On Apr 8, we downgraded our recommendation on
Rent-A-Center, Inc. ( RCII ), one of the
largest rent-to-own operators in the U.S. to Underperform based on
the company's dismal fourth-quarter 2012 results. The stock
currently carries a Zacks Rank #4 (Sell).
Why the Downgrade?
Estimates for Rent-A-Center have shown a downtrend since the
company reported its fourth quarter results on Jan 28. The
company's quarterly earnings of 81 cents a share missed the Zacks
Consensus Estimate by a couple of cents, and dropped 4.7% from 85
cents earned in the prior-year quarter.
Although total revenue rose 2.8% to $758.4 million, it fell
short of the Zacks Consensus Estimate of $781 million.
Comparable-store sales for the quarter fell 0.2%.
Consequently, management projected a 4% decline in the Core U.S.
segment during the first quarter of 2013. Comparable-store sales
are forecasted to drop 2% in the quarter. The Zacks Consensus
Estimate for 2013 and 2014 decreased by 6% and 6.1% to $3.28 and
$3.72, respectively in the last 90 days.
Cause for Concern
The sluggish recovery and a fragile job market are making
customers reluctant to enter new rental-purchase deals. We also
observe that higher cost of revenue kept the gross margin under
pressure. Gross margin shrunk 60 basis points to 69.5% during the
fourth quarter of 2012.
Rent-A-Center, which competes with Aaron's Inc.
( AAN ), forecasted
a 50 basis points contraction in gross profit margin for 2013. A
4.3% rise in salaries and other expenses impacted the operating
profit. Operating profit fell 4.7% to $79.3 million, whereas
operating profit margin contracted 80 basis points to 10.5%.
Other Stocks That Warrant a Look
While we prefer to avoid Rent-A-Center until we see signs of
improvement in the company's performance, other stocks worth
considering in the finance-leasing industry are AeroCentury
Corp. ( ACY
), which carries a Zacks Rank #1 (Strong Buy) and Electro
Rent Corp ( ELRC ), which holds a
Zacks Rank #3 (Hold).AARONS INC (AAN): Free Stock Analysis ReportAEROCENTURY CP (ACY): Get Free ReportELECTRO-RENT (ELRC): Get Free ReportRENT-A-CENTER (RCII): Free Stock Analysis
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