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Why Is Rent-A-Center (RCII) Up 9% Since Last Earnings Report?

Zacks Equity Research
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A month has gone by since the last earnings report for Rent-A-Center (RCII). Shares have added about 9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Rent-A-Center due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Rent-A-Center (RCII) Q4 Earnings & Revenues Beat

Rent-A-Center, Inc. reported better-than-expected fourth-quarter 2018 results. Notably, both the top and bottom lines improved year over year. Moreover, this was the third straight quarter of positive sales and earnings surprises.

This rent-to-own operator reported adjusted earnings of 35 cents a share that beat the Zacks Consensus Estimate of 19 cents and also compared favorably with a loss of 41 cents a year ago. Total revenues of $661.8 million also came ahead of the consensus mark of $654.5 million.

Rent-A-Center, which terminated the merger plan with Vintage Capital, posted top-line growth of 3.6% on account of solid comparable-store sales (comps) growth, partly offset by closures of certain Core U.S. locations. Meanwhile, adjusted EBITDA came in at $49 million against a loss of $8.5 million in the year-ago quarter.

Quite apparent, the company’s strategic initiatives are well on track. Management intends to focus more on cost containment endeavors, improving traffic trends, targeted value proposition, refranchising program and augmenting cash flow. Further, the company is rationalizing store base and lowering debt load. Markedly, it expects its cost-saving initiatives to help lower costs by approximately $50 million in 2019.

Comparable-Store Sales Performance

During the quarter, comps grew 9.1%, reflecting an increase of 8.8%, 9.6% and 13.8% across the Core U.S., Acceptance Now and Mexico segments, respectively. This was the eighth straight quarter of comps improvement.

Notably, comps for the Core U.S. and Mexico segments have improved 360 and 100 basis points (bps) sequentially, respectively, while for the Acceptance Now the same has increased 290 bps on a sequential basis.

Consolidated comps also portray a sequential improvement of 340 bps.

Segment Performance

Revenues from the Core U.S. segment rose 4.9% to $466.6 million due to improved comps performance partly offset by continued store base rationalization.

Revenues from the Acceptance Now segment fell 1.5% from the prior-year quarter to $173.1 million on account of closures of the company’s locations in 2017. These were partly mitigated by healthy comps performance.

Mexico segment’s revenues came in at $12.5 million, up 7.2% from the year-ago period. On a constant currency basis, the metric improved 12.1%.

Finally, total Franchising revenues surged 41% to $9.5 million during the reported quarter. This can be attributed to change in the accounting standard for franchise advertising fees and higher merchandise sales due to increased store count.

Store Update

At the end of the quarter, there were 2,158 Core U.S. locations, 1,106 Acceptance Now Staffed stores, 96 Acceptance Now Direct stores, 122 stores in Mexico and 281 Franchise stores.

Other Financial Aspects

Rent-A-Center ended the reported quarter with cash and cash equivalents of $155.4 million, net Senior notes of $540 million and stockholders' equity of $286.5 million. The company incurred capital expenditures of $5.5 million during the reported quarter.

During 2018, the company lowered its net debt by more than $220 million. Management anticipates net debt of $270-$235 million for 2019 with a leverage ratio of 1.25 to 0.90. The company expects to generate free cash flow of $115-$145 million during 2019.

Outlook

Rent-A-Center projects consolidated revenues between $2.585 billion and $2.630 billion for 2019 with expected Core U.S. revenues of $1.765-$1.790 billion and Acceptance NOW revenues of $725-$740 million. Management envisions consolidated comps to increase in the low to mid-single digits.

The company envisions adjusted EBITDA in the band of $220-$250 million and adjusted earnings in the range of $1.75-$2.15 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -15.53% due to these changes.

VGM Scores

Currently, Rent-A-Center has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Rent-A-Center has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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