We all remember the late 1990s, when the markets were overcome by "irrational exuberance." Aaron Rents
Top-line growth remained healthy, with comparable sales up 3.9% in company-owned stores and 15% in franchise locations. But profitability has stalled at the company. While beating analyst estimates by a penny, earnings per share fell 20% from the previous year's quarter.
The culprit? Expansion growth expenses skyrocketetd 20% for the quarter and 16% for the full year.
As management explained in the conference call, new stores have a slow growth curve -- payroll and rent expense can cause a loss of $150,000-$200,000 before the store hits its first month of profitability. This is in contrast to new Wal-Mart
There is a silver lining to the bad news, however. Management does realize that it bit off more than it can chew and intends to slow its growth rate in 2008 to 10% to 13%. Rather than continued rapid store base growth, it plans to focus on "increasing revenues in existing stores, and improving overall profitability."
Still, the pain is expected to persist for a while longer. First quarter EPS guidance is $0.38-$0.43, well below the $0.48 it earned last year. And while full-year 2008 guidance calls for a 14% increase in sales, profitability expectations form a wide range, from down 4% to up 6%.
It's tough to determine whether this industry is a casualty of the housing downturn. A comparison to rival Rent-A-Center
The CAPS community has mixed views, ranging from liking the rent-to-own business model, to concern over the financial health of the industry's lower-income demographic. I think Aaron Rents is a well-run company that just got overly exuberant over growth. For now, however, I think it's prudent to watch whether all those new stores can generate profits in 2008.
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Rent-A-Center and Wal-Mart are Motley Fool Inside Value selections. Rent the service free for 30 days.
Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, and owns shares Wal-Mart, but none of the other companies mentioned in this article. The Fool has a disclosure policy.