Aaron’s Inc. AAN is one of the stocks that have been doing well in the pandemic-ridden market, owing to the momentum in its business in the past two months. Despite the continuity of the COVID-19 outbreak-related woes, the company provided a business update for third-quarter 2020, revealing that solid performances across all products and categories as well as a strong customer base and robust lease portfolio have been contributing to third-quarter performance. As a result, management raised its earnings and sales guidance for the third quarter.
Further, the company has been in investors’ good books on its plans to spin-off into two independent publicly traded companies to sharpen focus and operational execution, while delivering long-term shareholder value. Also, strength in its Progressive business and progress on transformation initiatives for the Aaron’s business is keeping the stock going.
We note that shares of Aaron’s have gained 31.4% in the past three months despite the pandemic-related impacts on its business and the economy on the whole. Meanwhile, the industry has witnessed growth of 32.3% in the same period.
Factors Outlining the Growth Story
Robust Q3 Outlook: Driven by the aforementioned business momentum, Aaron’s anticipates revenues of $1-$1.02 billion for the third quarter, with adjusted earnings of $1.4-$.15 per share. Adjusted EBITDA is projected to be $140-$150 million. This suggests a rise from its earlier view of revenues of $950-$975 million and adjusted earnings of 80-90 cents per share. Segment-wise, revenues in the Progressive segment are envisioned to be $575-$585 million along with adjusted EBITDA of $100-$105 million. Further, invoice growth is likely to increase on a sequential basis to the tune of low to mid-single digits. Notably, strong invoice gain in the segment is likely to continue aiding growth in the quarter.
Moreover, revenues for the Aaron's Business segment are forecast to be $415-$425 million, with same-store revenue growth of 4-6% and adjusted EBITDA of $43-$48 million. Moreover, both Aaron's and Progressive segments are not expected to witness any COVID-19-related expenses in the third quarter.
Spin-Off Outlays Long-term Value: In July, management revealed plans to spin-off into two independent, publicly-traded companies. The company will be split into Progressive Leasing and Aaron’s Business. The spin-off is likely to be a win-win for the businesses, with improved focus, market-leading positions, strong free cash flow generation, and well-capitalized balance sheets, enabling each to unlock substantial value creation opportunities. The company expects to execute this as a tax-free spin-off to Aaron’s shareholders. The transaction is expected to be completed by the end of 2020.
As part of the proposed transaction, the spin-off will give rise to two companies with strong financial standing and long-term growth prospects. The Progressive business will comprise the current Progressive business segment as well as Vive Financial, with $2.2 billion of revenues in 2019. Meanwhile, Aaron’s, with revenues of $1.8 billion in 2019, will comprise of 1,400 company-operated and franchised stores in 47 U.S. states and Canada, the e-commerce platform Aarons.com, and Woodhaven Furniture Industries.
Business Segment Offer Dynamism: Aaron’s has been experiencing continued strength in its Progressive segment, which covers the virtual lease-to-own business. The segment has been performing exceedingly well for quite some time now, backed by robust growth in invoice volume and a solid customer base. In second-quarter 2020, the segment’s revenues increased 14.2% year over year. Although invoice volumes fell 2.2%, invoice volume per active door rose 1.7%. Further, the segment’s EBITDA was $70.7 million, up 3.7% from the year-ago quarter.
In the Aaron’s Business unit, the company is on track with the transformational initiatives, which are likely to turnaround the segment. This plan aims to attain sustainable long-term growth in revenues and earnings through investments in activities, and improve customer experience, operating efficiencies, compliance and employee engagement. Additionally, the company’s e-commerce site (Aarons.com) is currently witnessing growth due to the coronavirus-related spike in online sales industry-wide.
Although uncertainties prevail regarding the effects of the pandemic, we expect the recent positive trends to be beneficial to Aaron’s third-quarter results. Further, the Zacks Rank #1 (Strong Buy) stock stands to gain from the strength in its businesses and gradual reopening of the economy. These factors are likely to help the stock maintain momentum in the days ahead.
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