Rent-A-Center Inc.
(
RCII
), one of the largest rent-to-own operators, recently delivered
better-than-expected second-quarter 2012 results. The quarterly
earnings of 74 cents a share outdid the Zacks Consensus Estimate of
71 cents, and increased 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.
The company's business model, called RAC Acceptance, is gaining
traction. When a consumer is denied credit financing for a
particular product from the retailer, Rent-A-Center acquires that
product from the retailer by virtue of the RAC Acceptance program,
and thereby offers it to the consumer under a rental-purchase
transaction.
Revenue from the RAC Acceptance business almost doubled to $77
million from the prior-year quarter, whereas revenue from Core U.S.
segment climbed 1.6%.
Total store revenue rose 7.4% to $740.3 million. The growth was
driven by 6.7% advancement in rental and fees revenue to $659
million, an 18.9% increase in merchandise sales to $60.6 million
and a 9.5% jump in other revenue to $4.5 million, offset by a 2.4%
decline in installment sales to $16.2 million. Total franchise
revenue climbed 7% to $9.4 million during the quarter.
Higher Expenses Weighing Upon Margins
We observe that higher cost of revenues kept the gross margin
under pressure. Although, Rent-A-Center's gross profit grew 4.1% to
$527 million, gross margin shrunk 220 basis points to 70.3%. Cost
of rentals and fees rose 14.7% to $159.8 million, whereas cost of
merchandise sold soared 25.3% to $49.5 million.
Adjusted operating profit rose 1.2% to $79 million, whereas
operating profit margin contracted 70 basis points to 10.5% due to
an increase of 4.3% in salaries and other expenses, and a jump of
7.4% in general and administrative expenses.
Adjusted EBITDA climbed 3.6% to $98.8 million; however, adjusted
EBITDA margin shriveled 50 basis points to 13.2%.
Stores Update
During the quarter, the company opened 8 new Core U.S.
locations, consolidated 15 stores into existing locations and
closed 3 stores bringing the total store count to 2,973. The
company also opened 77 RAC Acceptance stores and consolidated 29
stores into existing locations, resulting in 811 stores.
Thirteen international locations were opened and 1 store was
shuttered during the quarter bringing the count to 99 stores.
ColorTyme, which is a wholly owned subsidiary of Rent-A-Center,
added 2 new locations and closed 1 store, taking the total store
count to 219.
For fiscal 2012, management plans to open approximately 50
domestic rent-to-own stores. Through the year, the company targets
to open 60 rent-to-own locations in Mexico and 10 in Canada.
Moreover, the company aims 200 domestic RAC Acceptance kiosk
additions.
Financial Aspects
Rent-A-Center ended the quarter with cash and cash equivalents
of $101.1 million, senior debt of $367.8 million, and shareholders'
equity of $1,433.5 million. During the first-six months, the
company generated cash flow from operations of about $161.1
million. Management projected capital expenditures of approximately
$105 million for fiscal 2012.
During the first half of 2012, the company bought back 488,731
shares for approximately $16.5 million. Since the inception of the
share buyback program, the company has repurchased 29,811,484
shares and has employed approximately $732 million out of the $800
million authorized.
Strolling Through Guidance
Rent-A-Center witnessed healthy demand for its products and
services during the quarter, and reiterated its fiscal 2012
outlook. The company continues to expect top-line growth between 7%
and 10%, attributable to a low single-digit jump in 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%.
Management maintained its fiscal 2012 earnings projection of
$3.00 to $3.20 per share, including a 25-30 cents cost related to
its international expansion initiatives. The current Zacks
Consensus Estimate for fiscal 2012 is $3.13, which dovetails with
management's guidance range.
Management also forecasted a 100 basis point contraction in
gross profit margin for fiscal 2012. It also hinted a 50 basis
point reduction in operating profit margin for the year.
Rent-A-Center Holds Zacks #2 Rank
Currently, we have a long-term Neutral recommendation on the
stock. Moreover, Rent-A-Center, which competes with
Aaron's Inc.
(
AAN
) and Advance America, holds a Zacks #3 Rank that translates into a
short-term Hold rating.
Rent-A-Center offers consumer electronics, appliances and
furniture products under rental purchase schemes that allow
customers to own the merchandise upon the 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 compared to
credit. However, the sluggish recovery and a fragile job market may
make customers reluctant to enter new rental-purchase deals.
(AAN): ETF Research Reports
RENT-A-CENTER (RCII): Free Stock Analysis
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