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Why Aaron's, Inc. Stock Slumped 10% Today

By Rich Smith - Oct 27, 2017 at 4:39PM

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Hurricanes have little impact on sales growth, but weigh on profits.

What happened

Shares of home-furnishings lessor Aaron's Inc. (AAN) fell as much as 10% in early trading Friday, after the company reported third-quarter 2017 earnings that fell short of Wall Street estimates. Expected to report pro forma profit of $0.54 per share, Aaron's instead reported just $0.43. Net income as calculated under GAAP (generally accepted accounting principles) was $0.35.

After retracing its early losses somewhat, Aaron's stock closed the day down 7.4%.

The words OWN and RENT, with arrows next to each

Rent? Own? At Aaron's you can do both. Image source: Getty Images.

So what

Aaron's earns revenue in the form of leasing fees, retail and other sales, franchise fees, and interest on loans. Combined, the company's revenues grew 9.1% from Q3 2016 levels to Q3 2017, rising to $838.9 million. Costs, however, grew even faster -- up 10.1% year over year. As a result, Aaron's net income declined in comparison to the year-ago period, falling 12.5% to $0.35 per share.

Management blamed hurricanes Harvey and Irma for "disrupting" its business in the third quarter.

Now what

Despite the disruption, Aaron's reiterated its earnings guidance for the full year, as previously disclosed in its Q2 2017 report. Thus, Aaron's continues to expect revenue of between $3.33 billion and $3.44 billion this year. Earnings per share should range between $2.10 and $2.30, diluted.

Taken at the midpoint, that works out to a closing share price of $39.14, divided by $2.20 in profit, making Aaron's P/E ratio 17.8. That's kind of expensive for a rental business expected to grow at only 12%, and coming off a quarter in which it grew not at all. If investors are selling off Aaron's shares today, I can't really blame them.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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