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Leading rent-to-own operator Aaron's Inc. (AAN - Snapshot Report) recently reported an outstanding second-quarter 2012 financial results with adjusted earnings per share surging 14.6% to 47 cents from 41 cents in the year-ago quarter. Moreover, quarterly earnings were in line with the Zacks Consensus Estimate of 47 cents per share.

On a GAAP basis, the company reported over two-fold increase with earnings per share (including lawsuit related charges) reaching 47 cents per share compared with 13 cents reported in the year-ago quarter. The year-over-year growth in its bottom line was primarily driven by robust top-line performance.

Quarterly Details

Aaron’s top line jumped 11.8% to $539.5 million in the second quarter from $482.7 million in the prior-year quarter. Total revenue was also above the Zacks Consensus Estimate of $522.0 million. The company’s comparable-store sales (comps) in the quarter rose 6.1% while stores open for over two years witnessed a 4.3% increase in comps.

Aaron's Sales & Lease Ownership division’s revenue increased to $523.7 million in the quarter, up 9.1% from the year-ago quarter. Aaron's HomeSmart division reported revenue of $13.7 million, up $12.0 million from the year-ago quarter.

The company ended the second quarter recording a 14.2% rise in its customer base, which grew to 1,083,000 over the last year. Customer count, on a same store basis, increased 8.8% compared with the same period last year.

Financial Position

Cash and cash equivalents as of June 30, 2012 were $109.6 million and total shareholders’ equity was $1,079.9 million. During the first six months of 2012, the company generated over $46.0 million of cash flow from operating activities.

During the quarter, Aaron’s repurchased 363,781 shares of common stock and has still 4,917,563 shares remaining under its current authorization.

Store Update

In the second quarter, Aaron's opened 13 new company-operated Sales & Lease Ownership stores, 10 new franchised stores, 4 HomeSmart stores, 1 franchised HomeSmart store and 1 RIMCO store. Aaron’s also acquired 12 stores from its franchisees and 3 stores from third party operators. Moreover, the company acquired one more store from third party operator and converted it to a HomeSmart store. During the quarter, the company closed 2 company-operated stores and 2 franchised stores.

Further, Aaron's awarded area development agreements to open 18 additional franchised stores in the second quarter. At quarter-end, the company had area development agreements in place and outstanding to open about 222 franchised stores over the next several years.

As of June 30, 2012, Aaron’s has a total of 1,176 company-operated Sales & Lease Ownership stores, 706 franchised Sales & Lease Ownership stores, 78 HomeSmart stores, 17 company-operated RIMCO stores, and 6 franchised RIMCO stores. Additionally, the company also operates one Aaron's Office Furniture store.  Therefore, the stores opened at quarter end totaled 1,985.

Management Guidance

Aaron's expects to report total revenue of $530.0 million and earnings per share of 40 cents to 44 cents in the third quarter of 2012. For full year 2012, the company expects total revenue of $2.2 billion and narrowed its adjusted earnings per share guidance to $1.98 to $2.06, compared with its earlier projected guidance range of $1.96 to $2.08.

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’s is a rent-to-own operator in the United States, and has a low price provider strategy. The company is involved in 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).

Moreover, 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 advantage over its competitors.

Currently, Aaron’s holds a Zacks #3 Rank, implying a short-term Hold rating on the stock. Moreover, the company maintains a long-term Neutral recommendation on the stock.

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