Upbound Group Inc (UPBD) 2002 Q1 法說會逐字稿

Good morning. My name is

and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Rent-A-Center 2002 first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad

If you would like to withdraw your question, press the pound key. Thank you, Mr. Davis, you may begin your conference.

Thank you

and good morning. Welcome to the Rent-A-Center first quarter 2002 earnings release conference call.

We're obviously very pleased with our most recent results and are excited about the opportunities that lie ahead. Having said that, I would like to take a moment to thank each and every one of you for joining us this morning, and for your continued interest in, and support of Rent-A-Center.

I am Robert Davis, the Chief Financial Officer of the company, and I'm joined this morning by Mark Speese, Chairman and CEO, Mitch Fadel, the President, and Peter Bates, Director of Investor Relations. I'd like to begin by briefly highlighting our financial performance for the first quarter, after which time I will turn the call over to Mark who will add a few brief updates.

We will be available for questions following Mark's comments.

I would like to mention that Mark, Peter and myself are currently in New York, and will be presenting an institutional retail conference later this afternoon, while Mitch is joining us from the office back in Plano.

I mention this so that those of you who may have a follow-up question after the call, it may be best to contact Mitch, as Mark, Peter and myself may be hard to reach the next couple of days. Having said that, however, obviously we will be checking our voicemails and returning calls as promptly as possible.

Now in order to help you understand our company and its results, we will make some forward-looking statements today. It is possible that our actual results may vary from the statements we make, so I'd like to refer you to additional information that could cause such a difference in the risk factors section of our annual report and 10-K for the year ended December 31st, 2001, as filed with the SEC in March of 2002.

I'd like to begin talking about the top line. Total revenues for the quarter increased 13.4 percent, supported by a same store sales comp of 7.7 percent, from 439.7 million to 498.6 million, an increase of nearly 59 million.

I would like to point out in the comp of 7.7 percent the company did benefit from increased merchandise sales in the first quarter, therefore I'd like to just point out that the rental and fee component of the same store sales base was about six percent, which is obviously very strong, and we feel good about in terms of that is recurring revenue, and what we can count on going forward. That six percent rental and fee same store sales comp was supported by growth in our customer base and BOR count, as well as growth in the APU, equally weighted about three percent each.

Net earnings for the quarter were 43.6 million, or $1.20 per diluted share. Excluding the effects of goodwill amortization for the first quarter of last year, 2001, earnings increased 12.4 million, and 34 cents respectively, an increase in diluted earnings per share of nearly 40 percent on a comparable basis.

Of the $1.20 in EPS for the first quarter of 2002,

I would like to mention that approximately 14 cents is non-recurring, which is reflected in our guidance going forward. Essentially the first quarter typically experiences higher cash sales at a higher margin than the remaining three quarters of the year, due to income tax refunds and more disposable income in the hands of our customers, and must therefore be taken into consideration.

Nevertheless, we're extremely pleased with the current strength in the business from a recurring nature, and have raised earnings expectations in the subsequent quarters, and for all of 2002 as a result.

From a margin perspective the company experienced significant improvement in this arena as well.

The first quarter EBITDA margin of 19.8 percent is up 190 basis points from the first quarter of 2001, but more importantly, up 510 and 380 basis points from the third and fourth quarters of 2001 respectively. For all of 2002 we expect EBITDA margins to approximate 19 plus percent, largely a reflection of the non-recurring boost from merchandise sales in the first quarter, as well as the impact of ramping up new store openings in the back half of the year.

As point of reference, the EBITDA margin all of 2001 excluding one-time events was 16.8 percent.

Cash flow for the first quarter was strong as well. The company generated over 96 million of operating cash flow and ended the quarter with 167 million of cash on hand. Since March 31st the company has reduced outstanding indebtedness over 18 million and we expect to further reduce debt at least 35 million in the next week or so.

The company also expects to invest $20 to $30 million in working capital in the second quarter as a result of the strong demand as well as the increased pay out and cash sales generated in the first quarter. We will continue to evaluate the best use of our cash according to the following priorities or options: New stores and acquisition opportunities are first and foremost, and continuing to deliver would be secondary to those two initiatives.

Cap ex for the first quarter was 8.1 million in line with our expectations of 35 to 40 million for all of 2002. Current debt outstanding is approximately 685 million or less than 600 million on a net basis.

A few other items of note before the call over to Mark. Inventory on rent was about 545 million. Idle inventory about 112 million or 17 percent of total inventory.

Our current leverage on net basis for the LTM period ending 3/31/02 is 1.7 times. Interest coverage about 5 times. Current guidance for the second quarter and all of 2002 is 106 to 110 and 430 to 440 respectively.

With that I would now turn the call over to Mark.

Thank you Robert. Good morning everyone. Just a couple of quick comments or some observations that I would like to share with you and then we will go ahead and open it up for questions.

Needless to say as Robert alluded to, we are extremely pleased with the progress that we made to date. The overall operating results that we've been experiencing and we are extremely excited about the opportunities that lie ahead. As Robert mentioned, the demand for our business remains very strong.

Obviously our comps speak to that, but it's also supported by a couple of other items. Specifically the traffic flow that we are seeing in the individual stores, the number of delivers that our stores are making, both on a weekly or monthly basis, as well as the consumer demand for higher end units.

And I emphasize or mention that because, you know, as we talk about the softening economy, we have always felt that we've not be impacted by that. Certainly our results speak to it. And even in this soft economy, we see that our customers still want bigger and better merchandise. And the operating results help support that.

Let me also add our collections or delinquencies continue to remain in line.

In fact below company standards. I will remind you that the company objective is to have no more than 6.5 percent our accounts pass due at the end of the workweek Saturday night. And in fact we have been below that standard, averaging about 5.5 to 5.9 percent.

Additionally our losses or skips and stolens, continue to trend very favorably, less than 3 percent of revenue. So surfice it to say we are very pleased with all the leading indicators.

The other encouraging thing in my mind is that we have been able to grow and capitalize on the demand for our business while managing our cost and working out our expense initiatives.

And I want to talk a little bit about that, some of the things we've been doing or will continue to work on as we go forward. First with regards to the discounting program that took place last summer.

We are now about 80 or 90 percent through or out of that if you will. Again I will remind you, last summer the discounting program, there was reduced rates and terms on a large number of products

That lead to a deterioration in margins. Also lead to units exiting the system sooner than they would have other wise. As the terms were shortened, it led to an increased number of pay outs and so forth. That along with the income tax refunds that Robert mentioned, is what lead to the higher than anticipated, or normal merchandise sales that we had in the first quarter.

We typically do see an increase in the first quarter because of the income tax refunds. This year was abnormally high because of the added discounting program that took place last year.

About $40 million in the quarter, where historically the first quarter had been in the $30 million range. Again as Robert alluded to, about 14 cents of the reported EPS for the first quarter is considered non-reoccurring due to those sales.

The other side of that, and I think what been very successful in and what gives us comfort on the renewed guidance that we've given going forward, is we've done a very good job of converting a large number of those pay outs in to a new agreement.

In other words, as they paid off the unit that they had, we were able to rent them something else and that does lead to the reoccurring revenue stream going forward. That coupled with the expense initiatives, again is what lead to the new guidance for the year and we are very comfortable with the guidance that we've given you.

In fact, I think that Robert did mention about 3 percent of the comp for the first quarter was driven by customer growth. So again we've been able to keep demand coming in the stores and capitalizing on that demand. So we are very excited about it.

Again, I mentioned about 80 to 90 percent through the discounting program. The other impact to that, you will remember historically our margins, cost of goods sold, have historically have been running about 20.6 or 20.7 percent. Because of that discounting program, it grew to over 21 percent in both the third and fourth quarter. Q1 is starting to come back down to the historical norms. We are at 20.8 percent.

I do expect by the end of the second quarter, we have worked our way entirely out of that. When I say that, in terms of the units exiting the system sooner than they would have otherwise. Pay outs are beginning to normalize. And again we are beginning to see the margins come back to the historical norm.

With regard to the expense initiatives, we've been very successful in taking cost out the business without negatively impacting it. By way of example, the first quarter salary and other expenses, which was 262.7 million, was approximately $8 million less than the fourth quarter of last year.

And that is coming throughout the P&L. Be it store office supplies, fuel and oil, some advertising , et cetera.

And again that is being driven by the renewed focus on expense control throughout the system coupled with the focus on growing the top line. So, needless to say, I'm very, very pleased with the progress that we've made to date. We've certainly had four great months thus far this year, and I believe that we've got the momentum to carry us through the summer.

I say that. I think most you know the summer tends to be a little softer in terms of demand for the business. Again the reoccurring nature of these contracts, we do know we've got this revenue stream going forwar4d, so we are very confident in our ability to deliver the expectations we've put out to you.

With regards to the long-term growth, our margins are nearly back in line with historical, as Robert alluded to, over 19 percent in the first quarter. We expect to be able to maintain at those levels throughout the year.

We are beginning to look at ramping up our new store initiatives. On that front again we opened six stores in the first quarter. We did a couple of acquisitions as well. More importantly, thus far in the second quarter, we have already six stores. We expect 8-12 more to open. And then we will increase that number to approximately 20 to 25 in both the third and fourth quarter and that will get us within that 60 to 80 range that we had communicated.

Next year we do expect that number to grow. Approximately 100 to 120 new stores and then again we will continue to look at tuck in acquisitions. On the subject of new stores, I do want to note that currently or today we have opened approximately 120 stores over the last 18 months.

Those stores are currently are approximately 9 or 10 months in age and they are on plan. And when I say that, regarding the revenue stream, the number of units on rent, the profitability, and so forth. We are very pleased with the results of the new stores.

It speaks to the successful model. Again I will remind you, a new store typically take about 9 months to generate enough revenue to begin making a profit on a monthly basis. Accumulatively breaking even 18 to 24 months out. And the 120 that we've opened to date are doing that.

So we very encouraged with those operating results.

I also mentioned that, again I think most of you know that when we look at the target market, the customer the serve, by definition that un-banked consumer we there is significant growth opportunities still out there in terms of expansion and so we will continue to expand and look at those opportunities.

In addition, I mentioned the acquisitions. We also feel that those are very favorable. The industry continues to consolidate. Certainly, given our size, our dominance in the industry, our cash flow, we certainly believe that we are in a very strong position to capitalize on that as well.

And as we have done in the past, we will continue to look at opportunistic acquisitions. That I am confident of our ability to add approximately 10 percent or so, or 5 to 10 percent to our store base annually going forward.

In conclusion, let me say that I am very excited about what we've accomplished to date, as well as the opportunities that lie ahead. I think that we've positioned ourselves to take advantage of it. And we are looking forward to another strong quarter and a great year. Again as Robert said, we appreciate your support and we are now happy to go ahead and open it up for questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad.

We'll pause for a just a moment to compile the Q&A roster. Your first question comes from

of Stevens.

Good morning, fantastic effort to say the least Mark, and the rest of the team there.

Thank you

, appreciate it.

Couple quick questions. The regional pay plan you instituted midway through the quarter, could you comment about how much of that benefit is in the renewed, in the new guidance, or is there still some upside possibly to that effort?

We, the pay plan that you're speaking to for those that may not recall, the company previously had had one standard pay plan throughout the country. About three months ago we rolled out a regional pay plan, again that will be worked in through attrition only, and I say that all the existing personnel will remain at current levels of pay.

At this point,

we now have about 800 coworkers on that new pay plan. If you look at the midpoint, i.e. about $2,000 a year, that's a run rate currently of about a million and a half dollars, we have that factored in as well as some consideration given expected attrition as we go forward.

In the aggregate I would say there is approximately five cents or so built into the EPS in consideration of that. The other point I would make, it is working very well.

Obviously we were sensitive to it in that can we still attract, hire and return, or retain the quality of personnel, and again at this point in time, everything indicates that that is in fact happening, and it's working successfully for us.

And then again, I do still think, I mentioned earlier and I'm still confident, or feel comfortable with it, at the end of the year, I would expect it will be at a run rate going into '03 that we could recognize about $10 million in annual savings.

So is that incremental to the existing guidance? That ten million?

No that's not ...

No that's not factored in to the existing guidance.

Right now, the existing guidance is only taking into consideration the five cents.

About five cents.

OK. And one other quick question, legal cost, could you just put a parameter on it, you know, in other words out of the cash that we have, how much of that is kind of earmarked to finally clean up all the existing legal issues?

Well, the one I can certainly talk to is the Wilfong gender discrimination case that the company announced settlement on a month or so ago. Again, that was $52 million.

We expect to fund that later this year, be it the end of the third or probably sometime in the fourth quarter. Outside of that, you know, do you have your normal day-to-day type of business, it's a little hard to quantify, but I wouldn't consider that the others to be at this point anyways anything that I would consider to be material.

OK, thanks a lot. Great effort again.

Thank you.

Your next question comes from

of SWS Securities.

Good morning guys.

good morning.

Good morning.

Great quarter.

Thank you.

On the same store sales trends Mark, can you talk about the first quarter and how you saw the progress there?

Was there an acceleration between January and March, and if you can speak to what the trends are in the second quarter so far.

The quarter was pretty strong, each month within the quarter.

Obviously February was a little difficult just given the extremely high number of payouts that we had, and again, that was somewhat anticipated. Again where we were successful was converting a large number of those into new agreements, and we got the benefit of that in March.

Going forward, the guidance that we'd given on the comp range is three and a half to six, excuse me, three and a half to five and a half percent in the second quarter, weighted over the year will be four to six percent because of the strength of the first quarter.

And that is increased from the previous guidance for '02 of three to five percent.

Right. And so because we were able to convert a fairly large number of those, we had the three percent customer growth in the first quarter, we've taken that into consideration for the balance of the year.

I guess what I'm trying to understand is, you know, why does, I guess what you are saying is there was acceleration in March versus February, and I'm trying to understand if that's continuing into April. Are you giving guidance that, you know, is that conservative, or you know, it's just?

I wouldn't say it was accelerated, what it, March came within kind of what we had expected it, I mean as the payouts started to normalize, still a little bit above normal, but as they began to normalize, we were starting to see a ramp up in the accounts. And when you look at the renewed guidance for the year, there's really a couple things driving that.

When I say that, if you go back to the March announcement that we had made when we, you know, gave the guidance on the first quarter in the year, at that time we did not make any consideration for revenue increase. The improved guidance then was really speaking to some of the cost initiatives.

The guidance that we've just given yesterday also has consideration now for revenue. In fact, the estimated revenue for the year is about 40 or 50 million higher than the original estimate we had given just six weeks or so ago.

And so it is factored in there.

OK.

And then, Robert, what is your expectation for the level of debt by the end of the year, given, you know, all the initiatives you talked about, you know, given the cash flow situation et cetera? Where would you see the debt at the end of the year?

Right now

you know we are less than the 600 million in debt. Factoring on a net basis with the current cash on hand, and we're very comfortable with that amount of leverage.

Having said that, you know, it's hard to predict or quantify what our expected debt levels are at the end of the year, mainly from the perspective of acquisitions.

You know, we factored in to the model the new store initiative, 60 to 80 new stores, but given the acquisition pipeline, you know, depending on the number, the amount, the timing of those, it's hard to predict.

But I, you know, I'd, I'm not uncomfortable saying that we will continue to deliver some, looking down into the year, and how to quantify that, I'm just ...

Right.

Well you know your store opening plans, you know, the legal payments are going to be, so the only unknown is the acquisition part.

That's right.

OK. Let's see, as far as the product mix, Mark, was there any particular category this quarter that was, that was more exciting than the others?

Generally speaking I would say no. The growth really came throughout all the product mix, be it electronics, appliance and so forth.

Again I did mention earlier that the demand for the higher-end remains very strong, and by way of example, big screen televisions is one of our number one products, and the demand for that product remains very strong. But I wouldn't say that it's a particular sector of inventory or a particular product within that sector.

It's really generally been across the board.

And then, another way to look at it, if you can, can you, looking at your, the breakdown of your same store sales more closely, is that coming from maybe a certain category of stores?

And by that I mean, you know, the old, I know you don't want to look at it this way, but Central Rents or Renters Choice, Thorn Americas, is there a certain category of stores that suddenly picked up, or is that again, because it's cost initiatives so it's across the board?

No, again, you're right.

We don't look at it Central Rents or Thorn or, I mean those are all by definition in our case, one group of stores, and it's, in that sense it's been strong. Obviously the new stores that are coming into the comps are coming in very strong.

When you think of a new store as it starts out with no revenue stream, and as it builds the number of agreements on rent, and when it comes into the comps five quarters out, it's comping at a pretty significant rate. But outside of that the core stores, the 2,000 or so, by definition continue to comp favorably and from a geography standpoint, I'd even go as to far as to say it's not driven by one part of the country either.

It's really across the board in terms of the stores as well as the geography of those stores.

Great, and last question on acquisitions, the small chains that you are acquiring from time to time, is there any significant change in the multiples, you know, compared to the past, and what are the multiple that you're paying now?

Generally speaking I would say no, if anything they've maybe contracted a little bit. I say that if you go back three years or so ago when there was a little bit more of frenzy for acquisitions, it was actually driving multiples up, maybe in the ten to 12 times monthly revenue range.

And what we're looking at now are typically in the eight to ten times, which had been the historical part of that frenzy a few years ago. And again, that's eight to ten times monthly revenue.

So, if anything, they've maybe come down a little bit from again, a couple of years ago, but certainly very attractive multiples for us.

Great.

Thanks and congratulations again.

Thank you.

Thanks

.

Your next question comes from

of Morgan Stanley.

Oh hey guys, a few quick questions. Mostly on the numbers.

How, the, how dilutive do you guys expect the new store openings to be to the back half of this year in terms of EPS?

Well the new stores in the first quarter were only two cents dilutive, and that's reflective by March as a whole, they're cumulatively breaking even, depending on the timing and the ramp in the existing

that are open as well as the stores that we opened.

Cumulatively, it will be a minimal amount.

You know, maybe 5 cents for the back half of the year. We could even break even as a group they're depending on the continued ramp in the 120 which are still growing at much faster rate than the core business.

The key there is once we get into a steady state of openings, i.e. if it's 25 or 30 a quarter if you will and that remains fairly constant, you are not going to see much of blip.

Because we did slow it down a little bit here the last couple of quarters to get our hands around some of the other cost initiatives and those types of things, to the extent that we pick it up in the third quarter and then again in the fourth as Peter just alluded to. It will be fairly minimal ...

It shouldn't be more than a couple pennies a quarter. Maybe 3 cents a quarter, something like that.

That's great. That's helpful. And then, how many stores did you guys acquire in the first quarter again? Was it just two?

Mitch, do you have net number.

Yeah,

we acquired three in the first quarter. Opened six and acquired three. Just in April, we've opened six and acquired three, as Mark has mentioned earlier. Betw4een eight and 12 to open the remainder of this quarter. So we will be between 15 and 18 or 19 by the end of the quarter.

And we will purchase more than the three. So far, I can't really predict it. We will have a few more purchases through the quarter also.

And does it look like all acquisitions are coming on accretive?

No, I wouldn't say all. I would say in general terms they are neutral to accretive. And in some cases if they are real small stores, they may loose money for a month or two. Very immaterial amounts if you buy one small store. It doesn't take us long to get them to break even. In general they are neutral to accretive.

And then my last question. Can you guys give us a little of bit of an up date on your advertising strategy, if there is one? And also, just competitively, do you guys think you are gaining share in the industry or do you think the industry holding up very well in this environment? Thanks.

On the advertising strategy.

Again that was an that was an area that we had talked about in the past and I felt that there might be synergies or economy scales that we could capitalize on. On that front we done some to this date, or to date. Again that was an area I said that we were going to be slow in if you will.

Taking baby steps. I didn't want to be too quick to take cost out to have it negatively impact the business.

We have been about to some cost out. We continue to work it on a go forward basis. And some of that cost that has come out, we been spending a lot of time looking historically and where our prints been going and the effectiveness of it. And identifying some, I guess what I would consider some non effective areas, in terms of where the brochures, mailers have gone, and that's an area where again we have cut some cost out.

We did, I think we mentioned, I will remind you, late last summer, late last fall we began a national television advertising campaign.

We had done TV in the past. It had been more on a local basis. And we put this national TV campaign in place. That seems to be working very well for us. That's not new money. That is reallocation of advertising dollars. Coming out of print and some other areas and going into television.

Obviously, early indication is that it has been working very well.

Your question on the competitive landscape and what we are doing. I think it's two things. I do believe we are probably getting some market share. Certainly, you know, as the industry continues to consolidate and we are dealing with more of the regional or smaller players. There is certainly some competitive advantages that we have. Our size, our buying power, the advertising in terms of enhancing customer awareness and so forth.

But I also think that the entire industry is growing.

And again, we talk about a soft economy or whatever, the demand for our products and service remains very strong. The customer awareness continues to be enhanced through our advertising or that of others. And I think generally speaking this is becoming more and more known and accepted way of doing business and we are seeing the benefits of that as customers are coming in.

Great. Thanks a lot guys.

Your next question comes from

of Lehman Brothers.

Let me add my congratulations as well. Robert, I must be at the same conference that you must be at.

With respect to the 14-cent incremental gain that you realized in the quarter as result of the income tax benefit, Mark, how much in your opinion of that incremental gain is realized from new customers as opposed to existing customers just willing to spend more? That's my first question.

If I understand your comment, what's going on there is customers are exercising the early purchase option, buying the product out right and then customers coming in an literally paying cash for products on the floor.

The vast majority of that was driven by the customers paying out the agreements that they had. The early purchase options which goes under the sale of rental merchandise.

I cannot, Allen off the top of my head, I don't have that data in front me, to quantify the break out between the two.

I think we do know from standard history thought that the majority of it is existing customers that rented something that pay it out

. And the acceleration was driven by the combination of higher income tax refunds, plus the discounting from the summer.

I think to be clear on the 14 cents incremental, when we say we got extra 14 cents in the first quarter, that's when we compare it to the estimate that we just gave for the second quarter.

When you compare the first quarter of '02 versus the first quarter of '01, it's probably about a 5 cents incremental add from the kind of above and beyond merchandise sales.

I think it is important to note also, Allen, that of the 14 cents incremental earnings from the higher cash sales, now as Mark mentioned previously, we have been successful in converting those pay outs as new agreement.

Going forward there is some consideration for the additional revenue stream from the top line, not that it was just a one-time blip, and you count on it going forward.

Yeah, Robert and Allen, this is Mitch. Along those lines, certainly the revenue in the first quarter comes from current customers paying out past agreements as Robert mentioned a vast majority re-rented, so we are in good shape going forward. But also as Mark had mentioned earlier, our customer growth was also awfully good in the first quarter. So we are attracting new customers based on the advertising plan that Mark already spoke of.

So, the revenue came from the old customers paying out and re-renting new, but our future revenue is coming as much from bring new customers into the business as anything.

That's really what I was driven at. Mitch, the growth in the new customer base in Q1 typically as the result of the income tax refunds. You are seeing a steady progression as you typically see in Q1.

Correct.

Just one more question if I may.

You continue get solid leverage on the salary line as a result of your strong comps. Do you have a target as to where you think that can be over the next two to three years, taking into account, you know, potentially the $10 million gains in the geographic pay scale once that's more fully rolled out?

There is probably another couple percent in opportunity,

. And I am driving that number from the first quarter, we reported a 19 percent EBITDA margin, or excuse me a 19.8 percent EBITDA margin. And we kind of always felt that you can get to a 22, 23 percent EBITDA margin.

To say that you are going to do much better than that, you are bordering on the realm of aggressive. And so we prefer not to set that expectation.

But to get a couple more percent leverage out of that SG&A margin by

drive the top line is the long-term goal.

OK. That's great. Thank you again and congratulations.

Thanks,

.

Just an add on, that may not translate to reported margin due to us opening new stores that come in and dilute the margin. But I'm talking of the stores we have now, that's the long-term goal.

OK. Thank you.

Your next question comes from

of Bear Stearns.

Hey guys, how are you? Congratulations.

Morning Joe.

Quick question that of the other ones were answered, but with regard to inventory. The inventory seems really lean and clean. And now idle inventory or held inventory is around 17 percent of total inventory which seems kind of low historically. And I was wondering how you guys feel about your inventory position and going forward are even walking sales at this point because you don't have enough in the stores? Or how is all that going?

Well,

this is Robert. As I mentioned previously, the company does expect to invest, you know 20 to 30 million in working capital in the second quarter. And that's not necessarily saying that the purchases are being made in the second quarter, but that they are being costed or paid for in the second quarter.

We did have a significant amount of payouts in merchandise sales in the first quarter, and as we ordered new merchandise to replace those units, they came into the store, you know, there's a timing difference between having them in the store and having to pay for them, based on the terms with the vendors.

So we do expect to see, you know, 20 to $30 million investment in the second quarter as a result of that.

The 17 percent, you know, typically we like the range to be around 19, 20 percent or so, so we're not, we're not feeling the pinch if you will of not having inventory, and Mark might can speak to it more on a number of units basis in the stores.

Yeah, the other thing I might add with that

, you're right if you look at that, we historically try to maintain about 160 pieces of idle inventory held for rent in the stores. And that gives us a fair mix and availability.

During the first quarter, because of that strong demand and the way we were going through it, we got down to about 135, 140 pieces per store.

OK.

Now, we're still able to fulfill the demand with that, it's a little lighter than we would have liked it to have been, and so Robert's point, I will tell you as we speak today we are back up to about the 160 pieces per store, so, and that speaks to the investment that he said we're making in the second quarter, and then I think you can expect it to stay at that level as we go forward.

Got it.

And then the one other question. Just, have you guys noticed any change in your average customer profile, or are things pretty much the same there?

I don't think so.

Mitch, you can maybe speak to it better than I, you're out there a lot. But generally speaking, I think I would say that no, there by definition, it's that same customer, you know, as the economy softened have we picked up maybe a little bit more on the upper end of that customer base?

Yeah, I would probably say that. Mitch you got some comments you want to add to that, or?

I'd agree. The demographics haven't changed a heck of a lot, I'd say we're probably picking up more on the, on the top end of the customer spectra based on the economy though.

Yeah.

And then, which speaks to that APU going up that you mentioned earlier Mark, that it, that the higher end units are running really about as, I guess you'd say better than ever.

So I think it speaks to a few more of that coming in on the higher end.

Yep.

Yep.

Great, thanks guys.

Thank you.

Thanks

.

Your next question comes from

of

.

Thank you, thank you guys.

Two quickies, what was the CapX in the quarter?

8.1 million.

OK. And you started to talk about this Mark, that all the handful of cost savings initiatives that we still had outstanding for kind of the second half of the year, the regional pay plan, the marketing and advertising costs, was there anything else going on, or were those the only two?

I think generally speaking on a go forward basis, and it's probably more the regional pay plan than the advertising, again we've recognized some of that at this point. I think it'll probably remain fairly constant going forward.

Right.

With regards to advertising.

Obviously the regional pay plan again, we're three months into it, about 800 coworkers currently, I do expect that to continue to grow as we go forward, and again we've got some consideration for that in the renewed guidance. The other cost, you know, when you look at it at the store level, be it the salary, or excuse me, store office supplies, fuel and oil for vehicles, those types of costs, generally speaking I think we've recognized those, and the key now is obviously to maintain.

Right.

And when I say that, obviously one, a reversed example, and again I, we've got consideration for that is when you look at fuel and oil.

You know, we've got 5,000 plus vehicles and gas has gone from three months ago, a $1.00 or $1.10 a gallon to now $1.50. So, we certainly have the processes in place to control and manage that, but that's an example of an area that, you know, it's actually starting to creep up just because of the cost of doing business in that area.

Right.

Also

to, Peter's point earlier when he was talking about the margins we can achieve at this point, maintaining and just growing that margin is where we get more leverage and a couple more percent of EBITDA. <

Exactly, right.

Revenue base, exactly. <

OK, thank you guys. Congratulations.

Thanks

.

Your next question comes from

of J.P. Morgan.

Hi, it's actually

from J.P. Morgan, and my questions have all been answered, so thank you.

Thanks Carla. <

Next call.

Your next question comes from

of

Asset Management. <

Hi, thanks and thanks for a great quarter.

Thank you. <

Just a clarification question if I could. This 14 cents in the first quarter, I'm not, I guess I'm not 100 percent, don't have my hands around it 100 percent as to what exactly it is, and the calculation of this. <

So, if you could just kind of walk through it real quick I would appreciate it, thanks.

The exact calculation

is we did 40 million in merchandise sales in the first quarter, at a 68 percent gross cost of goods sold, 32 percent gross profit. <

That's about $12 million in kind of gross profit.

Right. <

$12 million in gross profit compares to an expectation in the second quarter where we'll currently expect to do about $20 million in merchandise sales, at 20 percent profit.

OK. <

Which is

million dollars, so the incremental eight million dollars in gross profit, tax effected at 60 percent, divided by 36 and a half million shares is about 13 and a half cents.

So the gross profit in Q2 is going to be different than Q1? <

Well just associated with merchandise sales.

Right <

And that's always been the case.

And that's, right, I guess my question is, instead of comparing it to Q2, I guess, relative to what normally would happen in Q1, just trying to get kind of a clean first quarter if you will. <

And that's where I kind of threw out earlier that if you compare the first quarter of '02 to the first quarter of '01, it's really a five cent add.

Right, OK.

So then the ...

... and the five cent add is, if you look at the percent of merchandise sales as a percent of rental and fee.

Right.

And the percent of merchandise sales in the first quarter this year, of rental and fee, it translates to about an extra five million in merchandise sales, kind of above and beyond what you normally would have expected for this time of year. <

OK.

And $5 million in merchandise sales at 30 percent profit is, you know, is a million and a half at tax effect, you know, you get to about, you know, four or five cents. <

OK, so I guess that's kind of where my calculations were. So the buck 20 say on the, you know, extremely conservative side, gets you to a buck 15 because it's probably more like a buck 16, buck 17, something like that. <

Now does that three, four cents then come out of a normalized Q2, or no?

Well, that's captured in the 14 cents when you go to normalize the first quarter of this year versus the second quarter this year. <

OK, so we're mixing it up. OK, but if I were to kind of use the first quarter as your standard quarter, then obviously cause you guys build off of that given, you know, the contractual nature of your business, would I then take and take a look at Q2 and then back off that three, four cents Peter, or? <

You'd take the first quarter at a $1.20 and back off the 14 cents. And say, the first quarter normalized compared to the second quarter is a $1.06.

OK.

And we gave a range for the second quarter of $1.06 to $1.10 because we expect to control expenses, and we expect to grow rental and fee by a few million dollars.

Great, I think I got that. If not I'll call you.

Yeah, OK.

Take care, good luck in the next quarter.

Thank you.

Thank you.

Bye bye.

At this time there are no further questions.

Folks, I'd just like to say on behalf of the company again, we certainly appreciate your support and your interest. We're very excited about, again, not just what we've accomplished, but the opportunities that lie ahead, and we certainly look forward to talking to you again next quarter and reporting our results at that time.

Thank you very much.

Thank you for participating in today's conference.

You may now disconnect.