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Aaron's (AAN) Q2 Earnings Beat, Revenues Lag; Stock Up

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Aaron’s Inc. (AAN - Free Report) posted second-quarter 2016 results, wherein the bottom line surpassed the Zacks Consensus Estimate while the top line missed the same. Shares of this Atlanta-based company jumped 9.1% to $23.95 following the earnings release. Though earnings declined year over year, revenues witnessed an improvement over the same time frame.

This rent-to-own company’s adjusted earnings of 59 cents per share outpaced the Zacks Consensus Estimate of 57 cents but fell 3.3% from the prior-year quarter. Including one-time items, the company reported earnings of 53 cents per share, reflecting a 5.4% year-over-year decline.

Aaron's Inc. (AAN - Free Report) Street Actual & Estimate EPS - Last 5 Quarters | FindTheCompany

Aaron’s top line advanced nearly 2.7% to $789.4 million, mainly backed by revenue growth at the company’s Progressive division. However, the company’s total revenue fell short of the Zacks Consensus Estimate of $815 million.

Comparable store sales (comps) at company-operated stores dropped 1.2%, while the customer count, on a same-store basis, decreased 0.6%. Comps at the company’s franchise stores and same-store customer count registered a rise of 0.4% and 1.4%, respectively. At quarter end, the company’s self-operated stores had 1.0 million customers, reflecting a 1.1% year-over-year decline. The franchisees had a customer base of 560,000, representing a 3.3% year-over-year fall.

The company’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter declined 1.8% year over year to $88.2 million.

Segment Details

Core Business

Aaron’s core business’ sales fell 5.4% to $485.5 million in the reported quarter. Adjusted EBITDA for the core business segment was $47.5 million, down 11.7% year over year, while EBITDA margin contracted 70 basis points (bps) to 9.8%.

Within the core business, the company’s Sales & Lease Ownership division recorded revenues of $476.2 million, down 4.1% from the second quarter of 2015. This decline was attributed to a fall in store revenues and non-retail sales.

On May 13, 2016, the company sold the assets of its HomeSmart unit. The company’s results for the second quarter included HomeSmart revenues of $7.5 million through May 13, which were down 51.6% year over year.

Progressive

Progressive contributed $298.6 million to revenues in the second quarter of 2016, marking a 16.7% year-over-year surge. This was driven by a 19% rise in the number of active doors in the quarter, though invoice volume per active door fell 3.6%. The segment’s EBITDA was $41.8 million for the second quarter, down 16.1% year over year. However, EBITDA margin remained flat at 14.0%. Progressive had 526,000 customers as of Jun 30, 2016, representing 11% growth from the prior-year quarter. We note that Progressive acquired DAMI in Oct 2015, which contributed revenues of $5.3 million in the second quarter.

Financial Position

Aaron’s ended the quarter with cash and cash equivalents of $242.2 million, debt of $493.5 million, and total shareholders’ equity of $1,459.6 million.

In the first half of 2016, the company generated cash from operations of $324.3 million.

Store Update

Aaron’s consolidated or shuttered three Company-operated Aaron's Sales & Lease Ownership stores, five franchised Aaron's Sales & Lease Ownership stores and one franchised HomeSmart store. It sold 82 company-operated HomeSmart stores and purchased 1 franchised store.

As of Jun 30, 2016, Aaron’s had a total of 1,221 company-operated Sales & Lease Ownership stores, 721 franchised Sales & Lease Ownership stores and 1 franchised HomeSmart store. Consequently, the company operated 1,943 stores in total as of quarter end.

AARONS INC Price, Consensus and EPS Surprise

AARONS INC Price, Consensus and EPS Surprise | AARONS INC Quote

Guidance

Management lowered its outlook for 2016, based on ongoing business trends and sale of HomeStmart assets. The company expects consolidated revenues in the range of  $3.15−$3.35 billion, excluding franchised revenues. Earlier, the company expected revenues in the range of $3.25−$3.45 billion.

Segment-wise, the company expects revenues for the core segment in the range of $1.95−$2.05 billion, versus $2.05−$2.15 billion guided previously. Core business revenues will include about $1.50−$1.60 billion from lease revenues, compared with $1.55−$1.65 billion expected earlier. Comps are expected to come in the range of negative 3% to flat in 2016.

The company’s adjusted EBITDA is projected in the range of $325−$355 million in 2016 compared with the previous forecast of $330−$360 million. On a segmental basis, core business adjusted EBITDA is expected in the range of $195−$215 million versus $210−$230 million projected previously. However, the company raised its adjusted EBITDA guidance for the Progressive division to $135−$145 million compared with $125−$135 million guided earlier

Lastly, the company trimmed its GAAP earnings forecast for 2016 to $1.92−$2.12 per share from $2.03−$2.23 expected previously. Also, it lowered its adjusted earnings guidance to $2.13−$2.33 per share, versus $2.20−$2.40 anticipated earlier.

Zacks Rank

Aaron’s currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the retail space include Christopher & Banks Corporation , The Children's Place, Inc. (PLCE - Free Report) , both sporting a Zacks Rank #1 (Strong Buy) and GameStop Corp. (GME - Free Report) , holding a Zacks Rank #2 (Buy).

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