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Can Aaron's (AAN) Bank on Progressive Unit for a Turnaround?

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Shares of Aaron's, Inc. AAN have declined 3.9% in the past three months due to lower-than-expected earnings in first-quarter 2018. Moreover, softness across its Aaron’s Business segment remains a major concern. In contrast, the industry reflected a growth of 4.4% in the same period.

Additionally, analysts’ concerns for the company’s performance in the future are reflected in the downward revisions in its forward earnings estimates. The Zacks Consensus Estimate of 77 cents for the second quarter and $3.34 for 2018 has moved south by a penny each in the last seven days. Management envisions adjusted earnings per share in the band of $3.20-3.50 for 2018.

Given this backdrop, let’s delve deep to find out the factors that are affecting this Zacks Rank #4 (Sell) company’s performance and its strategies to offset the hurdles. The stock’s dismal run on bourses is also evident from its Momentum Score of F.

Reasons Behind Dismal Price Performance

Aaron's is witnessing sluggishness across its Aaron’s Business segment for the past few quarters due to lower non-retail sales, weak comparable-store sales (comps) and lower franchisee revenues. In first-quarter 2018, non-retail sales declined 23.2% year over year, though it was slightly offset by lease revenues and fees.

Adjusted EBITDA for the segment was down 21.6% and EBITDA margin contracted 250 basis points (bps). This has been denting the company’s overall EBITDA that decreased 14% year over year, with EBITDA margin contraction of 310 bps in the first quarter.

Comps at company-operated stores dropped 4.4% with franchisee revenues declining 23.2%. In fact, lower comps due to soft customer counts and waning store traffic has also been a major headwind in recent quarters. Notably, comps declined 5.4%, 5.6% and 8.1% in the fourth, third and second quarters of 2017, respectively.

Unfortunately, the trend is likely to continue in 2018 as well. Though comps for the Aaron’s business are anticipated to come in at the favorable end of its previous guidance of negative 4% to negative 1%, it still reflects a decline.

Stiff competition from well-established providers of lease-to-own stores, virtual lease-to-own operators, traditional and e-commerce players remains an additional concern.

Can Aaron’s Progressive Unit Aid a Turnaround?

Aaron’s Progressive segment, which deals in the virtual lease-to-own business, has been performing exceedingly well since last few quarters. Notably, robust growth in number of active doors, invoice volume per active door and a solid customer base has been aiding the segment’s impressive performance. In first-quarter 2018, the segment’s revenues surged 32.9% driven by a 10% rise in the number of active doors and 20% growth in invoice volume per active door.

Solid performance at this segment is likely to continue in the future backed by management’s upbeat guidance for 2018. Revenues at the Progressive division are envisioned between $1.95 billion and $2.05 billion, significantly up from $1.57 billion in 2017. This, in turn, should drive top-line growth and boost profitability.

Further, the company’s surprise history gives a warming picture. Although Aaron's missed earnings estimates in first-quarter 2018, it has delivered positive earnings surprise in six of the trailing eight quarters. Moreover, sales have outpaced estimates in the trailing five quarters.

This apart, Aaron’s ability to generate optimum operating cash flow helped management to execute its strategies such as enhancement of product and brand offerings and building operational infrastructure. The company’s commitment to return value to shareholders through share repurchases is also commendable. These moves underscore Aaron’s cash flow generation capacity, confidence in its prospects and focus on boosting shareholders value.

With so many positives in the pipeline, we believe there is surely hope for the company’s revival. However, it remains to be seen how fast the company can reverse the aforementioned headwinds.

Looking for Better-Ranked Retail Stocks? Check These

Conn's, Inc. CONN has a long-term earnings growth rate of 23% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Five Below, Inc. FIVE has an impressive long-term earnings growth rate of 27.7% and a Zacks Rank #2 (Buy).

Burlington Stores, Inc. BURL is a Zacks #2 Ranked stock and has pulled off an average positive earnings surprise of 17.8% in the trailing four quarters.

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