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Aaron's (AAN) Up 36.6% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Aaron's (AAN). Shares have added about 36.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Aaron's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Aaron's Q1 Earnings & Revenue Beat Estimates

Aaron’s posted better-than-expected results in first-quarter 2020. Also, the top line grew year over year. However, management had earlier withdrawn 2020 guidance owing to uncertainties stemming from the coronavirus pandemic.

Nevertheless, management is encouraged by higher customer payments in April as well as improving trajectory of its lease origination activity in the past few weeks. Impressively, the reopening of Aaron's Business stores supported by e-commerce registered an increase of above 50% in April.

Q1 Highlights

Aaron's delivered adjusted earnings of 85 cents per share, which surpassed the Zacks Consensus Estimate of 75 cents. However, the metric declined 30.5% from the prior-year quarter.

Reported loss per share was $4.19 on a GAAP basis against earnings per share of 82 cents reported in the year-ago quarter.

Consolidated revenues rose 8.8% to $1101.3 million and surpassed the Zacks Consensus Estimate of $1,036 million. Revenue growth was mainly backed by an increase in Progressive revenues, partly offset by soft revenues at Aaron's Business segment.

Aaron’s franchisee revenues declined 14.7% to $102.6 million. Same-store revenues for franchised stores decreased 5.2% and same-store customer counts dropped 6.7% in the reported quarter. Notably, the company’s franchisees had a customer base of 220,000 at the end of the quarter.

Adjusted EBITDA declined 14.6% year over year to $98.5 million, with adjusted EBITDA margin declining 250 basis points (bps) to 8.9% when calculated based on the 2019 adoption of ASC 842. The metric was hurt by higher bad debt expenses, lease merchandise and CECL-driven loan loss reserves.

Segment Details

Progressive Leasing

Revenues at the segment grew 25.8% to $658.5 million in the reported quarter. Moreover, invoice volume rose 13.4%, owing to a 2.9% rise in invoice volume per active door and a 10.2% increase in active doors to roughly 21,800. As of Mar 31, 2020, the division had 998,000 customers, reflecting 15.6% growth year over year.

The segment’s EBITDA was $70.2 million, up 7.5% from the year-ago quarter. However, EBITDA margin contracted 180 bps to 10.7%.

Aaron's Business

Total revenues at the Aaron’s Business segment fell 9.8% to $432.8 million, mainly due to net reduction of 183 outlets in the 15 months ended Mar 30, and lower lease portfolio balance impact. Moreover, same-store revenues and customer count on a same-store basis declined 4.6% and 6.4%, respectively.

Non-retail sales tumbled 27.4% on a year-over-year basis. Lease revenues and fees for the three months ended Mar 31, 2020, declined 7.5% from the year-ago quarter. At the quarter-end, the company-operated Aaron’s stores had 902,000 customers, reflecting a 9.1% year-over-year drop.

The segment’s adjusted EBITDA was $35 million, down 31.9% year over year owing to lower portfolio balance entering the first quarter and incremental coronavirus-related reserves. Also, adjusted EBITDA margin contracted 260 bps to 8.1%.

As of Mar 31, 2020, Aaron's Business had 1,129 company-operated stores and 318 franchised stores.

Vive

Sales at the Vive segment, formerly known as Dent-A-Med, Inc. (DAMI), amounted to $9.9 million, up 15.1% from a year ago.

Financial Position

The company ended the quarter with cash and cash equivalents of $551 million, debt of $646.1 million, and shareholders’ equity of $1,446.6 million. As of Mar 31, 2020, the company generated cash from operations of $227.8 million.

During the quarter, the company did not repurchase shares but paid dividends of $2.7 million.

COVID-19 Update

At the onset of the pandemic, the company has implemented several new initiatives. Under Progressive Leasing, management transitioned almost all associates to work from home and put non-essential travel on hold. Also, it provided customers payment relief and lent support to retail partners' businesses.

With respect to Aaron's Business, management shuttered all company-operated showrooms and shifted to a curbside and e-commerce operating model. Also, it furloughed workers and suspended in-home product delivery and setup. Moreover, the company has provided personal protective equipment to store associates. It had also suspended franchise royalty payments worth $1.1 million in March and $2.1 million in April.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -9.28% due to these changes.

VGM Scores

At this time, Aaron's has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Aaron's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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