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Aaron's (AAN) Down 0.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Aaron's (AAN). Shares have lost about 0.5% in that time frame, outperforming the S&P 500.

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

Aaron's Q2 Earnings Beat Estimates, Raises ’19 View

Aaron's posted robust second-quarter 2019 results, wherein the bottom line surpassed the Zacks Consensus Estimate and grew year over year. This marked the second straight quarter of positive earnings surprise. Also, the company’s revenues improved year over year, thanks to improved sales in most segments and enhanced margins.

For 2019, management now expects adjusted earnings in the bracket of $3.85-$4.00 per share, up from earlier projection of 3.65-$3.85 per share.

Q2 Highlights

Aaron's delivered adjusted earnings of 93 cents per share, which surpassed the Zacks Consensus Estimate of 88 cents and increased 10.7% from the prior-year quarter’s figure. The upside can be attributed to higher revenues and enhanced margins.

Including one-time items, the company reported GAAP earnings per share of 62 cents, up 14.8% from 54 cents in the year-ago quarter.

Consolidated revenues were $968.1 million, which advanced 4.3% year over year and came in line with the Zacks Consensus Estimate. Revenue growth was backed by increase in Progressive revenues and the inclusion of 152 franchised stores acquired by Aaron's Business segment. This was partly offset by the company’s store closure in the first half of 2019.

However, Aaron’s franchisee revenues declined 31.7% to $108 million. Same-store sales for franchised stores increased 1.2%, while same-store customer counts decreased 2.7% in the reported quarter. Notably, the franchisees had a customer base of 254,000 at the end of the quarter.

Adjusted EBITDA ascended 10.7% year over year to $107.4 million, thanks to robust Progressive segment growth. The adjusted EBITDA margin expanded 60 basis points (bps) to about 11.1%, courtesy of higher gross margin and lower operating expenses.

Segment Details

Aaron's operates through three primary businesses — the Progressive Leasing's virtual lease-to-own business (Progressive Leasing); Aaron's branded company-owned and franchised lease-to-own stores, Aarons.com and Woodhaven (collectively known as Aaron's Business); and Dent-A-Med, Inc. or DAMI.

Progressive Leasing

Sales at this segment grew to $516.3 million in the reported quarter, up 6.7% year over year. Invoice volumes rose 20.4%, owing to 23.4% in invoice volumes per active door, partially offset by 2.5% reduction in active doors. As of Jun 30, 2019, this division had 909,000 customers, reflecting 19.9% growth year over year.

The segment’s EBITDA was $68.2 million, up 22.3% from the year-ago quarter. Further, EBITDA margin expanded 30 bps to 13.2%.

Aaron's Business

Total sales at the Aaron’s Business segment increased 1.9% to $443.2 million on the back of the buyout of 152 franchised locations in 2018. Same store revenues inched up 0.1%, driven by improvement in trends. However, customer count fell 4.3% on same-store basis.

Non-retail sales tumbled 36.4% on a year-over-year basis. Lease revenues and fees for the three months ended Jun 30, 2019, grew 8% from the year-ago quarter. At quarter end, the company-operated Aaron’s stores had 984,000 customers, reflecting 2.9% year-over-year increase.

Adjusted EBITDA at this division came in at $39.7 million, down 6.4% year over year. Also, adjusted EBITDA margin contracted 80 bps to 8.9%.

As of Jun 30, 2019, the Aaron's Business segment had 1,171 company-operated stores and 357 franchised stores.

DAMI

Sales at the DAMI segment amounted to $8.6 million compared with $9.2 million in the year-ago period.

Financial Position

Aaron’s ended the quarter with cash and cash equivalents of $100.2 million, debt of $347.8 million and shareholders’ equity of $1,849.6 million.

As on Jun 30, 2019, the company generated cash from operations of $244.6 million. The company repurchased 242,860 shares for $14.4 million in the second quarter. Capital expenditures for 2019 are expected in the range of $100-$120 million.

Guidance

Management is pleased with strong second-quarter 2019 results, and is on track with the company’s transformation. Its progressive segment continues to perform at high level and is receiving positive response from retail partners.

Coming to the guidance for 2019, the company continues to project total sales to be between $3,905 million and $4,065 million. Adjusted EBITDA is now anticipated to be $430-$452 million compared to prior view of $415-$442 million.

Total sales at the Aaron’s Business segment are still projected to be $1,775-$1,855 million. While sales at the Progressive segment are envisioned to be between $2,100 million and $2,175 million, the same at the DAMI segment are expected to be $30-$35 million.

Aaron’s Business’ adjusted EBITDA is still anticipated to be $160-$170 million. EBITDA at the Progressive division is now envisioned to be $275-$285 million compared with $260-$275 million projected earlier. For the DAMI segment, management continues to project adjusted EBITDA to be negative $3-$5 million.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

At this time, Aaron's has a great Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile 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

Aaron's has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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