Aaron's, Inc. Reports Second Quarter Results

  • Lease Revenues Up 5%; Total Revenues $552.1 Million
  • Same Store Revenues Increase 1.9%
  • Net Earnings $25.9 Million; Diluted EPS $.34
  • Non-GAAP Diluted EPS of $.50 Excluding Special Charges

ATLANTA, July 24, 2013 // PRNewswire // -- Aaron's, Inc. (NYSE: AAN), a leader in the sales and lease ownership and specialty retailing of residential furniture, consumer electronics, home appliances and accessories, today announced revenues and earnings for the three and six months ended June 30, 2013.

For the second quarter of 2013, revenues increased 2% to $552.1 million compared to $538.6 million for the second quarter in 2012. Net earnings were $25.9 million versus $36.2 million last year. Diluted earnings per share were $.34 compared to $.47 per share a year ago.

For the first six months of this year, revenues increased 2% to $1.147 billion compared to $1.125 billion for the first six months of 2012. Net earnings were $76.9 million versus $107.5 million last year. Diluted earnings per share for the first half were $1.00 for 2013 compared to $1.40 in 2012.

Included in pre-tax earnings for the second quarter of 2013 is an additional $15 million accrual for loss contingencies for pending legal and regulatory proceedings. Most of our total accruals for legal and regulatory loss contingencies as of June 30, 2013 relate to a pending regulatory investigation by the California Attorney General into Aaron's leasing, marketing and privacy practices. The Company is continuing to cooperate in the investigation, and while the outcome of the investigation is inherently uncertain, the Company currently anticipates achieving a comprehensive resolution without litigation. We reassess our estimates of legal and regulatory accruals on a quarterly basis, and any final settlement or adjudication of our legal and regulatory proceedings that are pending from time to time could possibly be less than, or could materially exceed, the aggregate loss contingencies accrued by the Company. In addition, during the quarter $4.9 million of charges were recorded related to retirement and a change in vacation policies. In the first quarter of 2012, the Company recognized $35.5 million of income related to the settlement of a lawsuit.

Excluding from all periods the accrual for the California regulatory investigation, the retirement and vacation related charges and the 2012 reversal of a lawsuit-related accrual, net earnings for the second quarter of 2013 would have been $38.6 million compared to $36.2 million for the same period in 2012, and earnings per share assuming dilution would have been $.50 compared to $.47 a year ago, a 6% increase. Net earnings for the six months of 2013 would have been $89.6 million compared to $85.5 million last year, and earnings per share assuming dilution would have been $1.17 versus $1.11 last year, a 5% increase.

"The Company continues to experience positive same store revenue growth and non­-GAAP net earnings for the second quarter were within expectations," said Ronald W. Allen, Chairman, President and Chief Executive Officer of Aaron's. "However, we were expecting better revenue and customer growth during the quarter, but the financial headwinds and general economic stress we saw in the first quarter on our customers continued into the second quarter. Shipments of products to our franchisees again were below last year's numbers, as customers of our franchised stores are experiencing similar economic challenges. We anticipate these trends will continue in the near term, but remain very positive and optimistic on the long term prospects for the Company. We are planning several new promotions for the remainder of the year to stimulate growth in revenue and customers."

"Although non-GAAP earnings were up, the special charges recorded in the quarter lowered our overall earnings," Mr. Allen continued. "In addition, our HomeSmart weekly rental business grew in revenues, but overall performance was less than expected. We have recently made several changes in the HomeSmart management team and continue to solidify our business model. We remain quite positive on the weekly concept, and plan to open an additional five stores by the end of the year, as well as a significant number of new HomeSmart stores in 2014 and beyond."

Same store revenues (revenues earned in Company-operated stores open for the entirety of both quarters) increased 1.9% during the second quarter of 2013 compared to the second quarter of 2012, and customer count on a same store basis was up 1.6%. For Company-operated stores open over two years at the end of June 2013, same store revenues increased 0.6% during the second quarter of 2013 compared to the second quarter of 2012. The Company had 1,128,000 customers and its franchisees had 599,000 customers at the end of the most recent quarter, a 5% increase in total customers over the number at the end of the second quarter a year ago (customers of franchisees, however, are not customers of Aaron's, Inc.).

During the first six months of this year, the Company generated approximately $116 million of cash flow from operations, and had $211 million of cash on hand at the end of June 2013. The Company did not reacquire shares during the first six months, but has authorization to purchase an additional 4,044,655 shares.

Division Results

Aaron's Sales & Lease Ownership division revenues increased $9.5 million, or 2%, in the second quarter of 2013 to $533.2 million compared to $523.7 million in revenues in the second quarter of 2012. Sales and lease ownership revenues for the first half of 2013 increased 1% to $1.108 billion compared to $1.095 billion for the same period a year ago.

Revenues of the HomeSmart division were $15.8 million, a 16% increase over the $13.7 million in revenues in the second quarter of 2012. HomeSmart revenues for the first six months of 2013 were $32.7 million versus $26.2 million for the same period a year ago, a 25% increase.

Components of Revenue

Consolidated lease revenues and fees for the second quarter and first half of 2013 increased 5% and 6%, respectively, over the comparable previous year periods. In addition, franchise royalties and fees increased 4% in both the second quarter and first six months compared to the same periods in 2012. The increases in the Company's franchise royalties and fees are the result of an increase in revenues of the Company's franchisees, which collectively had revenues of $246.2 million during the second quarter and $518.6 million for the first six months, an increase of 4% and 3%, respectively, over the comparable 2012 periods. Same store revenues and customer counts for franchised stores were up 1.7% and 3.3%, respectively, for the second quarter compared to the same quarter last year (revenues and customers of franchisees, however, are not revenues and customers of Aaron's, Inc.). Non-retail sales, which are primarily, sales of merchandise to Aaron's Sales and Lease Ownership franchisees, decreased 10% for the second quarter and 16% for the first six months compared to the same periods last year due to less demand by franchisees.

Store Count

During the second quarter of 2013, the Company opened five Company-operated Aaron's Sales & Lease Ownership stores, 12 franchised stores and two RIMCO stores. The Company also acquired two franchised stores. Two Company-operated Aaron's Sales & Lease Ownership stores and two franchised stores were closed during the quarter.

Through the three and six months ended June 30, 2013, the Company awarded area development agreements to open nine and 12 additional franchised stores, respectively. At June 30, 2013, there were area development agreements outstanding for the opening of 168 franchised stores over the next several years.

At June 30, 2013, the Company had 1,235 Company-operated Aaron's Sales & Lease Ownership stores, 756 franchised Aaron's Sales & Lease Ownership stores, 78 Company-operated HomeSmart stores, one franchised HomeSmart store, 22 Company-operated RIMCO stores, and six franchised RIMCO stores. The total number of stores open at June 30, 2013 was 2,098.

Third Quarter and Full Year 2013 Outlook

The Company is updating its guidance for 2013 and expects to achieve the following:

  • Third quarter revenues (excluding revenues of franchisees) of approximately $550 million.
  • Third quarter diluted earnings per share in the range of $.48 to $.52 per share.
  • Fiscal year 2013 revenues (excluding revenues of franchisees) of approximately $2.30 billion, a decrease over the previous guidance of approximately $2.35 billion.
  • GAAP fiscal year 2013 diluted earnings per share in the range of $1.98 to $2.06.
  • Non-GAAP fiscal year 2013 diluted earnings per share in the range of $2.15 to $2.23, a change from the previous guidance of $2.15 to $2.27, which excludes the accrual for the regulatory investigation and the retirement and vacation related charges.
  • EPS guidance does not assume any significant repurchases of the Company's Common Stock.
  • New store growth of approximately 4% to 6% over the store base at the end of 2012, for the most part an equal mix between Company-operated and franchised stores, and including a small number of HomeSmart stores. This will be a net store growth after any opportunistic merging or disposition of stores.
  • The Company will continue, as warranted, to consolidate or sell stores not meeting performance goals.
  • The Company also plans to continue to acquire franchised stores or sell Company-operated stores to franchisees as opportunities present themselves.

Conference Call

Aaron's will hold a conference call to discuss its quarterly financial results on Thursday, July 25, 2013, at 10:00 a.m. Eastern Time. The public is invited to listen to the conference call by webcast accessible through the Company's website, www.aaronsinc.com, in the "Investor Relations" section. The webcast will be archived for playback at that same site.

Aaron's, Inc., based in Atlanta, currently has more than 2,098 Company-operated and franchised stores in 48 states and Canada. The Company's Woodhaven Furniture Industries division manufactured approximately $95 million, at cost, of furniture and bedding at 14 facilities in seven states in 2012. Most of the production of Woodhaven is for shipment to Aaron's stores.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this news release regarding Aaron's, Inc.'s business that are not historical facts are "forward-looking statements" that involve risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements. These risks and uncertainties include factors such as changes in general economic conditions, competition, pricing, litigation, customer privacy, information security, customer demand and other issues, and the other risks and uncertainties discussed under "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Statements in this release that are "forward-looking" include without limitation Aaron's projected revenues, earnings, and store openings for future periods and statements regarding our legal and regulatory accruals for loss contingencies.

 

Aaron's, Inc. and Subsidiaries

Consolidated Statements of Earnings

(In thousands, except per share amounts)

 
 

(Unaudited)
Three Months Ended

(Unaudited)
Six Months Ended

 

June 30,

June 30,

 

2013

2012

2013

2012

Revenues:

       

Lease Revenues and Fees

$

436,688

 

$

414,968

 

$

904,792

 

$

850,074

 

Retail Sales

8,884

 

8,459

 

23,303

 

22,207

 

Non-Retail Sales

86,785

 

96,376

 

177,740

 

211,939

 

Franchise Royalties and Fees

16,834

 

16,142

 

35,034

 

33,647

 

Other

2,873

 

2,674

 

6,336

 

6,748

 

Total

552,064

 

538,619

 

1,147,205

 

1,124,615

 
         

Costs and Expenses:

       

Retail Cost of Sales

5,307

 

4,700

 

13,661

 

12,424

 

Non-Retail Cost of Sales

79,369

 

88,580

 

162,198

 

193,462

 

Operating Expenses

251,924

 

237,573

 

505,878

 

472,483

 

Regulatory Investigation

15,000

 

--

 

15,000

 

--

 

Retirement and Vacation Charges

4,917

 

--

 

4,917

 

--

 

Lawsuit Income

--

 

--

 

--

 

(35,500)

 

Depreciation of Lease Merchandise

154,422

 

148,406

 

322,625

 

306,567

 

Total

510,939

 

479,259

 

1,024,279

 

949,436

 
         

Operating Profit

41,125

 

59,360

 

122,926

 

175,179

 

Interest Income

770

 

896

 

1,522

 

1,776

 

Interest Expense

(1,508)

 

(1,666)

 

(3,019)

 

(3,336)

 

Earnings Before Income Taxes

40,387

 

58,590

 

121,429

 

173,619

 
         

Income Taxes

14,533

 

22,346

 

44,575

 

66,149

 
         

Net Earnings

$

25,854

 

$

36,244

 

$

76,854

 

$

107,470

 
         

Earnings Per Share

$

0.34

 

$

0.48

 

$

1.01

 

$

1.42

 

Earnings Per Share Assuming Dilution

$

0.34

 

$

0.47

 

$

1.00

 

$

1.40

 
         

Weighted Average Shares Outstanding

75,901

 

75,927

 

75,831

 

75,949

 

Weighted Average Shares Outstanding Assuming Dilution

76,589

 

76,979

 

76,579

 

77,006

 

 

 

Selected Balance Sheet Data

(In thousands)

(Unaudited)

 
   

June 30, 2013

 

December 31, 2012

Cash and Cash Equivalents

 

$

210,665

 

$

129,534

 

Investments

 

93,409

   

85,861

 

Accounts Receivable, Net

 

58,473

   

74,157

 

Lease Merchandise, Net

 

965,909

   

964,067

 

Property, Plant and Equipment, Net

 

231,678

   

230,598

 

Other Assets, Net

 

315,078

   

328,712

 
         

Total Assets

 

1,875,212

   

1,812,929

 
         

Senior Notes

 

125,000

   

125,000

 

Total Liabilities

 

659,684

   

676,803

 

Shareholders' Equity

 

$

1,215,528

   

$

1,136,126

 
         

 

Use of Non-GAAP Financial Information:

This press release presents the Company's net earnings and diluted earnings per share excluding second quarter 2013 charges of $15 million for a regulatory investigation and $4.9 million of retirement and vacation related charges, as well as the reversal of a $35.5 million charge recorded in the first quarter of 2012 related to a previously announced lawsuit verdict against the Company, and associated legal fees and expenses. These measures are not presented in accordance with generally accepted accounting principles in the United States ("GAAP").

Management regards the circumstances of these special charges as not arising out of the ordinary course of business. The adjustments include matters that are not entirely susceptible to prediction or effective management, and consequently management believes that presentation of net earnings and diluted earnings per share excluding these adjustments is useful because it gives investors supplemental information to evaluate and compare the performance of the Company's underlying core business from period to period. Non-GAAP financial measures, however, should not be used as a substitute for, or considered superior to, measures of financial performance prepared in accordance with GAAP, such as the Company's GAAP basis net earnings and diluted earnings per share, which are also presented in the press release. Please refer to our Current Report on Form 8-K furnishing this earnings release to theSECon the date hereof for further information on our use of non-GAAP financial measures.

 

 

Reconciliation of Net Earnings and Earnings Per Share Assuming Dilution to Non-GAAP

Net Earnings and Earnings Per Share Assuming Dilution

(In thousands, except earnings per share)

 
 

(Unaudited)
Three Months Ended
June 30,

(Unaudited)
Six Months Ended
June 30,

 

2013

2012

2013

2012

Net Earnings

$

25,854

$

36,244

$

76,854

$

107,470

Add Regulatory Investigation Accrual, Net of Taxes (1)

9,603

--

9,603

--

Add Retirement and Vacation Related Charges, Net of Taxes (2)

3,148

--

3,148

--

Deduct Accrued Lawsuit Income, Net of Taxes (3)

--

--

--

(21,975)

Non-GAAP Net Earnings Assuming Dilution

$

38,605

$

36,244

$

89,605

$

85,495

         

Earnings Per Share Assuming Dilution

$

0.34

$

0.47

$

1.00

$

1.40

Add Regulatory Investigation Accrual

0.13

--

0.13

--

Add Retirement and Vacation Related Charges

0.04

--

0.04

--

Deduct Accrued Lawsuit Income

--

--

--

(0.29)

         

Non-GAAP Earnings Per Share Assuming Dilution (4)

$

0.50

$

0.47

$

1.17

$

1.11

         

Weighted Average Shares Outstanding Assuming Dilution

76,589

76,979

76,579

77,006

         

(1) Net of taxes of $5,397 for the three and six months ended June 30, 2013 calculated using the effective tax rate
for the three months ended June 30, 2013.

(2) Net of taxes of $1,769 for the three and six months ended June 30, 2013 calculated using the effective tax rate
for the three months ended June 30, 2013.

(3) Net of taxes of $13,525 for the six months ended June 30, 2012 calculated using the effective tax rate for the
six months ended June 30, 2012.

(4) In some cases the sum of individual EPS amounts may not equal total EPS calculations.

 

 

Reconciliation of 2013 Projected Guidance for Earnings Per Share

Assuming Dilution to Non-GAAP Earnings Per Share Assuming Dilution

 
 

Low Range

High Range

Projected Earnings Per Share Assuming Dilution

$

1.98

$

2.06

Add Regulatory Investigation Accrual

0.13

0.13

Add Retirement and Vacation Related Charges

0.04

0.04

Projected Non-GAAP Earnings Per Share Assuming Dilution

$

2.15

$

2.23

 

SOURCEAaron's, Inc.

###

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