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Aaron's Down 10% in 3 Months: Is a Turnaround on the Cards?

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Shares of Aaron's, Inc. (AAN - Free Report) have lost 9.7% in the past three months, thanks to soft performance at the Aaron's Business segment. Moreover, the company posted lower-than-expected earnings and sales in third-quarter 2019, wherein the bottom line lagged the Zacks Consensus Estimate after two straight beats. Soft quarterly performance coupled with management’s revised view for the rest of 2019 is further hurting investors’ sentiment. We note that the industry rallied 14.8% in the same time period.

Despite the aforesaid concerns, strength in Aaron's Progressive segment, which covers the virtual lease-to-own business, is expected to continue in quarters ahead. Moreover, the company’s transformational initiatives to bring the Aaron’s Business segment back to sustainable growth bode well.

Delving Deeper

In third-quarter 2019, Aaron's top line was hurt by decline in revenues at the Aaron’s Business segment owing to store closures in the first half of 2019. Total revenues at this segment fell 2.9%, thanks to the lack of revenues from net decrease of 149 stores in 2019, partly compensated with contributions from the buyout of 152 franchised locations. Moreover, same-store revenues and customer count declined 2.9% each. Non-retail sales also tumbled 29.9% on a year-over-year basis.

Further, the company’s adjusted EBITDA margin contracted 30 basis points (bps) to about 9% when calculated on a basis with respect to the 2019 adoption of ASC 842 associated with lease accounting.

Consequently, management now projects total revenues of $3,905-$4,010 million compared with $3,905-$4,065 million mentioned earlier. Adjusted EBITDA is now anticipated to be $425-$437 million, down from $430-$452 million stated previously. For 2019, management now expects adjusted earnings of $3.75-$3.85 per share, down from $3.85-$4.00 projected earlier.

Total revenues at the Aaron’s Business segment are now projected to be $1,775-$1,825 million compared with $1,775-$1,855 million mentioned earlier. The Aaron’s Business segment’s adjusted EBITDA is now anticipated to be $155-$160 million compared with $160-$170 million mentioned earlier. For the DAMI segment, management continues to project adjusted EBITDA of negative $3-$5 million.

Nevertheless, Aaron's Progressive segment has been experiencing momentum, thanks to robust growth in invoice volume and a solid customer base. In fact, this will keep on bolstering the company’s top line. Total revenues for the company rose 1.1% year over year in the third quarter. When calculated on a basis with respect to the 2019 adoption of ASC 842, revenues grew 8.4%.

Impressively, Progressive segment’s revenues have doubled from $1 billion in 2015 to $2 billion in 2018, while consistently generating strong profits. Revenues at this segment grew 4.9% in the third quarter, driven by invoice volume growth of 18.6% owing to 20.5% rise in invoice volume per active door. The segment’s EBITDA grew 21.5%, with margin expansion of 20 bps. As of Sep 30, 2019, this division had 953,000 customers, reflecting 17.9% growth year over year.

For 2019, management expects revenues of $2,100-$2,150 million and adjusted EBITDA of $275-$280 million at the Progressive segment. This guidance represents growth from the segment’s revenues of $1,999 million and adjusted EBITDA of $219.3 million reported in 2018.

Although the Aaron’s Business unit remains soft, this Zacks Rank #3 (Hold) company has been making continuous efforts to revive segmental performance. Management has been investing in activities to improve customer experience, operating efficiencies and employee engagement. Driven by the success of the pilots carried out in 2018, the company is on track to expand the next generation concept to 40-50 locations in 2019, including renovating existing stores and repositioning to new more attractive store locations. These new store concepts are poised to boost in-store level traffic and revenues. Additionally, the company’s e-commerce channel remains impressive.

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