Aaron's (AAN) Stock Up on Q3 Earnings & Sales Beat, View Hike

Shares of The Aaron's Company, Inc. AAN jumped nearly 16%, following the impressive third-quarter 2022 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. Despite the tough economic environment, results gained from strategic investments in centralized lease decisioning, the solid e-commerce business, strength in the GenNext store program, and gains from the BrandsMart buyout.

The company remains on track with its efforts to enhance customers' in-store and digital experiences. Consequently, management raised its 2022 guidance. It also launched an operational efficiency and optimization restructuring program.

However, shares of this Zacks Rank #4 (Sell) company have plunged 47.3% in the past three months compared with the industry’s 7.2% decline.

Image Source: Zacks Investment Research

Q3 in Detail

Aaron's delivered adjusted earnings of 31 cents per share, which surpassed the Zacks Consensus Estimate of 16 cents and our estimate of 20 cents. However, the bottom line declined 62.7% year over year from 83 cents per share reported in the prior-year quarter due to dismal margins and a higher provision for lease merchandise write-offs at the Aaron's Business. On a GAAP basis, the company reported a loss of 51 cents per share against earnings of 73 cents in the year-ago quarter.

Consolidated revenues grew 31.2% to $593.4 million driven by gains from the BrandsMart buyout, somewhat offset by weak lease revenues and fees, as well as drab retail sales at the Aaron's business. The figure beat the Zacks Consensus Estimate of $571 million and our estimate of $578.2 million.

Breaking up the components of consolidated revenues, we note that lease and retail revenues fell 7.3% in the reported quarter to $372.1 million and missed our estimate of $537.2 million. Non-retail sales, which mainly include merchandise sales to franchisees, declined 17.5% year over year to $26.5 million and lagged our estimate of $34.7 million. Franchise royalties and fees in the quarter slumped 5.5% to $6 million from the year-ago quarter and missed our estimate of $6.3 million.

In the Aaron’s business, revenues declined 8.7% year over year to $412.9 million due to lower lease revenues and reduced lease portfolio size. Same-store revenues fell 7.7% year over year in the third quarter due to a reduced lease renewal rate, the lower exercise of early purchase options, smaller same-store lease portfolio size and drab retail sales, which somewhat offset the larger lease portfolio. E-commerce lease revenues were up 11.1%, accounting for 16% of the total revenues.

Notably, the company had 195 GenNext locations in the said quarter. Management announced the opening of the 200th GenNext location this October.

For BrandsMart, revenues were $183.3 million in the third quarter of 2022, driven by strength in appliances and e-commerce, which offset weak product sales stemming from the deflation in certain consumer electronics categories. The company remains optimistic about its performance in the near future.

Margins

Aaron’s gross profit rose 4.6% to $298 million while, the gross margin contracted 1280 bps to 50.2%. The operating loss came was $17.1 million against the prior-year quarter’s earnings of $33.2 million.

Adjusted EBITDA declined 34.3% year over year to $35.2 million due to dismal gross margin and a higher provision for lease merchandise write-offs at the Aaron's Business, partly offset by gains from the BrandsMart buyout and reduced personnel costs at the Aaron's Business. The adjusted EBITDA margin contracted 600 basis points (bps) to 5.9% in the reported quarter.

Financial Position

The company ended the quarter with cash and cash equivalents of $37.8 million, a debt of $274 million, and shareholders’ equity of $703.7 million. In the first nine months ending Sep 30, 2022, it generated cash from operations of $123.9 million.

Capital expenditure was $26 million in the reported quarter. The metric is expected to be $105-$115 million for 2022 compared with the prior stated $100-$120 million. AAN expects a free cash flow of $70-$75 million for 2022 compared with the earlier mentioned $50-$60 million.

The Aaron's Company, Inc. Price, Consensus and EPS Surprise

The Aaron's Company, Inc. price-consensus-eps-surprise-chart | The Aaron's Company, Inc. Quote

Outlook

Driven by the solid quarterly results, management raised the 2022 view.

The company anticipates revenues of $2.23-$2.27 billion, up from the earlier mentioned $2.19-$2.27 billion. Adjusted EBITDA is likely to be $160-$170 million, which compares favorably with the prior stated $150-$170 million. It also envisions adjusted earnings of $1.90-$2.05 compared with the prior stated $1.75-$2.15.

In the Aaron’s business, revenues are expected to be $1.68-$1.71 billion, up from the previously stated $1.65-$1.71 billion. Adjusted EBITDA is likely to be $190-$195 million compared with the prior mentioned $180-$195 million. Same-store revenues are predicted to decline 7-6%, up from the earlier stated 8-6% decline.

In BrandsMart, revenues are anticipated to be $550-$565 million, up from the prior mentioned $545-$565 million. Adjusted EBITDA is still forecasted to be $20-$25 million.

Stocks to Consider

Some better-ranked companies from the Consumer Discretionary sector are Toro TTC, lululemon athletica LULU and Crocs Inc. CROX.

Toro currently sports a Zacks Rank #1 (Strong Buy). TTC has a trailing four-quarter earnings surprise of 1.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Toro’s current financial year’s sales and earnings suggests growth of 14.4% and 16%, respectively, from the year-ago period's reported numbers.

Crocs currently carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 21.9% on average. CROX has an expected long-term earnings growth rate of 15%.

The Zacks Consensus Estimate for Crocs’ current financial year’s sales and earnings per share suggests growth of 49.7% and 20.7%, respectively, from the year-ago period's reported numbers.

lululemon presently has a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 10.4%, on average. LULU has an expected long-term earnings growth rate of 20%.

The Zacks Consensus Estimate for lululemon’s current financial-year sales and earnings suggests growth of 26.7% and 26.8% from the year-ago period’s reported numbers, respectively.

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