The lease-to-own (LTO) industry concept has grown into an important sector of the retailing industry. It offers the facility of long-term leasing to consumers for using several goods such as furniture, appliances and various electronic products. Aaron's, Inc. (AAN, Financial) is one the prominent players in this industry.
This Atlanta-based company doesn’t confine its business to sales and lease ownership. Its other four business segments are Progressive, which is a virtual lease-to-own company that provides lease-purchase solutions; The HomeSmart segment, which offers furniture, electronics, appliances and computers to consumers on a weekly payment basis; Franchise, which awards franchises and supports franchisees of its sales and lease ownership concept, and Manufacturing segment, which manufactures upholstered furniture and bedding for use by company-operated and franchised stores. Aaron’s is the industry leader in serving the moderate-income consumer and offering affordable payment plans, quality merchandise and superior service. Aaron’s provides its services through more than 16,000 retail locations in 46 states and includes the Aarons.com, ShopHomeSmart.com and ProgLeasing.com brands.
Mixed figures posted
On July 24, 2015, this lease-to-own retailer reported financial results for the second quarter ended June 30, 2015. Although the company has a strong business model, it reported mixed results due to a few challenged markets. Aaron’s revenues increased 16.1% to $769.0 million, as compared to $662.5 million for the second quarter of 2014. The company’s net earnings and EBITDA for the quarter increased to $40.5 million and $89.8 million, respectively, as compared to $8.5 million and $43.0 million respectively in the prior year period. Diluted earnings per share were $.56 compared to $.12 for the same quarter last year.
Segment results
Within the core business, Aaron's Sales & Lease Ownership division decreased 3.9% in the second quarter of 2015 to $496.7 million compared with $516.9 million in revenues in the second quarter of 2014. Further, the HomeSmart division reported revenues of $15.5 million, a decrease of 3.1% from $16.0 million in the second quarter of 2014. Second quarter’s EBITDA for the core business was $53.8 million. During the second quarter of 2015, same store revenues decreased 4.4% compared to the same period of the prior year, and customer counts on a same-store basis were down 3.7%.
Progressive's (acquired in Apr 2014) revenues and EBITDA for the second quarter of 2015 were $255.9 million and $36.0 million respectively. The strength of Progressive's EBITDA margin in the second quarter was driven by strong lease portfolio performance, improved collection metrics, and increasing leverage on fixed operating expenses.
At the end of the quarter, Aaron’s cash and cash equivalents were $91.14 million, debts were $494.85 million, and shareholders’ equity were $1317.08 million.
During the second quarter of 2015, Aaron’s opened four company-operated Sales & Lease Ownership stores and three franchised stores. Further, it acquired seven Aaron's Sales & Lease Ownership stores from franchisees and sold four company-operated Aaron's Sales & Lease Ownership stores to franchisees. The company closed 25 company-operated Sales & Lease Ownership stores along with three franchised ones. As of June 30, 2015, Aaron’s had a total of 1,211 company-operated Sales & Lease Ownership stores, 784 franchised Sales & Lease Ownership stores, 83 company-operated HomeSmart stores, and two franchised HomeSmart stores. The company operated 2,080 stores in total at the end of the second quarter.
Projections for 2015
- Aaron's now expects EBITDA between $325 million to $350 million compared with the previous guidance of $305 million to $335 million.
- Guidance for EBITDA contribution from its core business has been revised to $205 million to $220 million from $200 million to $220 million projected earlier.
- Guidance for EBITDA contribution from its Progressive business has been revised to $120 million to $130 million compared with the previous guidance of $105 million to $115 million.
- Aaron’s expects its GAAP diluted earnings per share will be in the range of $1.92 to $2.12 compared with the previous guidance of $1.78 to $1.98.
- Finally, its non-GAAP adjusted diluted earnings per share are expected in the range of $2.15 to $2.35 compared with the previous guidance of $2.01 to $2.21.
Looking ahead
Aaron’s has been in operation for 60 years and to attract more and more customers under its roof it has taken several initiatives. This speciality retailer is positioning its core operations to optimize cash efficiency and profitability. It has a strong balance sheet with increasing profitability and cash generation. Further, the company is leveraging its Progressive’s strengths to seize large virtual LTO opportunity. In late 2014, Aaron’s has launched fully functional e-commerce LTO platform which is expected to be fully rolled out by the end of 2015. A chart has been provided below to show Aaron’s competitive advantages in its core and Progressive businesses.
On a concluding note
Aaron’s is a rock solid company, although it has faced several hiccups in the recent quarter. The company has taken several initiatives for its core business that will drive better year-over-year comparable-store sales in the future. There is enough room for Aaron’s Progressive to grow as its pipeline of new retailers is robust. Additionally, Aaron’s solid financial position with reasonable debt levels by most measures, good cash flow from operations, robust revenue growth, increase in net income, and expanding profit margins will help the company to deliver strong results in the future.
As per Gurufocus’ DCF calculator, Aaron’s business predictability rank is 5 stars. Further, Aaron’s also has a positive history of strong quarter results with consecutive revenue growth. Therefore, I expect that this speciality retailer will deliver exceptional returns in the near future, and I would recommend this company a buy as of now.
(Source: Company’s Website)
