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Rent-A-Center Down to Strong Sell

Zacks Equity Research

On Oct 26, 2013, Zacks Investment Research downgraded Rent-A-Center, Inc. (RCII) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Rent-A-Center has witnessed sharp downward estimate revisions after posting disappointing third-quarter 2013 results and a lowered outlook for 2013 on Oct 21, 2013.

Rent-A-Center’s third-quarter earnings per share of 51 cents missed the Zacks Consensus Estimate by 19.1% and was 23.9% lower than the year-ago figure. Though revenues of $754.8 increased 2.1% year over year, it fell short of the Zacks Consensus Estimate of $773 million.

The company also disappointed on the comparable-store sales front with comps dipping 0.8%. 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 gross and operating margins fell 10 basis points (bps) and 170 bps to 70.1% and 7.5%, respectively. However, sales of the company’s RAC Acceptance business rose 47.7% year over year.

Management now expects 2013 earnings in the band of $2.80–$2.85 per share, as against the earlier projection of $3.03–$3.15. Rent-A-Center also forecasts a contraction of 10 bps in gross profit, 100 bps in operating margin and 1.5 % decline in comparable-store sales for 2013.

The softness in results as well as conservative outlook stimulated a downward revision in the Zacks Consensus Estimate. For 2013, the Zacks Consensus Estimate fell 9.0% to $2.83 per share and for 2014, it fell 6.0% to $3.30 per share over the past 30 days.

Other Stocks That Warrant a Look

Not all stocks are performing as disappointingly as Rent-A-Center. Better-performing stocks in the finance sector include Apollo Investment Corp. (AINV), American Express Co. (AXP) and Capital One Financial Corp. (COF).  All these carry a Zacks Rank #2 (Buy).

Read the Full Research Report on RCII
Read the Full Research Report on COF
Read the Full Research Report on AXP
Read the Full Research Report on AINV

Zacks Investment Research