Aaron's Down on Y/Y Fall in Q1 Earnings - Analyst Blog

Owing to unfavorable weather conditions, Aaron's Inc. AAN posted weak financial results for the first-quarter 2014, wherein both its top and bottom lines declined year over year. Subsequently, the company's share price fell approximately 4.1% in Friday's trading session.

Aaron's earnings for the quarter declined 20.9% from the comparable prior-year quarter to 53 cents per share. The year-over-year decline in the bottom line was mainly due to decreased revenues and higher operating expenses. However, the company's earnings came within its own guidance range and were in line with the Zacks Consensus Estimate as well.

Due to decline in both comparable-store sales (comps) and softness witnessed in customer growth performance, the company's top line decreased 1.3% year over year to $585.4 million and fell short of its own guidance as well as the Zacks Consensus Estimate of $590.0 million.

In its preliminary results announced on Apr 15, Aaron's had lowered its outlook for the first quarter owing to the negative effect of the recent macroeconomic environment and adverse weather conditions. The leading rent-to-own operator reduced its revenue expectation to $587.5 million from the earlier projection of $600.0 million. Furthermore, Aaron's lowered its earnings per share guidance range for the first quarter to 51–54 cents from 57–62 cents forecasted earlier.

Coming to the quarter under review, comps at the company-owned stores fell 2.1% in the quarter while stores open for over 2 years witnessed a 3.7% decrease in sales. Customer traffic at the company-operated stores decreased 1.4%. Comps at the company's franchised stores registered a 1.0% fall owing to a decline in customer traffic by 1.8%.

The company's Sales & Lease Ownership division's revenues were recorded at $566.8 million, down 1% from the first quarter of 2013. The HomeSmart division reported revenues of $17.3 million, increasing 3% from the year-ago comparable quarter.

At the quarter-end, the company's self-operated stores had 1,091,000 customers while the franchisee customer count was 590,000. Total customer count decreased 1.0% from the same period last year.

Operating income came in at $61.9 million, down 25.7% from the year-ago quarter primarily due to lower sales and higher operating expenses. Consequently, operating margin contracted 340 basis points to 10.6%.

Financial Position

Cash and investments at Aaron's as of Mar 31, 2014 were $397.1 million and total shareholder equity was $1,179.0 million. The company generated nearly $62.0 million of cash flow from operating activities during the quarter.

Moreover, in the said quarter, Aaron's bought back 1,000,952 shares of its common stock and completed its previously announced $125 million accelerated share repurchase program. The company revealed that it has an additional authorization of repurchasing 10,496,421 shares.

Store Update

Aaron's opened 9 company-operated Sales & Lease Ownership stores, 7 franchised stores and 2 company-operated HomeSmart stores in the quarter. The company also acquired 1 store from its franchisees operator and sold 5 outlets to a franchisee. Furthermore, Aaron's also shut down five of its company-operated stores during the quarter.

As of Mar 31, 2014, Aaron's had a total of 1,262 company-operated Sales & Lease Ownership stores, 784 franchised Sales & Lease Ownership stores, 83 company-operated HomeSmart stores, 3 franchised HomeSmart stores. At the quarter-end, the company operated 2,132 stores in total.

Update on Progressive Acquisition

In an update on the recently announced acquisition of Progressive Finance Holdings LLC, Aaron's revealed that from the beginning of second quarter, it will provide consolidated financial statements that will include Progressive Finance Holdings' results.

Aaron's believes that the acquisition of Progressive Finance Holdings will prove transformational by giving it an opportunity to expand into the large and growing virtual rent-to-own market. Progressive Finance Holdings, which provides web-based lease-to-own financing programs for retailers, is expected to provide solid investor returns for Aaron's shareholders, given its exceptional growth metrics that registered 77% annual revenue growth from $228 million in 2012 to $403 million in 2013.

Further, the company expects the acquisition to increase cash earnings per share in 2014 in double digits and be significantly accretive in 2015 as well. Further, Aaron's will benefit from Progressive Finance Holdings' tie-ups with the largest U.S. retailers, including Mattress Firm, Big Lots Inc. BIG, Art Van Furniture and Sleepy's, which adds about 15,000 new sources of revenues for Aaron's.

Management Guidance

Looking ahead, Aaron's has updated its outlook for 2014 and 2015 after taking the benefits of Progressive Finance Holdings acquisition into account. However, due to incomplete valuation related to the acquisition, the company provided earnings per share guidance for 2014 and 2015 on an adjusted basis that excluded one-time items.

For second-quarter 2014, the company anticipates revenues of $675.0 million and earnings between 43 cents and 48 cents per share. Currently, the Zacks Consensus Estimate for revenues and earnings stand at $660.0 million and 46 cents per share, respectively.

Similarly, for full-year 2014, Aaron's now expects revenues and earnings in the range of $2.65–$2.75 billion and $1.95–$2.10 per share, respectively. This is higher than the previous revenue and earnings guidance range of $2.3 billion and $1.80–$2.00 per share, respectively. Currently, the Zacks Consensus Estimate for both the top and bottom line is pegged at $2.669 billion or $2.02 per share.

For 2015, the company expects revenues and earnings in the range of $3.25–$3.35 billion and $2.55–$2.80 per share, respectively. Currently, the Zacks Consensus Estimate for both the top and bottom line is pegged at $3.290 billion or $2.66 per share.

Further, management anticipates no increase in company-operated Aaron's stores in 2014 after taking in account store closures. However, it intends to raise the number of franchised stores by 25 stores during 2014.

Further, the company is shifting focus on reviving its core business operations through disciplined growth, better execution, portfolio optimization, cost cutting and return of capital. In the process, the company expects to concentrate on returning to same-store sales growth, building a strong online platform, optimizing cost savings, limiting company-operated store growth and driving 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.

Other Stocks Worth Considering

Aaron's currently has a Zacks Rank #2 (Buy). Other stocks worth a look in the retail sector include American Apparel Inc. APP and Foot Locker, Inc. FL, both of which have the same Zacks Rank as Aaron's.