Rent-A-Center in Neutral Lane - Analyst Blog

Rent-A-Center Inc. (RCII) is one of the largest rent-to-own operators in the U.S. and leverages an extensive network of about 3,000 stores to effectively penetrate its target markets, and gain a competitive advantage over its competitors, such as Aaron's Inc. (AAN), and Advance America.

The company is 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. Moreover, a new centralized purchasing system allows to better manage rental merchandise.

The company in order to enhance consumers' shopping experience is working on 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 remains optimistic about its future growth as it opens stores in international markets and accelerates the rollout of RAC Acceptance kiosks, and consequently provided an upbeat guidance. The company also hinted that it has been evaluating strategic alternatives for its financial services' businesses, which may or may not include the divestiture of the segment.

Management now expects fourth-quarter 2010 earnings in the range of 64 cents to 70 cents a share. Total revenue is expected in the range of $666 million to $681 million. Rent-A-Center projects comparable-store sales to remain in the range of flat to 1% for the quarter.

For fiscal 2011, earnings are projected between $2.85 and $3.05 per share. Total revenue is expected in the range of $2,806 million to $2,866 million. Management expects comparable-store sales between 1% and 2%.

Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow the customer to own the merchandise on the completion of the rental period. Due to the 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 even enter new rental purchase deals.

Currently, we have a ‘Neutral' rating on the stock. However, Rent-A-Center's shares maintain a Zacks #2 Rank, which translates into a short-term ‘Buy' recommendation.