Aaron's Inc. (AAN, Financial)'s rent-to-own business model has produced abundant returns for investors for more than 20 years. It's easy to see how.
Aaron's helps consumers afford virtually any large home good or electronic with no credit needed and free delivery, set up and service repairs included. Say you need a new refrigerator, but can't swing the payment it would cost to buy one in full or don't have the credit to get financing terms. You and many others would come to a place like Aaron's.
For a Samsung stainless steel refrigerator, the customer could expect to pay $110 per month for 24 months. The same refrigerator may only cost $1,099 at Lowe's, but with so many American's wanting to keep up with the Joneses, Aaron's can breakeven on its side within six to nine months. To Aaron's credit, it remains transparent with its pricing. The customer knows exactly what they're paying.
Aaron's largest segment is middle-income consumers with limited access to traditional credit resources. While Americans have the highest average credit score since 2012 according to Experian, total credit card debt has surpassed $1 trillion, an all time high. The report also stated that more than 21% have subprime credit, and a Pew study found just 46% of Americans earn more than they spend each month. Yet those consumers (right or wrong) still want nice things. That's why they still shop at Aaron's.
Since 2009, Aaron's has more than doubled sales to over $3.6 billion from $1.5 billion and net income to $294 million from $90 million. The company has also bought back over 11% of its stock, boosting both earnings per share and book value in the process. Currently, Aaron's gets double digit returns on capital across the board. Analysts and guru investors believe this will continue.
In Septembrer Stifel set a $65 price target for Aaron's based on improved results from its e-commerce platform. In August Ken Griffin's Citadel Advisors bought a 1.2% stake in Aaron's, joining Paul Tudor Jones (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) with smaller positions in the stock.
Aaron's has outmaneuvered its main competitor Rent-A-Center for years, despite having lower gross margins. Being the market leader has its advantages. The stock is up over 38% year to date, driven by tax benefits and meaningful improvement in the average ticket and lease margin. Sadly, it appears that the company will continue to grow as credit becomes tighter with higher interest rates, forcing more people to lease-to-own.
This trend is obvious as the digital leasing program Aaron's provides to customers of third-party retailers who don't qualify for conventional store credit continues to thrive. This primary growth engine increased revenue 33% on a 10% rise in retail locations and a 20% advance in invoice volume per store. In 2019 Aaron's is expected to earn between $3.90 and $3.95 a share. At the current 25x price multiple, that would push the stock north of $100 a share. But, at an average 15x earnings, the stock would price in the $58 to $59 range. So, while the company will continue to lead and capitalize on socioeconomic trends, investors are paying too much at the current price.
Disclosure: I am not long/short any stock in this article.
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