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Aaron's (AAN) to Continue Strong Run as Economy Reopens

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Aaron’s Inc. (AAN - Free Report) is a favorable pick at the moment as its strong first-quarter 2020 performance and positive initial trends, as the economy opens, have been boosting stock performance. The company’s strong first-quarter performance was backed by strength in its Progressive business despite the impacts of the coronavirus pandemic. Further, the company recently announced a favorable view for the second quarter, driven by positive trends from Progressive’s retail partners reopening stores.

We note that shares of the Atlanta, GA-based company have skyrocketed 147.5% in the past three months compared with the industry’s growth of 34.7%. This Zacks Rank #3 (Hold) stock has also comfortably outperformed the S&P 500 Index that rose 27.4% and the broader sector’s growth of 34.1% in the same period.

The stock is witnessing growth due to the company's phased store re-opening plan. Ross Stores re-opened roughly 700 stores on May 14 in a phased manner. Going forward, it plans to re-open more stores gradually in sync with health guidelines and government regulations, such as ensuring proper sanitation of stores and workspaces, providing personal protective equipment to store associates, and practicing social distancing norms. Further, the company intends to re-open its distribution center network in the next few weeks. Additionally, it remains on track to re-open the corporate offices in the coming months.

Aaron's reported better-than-expected results in first-quarter 2020, with the top line improving year over year. Revenue growth was mainly backed by an increase in Progressive revenues, partly offset by soft revenues at the Aaron's Business segment. Further, the company’s earnings surpassed the Zacks Consensus Estimate for the second straight quarter. Moreover, management is encouraged by higher customer payments in April as well as improving trajectory of its lease origination activity in the past few weeks.

Moreover, Progressive's invoice volumes are showing signs of improvement lately as its retail partners are reopening stores after the government eased restrictions in various states. Going ahead, management expects the trend to continue. Notably, invoice volumes are envisioned to be flat to down in low-single digits during the second quarter. The company also noted that the segment will not incur any costs related to the COVID-19 outbreak-led woes in the second quarter.

As a result, Aaron’s provided an encouraging view for second-quarter 2020, which also includes the disruptions caused by the pandemic on its Aaron’s business.

Notably, revenues are expected between $975 million and $1 billion in the second quarter. Adjusted earnings are envisioned to be 80-85 cents per share. Management expects revenues and earnings in the third and fourth quarters to be significantly better sequentially, driven by the improving trajectory of its lease-origination activity.

Meanwhile, revenues in the Aaron’s segment are projected to decline 15% year over year due to the impacts of the COVID-19 outbreak realized in April 2020. Same-store revenues are anticipated to be down 1.5-2.5%. Also, it highlighted that write-offs related to the pandemic are likely to improve by almost 100 basis points (bps) year over year in the second quarter. This reflects a significant rise on a sequential basis. Apart from these, no charges associated with COVID-19 will be incurred in the second quarter.

Also, Aaron’s earlier withdrew its 2020 guidance, citing unprecedented impacts from the outbreak. Moreover, sluggishness in franchisee revenues and the Aaron's Business segment is likely to continue.

Conclusion

After the effects of the coronavirus outbreak, Aaron’s looks poised to gain from increased business from the reopening of partner stores as well as its namesake business’ store reopening. In all likelihood, the company, with a long-term earnings growth rate of 10.1% and a VGM Score of A, is positioned for more growth ahead.

Better-Ranked Retail Stocks to Watch

Big Lots (BIG - Free Report) has a long-term earnings growth rate of 6.6% and it currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Dollar General Corporation (DG - Free Report) has a long-term earnings growth rate of 12.4% and a Zacks Rank #2 (Buy) at present.

Office Depot (ODP - Free Report) currently has a long-term earnings growth rate of 6.8% and a Zacks Rank #2.

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