What Lies Beyond The Name Aaron’s, Inc. (AAN)?
- Progressive revenue predicted to reach $1.05-$1.15 billion in 2015.
- There are several profit levels in AAN’s legacy business.
- E-commerce platform is expected to generate revenue of up to $1 billion over the next several years.
One of the major issues that investors have come to know about Aaron’s, Inc. (NYSE:AAN) is that the company’s core business is aging, or at least maturing. With that in mind, the question that quickly springs up is whether the specialty retailer can continue to grow revenues and profits.
What is it that many investors may not have already appreciated in regards to the future of Aaron’s?
Reintroducing Aaron’s at this juncture is important. Of course, that sets out clearly what you can or cannot expect from the company.
Aaron’s prides itself as a specialty retailer whose offerings capture furniture, household accessories, consumer electronics and appliances, among others. The company offers this merchandise through brick-and-mortar stores (which are its core business) and online.
Beyond the above, Aaron’s has continued to enrich its specialty retail business with rent-to-own solutions. Its play in the rent-to-own space is called Progressive, which also deals with customer approval issues. Progressive partners with retailers to enable customers to get their hands on the goods they want through flexible payment and ownership options that eliminate huge upfront costs.
Focus on Progressive
Aaron’s, Inc. (NYSE:AAN) acquired Progressive in April 2014, and the business seems to have a bright future. The reason for that is that the management of Aaron’s has identified a number of opportunities to drive sales growth in the Progressive segment.
Some of these opportunities are the addition of new retail partners and scaling existing partnerships.
As for new partnerships, Aaron’s is particularly looking for partners among the big-box retailers, such as Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT).
Aaron’s hopes to generate between $1.05 and $1.15 billion in revenue in the Progressive segment in 2015. The business generated about $550 million in revenue in 2014.
Value-add at Progressive: In addition to trying to scale existing partners and tap new ones, Progressive is also developing more solutions. The company is working on software that will simplify applications for financing. The move is expected to expand alternative financing opportunities and increase sales, leading to benefits for both Aaron’s and its retail partners.
Progressive’s competitive advantages
One of the main issues that seem to bother investors about Progressive is the competition against the business. There is no doubt that Progressive has competitors to fight, but it should come out clearly that the business has some interesting insulation against intense competition.
Here is a brief look at how Progressive can handle competition in its space with a higher degree of success:
For retailers, entering into partnerships is something that they consider carefully. Generally, retailers are more interested in establishing relationships with partners that have proven to be trustworthy over a long period of time. That is where Progressive beats the competition. The business has worked with retailers for several years (roughly a decade) and throughout that period Progressive has emerged as a trustworthy partner. It may take competitors years to build the kind of credibility that Progressive enjoys.
Even so, Progressive enjoys strong client stickiness, which also explains why competition may fail to pose a threat to its survival.
High barriers to entry:
Need for outstanding reputation is just one high bar that newcomers may find tough to achieve in a shorter period, but there are also some other barriers to entry in Progressive’s industry. The business of automated lease-to-own is capital intensive, especially in the early stages with most of the investment going into building the IT system. The high start-up capital requirement will certainly keep out many newcomers to the industry, thus less competition and more room for growth.
Experience in risk management:
Making approval decisions to minimize risks is one of the most demanding in the lease-to-own market. Over the years, Progressive has developed invaluable experience in customer approval. The business also boasts outstanding automated approval systems. All these mean that when it comes to underwriting, Progressive is head and shoulders above the competition.
Unmatched backend logistics
One of the greatest problems that competitors face in the lease-to-own marketplace is dealing with returns. Fortunately, that would not be an issue for Progressive because the business can easily leverage Aaron’s vast backend logistics. Aaron’s boasts national infrastructure with a network of over 2,000 stores that can handle returned goods. The backend logistics also help with picking up and refurbishing returned merchandise before they are re-rented. Doing this may not be easy for most, if not all, current competitors, or it may cost them more time and money to build out the same system.
Focus on Aaron’s core business and potential levers
Aaron’s, Inc. (NYSE:AAN)’s legacy business is reaching maturity and this has got some investors worried about continued profitability in the core operations. Without a doubt, Aaron’s may have to do something to ensure that it continues to generate profits from its maturing core operations.
The major question at this juncture should be whether the company has any levers to support continued profitability in the legacy business. Certainly Aaron’s has a number of catalysts to rely on for continued profitability in the core business.
Raising prices will ensure that Aaron’s can tap more revenue without facing a corresponding increase in costs or expenses. Additionally, the company will be able to close the gap with its competitors. The management estimates that their current prices are 25%-30% lower than the competition. That not only indicates room for price lifts, but also means that chances of a price hike causing customer defection are minimal.
Aaron’s can also expand its e-commerce platform to bolster its legacy brick-and-mortar business. Expanding e-commerce presence will increase foot traffic to the stores. This should lead to more sales.
Already, Aaron’s e-commerce footprint can be traced in 46 states and rollout continues. The interesting thing is that online sales at Aaron’s aren’t actually growing at the expense of the store sales as is the case with many retailers. As for Aaron’s, most of the customers coming through the online platform are new to its system. The management predicts that the e-commerce platform can bring in between $500 million and $1 billion in revenue in the next several years.
Aaron’s has been working to improve its cost-structure. The company has been able to close about 100 non-performing stores since at least last year as part of its cost efficiency drive. More cost reduction should lead to margin lifts, hence more profits. The management targets $50 million in annual cost-savings.
Aaron’s has already started a small scale smartphone rollout at some of its stores. The current smartphone offering is on a trial basis as the management hopes to learn the market before a broader rollout. If all goes well, the company hopes to have smartphones at all of its stores by this year’s holiday season.
Aaron’s can leverage the resources at Progressive to bolster its smartphone offering against rivals, such as Rent-A-Center Inc (NASDAQ:RCII).
Beyond the benefits from direct smartphone sales, Aaron’s also stands to benefit from increased store traffic, which should bolster sales in some other segments.
In essence, there are several profitability levers for Aaron’s core business, despite the fact that the business may be maturing.
The management of Aaron’s, Inc. (NYSE:AAN) expects adjusted EPS for 2015 to come in at $2.01-$2.21, indicating a growth of 20%-32%. Consolidated revenue is expected in the range of $3.1-$3.3 billion.
Progressive appears to be the segment that will drive more long-term revenue and profit expansion at Aaron’s, Inc. (NYSE:AAN) as the legacy business matures.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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