A month has gone by since the last earnings report for Aaron's (AAN). Shares have lost about 7.8% 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 Q1 Earnings & Revenues Top Estimates
Aaron's, Inc. posted robust first-quarter 2019 results, wherein both the top line and the bottom line surpassed the Zacks Consensus Estimate. Moreover, earnings and sales improved year over year, thanks to improved sales in most segments and enhanced margins.
Aaron's delivered adjusted earnings of $1.08 per share, which surpassed the Zacks Consensus Estimate of 93 cents and increased around 33% 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 82 cents, up from 73 cents in the year-ago quarter. The upside was driven by decline in operating expenses of around $3 million that stemmed from accounting changes and adoption of ASC-842.
Consolidated revenues were $1012.1 million, which advanced 6% year over year and beat the Zacks Consensus Estimate of $997.1 million. Revenue growth was backed by growth in Progressive revenues and the inclusion of 152 franchised stores acquired by Aaron's Business segment.
However, Aaron’s franchisee revenues declined 32.1% to $120.2 million. Same-store sales for franchised stores increased 1.3%, while same-store customer counts decreased 0.8% in the reported quarter. Notably, the franchisees had a customer base of 259,000 at the end of the quarter.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ascended 22.4% year over year to $115.2 million, thanks to robust Progressive segment growth. The adjusted EBITDA margin expanded 100 basis points (bps) to about 11.4%, 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 to $523.4 million in the reported quarter, up 7.6% year over year. Invoice volumes rose 14.2%, owing to 17.9% in invoice volumes per active door, partially offset by 3.1% decrease in active doors. As of Mar 31, 2019, this division had 863,000 customers, reflecting 19.2% growth year over year.
The segment’s EBITDA was $65.3 million, up 41.3% from the year-ago quarter. Further, EBITDA margin expanded 200 bps to 12.5%.
Total sales at the Aaron’s Business segment inched up 4.6% to $480.1 million on the back of the buyout of 152 franchised locations in 2018. Same store revenues increased 0.7%, driven by improvement in trends. However, customer count fell 3.9% on a same-store basis.
Non-retail sales tumbled 30.5% on a year-over-year basis. Lease revenues and fees for the three months ended Mar 31, 2019, grew 9.7% from the year-ago quarter. At quarter end, the company-operated Aaron’s stores had 992,000 customers, reflecting 4.1% year-over-year increase.
Adjusted EBITDA at this division came in at $51.4 million, up around 7% year over year. Also, adjusted EBITDA margin expanded 20 bps to 10.7%.
Sales at the DAMI segment amounted to $8.6 million compared with $9.5 million in the year-ago period.
Aaron’s ended the quarter with cash and cash equivalents of $124.2 million, debt of $408.3 million and shareholders’ equity of $1,813.5 million.
As on Mar 31, 2019, the company generated cash from operations of $164.7 million. Capital expenditures for 2019 are expected in the range of $100-$120 million.
In the quarter under review, Aaron’s acquired four franchised stores and closed 85 company-operated stores. It closed three franchised stores and sold one to the third party during the same time frame.
As of Mar 31, 2019, the Aaron's Business segment had 1,230 company-operated stores and 369 franchised stores.
Management is pleased with the strong start to 2019, 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.
The company reiterated its outlook for 2019. It continues to project 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.
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 strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions 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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