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Leading rent-to-own operator, Aaron's Inc. (AAN - Snapshot Report) reported strong bottom-line results for the second quarter of 2013, which came ahead of its own guidance range. This Zacks Rank #3 (Hold) company’s quarterly adjusted earnings of 50 cents per share were above its own guidance range of 45–49 cents. However, it was in line with the Zacks Consensus Estimate.

On a year-over-year basis, Aaron’s adjusted earnings increased 6.4% from 47 cents posted in the year-ago quarter, primarily driven by improved top-line performance.

Further, on a reported basis, Aaron’s earnings of 34 cents per share were down 27.7% from 47 cents reported in the comparable year-ago period.

Quarterly Details

On the back strong comparable-store sales (comps) growth, Aaron’s top line increased 2.5% to $552.1 million from $538.6 million in the year-ago quarter. However, total revenue fell short of the company’s earlier projection of $565.0 million as well as the Zacks Consensus Estimate of $570.0 million.

Comps at the company-owned stores increased 1.9% in the quarter, while stores open for over 2 years witnessed 0.6% rise in sales. The improved comps performance came on the back of 1.6% growth in customer traffic at the company-operated stores. Moreover, comps at the company’s franchised stores registered a 1.7% increase attributable to a 3.3% rise in customer traffic.

Aaron's Sales & Lease Ownership division’s revenues were recorded at $533.2 million, up 1.8% from the second quarter of 2012. The company’s HomeSmart division reported revenues of $15.8 million, increasing 16% million from the year-ago comparable quarter.

At the quarter-end, the company’s self-operated stores had 1,128,000 customers, while the franchisee customer count was 599,000. Total customer count increased 5.0% when compared with the same period last year.

Operating income came in at $41.1 million, down 30.7% from the year-ago quarter. Consequently, operating margin contracted 360 bps to 7.4%.

Financial Position

Cash and investments at Aaron’s as of Jun 30, 2013 were $304.1 million and total shareholder equity was $1,215.5 million. The company generated nearly $116.0 million of cash flow from operating activities during the first six months of 2013.

At the quarter-end, the company had 4,044,655 shares remaining under its current authorization, as it did not repurchase any shares.

Store Update

During the reported quarter, Aaron’s opened 5 new company-operated Sales & Lease Ownership stores, 12 new franchised stores and 2 RIMCO stores. The company also acquired 2 stores from its franchisees operators. Moreover, Aaron's closed 2 company-operated Sales & Lease Ownership stores and 2 franchised stores.

As of Jun 30, 2013, Aaron’s had a total of 1,235 company-operated Sales & Lease Ownership stores, 756 franchised Sales & Lease Ownership stores, 78 HomeSmart stores, 1 franchised HomeSmart store, 22 company-operated RIMCO stores, and 6 franchised RIMCO stores. At the first quarter-end, the company operated a total number of 2,098 stores.

Management Guidance

Battered by lower-than-expected top-line results, Aaron’s lowered its full-year 2013 revenue guidance to $2.30 billion from $2.35 billion forecasted earlier. Moreover, the company lowered its upper-end adjusted earnings guidance and now anticipates it in the range of $2.15–2.23 per share, compared with the earlier guidance of $2.15–2.27. Currently, the Zacks Consensus Estimate for 2013 is $2.20 per share, which may witness a correction in the coming days.

Further, management reiterates its new store growth target of about 4%–6% in 2013, with equal numbers of company-operated and franchised stores and a small rise in the number of HomeSmart stores. Going forward, Aaron's will be focused on its strategy of acquiring franchised stores or selling underperforming company-operated stores.

Further, Aaron's expects to report total revenue of about $550.0 million in the third quarter of 2013. Earnings per share will likely be 48–52 cents, compared with adjusted earnings of 46 cents in the comparable prior-year period. Currently, the Zacks Consensus Estimate is 51 cents per share, which could witness a revision in the future following the company’s guidance.

Our View

Aaron’s leverages an extensive network of stores to effectively penetrate into its target markets, which in turn, facilitates the company to generate healthy sales and gain a competitive edge. Notably, its peers include Rent-A-Center, Inc. (RCII - Analyst Report) and Advance America.

Other well performing stocks in the retail consumer electronic universe include Conns Inc. (CONN - Snapshot Report) and hhgregg Inc. (HGG - Analyst Report). While Conns carries a Zacks Rank #1 (Strong Buy), hhgregg has a Zacks Rank #2 (Buy).

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