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On Oct 26, 2013, Zacks Investment Research downgraded Rent-A-Center, Inc. (RCII - Analyst Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Rent-A-Center has witnessed sharp downward estimate revisions after posting disappointing third-quarter 2013 results and a lowered outlook for 2013 on Oct 21, 2013.

Rent-A-Center’s third-quarter earnings per share of 51 cents missed the Zacks Consensus Estimate by 19.1% and was 23.9% lower than the year-ago figure. Though revenues of $754.8 increased 2.1% year over year, it fell short of the Zacks Consensus Estimate of $773 million.

The company also disappointed on the comparable-store sales front with comps dipping 0.8%. The sustained deflation in electronic products along with promotions undertaken to attract budget constrained consumers led to the year-over-year decline in average revenue per agreement and is the principal factor behind the drop in comparable-store sales and trim in the guidance.  

The gross and operating margins fell 10 basis points (bps) and 170 bps to 70.1% and 7.5%, respectively. However, sales of the company’s RAC Acceptance business rose 47.7% year over year.

Management now expects 2013 earnings in the band of $2.80–$2.85 per share, as against the earlier projection of $3.03–$3.15. Rent-A-Center also forecasts a contraction of 10 bps in gross profit, 100 bps in operating margin and 1.5 % decline in comparable-store sales for 2013.

The softness in results as well as conservative outlook stimulated a downward revision in the Zacks Consensus Estimate. For 2013, the Zacks Consensus Estimate fell 9.0% to $2.83 per share and for 2014, it fell 6.0% to $3.30 per share over the past 30 days.

Other Stocks That Warrant a Look

Not all stocks are performing as disappointingly as Rent-A-Center. Better-performing stocks in the finance sector include Apollo Investment Corp. (AINV - Snapshot Report), American Express Co. (AXP - Analyst Report) and Capital One Financial Corp. (COF - Analyst Report).  All these carry a Zacks Rank #2 (Buy).

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