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AC

Aaron's Company, Inc. (AAN)·Q4 2023 Earnings Summary

Executive Summary

  • Q4 revenue declined 10.2% year over year to $529.5M; adjusted EBITDA was $22.4M; GAAP diluted EPS was $(0.41) and non-GAAP diluted EPS was $(0.26)
  • According to Seeking Alpha’s compiled consensus, AAN’s Q4 revenue of $529.48M missed by $12.59M and non-GAAP EPS of $(0.26) missed by $0.29; S&P Global consensus was unavailable via our data connector for AAN (used third-party consensus as proxy)
  • FY24 outlook introduced: revenue $2.055–$2.155B, adjusted EBITDA $105–$125M, and non-GAAP EPS $(0.10)–$0.25; management also guided to adjusted FCF of $15–$30M, ~50% non-GAAP tax rate, ~31.1M diluted shares, and no buybacks
  • Mixed operating signals: Aaron’s Business improved credit metrics (write-offs 6.5%, −60 bps YoY) and strong e-commerce momentum (+60% recurring revenue written), but BrandsMart comps were weak (−14%), which management said drove earnings below expectations

What Went Well and What Went Wrong

  • What Went Well
    • Credit quality and decisioning: Aaron’s Business write-offs were 6.5% in Q4, improving 60 bps YoY, aided by decisioning enhancements .
    • Omnichannel traction: New omnichannel lease decisioning and customer acquisition program drove a 60% YoY increase in e-commerce recurring revenue written in Q4; deliveries rose 1.4% .
    • Cost discipline and balance sheet: >$40M 2023 cost savings and ~$80M net debt reduction; Q4 included a sale-leaseback with $9.1M proceeds and a $5.4M gain .
  • What Went Wrong
    • Consolidated softness: Revenue down 10.2% YoY and adjusted EBITDA down 25.2% YoY on lower lease revenues/fees at Aaron’s Business and lower BrandsMart retail sales .
    • BrandsMart headwinds: Q4 comparable sales −14% (though a 300 bps sequential improvement), adjusted EBITDA $1.0M (−82% YoY) as weak traffic and trade-down persisted, despite 320 bps gross margin expansion to 23.2% .
    • Below-plan quarter and guidance reset: “Consolidated company earnings for the fourth quarter were below our expectations, primarily due to softer-than-expected demand at BrandsMart,” and FY24 outlook embeds continued near-term pressure; multi-year adjusted EBITDA margin outlook withdrawn .

Financial Results

Consolidated results by quarter

MetricQ2 2023Q3 2023Q4 2023
Revenue ($M)$530.4 $525.7 $529.5
GAAP Diluted EPS ($)$0.21 $(0.13) $(0.41)
Non-GAAP Diluted EPS ($)$0.39 $0.01 $(0.26)
Adjusted EBITDA ($M)$42.4 $25.3 $22.4

Q4 year-over-year comparison

MetricQ4 2022Q4 2023
Revenue ($M)$589.6 $529.5
GAAP Diluted EPS ($)$(0.19) $(0.41)
Non-GAAP Diluted EPS ($)$0.09 $(0.26)
Adjusted EBITDA ($M)$29.9 $22.4

Q4 segment breakdown

SegmentRevenue ($M)Gross Margin (%)Adjusted EBITDA ($M)Adj EBITDA Margin (%)Other KPI
Aaron’s Business$369.2 n/an/an/aWrite-offs 6.5% (−60 bps YoY)
BrandsMart$164.1 23.2% $1.0 0.6% Comparable sales −14.0%

Selected KPIs

KPIQ4 2023
E-commerce recurring revenue written (YoY)+60.0%
Lease merchandise deliveries (YoY)+1.4%
Sale-leaseback proceeds / gain$9.1M / $5.4M
Adjusted free cash flow ($M)$15.9

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY2024n/a (new)$2.055–$2.155BNew outlook introduced
Adjusted EBITDAFY2024n/a (new)$105–$125MNew outlook introduced
Non-GAAP Diluted EPSFY2024n/a (new)$(0.10)–$0.25New outlook introduced
Adjusted Free Cash FlowFY2024n/a (new)$15–$30MNew metric disclosed on call
Non-GAAP tax rateFY2024n/a (new)~50%New detail disclosed on call
Diluted weighted avg sharesFY2024n/a (new)~31.1MNew detail disclosed on call
Share repurchasesFY2024n/a (new)None assumedNew detail disclosed on call
Multi-year adj. EBITDA margin outlookMulti-yearProvided in 2023WithdrawnWithdrawn due to demand uncertainty

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2023)Previous Mentions (Q3 2023)Current Period (Q4 2023)Trend
Customer demand / trafficPersistent demand pressure in Appliances/Electronics at BrandsMart; adj. EBITDA $42.4M consolidated; diluted EPS $0.21 BrandsMart comps −17%; consolidated revenue −11.4%; adj. EBITDA $25.3M Earnings below expectations due to softer-than-expected BrandsMart demand; comps −14% (300 bps sequential improvement) Improving slightly sequentially but still weak
Credit/write-offs—Write-offs 6.1%, −140 bps YoY (Aaron’s Business) Write-offs 6.5%, −60 bps YoY; decisioning enhancements continuing Stable/good
Omnichannel/e-commerce—E-commerce ~18.5% of lease revenues; GenNext store count 245 New omnichannel decisioning & acquisition program; e-comm recurring revenue written +60% YoY Improving
Cost savings—Cost actions tracking $35–$40M >$40M achieved in 2023; additional cost actions in Q1’24 Improving
Balance sheet & leverage—Cash $39.3M; debt $187.5M at Q3-end Net debt reduced ~$80M in 2023; target leverage 1.0x–1.5x net debt/adj. EBITDA Improving
Tax refund season——Slight delay in refunds to start 2024; outlook assumes similar season to 2023 Watching

Management Commentary

  • “Consolidated company earnings for the fourth quarter were below our expectations, primarily due to softer-than-expected demand at BrandsMart.” — CEO Douglas Lindsay
  • “Aaron’s Business launched a new omnichannel lease decisioning and customer acquisition program in Q4, which led to 60% YoY growth in e-commerce recurring revenue written in Q4…”
  • “We delivered over $40 million in company-wide cost reductions in 2023… Reduced net debt in 2023 by ~$80 million (~37%).”
  • FY24 guidance parameters and assumptions: adj. EBITDA $105–$125M; non-GAAP EPS $(0.10)–$0.25; ~50% non-GAAP tax rate; ~31.1M diluted shares; no buybacks; adj. FCF $15–$30M; lease portfolio expected to grow sequentially starting Q2 2024 .

Q&A Highlights

  • Tax refund timing: Management flagged a “little delayed” start to refund season; outlook assumes similar season to last year, with implications for payment activity and early purchase options .
  • BrandsMart recovery path: Continued cost optimization, but EBITDA recovery is largely “about top-line demand and winning share” as category demand remains challenging .
  • Capital allocation and leverage: Target 1.0x–1.5x net debt to adjusted EBITDA; investing in Aaron’s and BrandsMart growth while maintaining conservative leverage; buybacks not assumed in FY24 .
  • Outlook framework: Portfolio began 2024 down ~7%; management expects mid-single-digit growth in portfolio size by year-end and sequential growth beginning in Q2, with adj. FCF reduced YoY due to higher inventory investments in both segments .

Estimates Context

  • S&P Global (Capital IQ) consensus was unavailable via our connector for AAN; where possible we default to S&P Global, but in this case we cite third-party compiled consensus as a proxy. According to Seeking Alpha, Q4 revenue of $529.48M missed consensus by $12.59M and non-GAAP EPS $(0.26) missed by $0.29. We recommend Street models adjust for BrandsMart softness and Aaron’s portfolio trajectory assumptions embedded in management’s FY24 outlook .

Key Takeaways for Investors

  • BrandsMart remains the swing factor: comps −14% show demand is still soft despite sequential improvement; EBITDA leverage is primarily revenue-dependent in 2024 .
  • Aaron’s Business fundamentals are healthier: improved write-offs and strong e-comm momentum point to better unit economics as portfolio growth resumes in Q2–Q4 2024 under the new omnichannel program .
  • FY24 guide implies near-term earnings trough vs. FY23: lower adj. EBITDA and EPS ranges, with FCF constrained by inventory investments; watch for delivery on sequential portfolio growth and tax season dynamics .
  • Multi-year margin outlook withdrawn: underscores macro and category uncertainty; upside likely contingent on appliance/electronics demand recovery and share gains at BrandsMart .
  • Balance sheet flexibility intact: net debt down ~$80M in 2023; management targeting 1.0x–1.5x leverage supports optionality once demand inflects .
  • Trading implications: Near term, results skew cautious given BrandsMart pressure and tax season timing; potential catalysts include visible sequential portfolio growth at Aaron’s, stabilization/improvement in BrandsMart comps, and execution on new store and assortment initiatives .