Rent-A-Center Outpaces - Analyst Blog

Rent-A-Center Inc. (RCII), one of the largest rent-to-own operators, recently delivered better-than-expected fourth-quarter 2010 results. The quarterly earnings of 71 cents a share outpaced the Zacks Consensus Estimate of 68 cents, and increased 7.6% from 66 cents registered in the prior-year quarter on the heels of strong demand and effective cost management.

The Zacks Consensus Estimate had remained stagnant prior to the earnings release. On a reported basis, including one-time items, earnings came in at 49 cents a share, down 25.8% from 66 cents earned in the year-ago quarter.

Rent-A-Center's total revenue, which comprises store and franchise revenues, grew marginally by 0.6% to $677.1 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $678 million. Comparable-store sales, excluding financial services revenue, remained flat with the prior-year quarter.

Total Store revenue rose a modest 0.4% to $667.5 million on a 21.2% increase in installment sales to $18.6 million, a 3.1% jump in other revenue to $16.3 million, and a 0.9% marginal increase in rental and fees revenue to $589.1 million, offset by a 12.6% fall in merchandise sales to $43.5 million. Total franchise revenue climbed 14.8% to $9.6 million during the quarter under review.

Rent-A-Center's adjusted operating profit jumped 9.7% to $81.8 million and the operating profit margin expanded 100 basis points to 12.1%. EBITDA rose 8.4% to $98.2 million and the EBITDA margin expanded by 100 basis points to 14.5%.

Other Strategic Initiatives

The company is working on a new business model called RAC Acceptance to enhance consumers' shopping experience. 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. To augment the RAC Acceptance business further, the company acquired 158 kiosk locations from a privately held company, The Rental Store, and expects to double its number of locations in fiscal 2011.

Plano, Texas-based company, Rent-A-Center, had earlier indicated that it has been evaluating strategic alternatives for its financial services' businesses, which may or may not include the divestiture of the segment. As of December 31, 2010, the company sold customer accounts at about 214 financial services store locations. Rent-A-Center, also notified that due to changes in the state law on account of the general election held in November, it closed six financial services store locations in Montana. Since the end of fiscal 2010, it sold customer accounts at approximately 66 more financial services store locations.

Financial Aspects

Rent-A-Center ended the quarter with cash and cash equivalents of $70.7 million and senior debt of $401.1 million, and shareholders' equity of $1,353.8 million. During the quarter under review, it bought back 1,403,993 shares for about $38.7 million.

During fiscal 2010, Rent-A-Center generated cash flow from operations of about $216.5 million. The company bought back 3,585,495 shares for approximately $84.6 million. To date, the company has repurchased approximately 23.5 million shares aggregating $551.2 million under its $800 million share repurchase authorization.

Stores Update

During the quarter, the company opened 8 new domestic rent-to-own locations, acquired 1 location, and consolidated 8 stores into existing locations. Management now expects to open 10 domestic rent-to-own locations during first-quarter 2011. The company also intends to open 5 rent-to-own locations in Mexico during the quarter. At the end of the quarter, the company operated 3,008 stores nationwide, as well as in Canada and Mexico.

The company also added 75 RAC Acceptance kiosks, acquired 158 stores, consolidated one store into existing locations and closed one store during the quarter under review, bringing the total count to 384 RAC Acceptance kiosks. The company plans to add about 100 domestic RAC Acceptance kiosks during first-quarter 2011.

For 2011, management plans to open approximately 25 domestic rent-to-own stores in fiscal 2011. Targeted rent-to-own locations for the full year are 40 to 75 in Mexico and 10 to 20 in Canada. Moreover, the company targets 275 to 325 domestic RAC Acceptance kiosk additions.

Management Guided

First-Quarter 2011

Management now expects first-quarter 2011 earnings in the range of 82 cents to 88 cents a share. Total revenue is expected in the range of $745 million to $765 million. Rent-A-Center projects comparable-store sales in the range of 1.5% to 2.5%.

The company has predicted total store revenue in the range of $736 million to $756 million. Store rental and fee revenues are estimated in the range of $615 million to $627 million.

Fiscal 2011

For fiscal 2011, earnings are projected between $2.90 and $3.10 per share. Total revenue is expected in the range of $2,868 million to $2,928 million. Management expects comparable-store sales between 1.5% and 2.5%.

Total store revenue is projected between $2,835 million and $2,895 million. The company anticipates store rental and fee revenues between $2,477 million and $2,527 million.

Current Zacks Consensus Estimate

The current Zacks Consensus Estimates for the first quarter and fiscal 2011 are a respective 84 cents and $3.00 per share. Following the first quarter and fiscal 2011 guidance, a positive sentiment is palpable among the analysts and we could witness a rise in the Zacks Consensus Estimates going forward.

Rent-A-Center Holds Zacks #2 Rank

Currently, we have a long-term ‘Neutral' rating on the stock. Moreover, Rent-A-Center, which competes with Aaron's Inc. (AAN) and Advance America, holds a Zacks #2 Rank, which translates into a short-term ‘Buy' recommendation.

Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow customers to own the merchandise upon the 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, sluggish recovery in economy and a fragile job market may make customers reluctant to enter new rental-purchase deals.

 
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