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Aaron's (AAN) Q4 Earnings Beat, Revenues Miss Estimates

Zacks Equity Research

Aaron's, Inc. AAN maintained positive earnings streak with its fourth-quarter 2016 results beating estimates for the third straight quarter, mainly backed by robust performance at Progressive. However, the company’s top line disappointed with a miss recorded for the fourth consecutive quarter.

The lower-than-expected sales led the shares of this Atlanta-based company to fall nearly 8.8% on Feb 17. Further, while the stock has yielded 22.1% in the past one year, it has underperformed the Zacks categorized Retail – Consumer Electronics industry that surged 27.4% in the same period.



The company posted adjusted earnings of 50 cents per share, which outpaced the Zacks Consensus Estimate of 45 cents and also rose 22% from the prior-year quarter. Including one-time items, the company reported earnings of 30 cents per share, which remained flat year over year.

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Further, this rent-to-own company’s top line dropped 3.2% to $795.0 million and also missed the Zacks Consensus Estimate of $819 million. The downside can mainly be attributed to a fall in revenues at the Aaron’s Business, lower franchised revenues and a decline in comparable store sales (comps).

Comps at company-operated stores dropped 5.8%, while the customer count on a same-store basis fell 4.2%. At quarter end, the company-operated Aaron’s stores had 973,000 customers, reflecting a 6.0% year-over-year decline.

Further, Aaron’s franchisee revenues declined 10.3% to $214.0 million in the reported quarter. Comps at the company’s franchise stores decreased 7.3%, while same-store customer count declined 2.3%. The franchisees had a customer base of 544,000, representing a 6.4% decline yearover year.

The company’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter increased 9.5% year over year to $73.8 million. In addition, the adjusted EBITDA margin improved 110 basis points (bps) to 9.3% in the quarter.

Segment Details

Aaron's operates through three primary businesses: Aaron's branded lease-to-own stores and Aarons.com; the Progressive virtual lease-to-own business; and Dent-A-Med, Inc. "DAMI". Additionally, management said that its “Core Business” segment will now be referred to as “Aaron's Business” segment, where the operations from the company’s branded lease-to-own stores and Aarons.com will be recorded.

Aaron's Business

Aaron’s Business’ total revenues declined 14.5% to $463.5 million in the reported quarter. Adjusted EBITDA for the Aaron's Business segment was $40.4 million, down from the year-ago figure of $42.9 million. Also, EBITDA margin contracted 90 bps to 7.0%.

On May 13, 2016, the company sold the assets of its HomeSmart unit. Its results for the fourth quarter included HomeSmart revenues of $25.4 million through May 13, which were up 60.8% year over year. Excluding the sale of HomeSmart unit, total revenues for the segment fell 12% in the quarter.

Moreover, lease revenue and fees were down 6% during the quarter, excluding the sale of HomeSmart unit. Non-retail sales also plunged nearly 29.5% in the quarter.

Progressive

Progressive contributed $324.0 million to revenues in the fourth quarter of 2016, marking a 17.3% year-over-year surge.

This was driven by a 36% rise in the number of active doors in the quarter, though invoice volume per active door fell 13%. The segment’s EBITDA was $41.7 million for the fourth quarter, compared with $25.5 million in the year-ago quarter. Also, EBITDA margin expanded 370 bps to 12.9%. Progressive had 598,000 customers as of Dec 31, 2016, representing 17% year-over-year growth.

DAMI

Revenues at the DAMI segment were $7.5 million in the reported quarter.

Full-Year Synopsis

For 2016, the company’s adjusted earnings came in at $2.30 per share, which surpassed the Zacks Consensus Estimate of $2.26 and grew 7% from 2015. Revenues for the year inched up 0.9% to $3.208 billion but lagged the Zacks Consensus Estimate of $3.231 billion.

Financial Position

Aaron’s ended 2016 with cash and cash equivalents of $308.6 million, debt of $497.8 million, and total shareholders’ equity of $1,481.6 million.

During 2016, the company generated cash from operations of $465.4 million. In 2016, the company spent approximately $42 million to reward shareholders, through share repurchases and dividends. Aaron’s repurchased 1.3 million shares of common stock worth nearly $34.5 million in 2016. Further, the company had an authorization to buy back 9.1 million shares as of Dec 31, 2016.

For 2017, management expects capital expenditures in the band of $60–$80 million.

Store Update

In fourth-quarter 2016, Aaron’s shut down 61 Company-operated outlets, while it sold two company-operated stores.

As of Dec 31, 2016, Aaron’s had a total of 1,165 company-operated stores and 699 franchised stores. Consequently, the company’s total store count at year-end was more than 1,860 stores.

Going forward, management expects to shut down nearly 70 outlets in second-quarter 2017.

Guidance

Overall, Aaron’s remains pleased with its performance in 2016 that was backed by solid execution across its omni-channel platform. Going forward, the company remains optimistic of growth potential of its Progressive business, while it continues to focus on initiatives to uplift the performance of its Aaron’s business.

Following a solid 2016, management initiated its outlook for 2017. Aaron's expects total revenues (excluding franchisees’ revenues) in the range of $3.10–$3.31 billion. Segment-wise, total revenues for Aaron’s Business are projected in the band of $1.68–$1.78 billion, including lease revenues of $1.30–$1.40 billion. Further, revenues at Progressive and DAMI segments are estimated in the band of $1.40–$1.50 billion and $25–$35 million, respectively.

In addition, comps at Aaron’s Business segment are expected to decline in the range of 8–12%.

The company’s adjusted EBITDA is projected in the range of $320−$353 million. On a segmental basis, Aaron’s Business adjusted EBITDA is expected in the range of $155−$170 million. Adjusted EBITDA for the Progressive division is guided at $170−$185 million. Moreover, EBITDA at DAMI segment is estimated in the range of negative $2 million – $5 million.

Management anticipates 2017 adjusted earnings in the band of $2.15–2.40 per share, while GAAP earnings are projected in the $1.85–$2.10 range. The Zacks Consensus Estimate for 2017 is currently pegged at $2.38 per share.

Aaron's, Inc. Price, Consensus and EPS Surprise

Aaron's, Inc. Price, Consensus and EPS Surprise | Aaron's, Inc. Quote

Zacks Rank

Aaron’s currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the Retail-Wholesale sector include The Children's Place, Inc. PLCE, Genesco Inc. GCO and Zumiez Inc. ZUMZ.

The Children's Place, with a long-term earnings growth rate of 10.3%, has surged 54.3% in the past one year. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Genesco, with a long-term earnings growth rate of 9.5%, has a Zacks Rank #2 (Buy). Also, the stock has posted an average beat of 31.4% in the past four quarters.

Zumiez, a Zacks Rank #2 stock has a long-term earnings growth rate of 15%. Further, the stock has increased 22.5% in the past six months.

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