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Aaron's (AAN) Hits 52-Week High: What's Driving the Stock?

Zacks Equity Research

Aaron's, Inc. AAN touched a 52-week high of $70.00, before closing the session a tad lower at $69.68 on Oct 14. Most of the momentum in the stock can be attributed to the solid growth in its Progressive segment. Robust growth in invoice volumes and solid customer base are driving the segment’s performance. Moreover, the company is witnessing positive trends in Aaron’s business on the back of transformation initiatives.

We note that shares of this Atlanta, GA-based company have increased approximately 32% in the past six months, outperforming the industry’s decline of 1.7%. This Zacks Rank #1 (Strong Buy) stock has also outperformed the Retail-Wholesale sector and the S&P 500 Index that advanced 0.1% and 1.5%, respectively. With a long-term earnings growth rate of 16.6% and a VGM Score of A, Aaron's is positioned to attain new highs.



You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors Narrating Aaron's Growth Story

Aaron’s Progressive segment, which covers the virtual lease-to-own business, has been performing exceedingly well since last several quarters. In second-quarter 2019, revenues at this segment increased 6.7% driven by invoice volumes growth of 20.4% owing to 23.4% increase in invoice volumes per active door, offset by a 2.5% reduction in active doors. Notably, the segment’s revenues have doubled from $1 billion in 2015 to $2 billion in 2018, while consistently generating strong profits.

As of Jun 30, 2019, this division had 909,000 customers, reflecting 19.9% growth year over year. Further, the EBITDA margin expanded 30 basis points (bps). This Atlanta, GA-based company expects the segment’s momentum to continue in 2019, with estimated revenues of $2,100-$2,175 million and adjusted EBITDA of $275-$285 million. This guidance represents an improvement from revenues of $1,999 million and adjusted EBITDA of $65.5 million last year.

Meanwhile, the Aaron’s Business division is progressing well driven by transformational initiatives. These efforts are meant to improve customer experience, operating efficiencies and employee engagement. Driven by the success of the pilots carried out in 2018, the company plans to expand the next generation concept to 40-50 locations by this year. These new store concepts are poised to boost in-store traffic and top-line growth. However, higher write-offs and ongoing investments related to transformation initiatives are hurting the segment’s adjusted EBITDA.

Nevertheless, the e-commerce business has been experiencing significant growth for a while and contributing to the top line. In fact, lease revenues are benefiting from consistent investments in the e-commerce business.

Further, same-store sales (comps) increased 170 bps in the second quarter of 2019, driven by the improvement in trends. In the current year, the company expects comps to be flat to up 2% on the back of higher pricing and product mix as well as gains from transformation efforts. Driven by these strengths, management expects revenues at the Aaron’s Business segment to come in the band of $1,775-$1,855 million in 2019. Last year, revenues recorded in this segment were $1,792.6 million.

Raised Outlook Bodes Well

Aaron’s projects total sales for 2019 to be between $3,905 million and $4,065 million. Sales recorded last year were $3,828.9 million. Moreover, adjusted EBITDA is now anticipated to be $430-$452 million, up from the prior view of $415-$442 million. The same was $386.2 million in 2018.

For 2019, management expects adjusted earnings in the range of $3.85-$4.00 per share, indicating growth of 15-19% year over year. Earlier, management anticipated adjusted earnings of $3.65-$3.85 per share. Overall, it anticipates witnessing slightly higher revenues, adjusted EBITDA and adjusted earnings per share in the second half of 2019 compared with the first half.

We believe that these efforts will continue driving the company’s performance helping it reach new highs.

Other Stocks to Consider

Zumiez Inc. ZUMZ has a long-term earnings growth rate of 12% and a Zacks Rank of 1.

Target Corporation TGT has an impressive long-term earnings growth rate of 7.1% and a Zacks Rank #1.

Fossil Group, Inc. FOSL delivered positive earnings surprise of 79% in the last four quarters. The stock currently has a Zacks Rank #2 (Buy).

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