Aaron's Faces Rising Losses, So What Should Investors Do?

• Aaron's, Inc. AAN shares have lost 32 percent in the past one month, declining steeply from $$40.46 on October 12.
• Cantor Fitzgerald’s Laura Champine downgraded the rating on the company to Hold, while reducing the price target from $47 to $27.
• The sharp increase in bad debt expenses in the company’s Progressive business is an area of concern, Champine noted.

Aaron is a leader in lease ownership and specialty retailing of furniture, consumer electronics, appliances, computers and household accessories. Analyst Laura Champine mentioned that the charge off rate at the company’s Progressive business increased 100bps y/y in 3Q15 to 8.5 percent.

Champine believes that the sharp increase in bad debt expenses raises concerns over Aaron’s overall health, especially in the wake of a 150bps y/y increase in the loss rate in the kiosk business of Rent-A-Center Inc RCII.

Aaron has attributed the higher loss rate to temporary issues that have been resolved now. “We think stepping to the sidelines is prudent here given the cloudier near-term visibility that has developed around the low-end consumer of late,” Champine wrote.

The company’s lease revenue for the quarter was also lighter than anticipated. “There was no surprise in the core weakness, as the SSS decline of 4.1% on top of -2.8% in the prior year met our expectation,” the Cantor Fitzgerald report mentioned.

Progressive sales grow 47 percent y/y, which is healthy, but represents a deceleration from the 85 percent growth generated in 1H and was also short of Cantor’s estimate of 65 percent.

The EPS estimates for 2015 and 2016 have been reduced from $2.30 to $2.01 and from $2.79 to $2.12, respectively.