Aaron Rents (NYSE: RNT) reported results for its second quarter this week, and the Street tended to overlook the good news for this renter of electronics, home appliances, and office furniture by focusing -- perhaps too intently -- on a guidance cut.
The stock suffered an 11% drop after management lowered its full-year outlook from a range of $1.55-$1.65 per share to $1.50-$1.60. The new projections, however, were made with an eye toward costs for increased expansion. Aaron Rents plans on opening 190 stores in the second half of the year, the vast majority being company-operated locations.
But should investors look on expansion as a bad thing? Not necessarily. Aaron Rents has recorded positive comps over the past few years, according to the latest 10-K. And this quarter was no different, as same-store revenue appreciated by 5%. So if the company runs its operations such that comps continue to rise in a sustainable manner, then expansion should be a good thing. It should be noted, however, that same-store growth from company-operated stores has been on a decline -- 11.6% for 2004, 8.3% for 2005, and 7.2% for 2006.
Net sales for the quarter rose 12% to $359 million, while earnings per diluted share dropped by three pennies to $0.36. However, in the first quarter of 2006, Aaron Rents booked a gain on an asset sale relating to operations in Puerto Rico. That gain was worth $0.06 per diluted share. So, on an adjusted basis, net income actually went up by three pennies this quarter, good for a 9% increase.
And now, let's talk about valuation. Let's say Aaron Rents hits $1.50 per share in earnings -- that level would suggest a P/E ratio of 16, given yesterday's closing price of approximately $24. Analysts think the company might grow about 15.6% over the next five years, according to Yahoo! Finance. Given those numbers, we can say that the stock is sporting a PEG ratio of roughly 1. That isn't too exorbitant a price to pay.
I think Aaron Rents will prosper over the long term, especially since there's a solid market of consumers who can't afford to buy big-ticket items from places such as Best Buy (NYSE: BBY) and Circuit City (NYSE: CC). I concede that Rent-A-Center (Nasdaq: RCII) is the big fish in this particular genre of retail, but even so, Aaron Rents has done reasonably well. It built on its previous quarter, and while second-quarter results did lag past growth achievements, I again have to point out that the retail renter is not too expensive. Put it on a watch list and perform some due diligence, especially if the stock drifts lower. But do keep an eye on the comps.
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Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 10,076 out of more than 60,000 investors in Motley Fool CAPS. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.
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