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Rent-A-Center's Earnings Misses Est.

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Rent-A-Center Inc. (RCII), one of the largest rent-to-own operators, delivered first-quarter 2013 earnings of 80 cents a share that missed the Zacks Consensus Estimate of 85 cents, and dropped 8% from 87 cents earned in the prior-year quarter. The lower-than-expected results were due to delay in refund of federal income tax, higher fuel prices and increase in payroll taxes. Consequently, the company trimmed its 2013 outlook. However, of late the company is witnessing improving demand.

Rent-A-Center’s total revenue, which comprises store and franchise revenue, fell 1.9% to $819.3 million from the year-ago quarter and fell short of the Zacks Consensus Estimate of $850 million. Comparable-store sales for the quarter dropped 4.3%. The decrease in the top line was attributable to a decline in the Core U.S. segment, partly offset by higher revenue from the RAC Acceptance and International segments.

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.

Revenue from the RAC Acceptance business surged 45% to $127.2 million from the prior-year quarter, whereas revenue from the Core U.S. segment declined 8% to $669.6 million. International segment revenue came in at $12.3 million substantially rising from $7.7 million in the year-ago quarter.

Total store revenue fell 1.7% to $809.1 million. The decline in revenue was attributed to a marginal drop in rental and fees revenue to $673.6 million, a 7.6% decrease in merchandise sales to $113.6 million, a 2.1% fall in installment sales to $17.1 million, and a 3.5% decline in other revenue to $4.8 million. Total franchise revenue (ColorTyme segment) plunged 14.8% to $10.2 million during the quarter.

Rent-A-Center’s gross profit tumbled 1.7% to $550.7 million, however, gross margin expanded 10 basis points to 67.2%. Operating profit plummeted 13.9% to $79.3 million, whereas operating profit margin contracted 130 basis points to 9.7%. Adjusted EBITDA decreased 11.4% to $98.6 million, while adjusted EBITDA margin shriveled 130 basis points to 12%.

Stores Update

During the quarter, the company opened 7 new Core U.S. locations, acquired 3 stores, consolidated 16 stores with existing locations and closed 1, bringing the total store count to 2,983. The company also opened 98 RAC Acceptance stores and consolidated 11 stores with existing locations, resulting in 1,053 stores.

Twenty international locations were opened during the quarter bringing the count to 128 stores. ColorTyme, which is a wholly owned subsidiary of Rent-A-Center, added 3 new locations and closed 3 locations, with the total store count remaining at 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 $82.3 million, senior debt of $341.3 million, and shareholders’ equity of $1,494.1 million. The company generated cash flow from operations of about $113.5 million during the quarter. Management now anticipates capital expenditures of approximately $120 million for 2013.

The company bought back 465,035 shares for approximately $17.4 million during the quarter. Since the inception of the share buyback program, the company has repurchased 31,585,314 shares and employed approximately $794.8 million out of the $1 billion authorized.

Strolling Through Guidance

Following a disappointing first-quarter performance, Rent-A-Center now projects 2013 top-line growth of 3.5% to 5.5%, attributable to a contribution of $540 million from the RAC Acceptance business. Management forecasts comparable-store sales growth ranging from 1% to 2% for 2013.

Earlier, Rent-A-Center had expected total revenue growth of 5% to 8%, and comps increase of 2% to 4% in 2013.

Management now envisions 2013 earnings in the band of $2.95 to $3.10 per share, including a cost of 25 cents related to its international expansion initiatives. The current Zacks Consensus Estimate for 2013 is $3.28. Consequently, we could witness a correction in the Zacks Consensus Estimates in the coming days. Earlier, management had projected 2013 earnings between $3.25 and $3.40 per share.

Management also forecasted a 50 basis points contraction in gross profit and operating margins for 2013. EBITDA for the year is projected at $400 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 #4 (Sell). Other stocks worth considering in the finance-leasing industry are AeroCentury Corp. (ACY), KCAP Financial, Inc. (KCAP) and American Capital, Ltd. (ACAS), all hold a Zacks Rank #1 (Strong Buy).

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