Being different can be good, particularly in retail. When you offer better pricing than the competition, larger (and nicer) stores, and more flexible payment options, customers will take notice. Aaron Rents (NYSE:RNT) has done all of that, and the company has been rewarded with strong growth.
Sales in the fourth quarter climbed 16%, while sales in the core rental business grew about 19%. Earnings were up 34%, and margins climbed nearly a full percentage point from the year-ago period.
Same-store sales were also healthy. Although the company failed to post a double-digit increase for the first time in more than a year, same-store sales were still up 8% for the quarter. Although investors might be disappointed in this deceleration, Aaron Rents isn't trying to make excuses for its performance like rival Rent-A-Center (NASDAQ:RCII).
While I took Rent-A-Center to task for trying to blame its problems on gasoline prices, Aaron Rents' management flat-out rejected the notion that gasoline prices were a factor at all. Hammering the point a bit harder, management pointed out that many rent-to-own customers don't even own cars and depend upon public transportation to get around.
Although Aaron Rents is considerably smaller than Rent-A-Center, David has been cleaning Goliath's clock, and the secrets to its success aren't really secrets at all.
First, Aaron Rents undercuts the competition on prices -- charging around three times wholesale prices, while competitors charge four times. Aaron Rents also tends to offer better merchandise (though this is clearly subjective) and more flexible payment terms. Finally, Aaron Rents stores are considerably larger than Rent-A-Center's (an average of 9,000 square feet to 4,400 square feet). In addition, they're generally "nicer" and more closely resemble traditional retailers.
Of course, it's not all sweetness and light for Aaron Rents. As a low-cost competitor, its margins are significantly lower than Rent-A-Center's. What's more, Aaron Rents uses a franchise system that makes results between the two companies more complicated. Finally, Aaron Rents offers essentially nothing in the way of cash flow information, so investors must wait for SEC filings or hope that an analyst asks the right question(s) on the conference call.
The valuation on Aaron Rents' shares reflects the company's success to date. The stock trades at about 20 times trailing earnings and the EV-to-FCF ratio is essentially infinite, since the company has negative free cash flow. Given the company's aggressive expansion plans, investors shouldn't expect to see much in the way of free cash flow anytime soon.
For Fools canvassing the rent-to-own space, the choice really comes down to Aaron Rents and Rent-A-Center. Although Fool colleague Rich Smith made an interesting case for Rent-A-Center, I'd rather go with the straight-shooting, faster-growing Aaron Rents for now.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
