- Analyst

Vincent Caintic -- Stephens Inc. -- Analyst

Anthony Chukumba -- Loop Capital Markets -- Analyst

Bradley B. Thomas -- KeyBanc Capital Markets -- Analyst

Jason Haas -- BofA Securities -- Analyst

Bobby Griffin -- Raymond James -- Analyst

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