3 Factors Stacking Up Against Rent-A-Center

Analysts at Loop Capital Markets turned incrementally bearish on Rent-A-Center Inc RCII as the company faces a clear secular shift that will impact its core business.

Loop Capital's Anthony Chukumba downgraded Rent-A-Center's stock from Hold to Sell with an unchanged $8 price target as a shift from brick-and-mortar to "virtual" rent-to-own retailers has "impaired" the company's core U.S. business.

While the shift is industry wide, Rent-A-Center is particularly at risk for three reasons:

1. The virtual nature of rent-to-own retailers implies a heightened competitive environment;
2. Rent-A-Center is expected to post lower intrinsic profitability;
3. A focus on the virtual Acceptance Now unit could result in higher "skip/stolen" rates and corresponding write-downs on "skip/stolens."

More Reasons To Be Negative

Aside from the structural issues, Rent-A-Center's ongoing proxy battle with the activist investor and major shareholder Engaged Capital serves as an unnecessary distraction, the analyst added. In fact, if Engaged Capital wins two to three seats on the company's board, it will serve as a further distraction and make it more difficult for management to executive on a turnaround plan and hire a highly qualified and experienced chief financial officer.

Moreover, Chukumba said strategic alternatives including a sale of itself to a strategic buyer or Aaron's, Inc. AAN is "very unlikely" given the company's high leverage and deteriorating profitability.

Bottom line, Rent-A-Center's ongoing woes makes it unlikely that management will succeed in hitting its 2018 and 2019 financial targets, including a low-single-digit and mid-single-digit percentage revenue growth next year and the year after.

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