Is Aaron's Earning Its Keep?

Margins matter. The more Aaron's (NYSE: AAN  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong Aaron's competitive position could be.

Here's the current margin snapshot for Aaron's over the trailing 12 months: Gross margin is 51.9%, while operating margin is 11.1% and net margin is 7.8%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where Aaron's has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Aaron's over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 52.0% and averaged 51.6%. Operating margin peaked at 11.0% and averaged 9.8%. Net margin peaked at 6.5% and averaged 6.0%.
  • TTM gross margin is 51.9%, 30 basis points better than the five-year average. TTM operating margin is 11.1%, 130 basis points better than the five-year average. TTM net margin is 7.8%, 180 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, Aaron's looks like it is doing fine.

Over the decades, small-cap stocks like Aaron's have provided market-beating returns, provided they're value-priced and have solid businesses. Read about a pair of companies with a lock on their markets in "Too Small to Fail: 2 Small Caps the Government Won't Let Go Broke." Click here for instant access to this free report.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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7/30/2014 11:53 AM
AAN $27.75 Down -0.19 -0.68%
Aaron's, Inc. CAPS Rating: ***

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