After months of negative press about its long-term future, Atlanta-based rent-to-own giant Aaron’s seemingly made some positive news last week.
Vintage Capital Management, which had made an unsolicited $2.3 billion bid to take over the company, dropped its plans after Aaron’s board rejected the offer Tuesday. Aaron’s simultaneously announced it had bought Progressive Finance, an online lender with an extensive lease-to-own customer base, for $700 million.
The moves sent Aaron’s stock up and down for the remainder of the week as investors seemed uncertain what the withdrawal of the takeover bid or the Progressive acquisition mean to the company.
But Aaron’s, the nation’s second largest rent-to-own retailer, is not out of the woods yet.
The company will report its earnings on Friday and leaders warned they will be disappointing. Aaron's cut its guidance for the period, saying same-store sales at company-operated locations will be down 2 percent. Colder-than-usual weather in winter and early spring — with many parts of the country receiving record rainfall — tamped down store traffic, the company said.
And Brian Kahn, managing member of Orlando-based Vintage, Aaron’s second-largest shareholder, said he still plans to make his company’s voice heard at the company’s annual meeting later this year (no date has been set for the gathering).
The board seats for Aaron’s Chief Executive Officer Ron Allen and chairman Ray Robinson are up for election and Vintage has nominated five people to fill them, including Kahn and former Aaron’s Chief Operating Officer Ken Butler.
Still, the week’s events brought a change in tone for Aaron’s, which has been besieged by reports of unhappy franchisees, a lawsuit challenging the make up of its board and accusations by Vintage that Aaron’s was unwilling to negotiate.
While Aaron’s shares wavered, analysts applauded the Progressive acquisition, which Aaron’s said will help it attract customers who buy online and would not come into its brick-and-mortar stores. Adding Progressive also makes Aaron’s more valuable, complicating Vintage’s takeover plans.
Kahn suggested the Progressive deal was an end-run.
“Your actions have had one intended effect: we are withdrawing our offer to acquire Aaron’s,” Kahn said in his letter to Aaron’s directors in ditching Vintage’s takeover bid. “Although we continue to have a strong interest in owning Aaron’s, in light of your decision to grossly overpay for Progressive Finance, we need to evaluate how much the company is now worth.”
Allen, who many blame for the company’s woes, stressed on Tuesday that the Progressive acquisition was not an attempt to distract investors from the company’s challenges. He said the deal had been in the works since April 2013 when John Robinson, Utah-based Progressives’s CEO, approached Aaron’s about a partnership.
“It gives us an opportunity to grow our customer base quite strongly,” said Allen, adding that he thought the announcement hit the “ball out of the park.”
Improving foot traffic is important to Aaron’s. The company eked out annual revenue growth of less than 1 percent in 2013. Its fourth quarter net income last year tumbled to $22.7 million from $36.6 million a year earlier.
In revising its earnings expectations for the first quarter of 2014 on Tuesday, the company said it expects revenue of $587.5 million for the quarter instead of about $600 million as earlier hoped. Earnings per share will be down from earlier guidance too, it said.
Allen’s confidence Tuesday stood in contrast to challenges he faced late last month. At that time, some franchisees threatened to mutiny and back Vintage’s bid because of what they saw as a lack of vision on Allen’s part and a marketing strategy that sought to attract middle- and high-end clientele instead of focusing on Aaron’s traditional customers.
A March closed-door meeting with franchisees in Orlando was at times heated, insiders said. The next day, Allen told those in attendance at a general session for the company that many of Aaron’s problems were created before he took over as CEO in February 2012.
They included an investigation by the California attorney general’s office into the company’s practices and accusations Aaron’s spied on customers through rented computers and kept sensitive data including social security and credit card numbers on its servers.
But the Progressive announcement early last week gave the company something to cheer about. Aaron’s on Wednesday released franchisee statements supportive of the purchase.
“The Progressive acquisition moves Aaron’s quantum leaps forward,” said Dave Edwards, president and chief operating officer of Atlanta-based SEI, operator of 106 stores and Aaron’s largest franchisee.
“Progressive has already proven they can attract a customer electronically and Progressive’s ability to approve a customer online is a more quantifiable way to qualify a customer,” said Edwards, who is also a member of the Aaron’s Franchisee Board. “This gives us the opportunity down the road to be more things to more people.”
Said Todd Wilkins, operator of 10 stores: “Progressive will help us broaden and expand our customer base. There are millions who fit our demographic who are not walking into our stores. We can leverage this acquisition to get them into our stores or online to become our customers.”
Leslie Kuban, a franchise consultant at FranNet, said the company obviously wants to change the narrative and what better way to do that than to show support among it franchisee base. But she said it would be a mistake to think that the support is universal.
“How widespread is the support, that’s the question?” she said.
Economist Tim Mescon said it’s important for the company to get the endorsement of franchisees since they, in many ways, are the company’s first customers. The Progressive deal should answer many of their complaints since Progressive’s customers are the very folks with credit struggles that Aaron’s franchisees feel have been abandoned.
“In a great respect it returns the company to its roots and that resonates with everybody,” he said.
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