Earnings Scorecard: Rent-A-Centre


Rent-A-Center Inc (RCII), one of the largest rent-to-own operators, recently delivered third-quarter 2012 earnings. The Wall Street analysts had more than a week to ponder over the earnings results and eventually made their estimates revision. In subsequent paragraphs, we will cover the results of the recent earnings announcement, estimate revisions by analysts as well as the Zacks Rank and long-term recommendation on the stock.

Earnings Report Review

Rent-A-Center’s earnings of 67 cents a share came in line with the Zacks Consensus Estimate, and bolstered 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 boost 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.

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.

Management forecasted a 175 basis points contraction in gross profit margin for 2012. It also hinted at a 50 basis points reduction in operating profit margin for the year.

(Read our full coverage on this earnings report: Rent-A-Center Meets Expectations)

Agreement of Estimate Revisions

Clearly, a negative sentiment is evident among analysts following the company’s third quarter earnings as 7 out of 10 estimates were lowered in the last 7 days for the fourth quarter of 2012, while 1 was raised. Looking out to fiscal 2012, 6 out of 9 estimates were lowered, while 2 moved in the opposite direction.

During the last 30 days, 7 out of 7 out of 10 estimates were lowered, while 1 was raised for the fourth quarter. For fiscal 2012, 6 out of 9 estimates were lowered, while 2 were raised.

Analysts remain concerned about the slowdown in the company’s core business and rising inventory level. Moreover, higher cost of revenues is likely to remain a drag on the margins of the company as evident from the company’s truncated margins outlook for fiscal 2012.

Magnitude of Estimate Revisions

Given the large number of downward estimate revisions, the Zacks Consensus Estimate decreased by 2 cents to 84 cents a share for the fourth quarter in the 7 days. Moreover, the story remains the same for fiscal 2012, as estimates waned 2 cents to $3.12.

The Zacks Consensus Estimate declined 3 cents in the last 30 days for the fourth quarter and fiscal 2012, respectively.

Our Recommendation

The company remains optimistic about its future growth prospects, with store openings in international markets and accelerated rollout of RAC Acceptance kiosks. Due to continued tightening of the credit market, customers see rent-to-own as a more viable option to credit. However, the sluggish recovery and a fragile job market may make customers reluctant to enter new rental-purchase deals. Moreover, margins remain under pressure due to higher cost of revenues.

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

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

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