Thank you, and good morning, everyone. Welcome to the PROG Holdings Third Quarter 2022 Earnings Call. Joining me this morning are Steve Michaels, PROG Holdings President and Chief Executive Officer; and Brian Garner, our Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website, investor.progholdings.com. During this call, certain statements we make will be forward-looking, including comments regarding our expectations related to the benefits of our lease decisioning adjustments on delinquencies, write-off levels and our accounts receivable provision, Progressive Leasing’s write-off levels for full year 2022, our ability to convert additional retail partners from our pipeline, the strength of our balance sheet going forward and our revised 2022 outlook. I want to call your attention to our safe harbor provision for forward-looking statements that can be found at the end of the earnings press release that we issued earlier this morning. That safe harbor provision identifies risks that may cause actual results to differ materially from the expectations discussed in our forward-looking statements. There are additional risks that can be found in our annual report on Form 10-K for the year ended December 31st, 2021, which we encourage you to read. Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, and we undertake no obligation to update any such statements. On today’s call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP earnings per share, which have been adjusted for certain items that may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company’s operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company’s ongoing operational performance. With that, I’d like to turn the call over to Steve Michaels, PROG Holdings’ President and Chief Executive Officer. Steve?

Thank you, John, and good morning, everyone. I appreciate you being with us today as we discuss our third-quarter results and update you on our business. I’d like to begin by highlighting the progress we have made to mitigate some of the impacts of the significant macroeconomic headwinds we face. I’ll start with the actions we have taken to strengthen the quality of our portfolio. As we mentioned last quarter, during Q2, we took decisive, timely action around decisioning to address the trends we saw in the performance of our lease portfolio. The second quarter’s write-offs were 9.8%, well above our 6% to 8% targeted annual range, a reflection of the continuing economic pressures being felt by our customers. Our attention to early indicators of payment performance and the decisive steps taken to impact the short-duration portfolio have quickly benefited overall portfolio health, as can be seen by the 7.2% write-offs for Progressive Leasing for Q3 and in the improved profitability from last quarter. Based on the current performance of lease pools originated since our Q2 tightening efforts, we have not found it necessary to make additional adjustments. However, we continue to monitor early indicators of pool performance, and we believe that we are still on track to achieve our goal of ending the year with write-offs near the high end of our 6% to 8% targeted annual range. Another item we are controlling tightly are SG&A expenditures given the top-line headwinds. As we mentioned on the Q2 call, we have meaningfully reduced our level of spend. These reductions were aimed at driving efficiencies across the organization and aligning servicing costs with our latest expectations around GMV and revenue. For the third quarter, SG&A as a percent of revenue for Progressive Leasing was 12.4%, down from Q2 levels of 13%, resulting from our focus on improving efficiency and rightsizing SG&A across the organization. The combination of these improvements in write-offs and the cost reduction actions we have taken were the primary drivers for Progressive Leasing’s strong increase in adjusted EBITDA margins from 8.1% in Q2 to 11.3% in Q3. We are pleased that our adjusted EBITDA margin in Q3 is more consistent with our historical targeted ranges despite the broad-based inflationary pressures on costs. I would further point out that we achieved these margins while still investing in several key growth initiatives that we believe put us in the best position to capture the unserved market that remains. With respect to progress on our growth initiatives, we have added approximately 60 new e-commerce retailers to our platform year-to-date, and we remain on pace to add more than a dozen more in the fourth quarter. These new partners will enable us to participate to an even greater degree in the continued expansion of online LTO. Our GMV within the online channel continues to grow versus brick-and-mortar as e-commerce accounted for 16.5% of total Q3 GMV compared to 14.5% for the same period last year. Our technology teams continue to deliver on our promise to develop products that enhance the experience for our retailers and customers. We have collaborated with partners on a number of product innovations designed to increase balance of share while continuing to provide easy integration and interactions for retailers and increased flexibility for customers. Constructive conversations with potential new retail partners are ongoing. We firmly believe that this difficult retail environment is more conducive for us to connect with retailers who we believe can benefit from our flexible payment solution, and we remain optimistic about converting more of our pipeline over the next several years. Our progress on portfolio health, cost structure, and key growth initiatives have mitigated some of the significant headwinds we continue to experience from the macroeconomic backdrop. We saw weak consumer demand during the quarter across most of our retail verticals, including with the majority of our key partners. In our addressable categories, retail traffic remains down, and we saw a number of large partners post double-digit negative comps in these categories. Furthermore, the inflationary pressures being felt across the country are disproportionately affecting our customers, creating softness in overall top-line trends. Despite this, we were able to continue to increase our balance of share with a number of key partners. While these challenges in the operating environment are not exclusive to us, they represent the primary driver for Progressive Leasing’s negative 11.3% GMV comp in the period as the spending of the credit-challenged consumer shifts away from our primary categories. GMV was also negatively impacted by our recent tightening of our lease decisioning, as I previously mentioned, and as we discussed on our Q2 call. Finally, as data for upstream credit providers 2022 origination pools become available, we expect the increases in delinquencies recently reported across most banks to continue. While we have not yet seen meaningful tightening in the credit back above us, these upstream delinquency increases historically preceded such tightening, and we anticipate that ultimately, that tightening would lead to the widening of the top of our application funnel that we’ve been discussing for several quarters. As a result of the continued challenging operating environment, we have lowered our full-year 2022 financial outlook, as shown in this morning’s earnings press release. As we have stated previously, while not a direct read-through, our GMV production is not immune to the double-digit decline that some of our retailers are experiencing. Nonetheless, we believe our focus on executing initiatives to increase our balance of share with key retailers, continued technological innovations and additional pipeline conversions will help us mitigate some of those headwinds in the near and intermediate terms. Looking forward, we expect Q4 will be challenging on the GMV front and will likely come in similar to Q3’s year-over-year percentage decline. We also expect write-offs to remain similar to Q3 levels. Our capital priorities remain unchanged. During the third quarter, we repurchased 588,000 shares and have reduced our outstanding share count by 27% since the beginning of 2021. We ended September with a cash position of $222 million. We believe the capital we generate will continue to allow us to reinvest in the business and maintain a strong balance sheet even with an uncertain economic backdrop. During the quarter, we significantly improved our portfolio health while rightsizing our cost structure and remain focused on technological innovations and pipeline conversions. As we look ahead, we expect to continue managing these areas efficiently and within targeted annual ranges to benefit us as we enter 2023 and going forward. I’ll close by emphasizing the strength of our business model. Even in a challenging environment with negative GMV growth, we have demonstrated our ability to manage the portfolio effectively, create efficiencies within our cost structure and generate significant cash flow in the process. Finally, I want to reiterate my appreciation for the teamwork of all PROG employees as we continue to help consumers and retailers navigate this difficult environment. I’ll now turn the call over to Brian for a more detailed look at the quarter’s financials. Brian?

Thanks, Steve, and good morning. The third quarter’s financial results reflect the impact of a challenging operating environment, mitigated to a degree by the actions we have taken, reducing write-offs and SG&A spend at our Progressive Leasing segment. During Q3, we saw adjusted EBITDA and adjusted EBITDA margins improve as a result of the actions we took, while a challenging retail environment continues to negatively impact top-line metrics. Q3 GMV for the Progressive Lease segment was down 11.3% year-over-year, driven primarily by macroeconomic factors, including a double-digit year-over-year decline in addressable categories at many of our retailers and our tighter decisioning, partially offset by increases in our balance of share in many key retail partners. GMV headwinds in the quarter negatively impacted revenue, and we believe it will continue to do so in the coming quarters. As we exit the period, our gross lease asset balance was up 3.3% year-over-year, a deceleration from the 12% growth reported for the end of the second quarter, which was primarily driven by the impact of a declining GMV on portfolio size. Progressive Leasing revenue was $606.6 million in the quarter compared to $635 million in the year-ago period, a 4.5% decrease. The accounts receivable provision, which is a direct reduction of revenue, remains elevated from historical levels. As you’ll see today in the company’s 10-Q, this provision increased to $104.3 million for Q3 of 2022 from $61.5 million for Q3 of 2021. The increase in the AR provision reflects higher delinquencies year-over-year. However, as the full benefit of our timing efforts impact our portfolio, we expect to see these delinquencies and/or provision trend closer to pre-pandemic levels. Progressive Leasing’s Q3 gross margin was 30.3% versus 31.4% in Q3 of 2021, primarily a result of the higher accounts receivable provision, partially offset by lower 90-day buyout activity. SG&A for the Progressive leasing segment was $75.2 million or 12.4% of revenues versus $80.2 million or 12.6% for Q3 of 2021, a decrease of $5 million. This decrease reflects the cost reduction actions we discussed in Q2 as improved efficiencies in an effort to rightsize our cost structure resulted in lower SG&A. Progressive Leasing write-offs were $43.5 million and 7.2% of revenues compared to $34.2 million or 5.4% of revenues in the year-ago period as we continue to compare against a stimulated period last year. Write-offs declined from the 9.8% level we saw in Q2, driven by our tightening efforts last quarter. As we mentioned, our annual target for write-offs is 6% to 8%, and we expect to be near the high end of this range for the full year of 2022. Adjusted EBITDA for the Progressive Leasing segment in the third quarter was $68.4 million compared to $88.4 million in the same period of 2021. This decrease is a reflection of the difficult comparison to the stimulated period last year and the current macro headwinds. I’ll note that adjusted EBITDA for the Progressive Leasing segment improved meaningfully from $51.2 million in Q2 to $68.4 million in Q3 and margins improved from 8.1% in Q2 to 11.3% in Q3, driven primarily by the improvements in write-offs and SG&A. Turning to consolidated results, Q3 revenue for PROG Holdings was $625.8 million compared to $650.4 million in the year-ago period, a 3.8% decrease. Adjusted EBITDA for Q3 was $65 million or 10.4% of revenues compared to $93.6 million or 14.4% of revenues for the stimulus-ended third quarter last year. We generated $127.4 million of cash from operations in Q3, which is net of the working capital required to fund GMV. As a reminder, we typically have net cash outflows from operations in the Q4 period as a result of funding seasonally high GMV. Our Q3 GAAP diluted EPS was $0.32, and our non-GAAP EPS came in at $0.68. We had $600 million of gross debt and $222 million of cash at the end of the third quarter and a net leverage ratio of 1.49x trailing 12-month adjusted EBITDA. We also ended the period with $350 million of availability under our undrawn revolving credit facility. During the third quarter, we repurchased $10.9 million of outstanding common stock at an average share price of $18.52. At the quarter’s end, we had $373.5 million remaining under our $1 billion share repurchase program. Finally, as Steve mentioned, we have lowered our full-year 2022 financial outlook to reflect the challenges we are currently experiencing around the macro environment. Since our Q2 earnings call, our expectations around GMV have been adjusted downwards as our customers deal with the impacts of inflation. We also saw weaker-than-expected customer payment behavior on leases originated prior to our Q2 timing efforts, which is reflected in our provision for accounts receivable. As we enter 2023 and more of the portfolio is concentrated in leases originated after our Q2 tightening, we expect this provision will trend towards pre-pandemic levels. Our updated fiscal year 2022 outlook is as follows: revenues in the range of $2.58 billion to $2.59 billion, adjusted EBITDA between $235 million and $240 million and non-GAAP EPS of $2.32 to $2.38. In summary, we’re encouraged by the performance of our lease pools originated after the Q2 tightening, which helps deliver the Q3 write-offs of 7.2%. We’re also encouraged by the improvement of our leasing segment’s adjusted EBITDA margins and expect to see similar benefit in Q4, thanks to continued hard work and effort of our teams. With that, I’ll now turn things over to the operator for the Q&A portion of the call.

Our first question comes from Kyle Joseph with Jefferies.

Just on GMV, obviously, it decelerated quarter-on-quarter. Just trying to wrap my arms around how much of that was incremental macro pressure versus underwriting changes? Or I guess another way I could ask would be what was the date the underwriting changes were specifically made in Q2? And how much of an impact did they have in Q2 versus Q3?

Kyle, this is Steve. So we made underwriting changes throughout Q2. We made some in early May, late May, and then in June again. So it’s difficult to parse out the impacts in Q2. Obviously, they were in full effect throughout all of Q3. And as you think about the GMV pressures, it’s really two headwinds and the tailwinds that have been around all year because we made some other small tweaks to decisioning back in February and March as well. So you’ve got the macro weakness. We’ve seen application volume, which is a proxy for consumer demand in our retail partners, be down in the in-store channel and flat to slightly up in the online channel. But because online, we have lower accrual rates and lower conversion rates due to known fraud from an approval rate standpoint, but also lower purchase intent online, losing an application in store has a bigger impact on funded GMV than losing an application online. So it’s really been consumer weakness from an application standpoint, along with our decisioning posture, offset slightly by higher ticket. So we have seen about a 4.5% to 5% increase in ticket this year due to inflationary pressures in the retail environment. So as you think about year-to-date, it’s predominantly consumer weakness and decisioning offset by ticket. Q3 more specifically, was probably more than 50% decisioning, then you had maybe a third from consumer weakness also offset by ticket.

Got it. Very helpful. And then as you’re thinking about the prospects for a GMV recovery, I know you guys mentioned the supply of credit, I haven’t seen any tightening yet there. But at least more on the demand side, is it just a function of if inflation gets under control? Do we have to lap certain comps? Or do we need to move away from the big product cycles we saw in 2020 and 2021, but just how you’re thinking about potential catalysts for consumer demand to recover?

The demand side is clearly challenging to forecast. There will always be a break-fix cycle. However, as we distance ourselves from the COVID testing phase and the increased demand during the pandemic's high liquidity situation, demand is likely to improve. We do not anticipate a significant retail rebound in 2023, depending on the economic outlook and whether a recession occurs. Nevertheless, we remain optimistic about executing our growth strategies with retailers, which could help us gain market share despite demand challenges. We have implemented some of these strategies this year, such as complete e-commerce integrations, enhancements in our credit offerings, and ongoing marketing efforts. We are indeed navigating a tough retail environment. As I've mentioned before, this situation does not directly impact us because we have strategies to alleviate some pressures, but we are not completely unaffected. It has certainly put some strain on our gross merchandise value. As noted in our prepared remarks, we expect similar results in Q4 due to these ongoing pressures and the uncertainty of the holiday season’s performance.

Got it. And then one last one for me. I’ve followed Progressive for a long time. Obviously, this is probably one of the most challenging environments. I think the business has faced. But in consideration of that, have you seen any impact on the competitive environment? Obviously, you guys are one of the biggest in the space, I would imagine some of the smaller competitors are feeling the impact even more. And are there any potential opportunities as a result of that in terms of winning partners or capturing business from competitors et cetera, how you’re thinking about the competitive dynamics given the tough backdrop?

Yes. I mean it is a tough backdrop, but it also gives us a chance to demonstrate the strength of the business model. And one of the things that has shown through this quarter is our ability to control the portfolio, which we’ve been talking about for a long time and have now proven it. But from a competitive standpoint, from a growth standpoint, I mean, obviously, the biggest size of the prize for us is still the unserved panel. So we’re going out there and having fruitful and constructive conversations with retailers that don’t have LTO. We obviously are highly focused on taking share from competitors as well and taking advantage of opportunities if somebody either has a funding issue or is not living up to the promise to that retail partner. But as we’ve said for years, it’s a very choppy competitive environment, especially in the regions. And so it’s like 2 steps forward, one step back in that you can win a regional player from a competitor, but then you turn around and find out that somebody else has come in and taken a little bit of business from you in a different one. We’re making progress there. We’ve got a great regional or SMB team, and they’re doing really well out there, and Progressive continues to show its leadership position in the industry and how we can win. So we’re encouraged about our ability to continue to grow that way, which can help mitigate some of the like-for-like or same-store pressures that we’re feeling from a GMV standpoint.

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

So it looks like from the guidance, there’s going to be better flow-through from GMV into revenue in the fourth quarter. I don’t know if that’s a reflection of a lower accounts receivable provision. And maybe just given the decisioning, is it better quality GMV that you’re bringing in better collectability. I know those are tied together, but just curious if you could talk about that dynamic, and if so, if we should continue to see that through the next 4 quarters or so into next year.

Yes, Jason, it’s Brian. Yes, the accounts receivable provision is a direct reduction of revenue, as I know you understand. And the dynamics at play are the decisioning change we made in the first half of the year, which continue to work their way through. And at this point in time, if we think about our account receivable provision, it’s still heavily weighted towards the old portfolio, call it or the pre-Q2 originations. And so what’s going to happen is that it moves towards our new decisioning posture. You are going to see some relief on that accounts receivable provision on a go-forward basis. I think you’ll see it here in Q4 step down a bit. And so that’s part of the dynamic that I think you’re seeing.

Got it. That’s great to hear. In terms of the gross margin, I’m calculating it for the Progressive Leasing segment. And we’re still running quite a bit. I think it’s maybe, I don’t know, 200 basis points or so below what you were doing in 2019. So just curious if you could talk about why that gross margin is lower. I don’t know if it’s a function of the environment being more competitive. Are you shifting to large national retailers that maybe have a different pricing structure? And is it possible that we could get back to more like 2019 levels? Or is this the right run rate to use going forward?

Yes. I would say at the top of the list of factors impacting that gross margin is the accounts receivable provision. You’ve seen how much it’s increased from a year-over-year perspective. It’s up, I think, roughly $43 million year-over-year and from an absolute dollar perspective, this is a percentage of gross revenue before that provision. It’s well elevated from historical levels. So I think the key to getting back to gross margins that are familiar pre-pandemic is going to be seeing that accounts receivable provision come down. That’s going to be a function of continuing to see delinquencies come down. And that’s the path forward. The next biggest drivers are just what’s happening from a disposition standpoint. And we actually saw 90 days come down a little bit year-over-year as we use our comp against a highly liquid simulated period last year. And so that’s actually working as a tailwind. So there’s not been significant composition changes in terms of retailers or retail behaviors that rise to the top of the list as the biggest factors. We need to turn over the accounts receivable dynamic, and we expect that will move to a more favorable spot starting here in Q4, and we’ll work to make that continue.

Our next question comes from Anthony Chukumba with Loop Capital.

So as I look at your revised guidance, so you brought down the midpoint of revenues by about 2%. But you brought down the midpoint of your EBITDA guidance by about 10%. And if I look at the implied EBITDA margin, it goes from 10% to 9.2% at the midpoint. So I guess I was just wondering what accounts for that, particularly given the fact that you said you’re taking costs out, and it sounds like the lease merchandise write-off rate has stabilized. So I guess that was my first question.

Yes, there are three elements to consider. During the fourth quarter, we anticipate the highest generation of Gross Merchandise Value (GMV). However, there are variable and transaction-related costs that come into play, meaning that GMV won't necessarily equate directly to revenue. That’s an important factor to note. While we've made significant progress in reducing Selling, General and Administrative expenses (SG&A) in the third quarter, reaching a level of 12.4% that reflects our position prior to becoming a public company in 2019, I believe SG&A will likely rise in the fourth quarter due to increased transaction costs associated with a higher GMV anticipated compared to the third quarter. This may create some pressure on our expectations.

Got it. That’s helpful. You mentioned the ongoing weakness with your retail partners, which aligns with what we're observing in the market. However, it seems like it could also create opportunities for your retail partner pipeline. Could you provide an update on your retail partner pipeline?

Yes, you’re correct that in a challenging retail environment, our comprehensive finance solution is likely to be more appealing and beneficial for sales. While we don’t disclose specific names in our pipeline, we believe this environment presents us with the chance to take advantage. We are well-positioned for leasing opportunities for retailers during the holiday season. Activity remains strong, and we are having valuable discussions, even though we are not currently in active hands-on mode. This represents a significant opportunity for us over the next one to three years to convert our pipeline, and we are optimistic about our capacity to do so.

Our next question comes from Brad Thomas with KeyBanc.

First, just with respect to the current underwriting and decisioning levels. I was hoping for just perhaps a little bit more perspective on where you are from a historic perspective. Obviously, you did some tightening in Q2. But can you help give us some context for if you look back over maybe the last 10 years, where you stand on a looser versus tighter perspective?

Ten years is a considerable period, and we have seen significant advancements in our decision-making capabilities during that time, along with shifts in channels. I will provide you with updates on approval rates as I did last quarter. Year-to-date, we are relatively flat. We’ve seen a decrease of 200 basis points for 2022 compared to 2021, but only a decline of 100 basis points compared to 2019, which was before the pandemic. In Q3, after implementing material changes to our decision processes in Q2, we are down about 750 to 800 basis points from 2021. It's important to note that 2021 had elevated approval rates due to payment performance and economic conditions. Compared to 2019, we're down around 225 basis points. These are weighted approval rates adjusted by channel. If we normalize by channel, there’s a significant variance between online and in-store approval rates, as well as conversion rates. When adjusted for channel origin in 2019, our approval rates remain consistent. Looking back before 2019, from 2015 to 2018, I don’t have the exact data, but I believe approval rates were likely higher as we developed our decisioning models to identify profitable approvals.

Yes. That’s really helpful perspective, Steve. And then I was hoping to ask a question just about EBITDA margins and maybe some initial thoughts as you think out 2023. Our view on Progressive is that you’ve got tremendous opportunity to be a highly profitable business, and a lot of that just comes with getting their underwriting aligned with the consumer backdrop that you’re a part of. And obviously, you’ve taken a lot of that medicine earlier this year. We’re also seeing a difficult retail environment, though. And so I guess as you think out to next year, can you help us think about those elements of getting the underwriting more aligned with how the consumer actually is able to pay, coupled with the level of investment that you think is warranted in the business in this perhaps more challenging environment and your optimism for margins for next year?

From the underwriting perspective, if we examine the pools generated after June 30 or July 1, we are aligned with our historical target of a 6% to 8% annual loss rate. We are continuously monitoring the situation, and if unemployment rises or if we feel the need to make further decision changes, we will do so, as these changes can quickly affect our portfolio. As we move into 2023, the majority of our portfolio will consist of leases from post-July 1, 2022. Although it won’t be completely composed of those leases, it will be nearly so. Looking at our portfolio's performance and health as we enter 2023, we are optimistic about our current position. The primary risk is a decline in the economy and increased unemployment. However, a potential positive aspect is that a tightening credit environment, which we anticipate, could improve the quality of applicants we attract, even without making changes to our decision process. To summarize, the portfolio is in good condition for leases from after July 1, and our ongoing monitoring has not indicated a need for additional adjustments so far, although we are prepared to respond if necessary. This will benefit us in 2023 as we will likely avoid higher write-offs and bad debt expenses. We are encouraged about the pipeline, although its impact on the 2023 GMV is uncertain; it could influence future results. From a growth angle, we anticipate maintaining productivity in our existing locations and possibly expanding. This business is profitable, though perhaps less so than in the past, but it consistently generates strong cash flow across different economic cycles. We expect that improvements at the beginning of the application process will reduce any headwinds and provide a significant tailwind to help us sustain our historical margins and revenue.

Our next question comes from Bobby Griffin with Raymond James.

First, just I wanted to circle back just on the operating expenses side of the business. Steve or Brian, as the fixed variable nature of this business changed over the last 12 or 18 months with some of the investments? I’m just trying to connect the dots of if GMV is down again in Q4, why aren’t we seeing operating expenses flex down with lower transactions or anything like that versus pickup as your earlier comments said sequentially?

Yes, to provide some additional insights, the increase is based on commentary from Q3 to Q4, which aligns with typical seasonal trends. Q4 usually sees the highest GMV, so we anticipate an uptick from Q3. This will influence our cost structure. The variable nature of our expenses has remained relatively stable over the years, though we have incurred some public company costs post-split, estimated between $10 million and $15 million in total spending. Overall, we maintain a highly variable cost structure, which allows us not to have long-term fixed obligations that tie us down for several years. This flexibility enabled us to improve SG&A in Q3, as noted by Steve in his prepared remarks. It’s important to note that fluctuations in GMV will lead to corresponding changes in SG&A, but we remain in control of our expenses moving forward. Steve's remarks regarding margins reflect our ability to maintain them, which is a testament to the strength of our model. Therefore, SG&A as a percentage of revenue is typically higher in Q4, and we expect that trend to continue, especially given our GMV scheduling.

If we consider the restructuring and impairment separately, we're estimating around $100 million in SG&A for this quarter, excluding those factors. As we move into 2023, if GMV continues to be under pressure, will we see that $100 million decrease in absolute terms? Or are there investments being made that prevent a reduction in dollar terms? It appears that SG&A is maintaining around $100 million or possibly increasing slightly.

Yes. Without getting too much color into 2023, I guess I would say that generally, I’d expect Q1 SG&A dollars or percentage to relieve a bit from Q4 levels. But again, we’re not committing to any 2023 metrics just yet. There’s an ongoing planning cycle. But I think you’re thinking about it right. You generally have just a bit of a tick-up here in Q4.

Our next question comes from Vincent Caintic with Stephens.

Just two follow-ups on earlier questions. So first on the write-off rates. It was very nice to see the write-off rates decline quarter-over-quarter. And I think you’re the only one of the lease-own guys to show that good result. So based on the adjustments, the tightening that was made in the second quarter, is there still more room for that write-off rate to decline, so we haven’t seen all the improvement yet in the third quarter? And then if you could maybe talk about the tightening that you’ve done, what macro backdrop is built through that? Or said another way, what would it take in order for that write-off rate to potentially perhaps get worse?

Yes, I’ll start. This is Steve and Brian can chime in. But the way that the portfolio works, there are two different dynamics when it comes to portfolio performance. One is the write-offs, which is our publicly reported metric. That one moves more quickly because it’s based on the book value of the inventory that we have out on lease. And then there’s the AR provision, which is also a publicly reported metric, but that takes a little bit longer to move through the system. So from a write-off standpoint, the post-lease July 1 originations are more of a story in Q3 than on the AR side; they will continue to become the story in Q4. But as we said in our prepared remarks, we’re expecting write-offs in Q4 to be in the same neighborhood, similar range to Q3. And our goal from an annual standpoint is 6% to 8%. So we’re not actually trying to drive write-offs down to 5% or even where they were during the pandemic. That’s just too tight of a posture. So we’re expecting similar results in Q4, which we think will get us near the high end of our 6% to 8% annual range, which we’re proud of, especially given the impact of earlier this year’s performance on the portfolio. What’s built in is we’re basically tracking all of our early indicators, whether it be first pay balance or delinquencies or any of the other indicators that we have against our pre-pandemic pools because I don’t remember the exact numbers in 2018 to 2019, but we delivered somewhere in the low 7s of write-offs in those years. And so that’s down the middle of the fairway of our 6% to 8% range. If we can track on a weekly basis the same results as the pool matures, then we feel good about our ability to deliver those results. What’s not baked in is some material shift in unemployment. The unemployment is also an interesting dynamic because I expect unemployment to go up. But what are you hearing out there as far as layoffs? It’s mostly in engineers and tech and Silicon Valley; it’s not necessarily affecting hourly service workers and manufacturing. Now that may come, and we’re braced for that, and we have our hands on the wheel to make adjustments. But there still seems to be a shortage in those workers, and there has to be a decent amount of demand destruction in order for there to be material weakness in that end of the employment curve. Not saying it’s not going to happen, but I’m saying that we’re looking for it to embrace for it and can make adjustments. But we’re tracking towards pre-pandemic levels. That’s our guidepost and we’re feeling really good about where we are on the pools originated after July 1.

Okay. Great. That’s a lot of helpful detail. And then a follow-up. So great to hear that merchant engagement is increasing. Just wondering if you could update us on the discussions you’re having in terms of the merchants that you are winning and the retailers you’ve won so far and another 12 this quarter, if there are any industries or bands that you’re getting particular success with? And then as we think about the fourth quarter and the holiday selling season, what engagement are you getting in terms of marketing and promotional activity with the merchants?

We are excited about our e-commerce activities. Adding around 75 new retailers in 2022 would indicate a successful year for us. While these retailers are on the smaller side and won't significantly impact the gross merchandise value, they help us, especially if they are e-tail-only. If they are e-commerce operations for brick-and-mortar retailers that we already serve, it strengthens our existing relationships. We are pleased with this progress. Regarding larger merchants in the fourth quarter, we currently have code freezes, but there are numerous opportunities across different categories. We plan to expand slightly if it involves higher-ticket items for consumers, and we are actively having discussions in this area. For the fourth quarter marketing, the upcoming holiday season looks to be intriguing. Some retailers are anticipating a late-developing holiday season. Consumer behaviors are pivotal here; if they decide to wait for promotional activities or markdowns, it may lead retailers to respond with discounts. We expect the period around Black Friday through Christmas to be more concentrated than usual. To prepare, we are implementing several initiatives with our retailers, such as co-branded marketing campaigns and daily deals. We’re also seeing retailers adopting point-of-purchase materials for the first time since collaborating with us, which shows their trust and willingness to work together on maximizing our programs.

Our next question comes from Hal Goetsch with Loop Capital.

I have a question about the retailers you’ve added, not specifically by name but by cohort or the year they were added. You mainly mentioned the e-commerce merchants added this year, and you also noted that they generally have lower approval rates and take rates due to quality issues. Can you provide insights on the retailers added in 2018, 2019, 2020, and 2021, particularly those added during the pandemic? Did they start with higher productivity levels than normal, and are we now seeing a decline? What does the analysis show regarding how cohorts from different years are performing? It seems like you’re adding merchants continuously, yet GMV is down. We're trying to understand when things might bottom out and when we can expect the next upturn, with more merchants conducting more business so that we can emerge from this situation with growth, rather than remaining stagnant.

I will address your question, starting with the last part of your comment. Our foundational expectation is that by expanding our base, adding more retailers and customers will provide a stronger platform for growth when the retail environment improves. Regarding the earlier part of your question, it's challenging to specify. The year 2019 was exceptional for us, especially with the addition of Best Buy and Lowe's. However, we did not accelerate productivity as much as we could have during the pandemic because customers were using cash more frequently instead of flexible payment options. The pandemic presented a business pause for us. While we did grow with those retailers, I believe that without COVID, we would be further along with them than we are now. On the topic of online applications, I want to emphasize their importance. They can be obtained quickly and in large quantities, and while in-store applications have higher approval and conversion rates, the volume of online applications can surpass in-store over time as we expand our e-commerce base and improve our digital platforms for product leasing. We anticipate a continued shift in channels, not only in terms of applications but also in funded GMV, with reports indicating that e-commerce currently accounts for 16.5% of our GMV. It's tough to look back at 2017, 2018, and 2019 and predict the future accurately. Nevertheless, our aim is to onboard as many retailers as possible during this soft retail period so that when we enter the next replacement cycle, we can start from a larger base. And I’ll add to that, the credit performance is a pretty big contributor to your earnings surge in late 2020 and 2021 then?

Yes.

Portfolio performance, absolutely. I mean we’ve been targeting that 11% to 13% adjusted EBITDA margin for a number of years. And where the payment performance because of all the stimulus came through in ‘20 and ‘21, we had write-offs down in the 2%, 3%, and 4%, and we were very clear that we were over-earning the model, at least in the growth phase that we expect that we’re in. So 14% to 16% EBITDA margins were out-of-target what we executed on. So we expect to get back towards those ranges. This year has been a reset in the opposite direction.

And my last question is would you say that with the credit underwriting you’ve done to date, the last tightening in Q2 and the performance you just put up in Q3 and the speed at which the book turns over, would you say you’re pretty set up to be in that 7% to 9% range going forward from here?

Yes, I think we feel good about where we are. I think we’ve proven and demonstrated our ability to influence the portfolio very quickly. And as the months turn and we turn into ‘23 and the portfolio is comprised of pools originated after July 1, we would expect it to deliver performance within those ranges.

That concludes today’s question-and-answer session. I will now turn the call over to Steve Michaels for closing remarks. Steve?

Yes. Thank you, everyone, for joining us today. We appreciate your continued interest in PROG. I just want to thank the team for really executing in a very difficult environment. Our goal is to make things easy for our retailers and our consumers. And we continue to do that. In this time, in this choppy environment is when we become more important to both of those. We look forward to continuing to deliver on that promise. We look forward to updating you next quarter.

This concludes today’s conference call. Thank you for participating. You may now disconnect.