Rent-A-Center Posts In Line Earnings, Down Y/Y on Low Demand - Analyst Blog


Rent-A-Center Inc. ( RCII ) posted second-quarter 2014 earnings of 38 cents a share that came in line with the Zacks Consensus Estimate but fell 50% from 76 cents delivered in the year-ago quarter due to higher operating costs and softness across the Core U.S. segment. The company held a tough retail environment responsible for sluggish demand. To overcome this, the company rolled out smartphones and no-contract airtime plans at its Core U.S. outlets.

Rent-A-Center, Inc - Earnings Surprise | FindTheBest

Including one-time items, earnings per share came in at 33 cents, down 56.6% year over year.

Total revenue of this rent-to-own operator grew 1.7% to $773.2 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $781 million. The increase in the top line was attributable to higher revenues from the Acceptance Now and Mexico segments, partly offset by a decline in the Core U.S. segment.

Comparable-store sales for the quarter grew 0.6%, reflecting an increase of 25.1% and 17% in the Acceptance Now and Mexico segments, respectively, partly offset by a 4.7% decline in the Core U.S. segment.

The company's business model, called Acceptance Now, continues to gain traction. Revenues from Acceptance Now surged 32.6% to $155.8 million from the prior-year quarter, whereas revenues from the Core U.S. segment declined 4.9% to $592 million. Mexico segment's revenues came in at $17.7 million, up 56.4% from the year-ago quarter. Total franchise revenue fell 16.8% to $7.7 million during the quarter.

Rent-A-Center's gross profit increased 1.1% to $536.5 million, whereas gross margin contracted 40 basis points (bps) to 69.4%. Adjusted operating profit decreased 42.3% to $44.5 million, while operating margin shrank 440 bps to 5.8%. Adjusted EBITDA declined 32.9% to $65.2 million, whereas EBITDA margin contracted 440 bps to 8.4%.

Stores Update

During the quarter, the company opened two new Core U.S. locations, acquired one outlet, consolidated 144 stores with existing locations and closed nine locations, bringing the total store count to 2,847. The company also opened 25 Acceptance Now stores and consolidated 21 stores with existing locations, resulting in 1,359 stores.

In Mexico, eight stores were opened and five stores were consolidated with existing locations bringing the count to 176 stores. Rent-A-Center Franchising, which is a wholly owned subsidiary of Rent-A-Center, added eight new locations and closed six locations, with the total store count coming to 180.

Management's target of opening approximately 30 rent-to-own locations in Mexico in 2014 was accomplished in the quarter under review. Moreover, the company aims at about adding 190 domestic Acceptance Now kiosks in the year.

Other Financial Aspects

Rent-A-Center, which competes with McGrath Rentcorp ( MGRC ), ended the quarter with cash and cash equivalents of $68.1 million, senior debt of $393.2 million and shareholder equity of $1,370.6 million. Management estimates capital expenditures of approximately $95 million for 2014.

Glance at Guidance

Management lowered its projection citing macroeconomic headwinds in the back half of the year that would soften demand in the Core U.S. segment.

Rent-A-Center now projects 2014 top-line growth of 2.5% to 4%, down from the earlier forecast of 3% to 6%. Management envisions a 1.5% to 2.5% jump in comparable-store sales. EBITDA for the year is projected between $300 million and $310 million.

Management now anticipates 2014 earnings in the band of $2.00 to $2.15 per share, including a cost of 25 cents related to its Mexican expansion initiatives. The current Zacks Consensus Estimate for 2014 is $2.14. The company had previously projected full-year earnings between $2.30 and $2.50 per share.

For the third quarter, Rent-A-Center projects top-line as well as comparable-store sales growth in the range of 2% to 3%, reflecting comps increase of 25% to 30% in the Acceptance Now segment and 15% to 20% in the Mexico segment, partly offset by a decline of 3.5% to 4.5% in the Core U.S. segment.

The quarterly earnings are expected in the band of 43 cents to 51 cents a share. The current Zacks Consensus Estimate for the quarter is 52 cents.

Closing Comment

Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow customers to own merchandise upon completion of the rental period. Due to continued tightening of the credit market, customers see rent-to-own as a more flexible and viable option. However, sluggish recovery may make customers reluctant to enter new rental-purchase deals.

Currently, Rent-A-Center holds a Zacks Rank #5 (Strong Sell). Better-ranked stocks include AerCap Holdings N.V. ( AER ) and AeroCentury Corp. ( ACY ) both of which hold a Zacks Rank #1 (Strong Buy).

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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 The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: RCII , ACY , MGRC , AER

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