A month has gone by since the last earnings report for Aaron's (AAN). Shares have lost about 4% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important drivers.
Aaron's Q4 Earnings & Revenues Improve Y/Y
Aaron’s, Inc. released fourth-quarter 2018 results, wherein both the top and the bottom lines lagged the Zacks Consensus Estimate. However, both the metrics increased year over year, thanks to improved sales in most segments and enhanced margins.
Aaron's delivered adjusted earnings of $1.02 per share, which missed the Zacks Consensus Estimate by a penny but increased almost 57% from the prior-year quarter’s figure. The year-over-year surge can be attributed to higher revenues and enhanced margins.
Including one-time items, the company reported GAAP earnings per share of 89 cents, down from $2.46 in the year-ago quarter. The decline stemmed from absence of the tax benefits realized last year.
Consolidated revenues totaled $993.2 million, which advanced 12.3% year over year but fell short of the Zacks Consensus Estimate of $996 million. Revenue growth was backed by increase in Progressive revenues and the inclusion of 152 franchised stores acquired by the Aaron's Business segment.
Aaron’s franchisee revenues declined 27.8% to $117 million. Same-store sales for franchised stores increased 3.1%, while same-store customer counts decreased 2.2% in the reported quarter. In fact, the franchisees had a customer base of 277,000 at the end of the quarter.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ascended 25.3% year over year to $112.7 million, thanks to robust Progressive segment growth. Moreover, the adjusted EBITDA margin expanded 110 basis points (bps) to about 11.3%, courtesy of higher gross margin and lower operating expenses.
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.
Sales at this segment summed $524.4 million in the reported quarter, up 22.4% year over year. Invoice volumes rose 14.1%, owing to 2% improvement in active doors and 11.6% in invoice volumes per active door. As of Dec 31, 2018, this division had 876,000 customers, reflecting 18.4% growth year over year.
The segment’s EBITDA was $65.5 million, up 31.2% from the year-ago quarter. Further, EBITDA margin expanded 80 bps to 12.5%.
Total sales at the Aaron’s Business segment inched up 2.9% to $459.7 million on the back of the buyout of 152 franchised locations in 2018. Same store revenues fell 0.5%, owing to reduced front-up payments stemming from higher promotional activity. However, this is likely to serve as a tailwind to same-store revenue growth in 2019. Also, customer-count fell 5% on a same-store basis.
Non-retail sales tumbled 25.2% on a year-over-year basis. Nonetheless, lease revenues and fees for the three months ended Dec 31, 2018, grew 8.6% from the year-ago quarter. At quarter end, the company-operated Aaron’s stores had 1,038,000 customers, reflecting 5.6% year-over-year increase.
Adjusted EBITDA at this division came in at $47.6 million, up 15.1% year over year. Also, adjusted EBITDA margin expanded 110 bps to 10.4%.
Sales at the DAMI segment amounted to $9.1 million compared with $9.3 million in the year-ago period.
Aaron’s ended the quarter with cash and cash equivalents of $15.3 million, debt of $424.8 million and shareholders’ equity of $1,760.7 million.
During the fourth quarter, the company repurchased 1,448,946 shares for $68.7 million, which along with dividend payments led to total shareholder returns of $70.8 million. In 2018, the company bought back 3.75 million shares for $168.7 million. Currently, Aaron’s has an authorization to repurchase shares worth another $331.3 million.
During 2018, the company generated cash from operations of $356.5 million. Capital expenditures for 2019 are expected to be $100-$120 million.
In the quarter under review, Aaron’s purchased 49 franchised stores and consolidated four company-operated stores. Further, it closed four franchised stores and sold two during the same time frame.
As of Dec 31, 2018, the Aaron's Business segment had 1,312 company-operated stores and 377 franchised stores.
Management remained pleased with its 2018 show, and is on track with the company’s transformation. The company projects total sales for 2019 to be between $3,905 million and $4,065 million. Adjusted EBITDA is anticipated to be $415-$442 million. Further, management expects adjusted earnings of $3.65-$3.85 per share, which lies below the Zacks Consensus Estimate of $3.91.
Total sales at the Aaron’s Business segment are 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 anticipated to be $160-$170 million. EBITDA at the Progressive division is envisioned to be $260-$275 million. For the DAMI segment, adjusted EBITDA is projected to be negative $3-$5 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Aaron's has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Aaron's, Inc. (AAN) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research