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Aaron's revenues climb 8%, but lawsuit sends earnings down 55.8%

Company says it will appeal $39.8 million in damages
ATLANTA — Rent-to-own giant Aaron's said second quarter revenues rose 8% but charges related to damages from a sexual harassment lawsuit led to a 55.8% drop in profit.

It also noted that its new concept HomeSmart stores are off to a strong start. While Aaron's originally projected to open 20 to 25 of the weekly payment stores this year, it said acquisitions and other growth should lead to about 60 HomeSmarts open by year's end.

Revenues for the period ended June 30 increased to $482.7 million from $445 million in the second quarter a year ago. Net earnings were $10.8 million or 13 cents per share, vs. $24.4 million or 30 cents per share last year.

Excluding the lawsuit-related charge, second quarter earnings would have been $33.3 million or 41 cents per share, said the Atlanta-based company, which has a blend of company-owned and franchised stores selling and leasing furniture, electronics, appliances, tire rims and other goods.

For the first six months of this year, revenues increased 8% to $1.015 billion and net earnings were $55.2 million or 68 cents per share, down 10.1% from $61.4 million or 75 cents per share last year.

In June, a jury in the U.S. District Court in southern Illinois awarded $93.5 million in damages to a former employee who alleged she was sexually harassed by her supervising manager. Because the award exceeded the maximum permitted under federal laws, the judge subsequently reduced the damages to $39.8 million.

Aaron's recorded a $36.5 million charge in the second quarter related to the judgment and related expenses.

"We are, needless to say, disappointed in the jury verdict in the lawsuit and plan to appeal the decision," Aaron's President and CEO Robin Loudermilk said in the earnings release. "Even though we believe the damages awarded are outrageously high and without merit, and we have a strong case for appeal, the charge to earnings this quarter is our best estimate at this time of our maximum dollar amount of exposure."

Loudermilk said the quarterly results were as expected and the company was pleased with the performance, "especially in the current economic environment. We believe that business will continue to be strong throughout the remainder of the year."

He added that the company is happy with early results of its HomeSmart stores, which operate on weekly payments from consumers rather than monthly payments at Aaron's Sales & Lease Ownership stores. The company opened 10 HomeSmarts during the quarter and earlier this month announced the acquisition of the 30-store Crusader rent-to-own chain in the Southeast, which it will convert to HomeSmart.

With the acquisition and another small one pending, Aaron's expects to have about 60 HomeSmarts open by the end of the year.

In a conference call with the investment community, Chief Operating Officer Ken Butler said the first store - opened in Houston about nine months ago - turned profitable in May and that newest HomeSmarts are starting out even stronger. So far, he said, there have been no signs of cannibalizing Aaron's revenues.

"This weekly concept gives us another growth vehicle and looks very promising," Loudermilk added in the press release.

Same-store revenues at all company-operated stores increased 5% during the second quarter.

Aaron's Sales & Lease Ownership division increased second quarter revenue 9% to $479.9 million and 8% to $1.01 billion in the first half.

The company's franchisees had combined revenues of $218 million in the second quarter and $459.4 million for the first six months, up 8% and 9%, respectively. Same-store revenues and customer counts for franchised stores increased 2% and 3.9%, respectively, in the second quarter.

Aaron's Sales & Lease Ownership division opened 17 new company-owned stores, 12 franchised stores, 10 HomeSmart stores, and one Rimco store during the quarter. It also acquired the accounts of one third party store, sold five company-operated stores to an Aaron's franchisee and one to an independent operator. Eight company-operated stores and two franchised stores were closed.

It ended the period with 1,143 company-operated stores, 681 franchised stores, 15 HomeSmart stores, 12 company Rimco stores, and six franchised Rimcos in its Sales & Lease Ownership division and one Aaron's Office Furniture store, for a total count of 1,858.

The company is looking for third quarter company-owned revenues of $480 million and earning per share in the range of 35 cents to 39 cents.

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