Rent-A-Center's Preferred Lease Unit Bodes Well, Stock Up 51%

Rent-A-Center, Inc.’s RCII stock is climbing up the charts, given the immense strength in its Preferred Lease segment. Moreover, the company is increasing its e-commerce offerings and mobile applications as well as expanding its e-commerce functionality to drive performance. Cost containment, improving traffic trends, targeted value proposition and refranchising program also bode well.

These factors are clearly reflected in its price performance, as the Plano, TX-based company’s shares have appreciated 51.4% in the past three months. The Zacks Rank #2 (Buy) stock has also outperformed its industry’s 29.6% rally and the broader S&P 500 Index’s 14.9% gain in the said time. A VGM Score of A for the stock is also reflecting strength.

Let’s Analyze

Higher invoice volumes and contributions from the Merchants Preferred buyout have been driving Rent-A-Center’s Preferred Lease segment. The buyout of Merchants Preferred, a nationwide virtual rent-to-own provider, enhances the company’s rent-to-own capabilities and allows it to provide both virtual and staffed solutions. Encouragingly, the segment’s revenues grew 10% to $216.1 million in the first quarter of 2020. Invoice volumes rose 16.9% to $150.5 million.

However, the company has been witnessing sluggishness across its namesake segment, mainly owing to the refranchising efforts and continued store-base rationalization. Meanwhile, the leading rent-to-own operator has been investing in enhancing its omni-channel platform so that customers can experience a seamless approach across channels, markets, products and brands. Sturdy e-commerce performance has contributed to the first-quarter results. The company has been implementing curbside pickup, which has gained huge popularity and has now become the effective way to meet customers’ demands in the wake of the coronavirus crisis.

In addition, Rent-A-Center looks well-placed on the dividend-payout front too. Management raised quarterly dividend from 25 cents to 29 cents during the first quarter. Notably, the company’s current annualized dividend rate of $1.16 a share reflects a substantial increase from the year-ago period. It has a dividend payout of 50%, dividend yield of 4.5% and free cash flow yield of 14.5%. With an annual free cash flow return on investment of 20.8%, ahead of that of the industry’s 13.1%, the company’s dividend payment is likely to be sustainable.

Adding to positives, analysts are optimistic about the stock. The Zacks Consensus Estimate of 59 cents for the second quarter and $2.27 for 2020 has increased 1.7% and 2.7% respectively in the past 30 days.

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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.