Aaron's, Inc. Reports Third Quarter 2015 Results

- Total Revenues of $767.7 Million, up 10%

- Progressive Revenues of $266.0 Million, up 47%

- Net Earnings of $24.2 Million; GAAP Diluted EPS of $.33

- Non-GAAP Diluted EPS of $.39

Oct 30, 2015, 07:15 ET from Aaron's, Inc.

ATLANTA, Oct. 30, 2015 /PRNewswire/ -- Aaron's, Inc. (NYSE: AAN), a leader in the sales and lease ownership and specialty retailing of furniture, consumer electronics, home appliances and accessories, today announced revenues and earnings for the three and nine months ended September 30, 2015.

For the third quarter of 2015, revenues increased 10% to $767.7 million compared with $698.4 million for the third quarter of 2014. Net earnings increased to $24.2 million versus $9.3 million in the prior year period. Diluted earnings per share were $.33 compared with $.13 for the same quarter last year. EBITDA for the quarter was $62.0 million compared with $44.4 million a year ago.

On a non-GAAP basis, net earnings for the third quarter of 2015 were $28.6 million compared with $28.2 million for the same period in 2014, and earnings per share assuming dilution was $.39 in both periods. In 2015, non-GAAP net earnings and diluted earnings per share exclude the effects of amortization expense resulting from the 2014 acquisition of Progressive. In 2014, in addition to Progressive amortization, non-GAAP results exclude the effects of certain one-time Progressive transaction costs, executive and other special retirement expenses, a regulatory item, financial advisory and legal costs related to addressing strategic matters and restructuring charges related to store closures. See "Use of Non-GAAP Information" and the related non-GAAP reconciliation accompanying this press release.

"While we delivered positive revenue and EBITDA growth, the third quarter was challenging in several respects," said John Robinson, Chief Executive Officer. "Solid revenue growth at Progressive and continued expense control at our core stores was partially offset by lower than expected EBITDA at Progressive and negative same store revenues in the core segment."

"Progressive's revenues rose 47% over the same quarter last year. We added retailers to our pipeline in the third quarter and remain excited about our growth opportunities. Gross margin improved in the quarter, however, we experienced higher bad debt expense and merchandise write offs due to a temporary interruption of certain data attributes we use to approve leases, as well as software issues that delayed our ability to identify and begin collections on certain delinquent accounts. We believe these issues have been resolved and will not have a meaningful impact on future results."

"Core earnings and EBITDA improved in the third quarter as our cost reductions continued to offset a challenging revenue environment. We are confident that future results will reflect the strong growth prospects of Progressive and improved execution across our business," Mr. Robinson concluded.

Financial Summary During the first nine months of 2015, revenues increased 21.2% to $2.359 billion compared with $1.946 billion for the first nine months of 2014. Net earnings were $114.0 million versus $56.1 million last year. Diluted earnings per share were $1.56 compared with $.77 per share a year ago.

EBITDA for the Company increased 56.1% to $255.5 million for the nine months of 2015 compared with EBITDA of $163.7 million for the same period a year ago. On a non-GAAP basis, net earnings for the first nine months of 2015 were $126.6 million compared with $93.6 million for the same period in 2014, and earnings per share assuming dilution were $1.73 compared with $1.29 a year ago.

Aaron's Inc., which includes Progressive, had 1,521,000 customers at the end of September 2015 versus 1,431,000 last year, a 6.3% increase. The Company generated $213.3 million in cash from operations during the first nine months of 2015 and ended the third quarter of 2015 with $66.9 million in cash compared with $3.5 million at the end of 2014. Debt was reduced to $494.2 million at September 30, 2015 from $606.1 million at December 31, 2014.

On October 15, 2015 the Company closed on the previously announced acquisition of Dent-A-Med, Inc. Dent-A-Med's financial results will be consolidated with the Company's in future periods.

Core Results Revenues of the Aaron's Sales & Lease Ownership division decreased 3.1% in the third quarter of 2015 to $486.1 million compared with $501.7 million in revenues in the third quarter of 2014. Sales and lease ownership revenues for the first nine months of 2015 decreased 3.1% to $1.535 billion compared with $1.584 billion for the same period a year ago.

HomeSmart division revenues were $15.1 million in the third quarter of 2015, a 3.2% decrease from $15.6 million in the third quarter of 2014. HomeSmart revenues for the first nine months of 2015 were $47.5 million versus $48.9 million for the same period a year ago, a 2.9% decrease.

EBITDA for the core business for the three and nine months ended September 30, 2015 was $43.7 million and $172.9 million, respectively. As a percentage of revenues, EBITDA was 8.7% for the three months and 10.9% for the first nine months of 2015 compared to 5.0% and 8.0% for the same periods a year ago. Margin improvement in the core business was driven by the Company's price increases, inventory reduction, and cost initiatives. Write offs for damaged, lost or unsaleable merchandise were 4.1% of revenues in the quarter compared to 3.9% in the same period last year.

Same store revenues (revenues earned in Company-operated stores open for the entirety of both quarters) decreased 4.1% during the third quarter of 2015 compared with the third quarter of 2014, and customer counts on a same store basis were down 2.8%. Company-operated Aaron's stores had 1,037,000 customers and franchised stores had 565,000 customers at the end of the quarter, a 2.6% decline in total customers from the end of the third quarter a year ago (customers of franchisees are not customers of Aaron's, Inc.).

Progressive Results Progressive's revenues in the third quarter of 2015 increased 47.2% to $266.0 million. Revenues for the first nine months of 2015 were $773.6 million. Invoice volume per active door grew 16% in the third quarter compared to the same period a year ago. Progressive had 483,000 customers at September 30, 2015.

EBITDA for the third quarter and first nine months of 2015 was $18.3 million and $82.6 million, respectively. As a percentage of revenues, EBITDA was 6.9% for the third quarter and 10.7% for the first nine months of 2015, compared with an EBITDA margin of 10.3% for the third quarter of 2014. Write offs for damaged, lost or unsaleable merchandise were 8.5% of revenues in the third quarter compared to 7.5% in 2014.

The year-over-year change in margin was primarily due to an increase in bad debt expense and merchandise write offs that resulted from the following:

  • The impact of a temporary interruption of certain data attributes used to make our approval decisions. We lost access to the attributes in February 2015 and replaced them in April 2015. Leases generated during the period of interruption, while expected to be profitable, are charging off at higher rates than originally anticipated. Progressive's decisioning algorithm is now operating with improved functionality and redundancy, and we expect to return to more normalized levels of bad debt expense and write offs; and
  • Software issues that occurred during a limited period of time spanning the second and third quarters of 2015. These issues failed to identify a number of accounts as being delinquent and affected our ability to begin prompt collections activities. As a result, although not material to either period, an adjustment was recorded in the third quarter to increase bad debt expense and merchandise write offs by $3.2 million.

Progressive's results of operations beginning on its acquisition date of April 14, 2014 were included in the Company's consolidated financial statements for the third quarter of 2014.

Components of Revenue Consolidated lease revenues and fees for the third quarter and nine months of 2015 increased 11.3% and 25.6%, respectively, over the comparable prior year periods. Franchise royalties and fees decreased 1.7% in the third quarter and 4.1% for the first nine months of 2015 compared with the same periods in 2014. The decrease in the Company's franchise royalties and fees are primarily the result of a decrease in revenues of the Company's franchisees. Franchisees had revenues of $235.9 million during the third quarter and $733.7 million for the nine months of 2015, decreases of 1.8% and 2.7%, respectively, from the comparable 2014 periods. Same store revenues and customer counts for franchised stores were down 0.4% and 0.7%, respectively, for the third quarter of 2015 compared with 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, increased 4.1% for the third quarter and 3.2% for the nine months of 2015 compared with the same periods last year.

Store Count During the third quarter of 2015, the Company opened one Company-operated Aaron's Sales & Lease Ownership store and two franchised stores. The Company acquired 13 franchised stores and sold three Company-operated stores to franchisees. Two Company-operated and six franchised Aaron's Sales & Lease Ownership stores were closed during the quarter. The Company also completed two store swaps with third parties during the quarter and merged the acquired stores with existing locations.

At September 30, 2015, the Company had 1,218 Company-operated Aaron's Sales & Lease Ownership stores, 762 franchised Aaron's Sales & Lease Ownership stores, 82 Company-operated HomeSmart stores, and two franchised HomeSmart stores. The total number of stores open at September 30, 2015 was 2,064.

2015 Outlook The Company is updating its EBITDA and diluted earnings per share guidance for the full year 2015. No change is being made to previously provided revenue or EBITDA guidance for the core segment. Diluted earnings per share is presented both on a GAAP basis and on a non-GAAP basis that excludes Progressive-related intangible amortization. The Company currently expects to achieve the following:

Progressive

  • No change is being made to Progressive's full year revenue guidance; however, revenues are now expected to be at the low end of the guidance range of $1.05 billion to $1.15 billion.  
  • EBITDA in the range of $103 million to $108 million compared with the previous guidance of $120 million to $130 million. Progressive expects its EBITDA margin to improve sequentially in the fourth quarter of the year.

Consolidated Results

  • EBITDA in the range of $308 million to $328 million compared with the previous guidance of $325 million to $350 million.
  • GAAP diluted earnings per share in the range of $1.79 to $1.99 compared with the previous guidance of $1.92 to $2.12.
  • Non-GAAP adjusted diluted earnings per share in the range of $2.02 to $2.22 compared with the previous guidance of $2.16 to $2.36.

Conference Call and Webcast Aaron's will hold a conference call to discuss its quarterly financial results on Friday, October 30, 2015, at 10:00 a.m. Eastern Time. The public is invited to listen to the conference call by webcast accessible through the Company's Investor Relations website, investor.aarons.com, in the "Investor Relations" section. The webcast will be archived for playback at that same site.

About Aaron's, Inc. Aaron's, Inc. (NYSE: AAN), a leader in the sales and lease ownership and specialty retailing of furniture, consumer electronics, home appliances and accessories, has more than 2,000 Company-operated and franchised stores in 48 states, the District of Columbia, and Canada. Aaron's was founded in 1955, is headquartered in Atlanta and has been publicly traded since 1982. Progressive Leasing, a wholly-owned subsidiary and leading virtual lease-to-own company, provides lease-purchase solutions through more than 16,000 retail locations in 46 states. Aaron's, Inc. includes the Aarons.com, ShopHomeSmart.com and ProgLeasing.com brands. For more information, visit www.aarons.com.

Cautionary Notes Regarding Forward-Looking Statements: This press release contains certain forward-looking statements that are intended to enjoy the safe harbor protections of the Private Securities Litigation Reform Act of 1995, as amended. These statements are based on management's current expectations and plans, which involve risks and uncertainties. Forward-looking statements contained in this press release include, among other information, statements concerning the impact of the interruption in Progressive's receipt of customer attribute data, the resolution and impact of issues relating to delinquent account classification at Progressive, management's confidence that the Company's future results will reflect Progressive's growth prospects and improved execution across the Company's businesses as well as the Company's projected results, including statements under the heading "2015 Outlook." You are cautioned not to place undue reliance on these forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements.  The following factors, in addition to those discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and subsequent filings with the SEC, could cause actual results to differ materially from management's current expectations and plans as suggested by the forward-looking statements contained in this press release: interruptions in Progressive's receipt of customer attribute data as well as other issues that could negatively impact Progressive's algorithm used to approve customers, controls and operational issues, including those relating to the Company's financial systems, software and other information technology disruptions, the impact of increased regulation, changes in general economic conditions, including consumer confidence and demand for certain merchandise, increased competition and pricing pressures, the impact of legal proceedings faced by the Company, costs relating to protecting customer privacy and information security more generally, challenges relating to the integration of the Progressive acquisition and a failure to realize the expected benefits of the transaction, the execution and results of our operational strategies, risks related to Progressive's "virtual" lease-to-own business, and deteriorations in our franchisee relationships. Except as required by law, the Company undertakes no obligation to update any forward-looking information contained in this press release.

       

Aaron's, Inc. and Subsidiaries

Consolidated Statements of Earnings

(In thousands, except per share amounts)

(Unaudited)  Three Months Ended

(Unaudited)  Nine Months Ended

September 30,

September 30,

2015

2014

2015

2014

Revenues:

Lease Revenues and Fees

$

661,856

$

594,455

$

2,017,610

$

1,606,765

Retail Sales

6,988

8,094

26,055

31,023

Non-Retail Sales

81,708

78,503

262,194

254,021

Franchise Royalties and Fees

15,574

15,838

48,069

50,147

Other

1,568

1,528

4,629

4,375

Total

767,694

698,418

2,358,557

1,946,331

Costs and Expenses:

Depreciation of Lease Merchandise

302,029

260,819

912,377

661,446

Retail Cost of Sales

4,537

5,409

17,090

19,900

Non-Retail Cost of Sales

73,567

71,403

236,882

230,537

Operating Expenses

345,514

325,148

998,989

898,963

Financial Advisory and Legal Costs

385

13,661

Progressive-Related Transaction Costs

371

6,638

Restructuring Expenses

6,876

9,140

Regulatory Income

(1,200)

(1,200)

Retirement and Vacation Charges

9,094

9,094

Other Operating Income, Net

(962)

(197)

(2,145)

(869)

Total

724,685

678,108

2,163,193

1,847,310

Operating Profit

43,009

20,310

195,364

99,021

Interest Income

483

634

1,714

2,461

Interest Expense

(5,524)

(6,162)

(17,115)

(13,174)

Other Non-Operating Expense, Net

(1,412)

(1,583)

(1,223)

(837)

Earnings Before Income Taxes

36,556

13,199

178,740

87,471

Income Taxes

12,362

3,904

64,757

31,332

Net Earnings

$

24,194

$

9,295

$

113,983

$

56,139

Earnings Per Share

$

.33

$

.13

$

1.57

$

.78

Earnings Per Share Assuming Dilution

$

.33

$

.13

$

1.56

$

.77

Weighted Average Shares Outstanding

72,586

72,340

72,558

72,350

Weighted Average Shares Outstanding Assuming Dilution

73,076

72,660

72,966

72,713

       

Selected Balance Sheet Data

(In thousands)

(Unaudited)

September 30, 2015

December 31, 2014

Cash and Cash Equivalents

$

66,912

$

3,549

Investments

22,334

21,311

Accounts Receivable, Net

85,224

107,383

Lease Merchandise, Net

1,052,615

1,087,032

Property, Plant and Equipment, Net

212,217

219,417

Other Assets, Net

896,372

1,018,152

Total Assets

2,335,674

2,456,844

Debt

494,161

606,082

Total Liabilities

992,312

1,233,323

Shareholders' Equity

$

1,343,362

$

1,223,521

       

Selected Cash Flow Data

(In thousands)

(Unaudited)  Nine Months Ended

September 30,

2015

2014

Cash Provided/(Used) by Operating Activities

$

213,310

$

(8,661)

Cash Used by Investing Activities

(34,342)

(623,863)

Cash (Used)/Provided by Financing Activities

(115,605)

411,834

Increase (Decrease) in Cash and Cash Equivalents

63,363

(220,690)

Cash and Cash Equivalents at Beginning of Period

3,549

231,091

Cash and Cash Equivalents at End of Period

$

66,912

$

10,401

        

Use of Non-GAAP Financial Information:

This press release presents the Company's net earnings and diluted earnings per share in accordance with generally accepted accounting principles in the United States ("GAAP") and in a format that is not in accordance with GAAP due to the exclusion of $6.6 million in Progressive-related intangible amortization expense in the third quarter of 2015 and $19.8 million for the nine months of 2015, as well as the exclusion of certain 2014 charges as presented and described in previous releases and as shown in this press release for comparative purposes.

Management regards the amortization expense relating to the Company's acquisition of Progressive as a special charge not arising out of the ordinary course of business. Management believes that presentation of net earnings and diluted earnings per share excluding this adjustment is useful because it gives investors supplemental information to evaluate and compare the Company's underlying operating performance 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 and the GAAP operating income of the Company's segments, which are also presented in the press release. Please refer to our Current Report on Form 8-K furnishing this earnings release to the U.S. Securities and Exchange Commission on 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   September 30,

(Unaudited) Nine Months Ended  September 30,

2015

2014

2015

2014

Net Earnings

$

24,194

$

9,295

$

113,983

$

56,139

Add Progressive-Related Intangible Amortization Expense (1)(2)

4,359

7,984

12,603

13,502

Add Financial Advisory and Legal Costs (3)

271

8,768

Add Progressive-Related Transaction Cost (4)

261

4,260

Add Restructuring Expenses (5)

4,842

5,866

Add Regulatory Income (6)

(845)

(770)

Add Retirement and Vacation Charges (7)

6,404

5,837

Non-GAAP Net Earnings

$

28,553

$

28,212

$

126,586

$

93,602

Earnings Per Share Assuming Dilution

$

.33

$

.13

$

1.56

$

.77

Add Progressive-Related Intangible Amortization Expense

.06

.11

.17

.19

Add Financial Advisory and Legal Costs

.12

Add Progressive-Related Transaction Costs

.06

Add Retirement and Vacation Related Charges

.09

.08

Add Restructuring Expenses

.07

.08

Add Regulatory Income

(.01)

(.01)

Non-GAAP Earnings Per Share Assuming Dilution (8)

$

.39

$

.39

$

1.73

$

1.29

Weighted Average Shares Outstanding Assuming Dilution

73,076

72,660

72,966

72,713

       

(1)

Net of taxes of $2,228 for the three months and $7,160 for the nine months ended September 30, 2015 calculated using the effective tax rate for the three and nine months ended September 30, 2015.

(2)

Net of taxes of $3,354 for the three months and $7,535 for the nine months ended September 30, 2014 calculated using the effective tax rates for the three and nine months ended September 30, 2014.

(3)

Net of taxes of $114 for the three months and $4,893 for the nine months ended September 30, 2014 calculated using the effective tax rates for the three and nine months ended September 30, 2014.

(4)

Net of taxes of $110 for the three months and $2,378 for the nine months ended September 30, 2014 calculated using the effective tax rates for the three and nine months ended September 30, 2014.

(5)

Net of taxes of $2,034 for the three months and $3,274 for the nine months ended September 30, 2014 calculated using the effective tax rates for the three and nine months ended September 30, 2014.

(6)

Net of taxes of $2,690 for the three months and $3,257 for the nine months ended September 30, 2014 calculated using the effective tax rates for the three and nine months ended September 30, 2014.

(7)

Net of taxes of $355 for the three months and $430 for the nine months ended September 30, 2014 calculated using the effective tax rates for the three and nine months ended September 30, 2014.

(8)

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

      

Aaron's, Inc. and Subsidiaries

Non-GAAP Financial Information

Quarterly Segment EBITDA

(In thousands)

(Unaudited)

Three Months Ended September 30, 2015

Sales & Lease Ownership

Progressive

HomeSmart

Franchise

Manufacturing

Other1

Consolidated Total

Net Earnings

$

$

$

$

$

$

$

24,194

Income Taxes

12,362

Earnings Before Income  Taxes

32,348

5,617

(335)

11,327

349

(12,750)

36,556

Interest Expense

1,950

5,556

213

5

(2,200)

5,524

Depreciation

7,169

572

612

358

396

3,778

12,885

Amortization

419

6,587

12

7,018

EBITDA

$

41,886

$

18,332

$

502

$

11,685

$

750

$

(11,172)

$

61,983

Three Months Ended September 30, 2014

Sales & Lease Ownership

Progressive

HomeSmart

Franchise

Manufacturing

Other1

Consolidated Total

Net Earnings

$

$

$

$

$

$

$

9,295

Income Taxes

3,904

Earnings Before Income  Taxes

23,814

1,689

(906)

12,542

(17)

(23,923)

13,199

Interest Expense

1,966

5,247

217

12

(1,280)

6,162

Depreciation

8,260

327

646

388

385

3,328

13,334

Amortization

353

11,338

42

11,733

EBITDA

$

34,393

$

18,601

$

(1)

$

12,930

$

380

$

(21,875)

$

44,428

Financial Advisory and Legal Costs

$

$

$

$

$

$

385

$

385

Progressive-Related Transaction Costs

371

371

Restructuring Expenses

2,572

6

4,298

6,876

Regulatory Income

(1,200)

(1,200)

Retirement/Vacation Charges

9,094

9,094

Adjusted EBITDA

$

36,965

$

18,601

$

5

$

12,930

$

380

$

(8,927)

$

59,954

1Other segment is primarily revenues attributable to (i) the RIMCO segment through the date of sale in January 2014, (ii) leasing space to unrelated third parties in the corporate headquarters building and (iii) several minor unrelated activities. The pre-tax losses or earnings in the Other segment are the net result of the activity mentioned above, net of the portion of corporate overhead not allocated to the reportable segments for management purposes.

          

Aaron's, Inc. and Subsidiaries

Non-GAAP Financial Information

Nine Months Segment EBITDA

(In thousands)

(Unaudited)

Nine Months Ended September 30, 2015

Sales & Lease Ownership

Progressive

HomeSmart

Franchise

Manufacturing

Other1

Consolidated Total

Net Earnings

$

$

$

$

$

$

$

113,983

Income Taxes

64,757

Earnings Before Income Taxes

132,079

44,761

239

37,218

2,007

(37,564)

178,740

Interest Expense

5,831

16,620

667

22

(6,025)

17,115

Depreciation

22,206

1,490

1,859

1,099

1,129

10,942

38,725

Amortization

1,150

19,763

21

20,934

EBITDA

$

161,266

$

82,634

$

2,786

$

38,317

$

3,158

$

(32,647)

$

255,514

Nine Months Ended September 30, 2014

Sales & Lease Ownership

Progressive

HomeSmart

Franchise

Manufacturing

Other1

Consolidated Total

Net Earnings

$

$

$

$

$

$

$

56,139

Income Taxes

31,332

Earnings Before Income Taxes

111,806

1,366

(1,492)

38,173

441

(62,823)

87,471

Interest Expense

5,891

9,501

688

40

(2,946)

13,174

Depreciation

25,766

587

1,944

1,217

1,152

9,677

40,343

Amortization

1,458

21,037

249

22,744

EBITDA

$

144,921

$

32,491

$

1,389

$

39,390

$

1,633

$

(56,092)

$

163,732

Financial Advisory and Legal Costs

$

$

$

$

$

$

13,661

$

13,661

Progressive-Related Transaction Costs

6,638

6,638

Restructuring Expenses

4,836

6

4,298

9,140

Regulatory Income

(1,200)

(1,200)

Retirement and Vacation Charges

9,094

9,094

Adjusted EBITDA

$

149,757

$

32,491

$

1,395

$

39,390

$

1,633

$

(23,601)

$

201,065

1Other segment is primarily revenues attributable to (i) the RIMCO segment through the date of sale in January 2014, (ii) leasing space to unrelated third parties in the corporate headquarters building and (iii) several minor unrelated activities. The pre-tax losses or earnings in the Other segment are the net result of the activity mentioned above, net of the portion of corporate overhead not allocated to the reportable segments for management purposes.

       

Reconciliation of 2015 Projected Guidance for Earnings Per Share

Assuming Dilution to Non-GAAP Earnings Per Share Assuming Dilution

Fiscal Year 2015

Low Range

High Range

Projected Earnings Per Share Assuming Dilution

$

1.79

$

1.99

Add Projected Progressive-Related Intangible Amortization Expense

.23

.23

Projected Non-GAAP Earnings Per Share Assuming Dilution

$

2.02

$

2.22

 

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SOURCE Aaron's, Inc.



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