Rent-A-Center Misses Expectations

Zacks

Rent-A-Center Inc. (RCII), one of the largest rent-to-own operators, delivered fourth-quarter 2012 earnings of 81 cents a share that missed the Zacks Consensus Estimate by a couple of cents, and dropped 4.7% from 85 cents earned in the prior-year quarter.

Rent-A-Center’s total revenue, which comprises store and franchise revenues, rose 2.8% to $758.4 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $781 million. Comparable-store sales for the quarter fell 0.2%. The increase in the top line was attributable to higher revenues from the RAC Acceptance and International segments, partly offset by a decline in the Core U.S. segment.

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 thereby offers it to the consumer under a rental-purchase transaction.

Revenues from the RAC Acceptance business surged 51% to $94.7 million from the prior-year quarter, whereas revenues from Core U.S. segment declined 2.9% to $638.7 million. International segment revenues came in at $12.7 million substantially rising from $5.6 million in the year-ago quarter.

Total store revenues rose 2.7% to $746 million. The growth was driven by 2.9% rise in rental and fees revenue to $665.1 million, a 1.7% increase in merchandise sales to $57.7 million and a 0.6% jump in installment sales to $19.1 million, partially offset by a 4.3% decline in other revenues to $4.1 million. Total franchise revenues (ColorTyme segment) climbed 9.7% to $12.3 million during the quarter.

We observe that higher cost of revenues (up 5%) kept the gross margin under pressure. Although Rent-A-Center’s gross profit grew 1.9% to $527.2 million, gross margin shrunk 60 basis points to 69.5%.

A 4.3% rise in salaries and other expenses impacted operating profit. Operating profit fell 4.7% to $79.3 million, whereas operating profit margin contracted 80 basis points to 10.5%. Adjusted EBITDA decreased 3.3% to $98.5 million, while adjusted EBITDA margin shriveled 80 basis points to 13%.

Stores Update

During the quarter, the company opened 12 new Core U.S. locations and consolidated 9 stores with existing locations bringing the total store count to 2,986. The company also opened 103 RAC Acceptance stores and consolidated 19 stores with existing locations, resulting in 966 stores.

Nine international locations were opened and 15 stores were shuttered during the quarter bringing the count to 108 stores. ColorTyme, which is a wholly owned subsidiary of Rent-A-Center, added 7 new locations and consolidated 3 stores with existing locations, taking the total store count to 224.

For 2013, management plans to open approximately 60 rent-to-own locations in Mexico. Moreover, the company aims at about 425 domestic RAC Acceptance kiosk additions.

Other Financial Aspects

Rent-A-Center ended the quarter with cash and cash equivalents of $61.1 million, senior debt of $387.5 million, and shareholders’ equity of $1,469.9 million. During 2012, the company generated cash flow from operations of about $217.9 million. Management now anticipates capital expenditures of approximately $120 million for 2013.

The company bought back 930,541 shares for approximately $31.7 million during the quarter and 1,797,526 shares for approximately $61.9 million during 2012. Since the inception of the share buyback program, the company has repurchased 31,120,279 shares and employed approximately $777.3 million out of the $1 billion authorized.

Plano, Texas-based company, Rent-A-Center on Dec 17, 2012, raised its quarterly dividend by 31% to 21 cents (or 84 cents annually) from 16 cents a share (or 64 cents annually). The increased dividend was paid on Jan 24, 2013 to stakeholders of record as on Jan 3, 2013. This was the 11th successive cash dividend.

Strolling Through Guidance

Rent-A-Center projects 2013 top-line growth of 5% to 8%, attributable to $540 million contribution from the RAC Acceptance business, however, the Core U.S. segment is expected to remain flat. The company anticipates a 4% decline in the Core U.S. segment during the first quarter of 2013. Management expects comparable-store sales to drop 2% in the first quarter but forecasts 2% to 4% growth for 2013.

Management envisions 2013 earnings in the band of $3.25 to $3.40 per share, including a cost of 25 cents related to its international expansion initiatives. The current Zacks Consensus Estimate for 2013 is $3.49. Consequently, we could witness a correction in the Zacks Consensus Estimates in the coming days.

Management also forecasted a 50 basis points contraction in gross profit margin for 2013. It also hinted that operating profit margin for the year will remain even. EBITDA for the year is projected between $415 million and $435 million.

Closing Comment

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 AeroCentury Corp. (ACY) and Electro Rent Corporation (ELRC),  both of which hold a Zacks Rank #1 (Strong Buy) and are expected to continue with their upbeat performances. Another stock that should be merited is Aaron’s Inc. (AAN), which holds a Zacks Rank #2 (Buy) and is expected to continue with its positive earnings surprise trend.

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