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Rent-A-Center Q1 Earnings Beat

Zacks Equity Research

Shares of Rent-A-Center Inc. (RCII) rose 4.5% to $26.95 during the after-market trading session yesterday, as the company posted better-than-expected first-quarter 2014 earnings. The quarterly adjusted earnings of 57 cents a share beat the Zacks Consensus Estimate by a couple of cents, but fell 27.8% year over year due to higher operating costs and softness witnessed across the Core U.S. segment.

Including one-time items, earnings per share came in at 54 cents, down 31.6% year over year.

Total revenue of this rent-to-own operator, which comprises store and franchise revenue, grew 1.8% to $833.7 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $845 million. The increase in the top line was attributable to higher revenues from the Acceptance Now and Mexico segments, partly offset by a decline in the Core U.S. segment.

On Jan 1, 2014, Rent-A-Center realigned its reporting structure. It has included 18 Canadian stores in its Core U.S segment, which was earlier under the International segment.Therefore, international segment is now referred as Mexico segment.  

Comparable-store sales for the quarter dropped 0.8%, reflecting a 6.1% decline in the Core U.S. segment, partly offset by an increase of 26.1% and 20.3% in the Acceptance Now and Mexico segments, respectively. Rent-A-Center’s domestic rent-to-own business continues to remain challenging, given the budget constrained consumers.

However, the company’s business model, called Acceptance Now, continues to gain traction. Revenue from the Acceptance Now business surged 37.0% to $174.2 million from the prior-year quarter, whereas revenue from the Core U.S. segment declined 5.6% to $634.7 million. Mexico segment’s revenue came in at $15.9 million, up 67.2% from the year-ago quarter.

Total store revenue rose nearly 2.0% to $824.8 million due to a 3.1% increase in rental and fees revenue to $694.2 million and a 7.2% jump in installment sales to $18.3 million, partially offset by a 4.9% drop in merchandise sales to $108.0 million and a 10.5% decline in other revenue to $4.3 million.

Total franchise revenue (i.e. ColorTyme segment rechristened as Rent-A-Center Franchising International, Inc.) plunged 12.9% to $8.9 million during the quarter.

Rent-A-Center’s gross profit increased 2.2% to $562.9 million, whereas gross margin expanded 30 basis points to 67.5%. Operating profit declined 24.1% to $59.7 million, whereas operating profit margin contracted 240 basis points to 7.2%. Adjusted earnings before interest, taxes, depreciation, and amortization (:EBITDA) decreased 18.8% to $79.6 million, while adjusted EBITDA margin shriveled 240 basis points to 9.6%.

Stores Update

During the quarter, the company opened 6 new stores in Core U.S. locations and consolidated 19 stores with existing locations, bringing the total store count to 2,997. The company also opened 60 Acceptance Now stores, consolidated 29 stores with existing locations and closed 1 store, resulting in 1,355 stores.

22 stores were opened in Mexico bringing the count to 173 stores. Rent-A-Center Franchising, which is a wholly owned subsidiary of Rent-A-Center, added 1 new location and closed 2 locations, with the total store count coming at 178.

For 2014, management plans to open approximately 30 rent-to-own locations in Mexico. Moreover, the company aims at about 100 domestic Acceptance Now kiosk additions.

Other Financial Aspects

Rent-A-Center, which competes with AeroCentury Corp. (ACY) and McGrath Rentcorp (MGRC), ended the quarter with cash and cash equivalents of $81.0 million, senior debt of $325.0 million, and shareholder equity of $1,362.2 million. Management anticipates capital expenditures of approximately $100 million for 2014.

Guidance for 2014

Rent-A-Center now projects 2014 top-line growth of 3% to 6%, attributable to a contribution of $695 million from the Acceptance Now business. Management forecasts a 3% to 5.5% jump in comparable-store sales. EBITDA for the year is projected between $325 million and $345 million.

Management envisions 2014 earnings in the band of $2.30 to $2.50 per share, including a cost of 25 cents related to its Mexican expansion initiatives. The current Zacks Consensus Estimate for 2014 is $2.30.

To rationalize the Core U.S. segment, the company has launched several initiatives and will consolidate around 150 locations by the second-quarter of 2014 to improve operational and financial performance.

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 #4 (Sell). A better-ranked stock in the same sector is AerCap Holdings N.V. (AER), which has a Zacks Rank #2 (Buy).

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