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Why Is Aaron's (AAN) Up 13.6% Since Last Earnings Report?

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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 13.6% 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 drivers.

Aaron's Beats Q3 Earnings & Sales Estimates, View Hike

Aaron’s posted impressive third-quarter 2022 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. Despite the tough economic environment, results gained from strategic investments in centralized lease decisioning, the solid e-commerce business, strength in the GenNext store program, and gains from the BrandsMart buyout.

The company remains on track with its efforts to enhance customers' in-store and digital experiences. Consequently, management raised its 2022 guidance. It also launched an operational efficiency and optimization restructuring program.

Q3 in Detail

Aaron's delivered adjusted earnings of 31 cents per share, which surpassed the Zacks Consensus Estimate of 16 cents and our estimate of 20 cents. However, the bottom line declined 62.7% year over year from 83 cents per share reported in the prior-year quarter due to dismal margins and a higher provision for lease merchandise write-offs at the Aaron's Business. On a GAAP basis, the company reported a loss of 51 cents per share against earnings of 73 cents in the year-ago quarter.

Consolidated revenues grew 31.2% to $593.4 million driven by gains from the BrandsMart buyout, somewhat offset by weak lease revenues and fees, as well as drab retail sales at the Aaron's Business. The figure beat the Zacks Consensus Estimate of $571 million and our estimate of $578.2 million.

Breaking up the components of consolidated revenues, we note that lease and retail revenues fell 7.3% in the reported quarter to $372.1 million. Non-retail sales, which mainly include merchandise sales to franchisees, declined 17.5% year over year to $26.5 million. Franchise royalties and fees in the quarter slumped 5.5% to $6 million from the year-ago quarter.

In the Aaron’s Business, revenues declined 8.7% year over year to $412.9 million due to lower lease revenues and reduced lease portfolio size. Same-store revenues fell 7.7% year over year in the third quarter due to a reduced lease renewal rate, the lower exercise of early purchase options, smaller same-store lease portfolio size and drab retail sales, which somewhat offset the larger lease portfolio. E-commerce lease revenues were up 11.1%, accounting for 16% of the total revenues.

Notably, the company had 195 GenNext locations in the said quarter. Management announced the opening of the 200th GenNext location this October.

For BrandsMart, revenues were $183.3 million in the third quarter of 2022, driven by strength in appliances and e-commerce, which offset weak product sales stemming from the deflation in certain consumer electronics categories. The company remains optimistic about its performance in the near future.

Margins

Aaron’s gross profit rose 4.6% to $298 million while, the gross margin contracted 1280 bps to 50.2%. The operating loss came was $17.1 million against the prior-year quarter’s earnings of $33.2 million.

Adjusted EBITDA declined 34.3% year over year to $35.2 million due to dismal gross margin and a higher provision for lease merchandise write-offs at the Aaron's Business, partly offset by gains from the BrandsMart buyout and reduced personnel costs at the Aaron's Business. The adjusted EBITDA margin contracted 600 basis points (bps) to 5.9% in the reported quarter.

Financial Position

The company ended the quarter with cash and cash equivalents of $37.8 million, a debt of $274 million, and shareholders’ equity of $703.7 million. In the first nine months ending Sep 30, 2022, it generated cash from operations of $123.9 million.

Capital expenditure was $26 million in the reported quarter. The metric is expected to be $105-$115 million for 2022 compared with the prior stated $100-$120 million. AAN expects a free cash flow of $70-$75 million for 2022 compared with the earlier mentioned $50-$60 million.

Outlook

Driven by the solid quarterly results, management raised the 2022 view. The company anticipates revenues of $2.23-$2.27 billion, up from the earlier mentioned $2.19-$2.27 billion. Adjusted EBITDA is likely to be $160-$170 million, which compares favorably with the prior stated $150-$170 million. It also envisions adjusted earnings of $1.90-$2.05 compared with the prior stated $1.75-$2.15.

In the Aaron’s Business, revenues are expected to be $1.68-$1.71 billion, up from the previously stated $1.65-$1.71 billion. Adjusted EBITDA is likely to be $190-$195 million compared with the prior mentioned $180-$195 million. Same-store revenues are predicted to decline 7-6%, up from the earlier stated 8-6% decline. In BrandsMart, revenues are anticipated to be $550-$565 million, up from the prior mentioned $545-$565 million. Adjusted EBITDA is forecast to be $20-$25 million.

How Have Estimates Been Moving Since Then?

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

The consensus estimate has shifted -107.32% due to these changes.

VGM Scores

Currently, Aaron's has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. 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. Notably, Aaron's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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