Rent-A-Center Buys Rental Store - Analyst Blog

Rent-A-Center Inc. (RCII), one of the largest rent-to-own operators in the U.S., recently acquired privately-held company, The Rental Store in a debt free transaction. The company financed the deal through cash available in hand, and partly utilized the purchase price of $75.5 million to disburse Rental Store's existing debt.

Rental Store, which operates approximately 145 kiosk locations, offers consumers lease-purchase financing via third-party retail furniture and electronics retailers. Management hinted that the acquisition of Rental Store will become accretive to revenue and operating income by $100 million and $15 million, respectively in fiscal 2011.

The Rental Store will become part of the RAC Acceptance business. 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, which also provides various financial services, such as short-term secured and unsecured loans, debit cards and money transfer services under the trade name RAC Financial Services, informed that it has sold a greater number of consumer accounts at about 207 financial services stores.

Plano, Texas based company, Rent-A-Center, also notified that due to the changes in the state law on account of the general election held in November, it will shut 7 financial services stores in Montana by December 31, 2010, which have been impacting its operations. Earlier, the company had indicated that it has been evaluating strategic alternatives for its financial services' businesses, which may or may not include the divestiture of the segment.

Management said that the financial services business will generate approximately $72 million in revenue and $11 million in operating income in fiscal 2011.

Rent-A-Center, which faces stiff competition from Aaron's Inc. (AAN">AAN), 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.

The company also remains optimistic about its future growth as it opens stores in international markets and accelerates the rollout of RAC Acceptance kiosks. 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.