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Aaron's Profits Rise, Guides High

RCII AAN

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Leading rent-to-own operator Aaron's Inc. (AAN - Snapshot Report) registered first-quarter 2012 adjusted earnings per share of 64 cents, an increase of 16% from 55 cents reported in the year-ago quarter. Quarterly earnings also surpassed the Zacks Consensus Estimate of 60 cents per share.

On a GAAP basis, the company posted a 67% increase with earnings per share reaching 92 cents per share in the first quarter, including a lawsuit related accrual reversal.

Quarterly Details

Aaron’s top line jumped 10% to $586.9 million in the first quarter from $532.7 million in the prior-year quarter. Total revenue was also above the Zacks Consensus Estimate of $572.0 million. The company’s comparable-store sales (comps) in the quarter rose 4.8% while stores open for over two years witnessed a 2.6% increase in comps.

Aaron's Sales & Lease Ownership division’s revenue increased to $571.0 million in the quarter, up 8% from the year-ago quarter. Aaron's HomeSmart division reported revenue of $12.5 million, up $12.2 million from the year-ago quarter.

The company ended the first quarter recording a 14% rise in its customer base, which grew to 1,043,000 over the last year. Customer count, on a same store basis, increased 8.6% compared with the same period last year.

Financial Position

Cash and cash equivalents as of March 31, 2012 were $234.1 million and total shareholders’ equity was $1,053.1 million.

Store Update

In the first quarter, Aaron's opened 9 new company-operated Sales & Lease Ownership stores, 6 new franchised stores and 2 HomeSmart stores. The company also acquired 3 stores from franchisees and 9 stores from third party operator. Additionally, the company acquired one store from third party operator and converted it to a HomeSmart store. During the quarter, the company closed 3 company-operated stores.

Moreover, Aaron's awarded area development agreements to open 11 additional franchised stores in the first quarter of 2012. At quarter-end, the company had area development agreements in place and outstanding to open about 223 franchised stores over the next several years.

As of March 31, 2012, the total number of stores at Aaron’s were 1,153 company-operated Sales & Lease Ownership stores, 710 franchised Sales & Lease Ownership stores, 74 HomeSmart stores, 16 company-operated RIMCO stores, and 6 franchised RIMCO stores. Additionally, the company had one Aaron's Office Furniture store.  Stores open at quarter-end totaled 1,960.

Management Guidance

Aaron's expects to report total revenue of $525.0 million and earnings per share of 44 cents to 48 cents in the first quarter of fiscal 2012. For fiscal 2012, the company expects total revenue of $2.2 billion and raised its adjusted earnings per share guidance to $1.96 to $2.08, up from its earlier projected guidance of $1.88 to $2.04.

In 2012, management targets new store growth of about 5%-7% over fiscal 2011, mostly slated to grow equally between company-operated and franchised stores with a small number of HomeSmart stores.  Going forward, the company will also remain focused on its strategy of acquiring franchised stores, converting independent operator's stores to Aaron's franchised stores, or selling company-operated stores to franchisees.

Our View

Aaron is a rent-to-own operator in the United States and has a low price provider strategy. The company is involved in the rental and specialty retailing of consumer electronics, residential and office furniture, household appliances, and accessories. The company competes directly with Rent-A-Center Inc. (RCII - Analyst Report)

Aaron’s shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold rating.

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