Aaron's Inc. (AAN) posted adjusted earnings per share of 39 cents for third-quarter 2014, which came in a penny below the prior-year figure of 40 cents but surpassed the Zacks Consensus Estimate of 38 cents. The decline in bottom line was mainly due to the troubles at its core business, while contributions from Progressive saved the day for Aaron’s to some extent.
Subsequently, the company’s share price fell approximately 5.79% in Friday’s trading session as the company trimmed its full-year 2014 earnings forecast.
During the quarter, the company recorded pre-tax charges of $9.1 million, related to the retirement of its Chief Executive Officer and Chief Operating Officer, about $6.9 million of restructuring charges for store closures and reorganization of its core business operations and $11.3 million in amortization expense for the Progressive acquisition, offset in part by a $1.2 million decline in previously stated regulatory expense due to the resolution of the regulatory investigation by the California Attorney General into Aaron's leasing, marketing and privacy practices. These charges had a material impact on the company’s results.
However, the company outlined that it has made significant progress on its strategic initiatives to strengthen its core business, mainly cost reduction. Further, the company remains impressed with e-commerce growth and the opportunities from the Progressive acquisition.
The company’s top-line grew 32% year over year to $707.6 million compared with $537.2 million reported in the year-ago quarter. Revenue also surpassed the Zacks Consensus Estimate of $696 million, driven by the strong contribution from Progressive, offset by a decline in revenue at Aaron’s core business.
Comparable-store sales (comps) at the company-owned stores fell 2.8% in the quarter. Customer count on a same store basis at the company-operated stores decreased 3.9%. Comps at the company’s franchised stores registered a 2.5% fall owing to a 4.1% decline in customer count.
At the quarter-end, the company’s self-operated stores had 1,072,000 customers, while the franchisees had a customer base of 574,000.
Segment Details
Core Business
Within the core business, the company’s Sales & Lease Ownership division posted revenues of $501.7 million, down 3% from the third quarter of 2013. Further, the HomeSmart division reported revenues of $15.6 million, increasing 5% from the year-ago comparable quarter.
As announced earlier, the company shut down 44 stores in the third quarter and restructured its home office and field support staff to more closely align with current business conditions. These store closures and support restructuring are expected to lower annualized operating costs by nearly $17 million and $10 million, respectively, in 2015.
Progressive
The recently acquired Progressive segment posted revenue of $189.8 million, contributing meaningfully to the company’s overall revenue.
Financial Position
Cash and investments at Aaron’s as of Sep 30, 2014 were $32.1 million and total shareholder equity was $1,201.2 million.
Aaron’s bought back 1,000,952 shares of its common stock during the nine months of 2014 and completed its previously announced $125 million accelerated share repurchase program. The company revealed that it has an additional authorization of repurchasing 10,496,421 shares.
Store Update
Aaron’s opened 9 company-operated Sales & Lease Ownership stores and 6 franchised stores in the quarter. The company also acquired 2 Aaron's Sales & Lease Ownership franchised stores. Furthermore, Aaron’s shut down 43 of its company-operated Sales & Lease Ownership stores and 1 HomeSmart store as well as 5 Aaron's Sales & Lease Ownership franchised stores and 1 HomeSmart franchised store, during the quarter.
Moreover, the company has awarded area development agreements to open 6 additional franchised stores in the third quarter, making for about 23 of such franchised store opening agreements awarded so far in 2014. As of Sep 30, 2014, the company has area development agreements in place for the opening of nearly 142 franchised stores over the next several years.
As of Sep 30, 2014, Aaron’s had a total of 1,234 company-operated Sales & Lease Ownership stores, 783 franchised Sales & Lease Ownership stores, 82 company-operated HomeSmart stores and 2 franchised HomeSmart stores. At the quarter-end, the company operated 2,101 stores in total.
Management Guidance
Looking ahead, Aaron’s has updated its outlook for the fourth quarter and full year. The company’s latest earnings guidance for 2014 is lower than what was projected at the end of second-quarter 2014.
For the fourth quarter, the company anticipates revenues of $740.0 million, excluding franchise revenues, but with Progressive’s contribution revenues are expected to total at $205 million. The company expects to generate adjusted EBITDA of $57—$62 million, including about $15—$18 million contribution from Progressive in the fourth quarter. GAAP earnings for the quarter are anticipated in the range of 24–29 cents per share, while adjusted earnings are expected to come between 34 and 39 cents per share.
Similarly, for full-year 2014, Aaron’s expects revenue to be $2.71 billion and EBITDA in the range of $257–$262 million. Starting from the time it was acquired in Apr 2014, Progressive is expected to contribute about $534 million to the company’s fiscal year revenue and about $47–$50 million to adjusted EBITDA.
For 2014, the company’s GAAP earnings per share are now expected to be $1.01–$1.06 and adjusted earnings are projected at $1.62–$1.67 per share. Earlier, the company had anticipated GAAP earnings per share of $1.12–$1.22 and adjusted earnings in the range of $1.65–$1.75 per share.
Management remains optimistic of its future potential as it progresses toward reviving its core operations through its strategic plan announced earlier in order to position the company for long-term stability and growth.
The company’s strategic plans focus on bringing it back to profitability by stimulating same-store sales growth, building a strong online platform, optimizing cost savings to expand margins, limiting company-operated store growth to 2%–3% per year and encouraging expansion of its franchise store base. As a part of these initiatives, the company recently identified over $50 million in annual cost savings and efficiencies. Additionally, the company targets debt-to-capitalization ratio of 20% and expects to use excess cash to reward shareholders.
Further, the company’s cost reduction initiatives remain focused on rigorously evaluating its store base, specific cost reductions across the organization, long-term SG&A cost saving initiatives and better inventory management and analytics to optimize store operation.
Other Stocks Worth Considering
Aaron’s currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the consumer electronics industry are Best Buy Co. Inc. (BBY) and GameStop Corp. (GME), both carrying a Zacks Rank #2 (Buy). Another stock that is worth a look in the retail sector is DSW Inc. (DSW), which has a Zacks Rank #1 (Strong Buy).
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