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Rent-A-Center Inc. (RCII - Analyst Report), one of the largest rent-to-own operators, delivered second-quarter 2013 earnings of 76 cents a share that came a penny ahead of the Zacks Consensus Estimate and rose 2.7% from 74 cents earned in the prior-year quarter.

Total revenue, which comprises store and franchise revenues, grew 1.4% to $760.5 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $779 million. Comparable-store sales for the quarter dropped 1.6%. The increase in the top line was attributable to higher revenue from the RAC Acceptance and International segments, partly offset by a decline in the Core U.S. segment.

The company’s business model, called RAC Acceptance, is gaining traction. When a consumer is denied credit financing for a particular product from the retailer, Rent-A-Center acquires that product from the retailer by virtue of the RAC Acceptance program, and thereby offers it to the consumer under a rental-purchase transaction.

Revenue from the RAC Acceptance business surged 52.5% to $117.5 million from the prior-year quarter, whereas revenue from the Core U.S. segment declined 5.3% to $619.7 million. International segment revenue came in at $14.1 million, substantially rising from $8.9 million in the year-ago quarter.

Total store revenue rose 1.5% to $751.3 million due to an increase of 1.5% in rental and fees revenue to $668.9 million, an 8.5% jump in installment sales to $17.5 million and a 10.2% rise in other revenue to $5 million, partially offset by a 1.4% drop in merchandise sales to $59.8 million. Total franchise revenue (ColorTyme segment) fell 1.6% to $9.2 million during the quarter.

Rent-A-Center’s gross profit inched up 0.7% to $530.6 million. However, gross margin contracted 50 basis points to 69.8%. Operating profit declined 2% to $77.4 million, whereas operating profit margin decreased 30 basis points to 10.2%. Adjusted EBITDA decreased 1.5% to $97.4 million, while adjusted EBITDA margin shriveled 40 basis points to 12.8%.

Stores Update

During the quarter, the company opened 2 new Core U.S. locations, acquired 3 stores, consolidated 14 stores with existing locations and closed 2, bringing the total store count to 2,972. The company also opened 110 RAC Acceptance stores and consolidated 10 stores with existing locations, resulting in 1,153 stores.

Twenty international locations were opened during the quarter bringing the count to 148 stores. ColorTyme, which is a wholly owned subsidiary of Rent-A-Center, added 2 new locations and closed 5 locations, with the total store count remaining at 221.

For 2013, management plans to open approximately 60 rent-to-own locations in Mexico. Moreover, the company aims at about 365 domestic RAC Acceptance kiosk additions.

Other Financial Aspects

Rent-A-Center ended the quarter with cash and cash equivalents of $78.5 million, senior debt of $323.8 million, and shareholders’ equity of $1,326.3 million. The company generated cash flow from operations of about $115.5 million during the first half of 2013. Management now anticipates capital expenditures of approximately $115 million for 2013.

In April, the company enhanced its current share repurchase authorization to $1.25 billion from $1 billion. In May, the company completed a new $250 million senior unsecured notes offering, the proceeds of which were utilized to repay the loan worth $46 million under the revolving credit facility and the buyback of $200 million shares.

The company bought back 5,057,458 shares for approximately $217.4 million during the first-half of 2013. Since the inception of the share buyback program, the company has employed approximately $994.8 million out of the $1.25 billion authorized.

Strolling Through the Guidance

Rent-A-Center now projects 2013 top-line growth of 3% attributable to a contribution of $515 million from the RAC Acceptance business. Management forecasts comparable-store sales ranging from flat to 1% growth for 2013.

Management now envisions 2013 earnings in the band of $3.03 to $3.15 per share, including a cost of 25 cents related to its international expansion initiatives. The current Zacks Consensus Estimate for 2013 is $3.08. Earlier, management had projected 2013 earnings between $2.95 and $3.10 per share.

Management also forecasted a 25 basis points contraction in gross profit and operating margins for 2013. EBITDA for the year is projected at $400 million.

Closing Comment

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

Currently, Rent-A-Center holds a Zacks Rank #2 (Buy). Other stocks worth considering in the finance-leasing industry are MCG Capital Corporation (MCGC - Snapshot Report), KCAP Financial, Inc. (KCAP - Snapshot Report) and Golub Capital BDC, Inc. (GBDC - Snapshot Report), all of which hold a Zacks Rank #2 (Buy).

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