It has been about a month since the last earnings report for Rent-A-Center (RCII). Shares have lost about 3.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Rent-A-Center due for a breakout? 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 drivers.
Rent-A-Center Q2 Earnings Top Estimates, FY19 View Up
Rent-A-Center, Inc. came out with second-quarter 2019 results, wherein earnings surpassed the Zacks Consensus Estimate and also grew year over year. Notably, this marked the fifth successive quarter of positive earnings surprise. Moreover, management raised its view for fiscal year 2019 following year-to-date performance and the recent refinancing.
This rent-to-own operator posted adjusted earnings of 60 cents a share that beat the Zacks Consensus Estimate of 56 cents and also increased 27.7% from the year-ago quarter. We note that lower operating expenses and reduced interest expense favorably impacted the company’s bottom line.
Total revenues of $655.9 million remained almost flat year over year on account of refranchising more than 100 locations since the first quarter of 2018 and closures of few Core U.S. stores. Nonetheless, the company witnessed sturdy same-store sales performance.
Meanwhile, adjusted EBITDA during the quarter came in at $67.4 million, up 10.4% generated in the year-ago period. We note that adjusted EBITDA margin expanded 100 basis points to 10.3%.
Clearly, the company’s initiatives are well on track. Management intends to focus on cost containment endeavors, improve traffic trends, targeted value proposition, refranchise program and augment cash flow. Recently, Rent-A-Center declared its agreement to acquire Merchants Preferred, a nationwide virtual rent-to-own provider. This buyout will accelerate the company’s existing virtual rent-to-own capabilities. Further, it is rationalizing store base and lowering debt load.
Comparable-Store Sales Performance
Same-store sales during the quarter grew 5.8%, reflecting an increase of 5.6%, 6% and 10.2% across the Core U.S., Acceptance Now and Mexico segments, respectively. This was the 10th straight quarter of comps improvement.
However, we noted that same-store sales for the Core U.S. and Mexico segments contracted 20 and 290 basis points, respectively, on a sequential basis. Also, same-store sales for the Acceptance Now segment decreased 410 basis points on a sequential basis. Consolidated comps for the company exhibited a sequential decline of 100 basis points.
Revenues at the Core U.S. segment declined around 1% to $451.1 million owing to the refranchising efforts and continued store base rationalization. This was partly offset by same-store sales growth.
Revenues at Acceptance Now fell 1.5% from the prior-year quarter to $176.4 million on account of closure of company’s locations. This was partly mitigated by healthy comps.
Mexico segment’s revenues came in at $13.6 million, up 10.1% from the year-ago period. On a constant-currency basis, the metric improved 8.7%.
Finally, total Franchising revenues surged to $14.9 million during the reported quarter from $8.7 million in the year-ago period. This can primarily be attributed to refranchising over 80 locations.
At the end of the quarter under review, there were 2,035 Core U.S. locations, 1,031 Acceptance Now Staffed stores, 112 Acceptance Now Virtual, 122 stores in Mexico and 334 Franchise stores. During the quarter, the company refranchised 20 locations.
Other Financial Aspects
Rent-A-Center ended the reported quarter with cash and cash equivalents of $353.1 million, net senior notes of $540.7 million and stockholders' equity of $391.9 million. The company incurred capital expenditures of $2.6 million. It generated free cash flow of around $195 million (including acquisitions and divestitures) during the first six months of 2019. As of June 30, 2019, the company had $255 million remaining under its share repurchase program.
As of August 5, 2019, the company reported its outstanding debt of $280 million, around $260 million lower than outstanding debt as of June 30, 2019.
Management now anticipates net debt of $165-$195 million for 2019 with net debt to EBITDA ratio of 0.60-0.90x. The company anticipates generating free cash flow of $200-$225 million during 2019.
Rent-A-Center projects consolidated revenues between $2.595 billion and $2.640 billion for 2019 compared with $2.585-$2.630 billion projected earlier. Management now envisions consolidated same-store sales growth in the mid-single digits, up from low to mid-single digits earlier projected.
The company now expects Core U.S. revenues of $1.800-$1.825 billion compared with the prior view of $1.790-$1.815 billion. Acceptance NOW revenues are still anticipated to be in the range of $700-$715 million.
The company foresees adjusted EBITDA in the band of $240-$265 million and adjusted earnings per share in the range of $2.05-$2.40 for 2019. Management had previously projected adjusted EBITDA of $230-$260 million and adjusted earnings per share in the range of $1.85-$2.25. Increase in adjusted EBITDA and earnings per share view was due to the second-quarter performance and interest savings in the back half of the year due to the refinancing.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 7.47% due to these changes.
Currently, Rent-A-Center has a great Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise 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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