), the largest rent-to-own operator in the U.S, leverages an
extensive network of stores to effectively penetrate into its
target markets, which in turn facilitates it to generate healthy
sales and gain competitive advantage over its rivals,
) and Advance America.
Moreover, the company has been 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.
In order to enhance consumers' shopping experience, the
company 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 sluggish recovery in the economy, Rent-A-Center is
witnessing healthy demand for its product and services, as
evident from its third-quarter 2012 results. Rent-A-Center posted
third-quarter 2012 earnings of 67 cents a share that came in line
with the Zacks Consensus Estimate, and rose 11.7% from the
prior-year quarter, aided by top-line growth. Total revenue
climbed 5% to $739.3 million on the back of higher RAC Acceptance
segment revenue. However, total revenue fell short of the Zacks
Consensus Estimate of $757 million.
The company projects top-line growth for 2012 between 7% and
8.5%, attributable to a low single-digit jump in Core U.S.
segment and a contribution worth more than $325 million 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 - $3.15 per
However, we observe that higher cost of revenues kept the
margins under pressure during the last reported quarter.
Rent-A-Center's gross profit margin shrunk 160 basis points to
70.2%. Cost of rentals and fees rose 11.2%, whereas cost of
merchandise sold grew 10%. Operating profit margin also
contracted 10 basis points to 9.2%.
Going forward, the sluggish economic recovery and a fragile
job market may make customers reluctant to enter new
rental-purchase deals. Moreover, Rent-A-Center's business is
seasonal in nature and typically generates stronger sales during
the first quarter characterized by federal income tax refunds,
which are used by the company's customers to exercise early
purchase option on existing rental agreements.
As a result, we have maintained our Neutral recommendation on
the stock with a target price of $36.00. Moreover, Rent-A-Center
holds a Zacks #3 Rank that translates into a short-term 'Hold'
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RENT-A-CENTER (RCII): Free Stock Analysis
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