Tickers in this Article: AAN, RCII, COST, BWS, AEA
Aaron's (NYSE:AAN) blew the lid off its earnings this week with a first-quarter earnings per share (EPS) of 65 cents on a diluted basis compared to last year's Q1 of 42 cents a share, or $35.4 million net income versus $22.6 million. It achieved this on a 15% revenue increase, with total revenue at $474 million versus $412.7 million for last year's Q1.

Aaron's has seen robust sales continue throughout this recession as its president and CEO, Robert C. Loudermilk Jr., said he sees "no indication that this trend will diminish in the foreseeable future". While Wall Street has been cheering earnings reports of companies that merely beat estimates despite declining earnings, Aaron's has produced the real things: earnings and growth.

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The Right Time And Place
Aaron's is appealing to traditional lower- and middle-income consumers - who wish to obtain basic furnishings and consumer products such as electronics through lease-to-own options - and to less traditional consumers, who have been pushed to their bottom line by the economic downturn. Aaron's was joined by Rent-A-Center (Nasdaq:RCII), with its rent-to-own model producing similar favorable earnings of 65 cents a share versus 51 cents for last year's Q1. Both companies raised guidance for the remainder of 2009. Wall Street has obviously picked up on both stocks, as Rent-A-Center is trading in the middle of its 52-week range, while Aaron's recently reached a new high.

While a recent Reuters piece crowed about the rise of consumer confidence in April, it's still apparent that many consumers are not making, or are unable to make, long-term financing commitments to buy consumer items. Along with the apparent downshift of the economy over the last year or two, with job cutbacks and layoffs, this has very likely sent a new group of consumers into the retail niche occupied by Aaron's and Rent-A-Center. The long-lasting recession keeps feeding this phenomenon. (Learn more in Economic Indicators: Consumer Confidence Index.)

Similar Niche Companies Not Faring As Well
Others that might be expected to benefit from the driven-down economy are discounters such as Costco (Nasdaq:COST), which sells many items similar to those that Aaron's rents or leases to own. Costco, however, has had sluggish earnings and hasn't seen the growth in this area that Aaron's or Rent-A-Center has. Another retailer, Brown Shoe Co. (NYSE:BWS), which has the Famous Footwear stores, has shown losses in recent quarters. Shoe sales, particularly mid-level and discount retailers, would normally be expected to do somewhat better in a recession. This, again, indicates the recession's severity and depth, and that we're not yet heading out of it. Not to be flippant, but perhaps some entrepreneur needs to start a business renting shoes during this recession (other than at the local bowling alley).

In another sampling of businesses that service less-affluent consumers, Advance America Cash Advance Centers (NYSE:AEA) has been flat or running slightly behind its earnings from one year ago. While other cash advance and payday loan centers are doing better, this shows that even some of the low-end credit businesses are not reaping the benefits that Aaron's is seeing. Consumers of all stripes may be just about borrowed out.

What This Means
This means that great profits aren't automatic in the less-affluent consumer sector. It also shows that as the recession plows along, there appear to be more potential customers to draw from in this area, or that they're being driven to places like Aaron's and Rent-A-Center. Loudermilk's comment that Aaron's does well in good times, but really thrives in these times, shows an expansion of its customer base. The question will be when we emerge from this recession, how much of that base will Aaron's retain? Will a generally prospering economy dampen its newfound extra demand?

An Interesting Long-Term And Recession Stock
Aaron's shares are now trading at a new 52-week high, as we mentioned, so you don't want to buy in at this price. As a fundamental investor, you would want to wait for the price to relax a bit. Long-term, try to check Aaron's earnings during the economy's more flush times to see whether the company will act as a reverse barometer of the economy. This makes the stock an interesting long-term investment. When bought on the basis of continually good earnings and at a reasonable stock price, it can generate price appreciation through recessions, which makes it especially inviting. It might be worth owning as an even better recession stock in the future than some of the more publicized names.

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