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Why Is Aaron's (AAN) Down 13.6% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Aaron's (AAN). Shares have lost about 13.6% 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 Misses Q3 Earnings Estimates, Revises View

Aaron's posted lower-than-expected results in third-quarter 2019, wherein the top and bottom lines lagged the Zacks Consensus Estimate.

While earnings missed after two straight quarters of reporting a beat, sales lagged after in-line results in the previous quarter.

Further, management revised guidance for 2019.

Q3 Highlights

Aaron's delivered adjusted earnings of 73 cents per share, which lagged the Zacks Consensus Estimate of 82 cents. However, the metric rose 5.8% from the prior-year quarter.

Including one-time items, the company reported GAAP earnings per share of 58 cents, down 6.5% from the year-ago quarter.

Consolidated revenues were $963.8 million, which inched up 1.1% year over year but missed the Zacks Consensus Estimate of $980 million.

The top line grew 8.4% when calculated on a basis with respect to the 2019 adoption of ASC 842 associated with lease accounting.

Revenue growth was backed by an increase in Progressive revenues and contributions from franchised stores acquired by the Aaron's Business segment. This was partly offset by the company’s store closures in the first half of 2019.

Further, Aaron’s franchisee revenues declined 19.8% to $103.5 million. However, same-store revenues for franchised stores grew 1.7%, while same-store customer counts decreased 3.7% in the reported quarter. Notably, the company’s franchisees had a customer base of 241,000 at the end of the quarter.

Adjusted EBITDA rose 5.6% year over year to $87.1 million, thanks to robust growth at the Progressive segment.

However, the adjusted EBITDA margin was down 30 basis points (bps) to about 9% when calculated on a basis with respect to the 2019 adoption of ASC 842.

Segment Details

Progressive Leasing

Revenues at the segment grew to $528.9 million in the reported quarter, up 4.9% year over year. Invoice volume rose 18.6%, owing to 20.5% rise in invoice volume per active door, partly offset by 1.6% reduction in active doors to roughly 19,900. As of Sep 30, 2019, this division had 953,000 customers, reflecting 17.9% growth year over year.

The segment’s EBITDA was $62.9 million, up 21.5% from the year-ago quarter. Further, EBITDA margin expanded 20 bps to 11.9%.

Aaron's Business

Total revenues at the Aaron’s Business segment fell 2.9% to $426.3 million, thanks to the lack of revenues from net decrease of 149 stores in 2019, partly offset by gains from contributions from the buyout of 152 franchised locations. Moreover, both same-store revenues and customer count declined 2.9%.

Non-retail sales tumbled 29.9% on a year-over-year basis. Lease revenues and fees for the three months ended Sep 30, 2019, grew 0.4% from the year-ago quarter. At the quarter end, company-operated Aaron’s stores had 963,000 customers, reflecting a 2.6% year-over-year decrease.

The segment’s adjusted EBITDA was $25.7 million, down 21.4% year over year due to lower collections. Also, adjusted EBITDA margin contracted 140 bps to 6%.

As of Sep 30, 2019, the Aaron's Business segment had 1,163 company-operated stores and 341 franchised stores.

DAMI

Sales at the DAMI segment amounted to $8.7 million compared with $9.5 million in the year-ago period.

Financial Position

Aaron’s ended the quarter with cash and cash equivalents of $150.3 million, debt of $347.1 million, and shareholders’ equity of $1,867.7 million. As of Sep 30, 2019, the company generated cash from operations of $350.8 million.

Moreover, it repurchased 399,424 shares for $25 million in the third quarter. The company expects capital expenditure of $90-$100 million for 2019.

Guidance

Management now projects total revenues of $3,905-$4,010 million for 2019 compared with $3,905-$4,065 million mentioned earlier. Adjusted EBITDA is now anticipated to be $425-$437 million compared with $430-$452 million stated previously.

Total Revenues at the Aaron’s Business segment are now projected to be $1,775-$1,825 million versus $1,775-$1,855 million mentioned earlier. Revenues at the Progressive segment are envisioned to be $2,100-$2,150 million compared with $2,100-$2,175 million mentioned earlier. However, revenues at the DAMI segment are still expected to be $30-$35 million.

Aaron’s Business’ adjusted EBITDA is now anticipated to be $155-$160 million versus $160-$170 million mentioned earlier. EBITDA at the Progressive division is now envisioned to be $275-$280 million compared with $275-$285 million mentioned earlier. For the DAMI segment, management continues to project adjusted EBITDA of negative $3-$5 million.

For 2019, management now expects adjusted earnings of $3.75-$3.85 per share, down from $3.85-$4.00 stated earlier.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, Aaron's has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. 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.

Outlook

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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