Aaron’s stock review and company analysis. Let’s have a discussion. Their ticker is AAN.
Overview of Business:
- Aaron’s is a lease-purchase retailer of various goods leading from furniture, jewelry, and electronics. It prides itself in providing its services to underserved, credit-challenged segments in the U.S., Canada, and Latin America.
- They have early buyout options, low up-front payments, and flexible payment options to their customers.
- Aaron’s has 25,000 retail locations, but the company owned only 1,502 stores on December 31, 2019.
Aaron’s has three operating segments:
This segment partners with traditional and e-commerce retailers to offer their leasing. The leasing application is done online strictly, and the customer would wait for their application to be approved. The segment will purchase the merchandise from the retailer of the customer’s choice and then leases the customer’s merchandise.
Of course, Aaron’s inc. conducts its business through its store locations and e-commerce platforms. Their targeted customers are those who have limited access to traditional credit sources like bank financing. The agreements are cancelable by either party without penalty, which is a nice feature to have and would make agreements more enticing to customers. As well, Aaron’s will re-lease or sell merchandise that their customers return. They also offer up-front purchase options to anyone looking to purchase the merchandise.
In addition to this segment, Aaron’s own Woodhaven Furniture Industries produces living-room furniture and bedding. Woodhaven creates exceptional quality furniture for their customers.
Vive is a segment of Aaron’s that acquires loans from third-party banks or lenders. The banks will finance a customer’s purchase at the point of sale. Vive is primarily offered whenever a customer wants to purchase furniture, mattresses, and fitness equipment, but it also extends into the medical and dental markets.
Recently just announced on July 29 of this year, Aaron’s will separate into two public companies by the end of 2020. Left standing will be Aaron’s Inc and Progressive Leasing. Progressive Leasing will consist of Vive Financial.
Competing Within the Industry
Aaron’s looks to compete by building and distinguishing their brands from competitors. The company emphasizes its sales and lease ownership program to potential customers, offers excellent quality customer service, offers a large selection of merchandise, digital leasing, and provides up-front cash and carry purchase options on merchandise. The company also prides itself on delivering lower payments, making it cheaper for customers to own merchandise. This is established through their brand.
It’s clear to me that Aaron wants to have a recognizable brand and offer excellent quality merchandise at lower lease payments than competitors. The customer and their needs come first for Aaron’s inc. In this particular industry, that is the most crucial focus a company can have. If you are not flexible with payment options and other leasing features, customers can quickly turn towards your competitors.
As per the SEC filing, the company competes against retailers that sell merchandise for cash and credit, such as a Leon’s or The Brick. No surprise here. To compete against these types of retailers, it would be creating an excellent product for lower or competitive prices. Although I believe they are focused on leasing primarily, it would not hurt to target a demographic that would instead purchase the furniture upfront, which I am sure they are doing.
Aaron’s competitive strategies are relatively the same as other leasing retailers. Excellent leasing options, low payment options, and great quality furniture. It also would be necessary for the company to use advertising to their advantage. In these locations across the U.S., where those don’t have excellent credit, advertising either online or in-person via a home show could prove to be effective.
Suppose you take a look into the company’s annual report. In that case, they even state that they believe they compete based on fewer payments customers have to make, lower payments overall, more comprehensive selection and store capacity, and flexible payment methods.
As stated above, Aaron’s inc. also competes against retailers like The Brick and Leon’s, who offer no leasing. However, I want to shift away from these retailers and focus on a more direct competitor like Rent-A-Center Inc.
Rent-A-Center Inc. is a copycat business of Aaron’s Inc. They offer leasing options on a vast array of merchandise from popular manufacturers, like LG and Samsung. Even with Rent-A-Center, customers do not need credit to be applicable to lease out merchandise. Instead, the company primarily looks at the customer’s residency and sources of income.
One of the best features Rent-A-Center Inc. offers is free delivery and set-up generally within the next day of sale or agreement, which is also provided by Aaron’s Inc. The company will replace and repair the merchandise at no charge unless there is any intentional damage.
As I was reading through the company’s annual reports, I also have seen that they are focused on significant EBITDA margins, strong cash flows, and strong returns for shareholders. That might garner your interest if you look into companies that focus on this.
There are 1,973 company-owned stores within the U.S and Puerto Rico, which is significantly higher than Aaron’s Inc.
Although this might compel you to think that Rent-A-Center has a higher market share, Aaron’s Inc does have higher revenue than the company at $3.9 billion to $2.6 billion. Either way, I would consider both companies to have the highest market share within the merchandise leasing industry.
Let’s take a look at both company’s financial statements.
I first want to discuss the operating profit as a percentage of sales for each company. Let’s start with Aaron’s Inc. Their rate would be 2.69% while Rent-A-Center’s is 9.51%. This is a significant difference considering that Aaron’s Inc. has nearly $1.3 billion more in sales. The same scenario happens when comparing both of these margins from their Latin American operations.
Aaron’s Inc. has very high depreciation and operating expenses. This consumes most of the cash being left over in the operating profit. To point out this year, the company faced nearly $180 million-dollar legal fees during 2019.
This huge legal fee arose from a settlement to the federal trade commission. The FTC had a complaint that consumers who wanted to purchase merchandise at a retailer would not be charged more than the item’s stated price. However, in the complaint, consumers paid more than the stated price of an item. Frequently people paid double the indicated price, causing major deception to all of these consumers. In the settlement filed against Progressive Leasing, the money will go towards refunding these consumers.
The depreciation value for Aaron’s Inc. is very, but considering the company’s operations, it is nonetheless acceptable. It indeed accounts for the majority of their expenses, but it is the price of leasing. You won’t find high depreciation for Rent-A-Center. Instead, their cost of rentals and fees, merchandise sold, and installment sales are their depreciation values in this instance, which again accounts for their high expenses.
Having briefly looked into the company’s cash flows, I see that both companies have been paying off their debts instead of borrowing money, which is good, mostly since each company has earned cash for Aaron’s inc. This is the first time in a couple of years that the company has an increase in cash. In years past, the company has suffered a decrease in cash from multiple factors, a couple of those being purchasing their treasury stock and acquiring businesses and customer agreements.
It’s interesting to note that Rent-A-Center has roughly a $1.6 billion treasury stock balance on its balance sheet. This is more than double the approximately $627 million balance Aaron Inc. has. It seems that in this case, Rent-A-Center may be concerned with ensuring shareholders have a good return, among other things.
For Aaron’s stock review, I did a calculation based on the average collection period, based on Aarons’ lease revenues fees divided by their average accounts receivable. Then I divided 365 days by this amount. With this calculation, I have an average of 10 days that the company collects on its receivables. Rent-A-Center’s collection takes 13 days.
I will skim over the financial ratios for Aaron’s Inc.
The forward P/E is 11.49, which isn’t terrible, so to say. Even then, the price/sales are 0.92, which signifies that investors are barely just undervaluing the company’s sales, but the price/book ratio is 2.48.
The company seems relatively healthy with a 2.45 current ratio, and the company would be able to pay off all debt if they can collect on the lease payments and liquidate any merchandise on hand. The book value per share is relatively low compared to the stock’s price, 22.66. As a result, does this signify that the stock price is overvalued? I’ll touch on that in just a moment.
This stock even pays a dividend, but it currently is shallow at a yield of 0.28%.
These ratios are not necessarily spectacular. I would say they are all right and are somewhat comparable to those of Rent-A-Center’s.
However, with that said, Rent-A-Center pays a much higher dividend, at $1.16/share versus Aaron’s Inc.’s $0.16/share.
Rent-A-Center has a current ratio of 0.62, which is slightly concerning. Then again, maybe the company needs to collect more of their lease payments from customers.
I do believe this stock to be overvalued at the current moment. There’s nothing significant that sticks out to me in terms of an undervalued ratio.
This company seems stable, and there will be a need for their services for the foreseeable future. Is this stock going to go up significantly by tomorrow? No, likely not. But would this be a stable stock to hold onto for the next couple of years? Possibly. Everything depends on when people will need their services.
When I calculated the intrinsic value of this company, it’s around $63/share (USD). So technically it would be slightly undervalued, but however, this doesn’t seem like a significant value stock at this current time period.
I will give this stock a grade of a C+. Not a terrible stock by any means. Some good ratios and financials aren’t terrible. Compared to Rent-A-Center, management should attempt to increase their net income.
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Disclaimer: I am not a financial advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only.