Aaron's (AAN) Q2 Earnings Beat, Revenues Lag; Stock Up

Aaron’s Inc. (NYSE:AAN) posted second-quarter 2016 results, wherein the bottom line surpassed the Zacks Consensus Estimate while the top line missed the same. Shares of this Atlanta-based company jumped 9.1% to $23.95 following the earnings release. Though earnings declined year over year, revenues witnessed an improvement over the same time frame.

This rent-to-own company’s adjusted earnings of 59 cents per share outpaced the Zacks Consensus Estimate of 57 cents but fell 3.3% from the prior-year quarter. Including one-time items, the company reported earnings of 53 cents per share, reflecting a 5.4% year-over-year decline.

Aaron’s top line advanced nearly 2.7% to $789.4 million, mainly backed by revenue growth at the company’s Progressive division. However, the company’s total revenue fell short of the Zacks Consensus Estimate of $815 million.

Comparable store sales (comps) at company-operated stores dropped 1.2%, while the customer count, on a same-store basis, decreased 0.6%. Comps at the company’s franchise stores and same-store customer count registered a rise of 0.4% and 1.4%, respectively. At quarter end, the company’s self-operated stores had 1.0 million customers, reflecting a 1.1% year-over-year decline. The franchisees had a customer base of 560,000, representing a 3.3% year-over-year fall.

The company’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter declined 1.8% year over year to $88.2 million.

Segment Details

Core Business

Aaron’s core business’ sales fell 5.4% to $485.5 million in the reported quarter. Adjusted EBITDA for the core business segment was $47.5 million, down 11.7% year over year, while EBITDA margin contracted 70 basis points (bps) to 9.8%.

Within the core business, the company’s Sales & Lease Ownership division recorded revenues of $476.2 million, down 4.1% from the second quarter of 2015. This decline was attributed to a fall in store revenues and non-retail sales.

On May 13, 2016, the company sold the assets of its HomeSmart unit. The company’s results for the second quarter included HomeSmart revenues of $7.5 million through May 13, which were down 51.6% year over year.

Progressive

Progressive contributed $298.6 million to revenues in the second quarter of 2016, marking a 16.7% year-over-year surge. This was driven by a 19% rise in the number of active doors in the quarter, though invoice volume per active door fell 3.6%. The segment’s EBITDA was $41.8 million for the second quarter, down 16.1% year over year. However, EBITDA margin remained flat at 14.0%. Progressive had 526,000 customers as of Jun 30, 2016, representing 11% growth from the prior-year quarter. We note that Progressive acquired DAMI in Oct 2015, which contributed revenues of $5.3 million in the second quarter.

Financial Position

Aaron’s ended the quarter with cash and cash equivalents of $242.2 million, debt of $493.5 million, and total shareholders’ equity of $1,459.6 million.

In the first half of 2016, the company generated cash from operations of $324.3 million.

Store Update

Aaron’s consolidated or shuttered three Company-operated Aaron's Sales & Lease Ownership stores, five franchised Aaron's Sales & Lease Ownership stores and one franchised HomeSmart store. It sold 82 company-operated HomeSmart stores and purchased 1 franchised store.

As of Jun 30, 2016, Aaron’s had a total of 1,221 company-operated Sales & Lease Ownership stores, 721 franchised Sales & Lease Ownership stores and 1 franchised HomeSmart store. Consequently, the company operated 1,943 stores in total as of quarter end.

Guidance

Management lowered its outlook for 2016, based on ongoing business trends and sale of HomeStmart assets. The company expects consolidated revenues in the range of $3.15−$3.35 billion, excluding franchised revenues. Earlier, the company expected revenues in the range of $3.25−$3.45 billion.

Segment-wise, the company expects revenues for the core segment in the range of $1.95−$2.05 billion, versus $2.05−$2.15 billion guided previously. Core business revenues will include about $1.50−$1.60 billion from lease revenues, compared with $1.55−$1.65 billion expected earlier. Comps are expected to come in the range of negative 3% to flat in 2016.

The company’s adjusted EBITDA is projected in the range of $325−$355 million in 2016 compared with the previous forecast of $330−$360 million. On a segmental basis, core business adjusted EBITDA is expected in the range of $195−$215 million versus $210−$230 million projected previously. However, the company raised its adjusted EBITDA guidance for the Progressive division to $135−$145 million compared with $125−$135 million guided earlier

Lastly, the company trimmed its GAAP earnings forecast for 2016 to $1.92−$2.12 per share from $2.03−$2.23 expected previously. Also, it lowered its adjusted earnings guidance to $2.13−$2.33 per share, versus $2.20−$2.40 anticipated earlier.

Zacks Rank

Aaron’s currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the retail space include Christopher & Banks Corporation (NYSE:CBK) , The Children's Place, Inc. (NASDAQ:PLCE) , both sporting a Zacks Rank #1 (Strong Buy) and GameStop Corp. (NYSE:GME) , holding a Zacks Rank #2 (Buy).