Aaron’s Inc (NYSE: AAN): Stock of the Day

By the Investment U Research Team

Renting Becomes Fashionable… Or Not?

After the bell yesterday, we had a double whammy on earnings surprises.

Both Aaron’s Inc (NYSE: AAN) and Rent-a-Center (Nasdaq: RCII) reported upside surprises… but the end result couldn’t be more different.

Aaron’s reported EPS of $0.65 versus an expected $0.52 percent, a 25% surprise.

It appears as though Aaron’s 1,577 total locations has found new cash-strapped consumers looking to rent or lease rather than purchase home furnishings. Revenues increased 15% for the first quarter, year-over-year.

So did the same happen at Rent-A-Center? Yes… kind of.

Rent-A-Center checked in with $0.65 per share, 20% over the expected $0.54.

But the EPS surprise came from some cost cutting measures that improved margins, not from revenue growth. In fact, year-over-year revenue fell 3.7%.

As if that wasn’t enough, Aaron’s is much more optimistic about the future:

“Although we have done well through the years in different economic environments, both good and challenging, we believe the current conditions have helped accelerate the number of customers coming into our stores. We currently see no indication that this trend will diminish in the foreseeable future.”

While Rent-A-Center couldn’t muster up the same fervor:

“Despite the softness in customer agreements during the first quarter, we believe we are improving our margins and prudently using our cash.”

It sounds like one company is turning a down market into an opportunity, and the other is battening down the hatches for the storm.

The market took notice. Despite both posting upside surprises, Aaron’s is up about 14% and Rent-A-Center is down almost 20% as of this writing.

I’d give Rent-A-Center more credit if I believed they were prudently tempering expectations in an effort to “under-promise and over-deliver.” But Rent-A-Center and CEO Mark Speese don’t have a history of earnings surprises.

For now, Aaron’s sales growth is much more sustainable than Rent-A-Center’s cost-cutting. If you’re looking for best of breed in the countercyclical rental business, Aaron’s Inc. is the way to go.

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