Rent-A-Center Inc. ( RCII ), one of the largest rent-to-own operators, delivered third-quarter 2013 earnings of 51 cents a share that missed the Zacks Consensus Estimate of 63 cents, and fell 23.9% from 67 cents earned in the prior-year quarter. Consequently, management lowered its earnings projection.
Total revenue, which comprises store and franchise revenue, grew 2.1% to $754.8 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $773 million. The increase in the top line was attributable to higher revenue from the RAC Acceptance and International segments, partly offset by a decline in the Core U.S. segment.
Comparable-store sales for the quarter dropped 0.8%, reflecting a 5.1% decline in the Core U.S. segment, partly offset by an increase of 29.3% and 33.1% in the RAC Acceptance and International segments, respectively.
The sustained deflation in electronic products along with promotions undertaken to attract budget constrained consumers led to the year-over-year decline in average revenue per agreement and is the principal factor behind the drop in comparable-store sales and trim in the guidance.
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 offers it to the consumer under a rental-purchase transaction.
Revenue from the RAC Acceptance business surged 47.7% to $123.8 million from the prior-year quarter, whereas revenue from the Core U.S. segment declined 4.1% to $608.3 million. International segment revenue came in at $15 million, up 37.7% from the year-ago quarter.
Total store revenue rose 2.4% to $747.1 million due to an increase of 3% in rental and fees revenue to $671.3 million, a 12.3% increase in installment sales to $17.5 million and a 59.5% rise in other revenue to $4.5 million, partially offset by an 8.6% drop in merchandise sales to $53.8 million. Total franchise revenue (i.e. ColorTyme segment now rechristened as Rent-A-Center Franchising International, Inc.) plunged 23.4% to $7.7 million during the quarter.
Rent-A-Center's gross profit inched up 1.9% to $529.3 million. However, gross margin contracted 10 basis points to 70.1%. Operating profit declined 17% to $56.5 million, whereas operating profit margin decreased 170 basis points to 7.5%. Adjusted EBITDA decreased 13.9% to $76.6 million, while adjusted EBITDA margin shriveled 190 basis points to 10.1%.
During the quarter, the company opened 6 new Core U.S. locations, acquired 6 stores and consolidated 10 stores with existing locations, bringing the total store count to 2,974. The company also opened 112 RAC Acceptance stores, consolidated 10 stores with existing locations and closed 1, resulting in 1,254 stores.
Twenty two international locations were opened and 2 stores consolidated with existing locations during the quarter bringing the count to 168 stores. Rent-A-Center Franchising International, which is a wholly owned subsidiary of Rent-A-Center, added 4 new locations and closed 12 locations, with the total store count remaining at 213.
For 2013, management plans to open approximately 60 rent-to-own locations in Mexico. Moreover, the company aims at about 365 domestic RAC Acceptance kiosk additions.
Other Financial Aspects
Rent-A-Center ended the quarter with cash and cash equivalents of $52.9 million, senior debt of $284.6 million, and shareholders' equity of $1,347.7 million. The company generated cash flow from operations of about $172.9 million during the first nine months of 2013. Management now anticipates capital expenditures of approximately $110 million for 2013.
The company bought back 5,057,458 shares for approximately $217.4 million during the first nine months of 2013. Since the inception of the share buyback program, the company has employed approximately $994.8 million out of the $1.25 billion authorized to repurchase 36,177,737 shares.
Strolling Through the Guidance
Rent-A-Center now projects 2013 top-line growth of 1%, attributable to a contribution of $515 million from the RAC Acceptance business. Management forecasts a 1.5% decline in comparable-store sales for 2013.
Management now envisions 2013 earnings in the band of $2.80 to $2.85 per share, including a cost of 30 cents related to its international expansion initiatives. The current Zacks Consensus Estimate for 2013 is $3.08, which is subject to downward revision due to the guidance cut. Earlier, management had projected 2013 earnings between $3.03 and $3.15 per share.
Management also forecasted a contraction of 10 basis points in gross profit and 100 basis points in operating margin for 2013. EBITDA for the year is projected at $370 million.
Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow customers to own the 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 compared to credit. However, the sluggish recovery and a fragile job market may make customers reluctant to enter new rental-purchase deals.
Currently, Rent-A-Center holds a Zacks Rank #3 (Hold). Other stocks worth considering in the finance-leasing industry are Apollo Investment Corporation ( AINV ) and NGP Capital Resources Company ( NGPC ) both carrying a Zacks Rank #1 (Strong Buy) and Hercules Technology Growth Capital, Inc. ( HTGC ) holding a Zacks Rank #2 (Buy).