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Aaron's Falls on Q2 Guidance Cut, Business Struggles

Zacks Equity Research

Shares of Aaron’s Inc. (AAN) plunged 9.51% during yesterday’s trade, to close at $30.34 per share after the company lowered its earnings and sales forecast for the second quarter of fiscal 2014 due to dismal performance of its core business.

The rent-to-own specialty retailer came up with its preliminary results for the second quarter that reflects strong revenue performance at the recently acquired Progressive business offset by disappointing results at its core operations. That being said, the company forecasts revenue to be nearly $672 million in the second quarter as against $675 million projected earlier.

Consequently, Aaron’s slashed its adjusted earnings per share, which is now expected to be in the range of 34–37 cents, while its earlier anticipated adjusted earnings ranged between 43–48 cents per share. Adjusted earnings results for the quarter excludes the amortization expenses and transaction costs related to Progressive’s purchase as well as other one-time costs and expenses. On a GAAP basis, the company projects earnings in the range of 9–12 cents per share.

While Aaron’s core business remains troubled, the company is encouraged by the better-than-expected second quarter earnings and revenue results of the recently acquired Progressive business. The company is working relentlessly to integrate Progressive’s business to realize the attractive e-commerce, customer relationship and other operational synergies between the two businesses.

Looking forward, the company remains confident of Progressive’s future growth and is on track to revive its core business’ results through the strategic initiatives announced in April.

The company’s strategic plans focus on reviving its core business and bringing the company back to profitability include concentrating on stimulating same store sales growth, building a strong online platform, optimizing cost savings to expand margins, limiting company-operated store growth to 2%–3% per year and encouraging the expansion of its franchise store base. Additionally, the company targets debt-to-capitalization ratio of 20% and expects to use excess cash to reward shareholders.

Further, the company’s cost reduction initiatives remain focused on rigorously evaluating its store base, specific cost reductions across the organization, long-term SG&A cost saving initiatives and better inventory management and analytics to optimize store operation. As a part of its store evaluation process, the company intends to close down 44 underperforming stores in the third quarter of fiscal 2014 and plans to focus on store rationalization for the next few years.

Aaron’s currently holds a Zacks Rank #3 (Hold). A better-ranked retail stock in the related industry is Conns Inc. (CONN) with a Zacks Rank #2 (Buy). Meanwhile, other stocks performing well in the retail industry include  Citi Trends Inc. (CTRN) and Christopher & Banks Corp. (CBK), both of which sport a Zacks Rank #1 (Strong Buy).

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