3 Reasons It's A Good Time To Buy Aaron's

Specialty retailer Aaron's (NYSE:AAN) announced its record-setting first quarter earnings in early May. I last wrote about the Atlanta-based company in June 2010 when it was three years into its Canadian expansion with 32 stores on the ground and more to open. Today, there are 46 stores open in eight provinces coast-to-coast. In the two years it has taken to open the 14 new stores, its stock's doubled in price. Lately, though, Aaron's has stalled, up less than 1% compared to 5.7% for the S&P 500. With a break in the action and record earnings being served up, now's the perfect time to buy its stock.

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The big change from a governance standpoint its shareholders voted Dec. 7, 2010, to eliminate its dual class structure whereby founder and Chairman Charlie Loudermilk controlled 61% of its stock. I didn't have a problem with this type of arrangement because most owners are wise enough not to abuse the privilege. However, many investors believe the dual class structure leads to big differences in stock prices, reduces liquidity and deters institutional investors.

Looking at its stock performance, I would say Loudermilk and the rest of the directors were wise to create one class of voting shares. On paper, Loudermilk might not have the absolute control he had before the change, but investors know who built the company. He's Chairman until he doesn't want the job any more.

In 2011, Aaron's added 68 stores to its HomeSmart concept, which provides weekly payments rather than monthly to customers with little credit or cash. By the end of 2011, it had opened 71 company-operated stores generating revenues of $15.6 million compared to $56,000 in 2010. As this is a new concept, it has yet to make money, but shows great promise. In the first quarter of 2012, HomeSmart saw its revenues increase $12.2 million year-over-year to $12.5 million.

Again, the stark difference in revenues has to do with the infancy of the concept in the first three months of 2011. In the first quarter, it opened three HomeSmart stores and I'd look for it to continue to do the same in the quarters to come until its financial assessment of the concept is completed at the end of 2012. With the continuing credit problems many Americans still face, firms like Cash America International (NYSE:CSH), DFC Global (Nasdaq:DLLR) and World Acceptance (Nasdaq:WRLD) continue to do well. There's no reason why HomeSmart can't also.

In October 2011, Aaron's acquired 11.5% of U.K. rent-to-own brand Perfect Home for $11.5 million and the option to buy the 46-store chain any time up to Dec. 31, 2013. If the company doesn't choose to exercise its option, it will have to sell back its interest at the original purchase price. With the UK financial situation seemingly worse than over here, I'd be shocked if it didn't take the opportunity to grow beyond North America.

Charlie Loudermilk's son Robin, who had been CEO of the company since June 2008, resigned last November due to personal health reasons. Board member Ron Allen, former Chairman and CEO of Delta Airlines, took over as CEO. At age 70, Allen is a veteran presence guiding the management team. I'm assuming Allen will work to groom his successor in the immediate term. In the meantime, I'm sure he'll continue pushing the business forward.

SEE: Top Qualities Of An Effective CEO

What Is the Same
Its first quarter earnings were brilliant as usual. Revenues increased 10% to $586.9 million, same-store sales were up 4.8% and non-GAAP earnings increased 16.4% year-over-year to 55 cents per share. All five segments experienced year-over-year revenue growth in the first quarter with its biggest, sales and lease ownership, increasing 8.8% to $558 million. It ended March with $352.7 million in cash and short-term bonds, a 28.5% increase from December. Most importantly, it raised its full-year 2012 non-GAAP earnings guidance to a minimum of $1.96 a share, up from $1.88 in December.

The Bottom Line
Aaron's stock has outperformed its slightly bigger rival - Rent-A-Center (Nasdaq:RCII) - in eight of the last 11 years and annually by 935 basis points. Long-term, look for it to continue delivering 13% in total returns. I like it more today than I did in 2010 and that's saying something.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.