Where do you turn when you need a widescreen, plasma, HD television to watch the Super Bowl, but don't have enough cash to buy the beast at Best Buy (NYSE:BBY) or Wal-Mart (NYSE:WMT)? Over the years (the last 50, to be exact), many Americans have turned to Aaron Rents (NYSE:RNT) to solve this very problem.

Q1 sales
The company reported solid first-quarter financials late last week, demonstrating that the durable goods rental business remains in strong demand. Total revenues were up 10.3%, but the revenue line takes a bit of explaining. Rental revenues (74% of total revenue) rose 12%, with same-store rentals in company-owned locations notching a 9% gain. For the other pieces, sales of merchandise to franchisees grew 10%, with franchise royalties up 19%. I'm excluding a $4.9 million gain on the sale of a parking deck at corporate headquarters. The company booked this as "other revenue," but I consider it a one-time gain on disposal of fixed assets.

This is a slower growth rate than Aaron has enjoyed in the past few years -- full-year 2006 was 18%, 2005 was 19%. The company attributed the slower growth to corporate furnishings being down 3% (up against strong post-hurricane business last year), and direct retail sales down 18%. Aaron is downplaying its direct retail sales business. Quoth management, "we're not in the retail business." It also forecast 2007 sales in the range of $1.5 billion, which would translate into a 13% gain over 2006, confirming that revenue growth is slowing.

The rest of the P&L
From gross profit through expenses, the rest of the P&L looks solid. You will note the unusually high margins (80%), as the company charges depreciation on their rental inventory as a separate line item. Gross profit was up 140 basis points, with expenses rising 80 basis points, leading to operating profit of 11.5%. The expense bump is partially explained by growth in the sales force to sell new franchises.

% to Sales

Q1 2007

Q1 2006


Gross Profit




SG&A Expense








Operating Profit




Excludes $4.9 million gain on sale of parking deck.
*Reported as change in percentage points.

Growth prospects
During 2006, the company accelerated its new store growth program, vowing to open 350 company-owned and franchise locations over 18 months. It remains on track to accomplish this, with 104 stores opened in the fourth quarter, and another 29 opened in the first quarter. It has 215 in the pipeline for the rest of 2007, and at least 80 of these are franchise locations.

Healthy franchise network
For a company that franchises, I consider the health of the franchise network a key indicator. In the first quarter, Aaron bought back three franchise locations, not bad for a company that has 451 franchised locations. Its key competitor is Rent-A-Center (NASDAQ:RCII), which is two-and-a-half times as big as Aaron (with over 3,400 locations), but has a smaller franchise business. Aaron doesn't report same-store rental revenue for its franchisees, but with 80-plus new franchise locations in the pipeline, and first-quarter franchise royalties up 19%, the network appears healthy.

This business in your portfolio?
Rent-to-own is a specialized business that is not easy to evaluate. Both Aaron Rents and Rent-A-Center sport trailing-twelve-month P/E ratios just under 20. Wall Street analysts expect double-digit growth rates for Aaron in 2007 and 2008, and single-digit growth over the same period for Rent-A-Center. Operating profit, as you would expect in this business, is high as a percentage of sales.

I see this as a profitable niche business. Whether or not you like its underlying premise (where lease rates can almost double the price of the product), these companies clearly offer a service that many consumers consider valuable.

For more info on rent-to-own companies, check out:

Rent-a-Center and Wal-Mart are  Motley Fool Inside Value recommendations and Best Buy is a  Motley Fool Stock Advisor selection. Both newsletters outpace the market and both are available for a free 30-day trial.

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Motley Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, and owns shares of Wal-Mart, but none of the other companies mentioned in this article. The Fool has a disclosure policy.