Bullish on Rent-A-Center - Analyst Blog


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With an extensive network of more than 3,000 stores, Rent-A-Center Inc. ( RCII ) is one of the largest rent-to-own operators in the U.S. The sheer geographic reach enables the company to effectively penetrate its target markets and gain a competitive advantage over competitors such as Aaron's Inc. ( AAN ) and Advance America.

The company is taking prudent steps to optimize rental merchandise levels in accordance with sales trends. Rent-A-Center implemented a centralized inventory management system, including automated merchandise replenishment. Moreover, a new centralized purchasing system allows better management of rental merchandise.

The company, in order to enhance consumers' shopping experience, has developed a new business model called RAC Acceptance. When the consumer is denied credit financing for a particular product from the retailer, Rent-A-Center under its RAC Acceptance program, acquires that product from the retailer and offers it to the consumer under a rental-purchase transaction.

Despite a sluggish recovery in the economy, Rent-A-Center is witnessing healthy demand for its product and services, as evident from its second-quarter 2012 results. The quarterly earnings of 74 cents a share outdid the Zacks Consensus Estimate of 71 cents, and augmented 8.8% from 68 cents earned in the prior-year quarter, aided by growth in the top line.

Rent-A-Center's total revenue, which comprises store and franchise revenues, grew 7.4% to $749.7 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $757 million. Comparable-store sales for the quarter rose 2.8%. The increase in the top line was attributable to higher revenue from the RAC Acceptance segment.

Revenue from the RAC Acceptance business almost doubled to $77 million from the prior-year quarter, whereas revenue from the Core U.S. segment climbed 1.6%.

Rent-A-Center remains optimistic about its future growth as it opens stores in international markets and accelerates the rollout of RAC Acceptance kiosks. Management maintained its fiscal 2012 earnings projection of $3.00 to $3.20 per share.

The company also reiterated its revenue growth forecast of 7% to 10% for the year, attributable to a low single-digit jump in the Core U.S. and more than $300 million contribution from the RAC Acceptance business. Management expects comparable-store sales between 2.5% and 4.5%.

Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow customers to own the merchandise on the completion of the rental period. Due to the continued tightening of the credit market, customers see rent-to-own as a more flexible and viable option compared to credit.

Currently, we have a long-term Outperform recommendation on the stock. However, Rent-A-Center's shares maintain a Zacks #3 Rank, which translates into a short-term Hold.

We observe that higher cost of revenues kept the gross margin under pressure that shrunk 220 basis points to 70.3% during the second quarter. Operating profit margin also contracted 70 basis points to 10.5%.

(AAN): ETF Research Reports
RENT-A-CENTER (RCII): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: AAN , RCII

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