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Why Aaron's Stock Rocketed 20% on July 29

By Reuben Gregg Brewer – Jul 29, 2020 at 12:45PM

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Yes, it was earnings. But there was an even bigger announcement that went along with the quarterly update.

What happened

Shares of rent-to-own specialist Aaron's (AAN) took off on Wednesday, rising 20% in the first couple of hours of trading. There were two important pieces of news that drove the stock higher: earnings and the company's plans for a big corporate makeover. At 12:41 p.m. EDT, shares were up 17%.

So what

On the earnings front, Aaron's second-quarter results were pretty good given the COVID-19-related headwinds that the economy has been facing. Revenue advanced 6.4% year over year in the quarter. EBITDA was up 20.9%. And adjusted earnings were up a hefty 26.9%. Clearly Aaron's made out pretty well even in the face of the government-mandated shutdowns of nonessential businesses. That said, the company's two divisions posted vastly different top-line results.  

A smiling woman at a desk with shelving in the background

Image source: Getty Images.

Aaron's core retail business, which operates lease-to-own stores selling furniture and electronics, saw a revenue decline of 2.8% year over year. Revenue in Aaron's Progressive Leasing business, meanwhile, jumped 14.2%. This business offers rent-to-own financing through other retailers, with more than 20,000 stores making use of its services. Which brings up the other piece of news, and the one that likely has investors most excited: Aaron's announced that it intends to break itself in two. The move will allow the faster-growing Progressive Leasing unit to trade as a separate company and, more important, be valued as an independent entity.   

Now what

There's a lot of work that has to be done before this corporate restructuring transaction is complete, but, based on the stock price advance, it seems investors approve of the move. That said, after such a big gain, investors appear to be pricing in material positives. Long-term investors will probably want to wait for the transaction to be completed and then reevaluate the story to see if it's really as exciting as Wall Street seems to think it is.

Reuben Gregg Brewer 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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