Owing to its failure to drive customers amid the economic pressures on low and middle-income groups, Aaron's Inc. (AAN) posted weak financial results for the fourth quarter and full-year 2013 that came below its own expectations. Following this, the company has provided a soft outlook for the first quarter and fiscal 2014.
Nevertheless, Aaron’s share price rose approximately 19.3% to touch a new 52-week high of $32.27 on Friday, Feb 7 during the trading session. The price appreciation occurred after Vintage Capital Management, which holds about 10% stake in Aaron’s, offered to acquire it for $2.3 billion. The offer price of $30.50 per share was at 12.8% premium to Thursday’s closing price. In response to Vintage Capital’s offer, Aaron’s declared that it would evaluate the bid according to its fiduciary duties.
Coming back to quarterly discussion, the company posted earnings per share of 30 cents that declined 37.5% from the comparable year-ago quarter of 48 cents. The year-over-year decline in the bottom line was mainly due to fall in revenues and higher operating expenses. However, quarterly earnings came a penny ahead of the Zacks Consensus Estimate.
Due to weakness in both comparable-store sales (comps) and customer growth performance, the company’s top line decreased 2.0% year over year to $553.9 million and fell short of its own guidance as well as the Zacks Consensus Estimate of $559.0 million.
In its preliminary results announced on Jan 13, Aaron’s had lowered its outlook for the fourth quarter. The leading rent-to-own operator reduced its revenue expectation to $555 million from the earlier projection of $575 million. For 2013, the company reduced its revenue expectation to $2.24 billion from $2.26 billion. The revision was primarily due to the prevalent sluggish economic environment, which is limiting consumer spending.
Furthermore, Aaron’s lowered its earnings guidance range for the fourth quarter to 27–31 cents per share from 38–42 cents forecasted earlier, which included certain one-time charges. Similarly, for 2013, GAAP earnings per share were anticipated in the range of $1.56–$1.60, down from the former projection of $1.67–$1.71. On a non-GAAP basis, excluding the regulatory investigation as well as retirement and vacation related charges, earnings were expected to be $1.84 –$1.88 per share, as against the earlier guidance of $1.95–$1.99.
Comps at the company-owned stores dropped 0.9% in the quarter, while stores open for over 2 years witnessed a 1.9% fall in sales. Customer traffic at the company-operated stores decreased 1.4%. However, comps at the company’s franchised stores registered a 0.5% rise, attributable to an increase in customer traffic by 0.7%.
The company’s Sales & Lease Ownership division’s revenues were recorded at $537.9 million, up 1% from the fourth quarter of 2012. The HomeSmart division reported revenues of $15.2 million, increasing 2% from the year-ago comparable quarter.
At the quarter-end, the company’s self-operated stores had 1,138,000 customers, while the franchisee customer count was 613,000. Total customer count increased 1.0% from the same period last year.
Operating income came in at $33.9 million, down 40.1% from the year-ago quarter primarily due to lower sales and higher operating expenses. Consequently, operating margin contracted 390 bps to 6.1%.
Full-Year 2013 Performance
Aaron’s adjusted earnings for the year fell 8.8% year over year to $1.86. However, it was in line with the Zacks Consensus Estimate. On a reported basis, Aaron’s earnings of $1.58 per share were down 29.8% from $2.25 in the comparable year-ago period. Net sales for the period improved 1% to $2,234.6 million from the year-earlier quarter. However, it missed the Zacks Consensus Estimate of $2,246.0 million.
Financial Position
Cash and investments at Aaron’s as of Dec 31, 2013 were $343.5 million and total shareholder equity was $1,141.3 million. The company generated nearly $307.0 million of cash flow from operating activities during 2013.
Moreover, in the said quarter, Aaron’s bought back 3.5 million of its common stock under its previously announced $125 million accelerated share repurchase program. The company also revealed that it had completed the accelerated share repurchase program in February and will receive an additional 1.0 million shares through settlement.
Store Update
Aaron’s opened 19 company-operated Sales & Lease Ownership stores, 16 franchised stores, 3 HomeSmart stores and 4 RIMCO outlets in the quarter. The company also acquired 1 store from its franchisees operator and shut down 2 franchised stores.
As of Dec 31, 2013, Aaron’s had a total of 1,262 company-operated Sales & Lease Ownership stores, 773 franchised Sales & Lease Ownership stores, 81 HomeSmart stores, 3 franchised HomeSmart stores, 27 company-operated RIMCO stores, and 5 franchised RIMCO stores. At the year-end, the company operated 2,151 stores in total.
Management Guidance
Disappointed by weak quarterly results, this major lease-to-own retailer has provided a soft guidance for the first quarter and full-year 2014. For the first quarter 2014, the company anticipates revenues of $600.0 million and earnings between 57 cents and 62 cents per share. Currently, the Zacks Consensus Estimate for revenues and earnings stands at $605.0 million and 62 cents per share, respectively.
Similarly, for full-year 2014 Aaron’s expects revenues of $2.3 billion and earnings in the range of $1.80–$2.00 per share. Currently, the Zacks Consensus Estimate for both the top and bottom line is pegged at $2.3 billion or $1.91 per share.
Further, management anticipates new store growth in the range of 1%–2% in 2014, with equal numbers of company-operated and franchised stores and a marginal rise in the number of HomeSmart stores. Going forward, Aaron's will be focused on its strategy of acquiring franchised stores or selling underperforming company-operated stores.
Other Stocks Worth Considering
Aaron’s currently has a Zacks Rank #5 (Strong Sell). However, some better-performing stocks in the wholesale retail sector include Christopher & Banks Corp. (CBK), Finish Line Inc. (FINL) and Foot Locker, Inc. (FL). While Christopher & Banks sports a Zacks Rank #1 (Strong Buy), Finish Line and Foot Locker carry a Zacks Rank #2 (Buy).
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