Amazon's Traffic, Mindshare Could Be A 'Huge' Opportunity For Aaron's

Lease-to-own retailer Aaron's, Inc. AAN could benefit from tapping into Amazon.com, Inc. AMZN's mindshare, offering its Progressive segment "a huge opportunity to shine," according to Northcoast Research.

The Analyst

Northcoast Research's Nick Mitchell maintained a Buy rating and $52.50 price target for the shares of Aaron's. 

The Thesis

Aaron's Progressive segment is by far and away the best-positioned virtual lease-to-own platform in the market, analyst Mitchell said in a Friday note. (See Mitchell's track record here.)

Mitchell said he expects the company's market-leading position to translate into significant growth over the next five to 10 years, as the segment strives to take advantage of a $25 billion addressable market.

The Progressive segment appears to be working to form "a scalable go-to-market strategy that would allow it to leverage Amazon's traffic and mindshare," Mitchell said. Amazon directly sold about $50 billion of merchandise in the U.S. over the past 12 months, with roughly 45 percent of the transactions occurring in categories in Progressive's wheelhouse, the analyst said. 

"As such, each 100 bps of sales lift that Progressive can help generate in these departments would translate into a roughly $240 million sourcing opportunity." 

Notwithstanding the threat posed by some obstacles, including the demographic mix, and the likely need to use personal shopping assistants, at least in the short run, Mitchell said Aaron's value proposition could create a 100-300 basis-point sales lift across relevant categories for Amazon.

Northcoast Research estimates the e-commerce giant could conservatively represent a $240 million to $720 million inventory sourcing opportunity. This would generate incremental operating income of $45 million to $219 million and unlevered net income of $28 million to $135 million for Aaron's, the analyst said. 

Northcoast Research sees the recent pullback in the shares as a buying opportunity.

The Price Action

Aaron's shares are up about 23 about percent year-to-date.

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