Rent-A-Center Misses Estimates

Zacks

Rent-A-Center Inc. (RCII'>RCII), one of the largest rent-to-own operators, recently delivered lower-than-expected second-quarter 2011 results. The quarterly earnings of 68 cents a share missed the Zacks Consensus Estimate of 72 cents, and fell 5.6% from the prior-year quarter.

The quarterly earnings met the lower end of management’s guidance range of 68 cents to 74 cents a share. On a reported basis, including one-time items, earnings came in at 63 cents a share, down 12.5% from 72 cents earned in the year-ago quarter.

Rent-A-Center’s total revenue, which comprises store and franchise revenues, grew 4% to $698.3 million from the year-ago quarter attributable to higher revenue from the RAC Acceptance business, partially offset by the discontinued financial services business. However, the total revenue fell short of the Zacks Consensus Estimate of $702 million. Comparable-store sales for the quarter dropped 0.3%.

The company’s new 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 under its RAC Acceptance program acquires that product from the retailer and offers it to the consumer under a rental-purchase transaction.

Total store revenue rose 3.9% to $689.5 million. The growth was driven by an 18.5% increase in merchandise sales to $51 million, a 14.3% jump in installment sales to $16.6 million and 5.3% advancement in rental and fees revenue to $617.8 million, offset by a 78.8% decline in other revenue to $4.1 million. Total franchise revenue climbed 10.1% to $8.8 million during the quarter under review.

Rent-A-Center’s adjusted operating profit fell 5.7% to $78.1 million, whereas operating profit margin contracted 110 basis points to 11.2%. Adjusted EBITDA slipped 4.8% to $95.4 million, whereas EBITDA margin shrunk by 120 basis points to 13.7%.

Financial Aspects

Rent-A-Center ended the quarter with cash and cash equivalents of $74 million, senior debt of $361.5 million, and shareholders’ equity of $1,371.1 million. During the six-month period, the company bought back 2,938,702 shares, aggregating $92.7 million.

During the six-month period, Rent-A-Center generated cash flow from operations of about $171.2 million. To date, the company has repurchased approximately 26.4 million shares totaling $644 million under its $800 million share repurchase authorization. The company also recently raised its quarterly dividend by 167% to 16 cents a share from 6 cents.

Stores Update

During the quarter, the company opened 7 new domestic rent-to-own locations, consolidated 6 stores into existing locations and closed 2 stores. Management now looks forward to opening 20 domestic rent-to-own locations during the third quarter.

The company also opened 5 rent-to-own locations in Mexico during the quarter, and intends to add 10 more during the third quarter. The company also plans to open 5 rent-to-own locations in Canada in the upcoming quarter. At the end of second-quarter 2011, the company operated 3,022 stores nationwide, as well as in Canada and Mexico.

The company also added 130 RAC Acceptance kiosks, acquired 3 stores and closed 4 stores during the quarter under review, bringing the total count to 611 RAC Acceptance kiosks. The company plans to add about 85 to 110 domestic RAC Acceptance kiosks during third-quarter 2011.

For fiscal 2011, management plans to open approximately 40 domestic rent-to-own stores. Targeted rent-to-own locations for the full year are 40 to 55 in Mexico and 10 to 20 in Canada. Moreover, the company is aiming at 350 to 375 domestic RAC Acceptance kiosk additions.

Management Guided

Third-Quarter 2011

Management now expects second-quarter 2011 earnings in the range of 55 cents to 61 cents a share. Total revenue is expected in the range of $691 million to $706 million. Rent-A-Center projects comparable-store sales in the range of 0.5% to 1.5%.

The company has predicted total store revenue in the range of $683 million to $698 million. Store rental and fee revenue is estimated in the range of $612 million to $624 million.

Fiscal 2011

For fiscal 2011 earnings are projected between $2.85 and $3.00 per share. Total revenue is expected in the range of $2,868 million to $2,908 million. Management expects comparable-store sales between 1% and 2%.

Total store revenue is projected between $2,835 million and $2,875 million. The company anticipates store rental and fee revenue between $2,477 million and $2,517 million.

Rent-A-Center Holds Zacks #3 Rank

Currently, we have a long-term ‘Neutral’ rating on the stock. Moreover, Rent-A-Center, which competes with Aaron’s Inc. (AAN'>AAN) and Advance America, holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.

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 availing credit. However, a sluggish recovery in the economy and a fragile job market may make customers reluctant to enter new rental-purchase deals.

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