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Aaron's (AAN) Q2 Earnings & Sales Beat Estimates, Stock Up

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Aaron's, Inc. (AAN - Free Report) maintained its positive earnings trend for the fifth time with its second-quarter 2017 earnings and sales surpassing estimates, and improving year over year. In fact, the company’s top line marked its second straight beat after four consecutive quarters of negative surprise trend.

Results gained from the excellent Progressive Leasing performance, along with strong execution at Aaron's Business. These factors contributed to increased customer count and lease revenues, besides boosting the bottom line.



Shares of this Atlanta-based company have rallied nearly 17% on Friday following the sturdy results. Further, this Zacks Rank #1 (Strong Buy) stock has surged 54.3% in the last six months, outperforming the industry’s gain of 29.7%. Notably, the industry is placed at top 8% of the Zacks Classified industries (20 out of 256).

Q2 Highlights

The company posted adjusted earnings of 68 cents per share, which outpaced the Zacks Consensus Estimate of 58 cents and rose 15.3% from the prior-year quarter. However, including one-time items, the company reported earnings of 51 cents per share that declined 3.8% year over year.

Aaron's, Inc. Price, Consensus and EPS Surprise

Aaron's, Inc. Price, Consensus and EPS Surprise | Aaron's, Inc. Quote

 

This rent-to-own company’s top line came in at $815.6 million up 3.3% year over year and also surpassed the Zacks Consensus Estimate of $790 million. This upside was driven by robust revenue growth witnessed at the Progressive and DAMI segments, somewhat compensated with decline in revenues at the Aaron's Business.

While comps at company-operated stores dropped 8.1%, the customer count on a same-store basis fell 4.8%. At quarter end, the company-operated Aaron’s stores had 932,000 customers, reflecting a 7.2% year-over-year decline.

Further, Aaron’s franchisee revenues declined 9.3% to $206.9 million in the reported quarter. Although comps at the company’s franchise stores decreased 6.1%, same-store customer counts declined 4.5%. In fact, the franchisees had a customer base of 517,000, representing a 7.7% decline year over year.

The company’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter increased 8.5% year over year to $95.7 million. In addition, the adjusted EBITDA margin improved 50 basis points (bps) to about 11.7% in the quarter.

Segment Details

Aaron's operates through three primary businesses: Aaron's branded company-owned and franchised lease-to-own stores, Aarons.com and Woodhaven (collectively, the Aaron's Business); the Progressive virtual lease-to-own business; and Dent-A-Med, Inc. – DAMI.

Aaron's Business

Aaron’s Business’ total revenues declined 10.7% to $433.6 million in the reported quarter. Moreover, lease revenues and fees were down 11.7% during the quarter. Non-retail sales also slumped nearly 4.1%.

On May 13, 2016, the company sold the assets of its HomeSmart unit, which recorded revenues of $7.5 million in second-quarter 2016. Excluding the HomeSmart unit, total revenue for the segment fell 9.3% in the reported quarter.

Adjusted EBITDA for the Aaron's Business segment was $46.7 million, down 1.7% from the year-ago figure of $47.5 million. However, EBITDA margin expanded 100 bps to 10.8%.

Progressive

Progressive revenues came in at $373.5 million in the quarter, marking a 25.1% year-over-year surge. This was driven by a 37% rise in the number of active doors, though invoice volume per active door fell 4.3%. Notably, this segment had 646,000 customers as of Jun 30, 2017, representing 23% growth year over year.

The segment’s EBITDA was $50.1 million compared with $41.8 million in the year-ago quarter. However, EBITDA margin contracted 60 bps to 13.4%.

DAMI

Revenues at the DAMI segment were $8.5 million in the reported quarter, significantly up from $5.3 million in the year-ago period.

Financial Position

Aaron’s ended the quarter with cash and cash equivalents of $260.3 million, debt of $401.1 million, and total shareholders’ equity of $1,542.1 million.

As of Jun 30, the company generated cash from operations of $115.6 million. Additionally, Aaron’s did not repurchase any shares in the reported quarter. However, it had an authorization to buy back 7.9 million shares as of Jun 30.

Store Update

In second-quarter 2017, Aaron’s shut down or consolidated 62 company-operated outlets and six franchised outlets, while it sold two franchised stores. As of Jun 30, Aaron’s had a total of 1,093 company-operated stores and 680 franchised stores.

Clearly, the company is on track with its strategy of closing down the underperforming stores in order to right size its operating scale. In the quarter, the company’s Aaron's Business segment spent a pre-tax restructuring charge of $13.3 million, on account of the store closures.

Other Developments

Concurrent to the earnings release, management at Aaron's announced that it has bought considerably all the assets of its largest franchisee, SEI/Aaron's, Inc., for a cash outlay of roughly $140 million. Aaron's anticipates this to be accretive to earnings in 2017.

In fact, SEI, which was found in 1995, caters to over 90,000 customers via 104 Aaron's outlets across 11 states. The deal is likely to widen Aaron's footprint in the markets with high growth opportunities, alongside boosting its revenues and supply-chain synergies between the Aaron's Business and Progressive Leasing.

Guidance

Management remains impressed with the second-quarter performance that was mainly backed by solid execution at the Aaron’s business and continued strength at the Progressive business. Going forward, the company remains optimistic about growth at its Progressive business, while striving to improve the Aaron’s direct-to-consumer operations.

Consequently, the company updated its outlook for 2017. Aaron's now expects total revenue in the range of $3.33–$3.44 billion, versus $3.10–$3.31 anticipated during the first-quarter results.

Total revenue for Aaron’s Business segment is projected in the band of $1.75–$1.80 billion, including lease revenue of $1.40–$1.45 billion. Earlier, it anticipated total revenue for Aaron’s Business in the range of $1.68–$1.78 billion, including lease revenue of $1.30–$1.40 billion. Additionally, comps at Aaron’s Business segment are expected to decline in the range of 7–9%, versus the earlier projected range of 8–12%.

Revenues at Progressive are estimated in the band of $1.55–$1.60 billion versus $1.40–$1.50 billion, anticipated earlier. Further, management reiterated its previously stated guidance of $25–$35 million in revenues for the DAMI segment.

The company’s adjusted EBITDA is projected in the range of $355−$378 million compared with the previous guidance of $320−$353 million. On a segmental basis, Aaron’s Business adjusted EBITDA is expected in the range of $170−$180 million versus $155−$170 million, guided earlier. EBITDA for the Progressive division is guided in the band of $190−$200 million, compared with earlier guidance of $170−$185 million. The company also reiterated its previously stated EBITDA projection for the DAMI segment in the range of negative $2 million–$5 million.

Management anticipates 2017 adjusted earnings in the band of $2.45–2.65 per share versus $2.15–2.40, guided earlier. The Zacks Consensus Estimate for 2017 is currently pegged at $2.49 per share. This guidance excludes the Progressive and franchisee acquisition associated with intangible amortization, along with the future one-time or unusual items.

GAAP earnings are projected in the $2.10–$2.30 band compared with the previous guided range of $1.85–$2.10.

Stocks You May Consider

Other top-ranked stocks in the Retail-Wholesale space include Conn's, Inc. (CONN - Free Report) , The Home Depot, Inc. (HD - Free Report) and Lowe's Companies, Inc. (LOW - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Conn's delivered average positive earnings surprise of 80.9% in the last four quarters and has a long-term earnings growth rate of 18.5%.

Home Depot came up with an average positive earnings surprise of 3.5% in the trailing four quarters and has a long-term earnings growth rate of 13%.

Lowe's increased 7.5% year to date and has a long-term earnings growth rate of 14.7%.

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