Rent-A-Center Inc.
(
RCII
), one of the largest rent-to-own operators, delivered
third-quarter 2012 earnings of 67 cents a share that came in line
with the Zacks Consensus Estimate, and increased 11.7% from 60
cents earned in the prior-year quarter, aided by top line
growth.
Rent-A-Center's total revenue, which comprises store and
franchise revenues, rose 5% to $739.3 million from the year-ago
quarter but fell short of the Zacks Consensus Estimate of $757
million. Comparable-store sales for the quarter rose 1.2%. The
increase in the top line was attributable to higher revenue from
the RAC Acceptance segment, partly mitigated by a decline in the
Core U.S. 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 surged 63.4% to $83.8
million from the prior-year quarter, whereas revenue from Core
U.S. segment edged down 0.8% to $634.6 million. International
segment revenue came in at $10.9 million substantially up from
$4.7 million in the year-ago quarter.
Total store revenue rose 4.8% to $729.3 million. The growth
was driven by 4.8% advancement in rental and fees revenue to
$652.1 million and an 11.5% increase in merchandise sales to
$58.9 million, partially offset by a 4.8% decline in installment
sales to $15.6 million and 32.2% decrease in other revenue to
$2.8 million. Total franchise revenue (ColorTyme segment) climbed
18% to $10 million during the quarter.
We observe that higher cost of revenues kept the gross margin
under pressure. Although, Rent-A-Center's gross profit grew 2.7%
to $519.3 million, gross margin shrunk 160 basis points to 70.2%.
Cost of rentals and fees rose 11.2% to $158.8 million, whereas
cost of merchandise sold grew 10% to $47.5 million.
Operating profit rose 4.2% to $68.1 million, whereas operating
profit margin contracted 10 basis points to 9.2%. Adjusted EBITDA
climbed 7.5% to $89 million, while adjusted EBITDA margin
expanded 30 basis points to 12%.
Stores Update
During the quarter, the company opened 11 new Core U.S.
locations, acquired 2 stores and closed 3 stores (2 stores
consolidated with existing locations and 1 location closed)
bringing the total store count to 2,983. The company also opened
100 RAC Acceptance stores and closed 29 stores (consolidated with
existing locations), resulting in 882 stores.
Sixteen international locations were opened and 1 store was
shuttered (consolidated with existing locations) during the
quarter bringing the count to 114 stores. ColorTyme, which is a
wholly owned subsidiary of Rent-A-Center, added 5 new locations
and closed 4 stores, taking the total store count to
220.
For 2012, management plans to open approximately 35 domestic
rent-to-own stores. Through the year, the company targets to open
40 rent-to-own locations in Mexico and 6 in Canada. Moreover, the
company aims 300 domestic RAC Acceptance kiosk additions.
Other Financial Aspects
Rent-A-Center ended the quarter with cash and cash equivalents
of $81.8 million, senior debt of $293.3 million, and
shareholders' equity of $1,460.8 million. During the first-nine
months of 2012, the company generated cash flow from operations
of about $258.7 million. Management reiterated capital
expenditures of approximately $105 million for 2012.
During the first-nine months of 2012, the company bought back
866,985 shares for approximately $30.1 million. Since the
inception of the share buyback program, the company has
repurchased 30,189,738 shares and has employed approximately
$745.6 million out of the $800 million authorized. The company's
Board of Directors enhanced the share repurchase authorization by
an additional $200 million to $1 billion.
Strolling Through Guidance
Rent-A-Center projects 2012 top-line growth between 7% and
8.5%, attributable to a low single-digit jump in Core U.S.
segment and more than $325 million contribution from the RAC
Acceptance business. Management expects comparable-store sales
growth of 2% for the fourth quarter and 2012.
Management envisions 2012 earnings in the band of $3.05 to
$3.15 per share, including 30 cents cost related to its
international expansion initiatives. The current Zacks Consensus
Estimate for 2012 is $3.14 that lies near the upper-end of the
guidance range.
Management also forecasted a 175 basis points contraction in
gross profit margin for 2012. It also hinted a 50 basis points
reduction in operating profit margin for the year.
Closing Comment
Currently, we have a long-term Outperform recommendation on
the stock, given its sustained top and bottom lines growth for
the past four quarters. However, Rent-A-Center, which competes
with
Aaron's Inc.
(
AAN
) and Advance America, holds a Zacks #4 Rank that translates into
a short-term Sell rating as margins remained under pressure due
to higher expenses.
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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