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Leading rent-to-own operator, Aaron's Inc. (AAN - Snapshot Report) reported lower-than-expected financial results for the first quarter of 2013. This Zacks Rank #4 (Sell) company’s quarterly earnings of 67 cents per share were below its own guidance range of 70–74 cents as well as the Zacks Consensus Estimate of 71 cents.

However, on a year-over-year basis, Aaron’s earnings increased 4.7% to 67 cents per share from adjusted earnings of 64 cents posted in the year-ago quarter, primarily driven by improved top-line performance.

Further, on a reported basis, Aaron’s earnings of 67 cents per share were down 27.2% from 92 cents reported in the comparable year-ago period. The first quarter of 2011 included an income of $35.5 million or 28 cents per share related to a lawsuit settlement.

Quarterly Details

On the back strong comparable-store sales (comps) growth, Aaron’s top line nudged up 1.6% to $595.1 million from $586.0 million in the year-ago quarter, marking the highest-ever first-quarter revenues for the company. However, total revenue fell short of the company’s earlier projection of $630.0 million as well as the Zacks Consensus Estimate of $631.0 million.

Comps at the company-owned stores increased 3.4% in the quarter, while stores open for over 2 years witnessed a rise of 1.8%. The improved comps performance came on the back of 4.1% growth in customer traffic at the company-operated stores. Moreover, comps at the company’s franchised stores registered a 2.6% increase attributable to a 6.6% rise in customer traffic.

Aaron's Sales & Lease Ownership division’s revenues were recorded at $575.3 million, up 0.8% from the first quarter of 2012. The company’s HomeSmart division reported revenues of $16.9 million, increasing $4.4 million from the year-ago quarter.

The company’s self-operated stores ended the first quarter with 1,108,000 customers, while its franchisee customer count came in at 592,000. Total customer count increased 6.0% compared with the same period last year.

Gross profit increased 6.5% to $504.0 million from $473.4 million in the year-ago quarter primarily due to lower cost of goods sold. Consequently, gross profit margin improved 390 basis points (bps) to 84.7% from 80.8% in the first quarter of 2012.

Operating income (excluding reversal of accrued lawsuit expenses and depreciation) came at $250.0 million, up 4.8% from $238.5 million in the year-ago quarter. Consequently, operating margin expanded 130 bps to 42.0%.

Financial Position

Cash and investments at Aaron’s as of Mar 31, 2013 were $210.0 million and total shareholder equity was $1,188.9 million. The company generated nearly $103.0 million of cash flow from operating activities.

At the end of first quarter, the company still has 4,044,655 shares remaining under its current authorization, as it did not repurchase any shares.

Store Update

During the first quarter, Aaron’s opened 4 new company-operated Sales & Lease Ownership stores, 7 new franchised stores and 1 RIMCO store. The company also acquired 1 store from its franchisees operators. Moreover, Aaron's closed 2 company-operated Sales & Lease Ownership stores.

As of Mar 31, 2013, Aaron’s had a total of 1,230 company-operated Sales & Lease Ownership stores, 748 franchised Sales & Lease Ownership stores, 78 HomeSmart stores, 1 franchised HomeSmart store, 20 company-operated RIMCO stores, and 6 franchised RIMCO stores. At the end of first quarter, the number of stores opened stood at 2,083.

Management Guidance

Battered by lower-than-expected quarterly results, Aaron’s lowered its full-year 2013 revenue guidance to $2.35 billion from $2.40 billion expected earlier. Moreover, the company now anticipates earnings per share in the range of $2.11–2.23 per share, down from the previously announced guidance of $2.25–2.41. Currently, the Zacks Consensus Estimate stands at $2.31 per share, which could witness a revision in the future following the company’s revised guidance.

In 2013, management targets new store growth of about 4%–6% over 2012, with equal numbers of company-operated and franchised stores and a small rise in the number of HomeSmart stores. Going forward, Aaron's will also 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 $565.0 million in the second quarter of 2013. Earnings per share are anticipated to be 45– 49 cents compared with adjusted earnings of 47 cents in the comparable prior-year period. Currently, the Zacks Consensus Estimate stands at 55 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 advantage over its rivals, Rent-A-Center, Inc. (RCII - Analyst Report) and Advance America.

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

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