We have maintained our Neutral recommendation on Rent-A-Center Inc. (RCII), the largest rent-to-own operator in the U.S, with a target price of $38.00. The stock currently carries a Zacks Rank #3 (Hold).
Rent-A-Center leverages an extensive network of stores to effectively penetrate into its target markets, which in turn facilitates it to generate healthy sales and gain a competitive advantage over its rivals, Aaron’s Inc. (AAN) and Advance America.
Moreover, the company has been taking prudent steps to optimize rental merchandise levels in accordance with sales trends. Rent-A-Center implemented a centralized inventory management system, including automated merchandise replenishment. In addition, a new centralized purchasing system allows better management of rental merchandise.
In order to enhance consumers’ shopping experience, the company has developed a new business model called RAC Acceptance. When the 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.
Rent-A-Center’s well knitted operational measures and growth initiatives facilitated it to attain top and bottom-line growth of 2.7% and 1.4%, respectively, during the second quarter of 2013. Consequently, management provided an upbeat earnings outlook for 2013.
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. Moreover, with margins remaining under pressure we prefer to maintain our unbiased view on the stock. Management forecasted a 25 basis points contraction in gross profit, operating profit and EBITDA margins for 2013.
The pros and cons embedded in the stock supports our unbiased view.
Other Stocks to Consider
Until any further upward revision in Rent-A-Center’s Zacks Rank, other stocks in the finance-leasing universe worth considering are Apollo Investment Corp. (AINV) and Gladstone Capital Corp. (GLAD), both of which hold a Zacks Rank #1 (Strong Buy).