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Aaron's (AAN) Up 7.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Aaron's Company, Inc. (AAN). Shares have added about 7.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Aaron's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Aaron's Tops Q3 Earnings & Revenues Estimates, Ups View

Aaron's reported impressive third-quarter 2021 results, wherein the top and bottom lines beat the Zacks Consensus Estimate. The company has strengthened its position in the direct-to-consumer lease-to-own market. The solid e-commerce business and sturdy performance in GenNext stores also aided quarterly results. Management raised its 2021 view.

It remains on track with its GenNext real estate strategy, which is performing well. As of Sep 30, 2021, Aaron’s boasts 86 GenNext stores. The company expects to open more than 100 such stores by 2021.

Q3 Highlights

Aaron's delivered adjusted earnings of 83 cents per share, which surpassed the Zacks Consensus Estimate of 53 cents. However, the bottom line declined 25% year over year from $1.10 per share reported in the prior-year quarter. On a GAAP basis, the company recorded earnings of 73 cents per share, down 24% year over year from 96 cents reported in the year-ago quarter.

Consolidated revenues rose 2.5% to $452.2 million and beat the Zacks Consensus Estimate of $434 million. The uptick is mainly due to improved quality and the size of its lease portfolio, which somewhat offset reduced customer payment activities, and the impact of the net closure of 79 franchised stores in 15 months ended Sep 30, 2021.

Same-store revenues rose 4.6% in the third quarter, driven by a robust lease portfolio, which somewhat offset reduced payment activities. E-commerce lease revenues were up 13.3%, accounting for 14.3% of total revenues.

Breaking up the components of consolidated revenues, we note that lease and retail revenues grew 4% in the reported quarter to $413.7 million. Non-retail sales, which mainly include merchandise sales to franchisees, fell 7.6% year over year. Franchise royalties and fees in the quarter slumped 24.7% to $6.3 million from the year-ago quarter.

Aaron’s franchisee revenues decreased 21.2% year over year to $79.8 million on reduced franchised locations. Meanwhile, same-store revenues for franchised stores grew 2.1% year over year. Revenues and customers of franchisees are not deemed as revenues and customers of the company.

Aaron’s adjusted EBITDA declined 16.6% year over year to $53.6 million from $64.3 million reported in the year-ago quarter. Adjusted EBITDA margin contracted 270 basis points (bps) to 11.9% in the reported quarter due to reduced customer payment activity and a potential rise in write-offs.

Financial Position

The company ended the quarter with cash and cash equivalents of $14.8 million, and shareholders’ equity of $721.5 million. As of Sep 30, 2021, it generated cash from operations of $30.2 million. It had total available liquidity of $247.5 million as of Sep 30, 2021. Capital expenditure is expected to be $90-$100 million for 2021.

The company bought back 1,333,264 shares of Aaron's common stock, worth $37.5 million. From the start of the year till Oct 22, it repurchased 3,034,097 shares for $90.4 million. Currently, the company has shares worth $59.6 million remaining to be bought back under its existing share repurchase program of $150 million. The board also approved a quarterly dividend of 10 cents per share, which was paid out on Oct 5.

Outlook

Driven by solid results, management raised its 2021 view. For 2021, the company anticipates revenues of $1.82-$1.83 billion, up from the earlier mentioned $1.775-$1.8 billion. Same-store revenues are forecast to grow 7.5-8.5% compared with 6-8% growth stated previously.

Adjusted EBITDA is likely to be $225-$230 million, reflecting an improvement from the previously mentioned $215-$225 million. However, it slashed its free cash flow view from $90-$100 million to $30-$40 million for 2021 due to the higher sale of lease merchandise in the third quarter. Management expects customer payment activity to remain drab for the coming few quarters.

For fourth-quarter 2021, write-offs and lease payment activities are likely to be lower than the year-ago quarter but above the pre-pandemic levels.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -9.42% due to these changes.

VGM Scores

At this time, Aaron's has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Aaron's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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