Aaron's Inc. (AAN) posted weaker- than originally anticipated financial results for second-quarter 2014 due to the disappointing performance of its core operations offset by strong results at the recently acquired Progressive business. However, earnings results came in at the higher end of the company’s lowered guidance range released on Jul 15. Subsequently, the company’s share price fell approximately 3.0% on Friday’s trading session.
Aaron’s earnings for the quarter declined 26.0% from the comparable prior-year quarter to 37 cents per share. However, it surpassed the Zacks Consensus Estimate of 36 cents per share by a penny. 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.
The company’s top-line grew 22% year over year to $672.5 million compared with $675 million projected earlier. Revenue also was almost in line with the Zacks Consensus Estimate of $672.0 million.
Comparable store sales (comps) at the company-owned stores fell 3% in the quarter. Customer traffic at the company-operated stores decreased 2.8%. Comps at the company’s franchised stores registered a 2.3% fall owing to a 3.0% decline in customer traffic.
At the quarter-end, the company’s self-operated stores had 1,099,000 customers while the franchisees had a customer count of 585,000.
Segment Details
Core Business
The company’s core business recorded an overall revenue decline of $16.9 million during the quarter. Within the core business, the company’s Sales & Lease Ownership division posted revenue of $516.9 million, down 2% from the second quarter of 2013. Results for the Sales & Lease Ownership division exclude the RIMCO division which was sold in Jan 2014. Further, the HomeSmart division reported revenues of $16.0 million, increasing 1% from the year-ago comparable quarter.
Going into the third quarter, the company plans to shut down 44 Aaron's Sales & Lease Ownership stores as a part of its restructuring plan. These closures are expected to incur pre-tax charges of nearly $7 million in the third quarter.
Progressive
The recently acquired Progressive segment posted revenue of $138.9 million, contributing meaningfully to the company’s overall revenue in its first quarter since joining forces with Aaron’s.
Financial Position
Cash and investments at Aaron’s as of Jun 30, 2014 were $110.5 million and total shareholder equity was $1,188.8 million.
Aaron’s bought back 1,000,952 shares of its common stock during the six 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 6 company-operated Sales & Lease Ownership stores and 6 franchised stores in the quarter. The company also acquired 1 Aaron's Sales & Lease Ownership franchised store and sold 2 franchised outlets to a third party. Furthermore, Aaron’s also shut down 3 each of its company-operated and franchised Aaron's Sales & Lease Ownership stores during the quarter.
As of Jun 30, 2014, Aaron’s had a total of 1,266 company-operated Sales & Lease Ownership stores, 784 franchised Sales & Lease Ownership stores, 83 company-operated HomeSmart stores, 3 franchised HomeSmart stores. At the quarter-end, the company operated 2,136 stores in total.
Management Guidance
Looking ahead, Aaron’s has updated its outlook for the third quarter and full-year 2014 after taking the benefits of the Progressive Finance Holdings acquisition into account.
For third-quarter 2014, the company anticipates revenues of $695.0 million with progressive’s contribution to revenue totaling $175 million. The company expects to generate EBITDA of $15—$17 million at Progressive in the third quarter. GAAP earnings for the quarter are anticipated in the range of 20–25 cents per share, while adjusted earnings are expected to come between 36 and 41 cents per share.
Similarly, for full-year 2014, Aaron’s expects revenue and EBITDA in the range of $2.65–$2.70 billion and $45–$50 million, respectively. Progressive is expected to contribute about $500 million to the company’s fiscal year revenue, starting from the time it was acquired in April 2014. The company’s GAAP earnings per share are expected to be $1.12–$1.22 and adjusted earnings are projected at $1.65–$1.75 per share.
Despite the company’s disappointing second-quarter results, 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 the company 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. As a part of its store evaluation process, the company intends to close down 44 underperforming stores in the third quarter of fiscal 2014 and plans to focus on store rationalization for the next few years.
Other Stocks Worth Considering
Aaron’s currently has a Zacks Rank #5 (Strong Sell). A better-ranked stock in the related industry is Conns Inc. (CONN) with a Zacks Rank #2 (Buy). Other stocks worth a look in the retail sector include Citi Trends Inc. (CTRN) and Zumiez Inc. (ZUMZ), both of which carry a Zacks Rank #1 (Strong Buy).
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