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Aaron's (AAN) Up 19% in 3 Months: Will Momentum Sustain?

Zacks Equity Research

Aaron's, Inc. AAN clearly appears to be a preferred pick, as it seems to have all it takes to catch investors’ attention. Notably, the company is gaining from strength in the Progressive business, which is benefiting from robust invoice volume growth and solid customer base. Also, it remains on track with the transformation of the Aaron’s segment, which bodes well for growth. These factors have helped the company deliver robust first-quarter 2019 results and are driving the stock higher.

Shares of this Atlanta, GA-based company have rallied approximately 19% in the past three months against the industry’s decline of 4%.

All said, let’s take a closer look at the aspects driving this Zacks Rank #2 (Buy) stock, which also flaunts a VGM score of A.

Progressive Business: Key Catalyst

Aaron's Progressive segment, which contributed nearly 51.7% to total revenues in the first quarter of 2019, has been significantly driving the company’s results. The division includes the virtual lease-to-own business. The segment has performed exceedingly well over last several quarters backed by robust growth in invoice volume and a solid customer base. Notably, the segment’s revenues have doubled from $1 billion in 2015 to $2 billion in 2018, while consistently generating strong profits.

In first-quarter 2019, the segment’s revenues surged 7.6% year over year. Invoice volumes rose 14.2%, owing to 17.9% in invoice volumes per active door. As of Mar 31, 2019, this division had 863,000 customers, reflecting 19.2% year-over-year growth. Further, EBITDA margin for the segment expanded 200 basis points. The company expects the momentum for the segment to continue in 2019, with estimated revenues of $2,100-$2,175 million and adjusted EBITDA of $260-$275 million.

Aaron’s Business Transformation on Track

Aaron’s business is on track with the transformational initiatives, which are likely to bring the segment back to sustainable long-term growth in revenue and earnings. For this, the company is investing in activities to improve customer experience, operating efficiencies, compliance and employee engagement. Driven by the success of the pilots carried out in 2018, the company plans to expand the next generation concept to 40 to 50 locations in 2019, including renovating existing stores and repositioning to new attractive store locations. These new store concepts are poised to lift in-store traffic and revenue.

Additionally, the company’s e-commerce site (Aarons.com) has witnessed significant growth over the years and is attracting new and younger customers. Notably, revenues for the Aaron’s business improved 4.6% in first-quarter 2019, while lease revenues rose 9.7%. Lease revenues benefited from the continued investments in Aarons.com. Further, adjusted EBITDA margin for the segment expanded 20 bps. In 2019, the company expects revenues for the Aaron’s segment to be $1,775-$1,855 million, with adjusted EBITDA of $160-$170 million.

For fiscal 2019, the company projects total sales in the range of $3,905-$4,065 million. Adjusted EBITDA is anticipated to be $415-$442 million. Further, management expects adjusted earnings of $3.65-$3.85 per share.

Wrapping Up

However, EBITDA and operating expenses continue to be impacted by write-offs. During the first quarter, write-offs were 4.8% of revenues compared to 3.8% in the same period, prior year. The increase of write-offs was due to the rise in the number and type of promotional offerings, store closures during the quarter under review, higher ticket leases and an increasing mix of e-commerce as a percent of revenue. Moreover, increased write-offs led to higher adjusted operating expenses. Also, lower active door count and stiff competition cannot be ignored.

Nevertheless, we expect all aforementioned growth drivers to offset these hurdles and help the company to sustain its solid momentum.

Key Picks

Best Buy Co., Inc. BBY has a long-term earnings growth rate of 8.8% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The TJX Companies, Inc. TJX has a long-term earnings growth rate of 10.9% and a Zacks Rank #2.

Target Corporation TGT has a long-term earnings growth rate of 7.1% and a Zacks Rank #2.

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