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Aaron's (AAN) Up 6.3% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Aaron's Company, Inc. (AAN - Free Report) . Shares have added about 6.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Aaron's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Aaron's Q2 Earnings Beat Estimates, Sales Lag

Aaron’s has been gaining from strength in its e-commerce business and a sturdy performance in GenNext stores. This, along with accretive gains from the acquisition of BrandsMart, contributed to its second-quarter 2022 results. However, the company witnessed weak customer demand and lower payment activity in the Aaron’s business stemming from rising inflation. Also, lower-than-expected lease renewal rates acted as a deterrent.

In response to this, AAN has been leveraging its centralized lease decisioning and digital servicing platforms to mitigate cost inflation. It has also lowered operating expenses as well as reduced staff in its Aaron stores and store support center. AAN announced the closure of one of its corporate office locations. It revealed plans to close additional Aaron stores by the year end. The company also reduced inventory purchases to remain in sync with ongoing demand trends.

Let’s Delve Deeper

Aaron's delivered adjusted earnings of 79 cents per share, which surpassed the Zacks Consensus Estimate of 66 cents. However, the bottom line declined 24.8% year over year from $1.05 per share reported in the prior-year quarter. On a GAAP basis, the company reported a loss of 17 cents per share against earnings of 95 cents reported in the year-ago quarter.

Consolidated revenues grew 30.6% to $610.4 million but missed the Zacks Consensus Estimate of $615 million. Breaking up the components of consolidated revenues, we note that lease and retail revenues jumped 35% in the reported quarter to $577.4 million. Non-retail sales, which mainly include merchandise sales to franchisees, fell 16.7% year over year to $27 million. Franchise royalties and fees in the quarter slumped 8.6% to $6 million from the year-ago quarter.

In the Aaron’s business, revenues declined 8% year over year to $430.2 million due to due to lower lease revenues and retail sales. This is mainly due to reduced lease, drab retail sales and a decline in early purchase options. On the flip side, a larger average same-store lease portfolio size remained an upside.

Same-store revenues fell 6.7% year over year in the second quarter due to reduced lease renewal rate, lower exercise of early purchase options and drab retail sales, which somewhat offset the larger lease portfolio. E-commerce lease revenues were up 4%, accounting for 15.4% of the total revenues.

Notably, the company opened 36 GenNext locations in the said quarter, bringing the total store count to 171. This accounted for 17.4% of total revenues. Management also revealed plans to add approximately 45 more GenNext locations this year.

For BrandsMart, revenues came in at $181.4 million in the second quarter of 2022, driven by a rise in average ticket, strength in appliances and double-digit growth in the e-commerce channel. This is the first time that BrandsMart was included in the company’s results since its buyout. Management noted that this new business segment started on a solid note. The company remains optimistic about its performance in the near future.

Aaron’s adjusted EBITDA declined 26.4% year over year to $48.1 million. Adjusted EBITDA margin contracted 610 basis points (bps) to 7.9% in the reported quarter due to an expected reduction in lease renewal rates, potential growth in write-offs and elevated operating expenses, which was partly offset by lower personnel. Adjusted EBITDA margin contracted 710 bps year over year to 7.9%.

Financial Position

The company ended the quarter with cash and cash equivalents of $28.2 million, debt of $310.3 million and shareholders’ equity of $720.5 million. As of Jun 30, it had total liquidity of  $273.4 million under its revolving credit facility. In the reported quarter, it generated cash from operations of $57.1 million.

Capital expenditure is expected to be $100-$120 million for 2022 compared to prior view of $100-$125 million. AAN expects a free cash flow of $50-$60 million as compared to earlier mentioned view of $45-$55 million for 2022.

In the reported quarter, it bought back 254,216 shares of Aaron's common stock worth $5.3 million. AAN’s board raised the share repurchase authorization. As of Jun 30, 2022, the company has shares worth $135.8 million remaining under its share repurchase program. The board paid out a quarterly dividend of 11.25 cents per share on Jul 5.

Outlook

Going ahead, management expects continued inflation and other macroeconomic factors, including adverse customer demand, lease portfolio size, lease renewal rates and potential decline in lease merchandise write-offs. As a result, it slashed the 2022 view.

The company anticipates revenues of $2.19-$2.27 billion, down from the earlier mentioned $2.32-$2.39 billion. Adjusted EBITDA is likely to be $150-$170 million, which compares unfavorably with the prior stated $200-$215 million. It also envisions adjusted earnings of $1.75-$2.15, down from the prior stated $2.65-$2.90.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

The consensus estimate has shifted -72.41% due to these changes.

VGM Scores

At this time, Aaron's has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Aaron's has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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