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Aaron's Shares Fall, Guidance Cut the Culprit?

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Shares of Aaron’s Inc. (AAN - Free Report) rolled down 4% during yesterday’s trade, to close at $29.25 per share. A cut in earnings and sales forecast for the first quarter of fiscal 2014 could probably be the reason for this rent-to-own specialty retailer’s share price fall.  The company also kept itself busy with the rejection of Vintage Capital Management LLC’s $2.3 billion takeover bid and the purchase of merchandise lease-to-own company Progressive Finance Holdings LLC.

Recognizing the negative effect of the recent macroeconomic environment and adverse weather conditions that weighed on the quarterly results of most retailers, Aaron’s has lowered its earnings and revenue forecast for the first quarter of fiscal 2014.

The company noted that more than 80% of its company-operated stores are located in areas affected by the severe weather conditions throughout January and February and early March, while nearly 70% of its stores faced disrupted operations due to the weather hazards. This resulted in both same store sales and customer growth at company-operated stores falling 2% in the quarter, while franchised stores experienced negative same store sales and customer growth.

As a result, the company now projects first-quarter revenue of $587.5 million compared to $600 million guided earlier. Earnings per share for the quarter are expected to be in the 51 cents – 54 cents range, about 5 cents – 6 cents below the prior guidance range of 57 cents – 62 cents. The current Zacks Consensus Estimate stands at 59 cents per share, which may see further downward revision following the company’s lowered forecast.

Further, in a separate event, the company issued a letter to shareholders communicating the details of the board’s intention and future plan. In the letter, the company stated that after complete evaluation, the board finds Vintage Capital’s buyout proposal of $30.50 per share or a total of $2.3 billion as inadequate and illusory. Hence, the company’s board appropriately rejected the private equity firm’s fourth takeover attempt since 2011 and chose to acquire the retail credit financing firm, Progressive Finance Holdings LLC, for about $700 million in cash.

Aaron’s believes that the acquisition of Progressive will prove transformational for the company, furnishing it an opportunity to expand into the large and growing virtual rent-to-own market. Progressive, which provides web-based lease-to-own financing programs for retailers, is expected to provide solid investor returns for Aaron’s shareholders, given its exceptional growth metrics that represent 77% annual revenue growth from $228 million in 2012 to $403 million in 2013.

Further, the company expects the acquisition to be accretive in the double-digits to cash earnings per share in 2014 and significantly accretive in 2015. Further, Aaron’s will benefit from Progressive’s tie-ups with the largest U.S. retailers, including Mattress Firm, Big Lots Inc. (BIG - Free Report) , Art Van Furniture and Sleepy's, which adds about 15,000 new sources of revenue for Aaron’s.

Further, the company highlighted that it is shifting focus on reviving its core business operations through disciplined growth, better execution, portfolio optimization, cost cutting and return of capital. In the process, the company expects to concentrate on returning to same store sales growth trajectory, build a strong online platform, optimize cost savings, limit company-operated store growth to 2%–3% per year and encourage the expansion of its franchise store base. Additionally, the company targets debt-to-capitalization ratio of 20% and expects to use excess cash to reward shareholders.

Aaron’s currently holds a Zacks Rank #3 (Hold). Other better-ranked retail stocks that look promising and are expected to continue with their upbeat performance include American Apparel Inc. and Foot Locker Inc. (FL - Free Report) , both of which sport a Zacks Rank #2 (Buy).

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