Aaron's (AAN) Stock Declines on Q3 Earnings Miss, Sales Beat

Shares of Aaron's, Inc . AAN fell roughly 9% during the trading session on Oct 25, following its third-quarter results, wherein earnings lagged estimates after reporting a beat in the preceding quarter. However, the company's top line surpassed estimates for the seventh straight quarter. Also, both earnings and sales improved on a year-over-year basis. Management reiterated its outlook for 2018.

Results were driven by significant growth at the Progressive segment and notable improvement in the Aaron's Business division. Solid growth in invoice volumes, consistent portfolio performance, and better managed costs also contributed to the company's impressive performance in the quarter under review.

In the past six months, shares of this Zacks Rank #4 (Sell) company have gained 5% against the industry 's 7.8% decline.

Q2 Highlights

Aaron's delivered adjusted earnings of 69 cents per share, which missed the Zacks Consensus Estimate of 75 cents but increased 60.5% from the prior-year quarter. Including one-time items, the company reported GAAP earnings per share of 62 cents, up from 35 cents in the year-ago quarter.

Revenues totaled $953.1 million, up 13.6% year over year and came ahead of the Zacks Consensus Estimate of $948 million. The upside was driven by 26.6% increase in progressive revenues and the inclusion of 90 franchise stores acquired by the Aaron's Business segment.

Comparable-store sales (comps) at company-operated stores remained flat during the quarter. Further, the customer count on a same-store basis declined 5.3%. At quarter end, the company-operated Aaron's stores had 989,000 customers, reflecting 0.3% year-over-year increase.

Aaron's franchisee revenues declined 27.6% to $129 million. Same-store sales for franchised stores and same-store customer counts decreased 3.1% and 3.5%, respectively, in the reported quarter. In fact, the franchisees had a customer base of 306,000, on Sep 30, 2018.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) improved 21.8% year over year to $82.5 million. However, the adjusted EBITDA margin expanded 160 basis points (bps) to about 8.7% in the quarter under review.

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

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

Segment Details

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

Progressive Leasing

Sales at this segment summed $504.4 million in the reported quarter, up 26.6% year over year. Additionally, invoice volume rose 26%, owing to a 3.8% improvement in active doors and 21.4% rise in invoice volumes per active door. As of Sep 30, 2018, this division had 808,000 customers, reflecting 19.7% growth year over year.

Moreover, the segment's adjusted EBITDA was $51.7 million, up 31.6% from the year-ago quarter. However, adjusted EBITDA margin expanded 40 bps to 10.3%.

Aaron's Business

Total sales at the Aaron's Business segment inched up 1.7% to $439.2 million. Non-retail sales fell 21.4% on a year-over-year basis. However, lease revenues and fees for the three months (ended Sep 30, 2018) grew 5.4% from the year-ago period.

Adjusted EBITDA at this division was $32.7 million, up 6.3% from the year-ago figure of $30.8 million. Also, adjusted EBITDA margin expanded 40 bps to 7.5%.


Sales at the DAMI segment amounted to $9.5 million, up from $8.9 million in the year-ago period.

Financial Position

Aaron's ended the quarter with cash and cash equivalents of $35 million, debt of $297.3 million and shareholders' equity of $1,763.5 million.

Moreover, the company repurchased 675,552 shares for $31.6 million in the quarter. Currently, it has an authorization to repurchase $400 million.

During the first nine months of 2018, the company generated cash from operations of $363 million.

Store Update

In the quarter under review, Aaron's purchased 90 franchised stores and two consolidated company-operated stores. Further, it closed three franchised stores and sold three other.

As of Sep 30, 2018, the Aaron's Business segment had 1,267 company-operated stores and 432 franchised stores.

2018 Guidance

Following the quarterly results, the company slightly adjusted its guidance for 2018. It anticipates comparable-store sales from the Aaron's Business segment to come in at negative 2% to negative 1% as compared to the previous projection of negative 4% to negative 1%.

Aaron's projects total sales to be between $3.80 billion and $3.86 billion compared to prior view of $3.68-$3.89 billion. Management now anticipates earnings to be $3.30-$3.45 per share. Earlier, the company expected adjusted earnings to be $3.20-$3.50 per share. Notably, this guidance excludes the Progressive segment and franchisee acquisition associated with intangible amortization along with future one-time or unusual items. This apart, management projects GAAP earnings to be $2.75-$2.90 per share compared with $2.90-$3.20 per share guided earlier.

Total sales at the Aaron's Business segment are still projected to be $1.77-$1.80 billion compared with the previous guidance of $1.70-$1.80 billion. While sales at the Progressive segment are envisioned to be between $1.99 billion and $2.02 billion, the same at the DAMI segment are projected to be $35-$40 million. Previously, sales at progressive and DAMI segments were expected to be $1.95-$2.05 billion and $30-$40 million, respectively.

The company's EBITDA is expected to be $382-$395 million versus $380-$413 million predicted earlier. On a segmental basis, Aaron's Business' adjusted EBITDA is continued to be anticipated in the $170-$175 million band as compared to the prior guidance of $170-$185 million. EBITDA at the Progressive division is envisioned to be $217.5-$222.5 million compared with the former outlook of $215-$230 million. For the DAMI segment, its EBITDA is still projected to decline $2-$5 million.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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