U.S. Markets closed

Bearish View on Rent-A-Center

Zacks Equity Research

On Apr 8, we downgraded our recommendation on Rent-A-Center, Inc. (RCII), one of the largest rent-to-own operators in the U.S. to Underperform based on the company’s dismal fourth-quarter 2012 results. The stock currently carries a Zacks Rank #4 (Sell).

Why the Downgrade?

Estimates for Rent-A-Center have shown a downtrend since the company reported its fourth quarter results on Jan 28. The company’s quarterly earnings of 81 cents a share missed the Zacks Consensus Estimate by a couple of cents, and dropped 4.7% from 85 cents earned in the prior-year quarter.

Although total revenue rose 2.8% to $758.4 million, it fell short of the Zacks Consensus Estimate of $781 million. Comparable-store sales for the quarter fell 0.2%.

Consequently, management projected a 4% decline in the Core U.S. segment during the first quarter of 2013. Comparable-store sales are forecasted to drop 2% in the quarter. The Zacks Consensus Estimate for 2013 and 2014 decreased by 6% and 6.1% to $3.28 and $3.72, respectively in the last 90 days.

Cause for Concern

The sluggish recovery and a fragile job market are making customers reluctant to enter new rental-purchase deals. We also observe that higher cost of revenue kept the gross margin under pressure. Gross margin shrunk 60 basis points to 69.5% during the fourth quarter of 2012.

Rent-A-Center, which competes with Aaron’s Inc. (AAN), forecasted a 50 basis points contraction in gross profit margin for 2013. A 4.3% rise in salaries and other expenses impacted the operating profit. Operating profit fell 4.7% to $79.3 million, whereas operating profit margin contracted 80 basis points to 10.5%.

Other Stocks That Warrant a Look

While we prefer to avoid Rent-A-Center until we see signs of improvement in the company's performance, other stocks worth considering in the finance-leasing industry are AeroCentury Corp. (ACY), which carries a Zacks Rank #1 (Strong Buy) and Electro Rent Corp (ELRC), which holds a Zacks Rank #3 (Hold).

Read the Full Research Report on RCII

Read the Full Research Report on AAN

Read the Full Research Report on ACY

Read the Full Research Report on ELRC

Zacks Investment Research

More From Zacks.com