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Analyst Blog

On Jul 24, 2014, we issued an updated research report on domestic rent-to-own operator Rent-A-Center, Inc. (RCII - Analyst Report), following its lackluster second-quarter 2014 performance.

The company’s earnings of 38 cents per share came in line with the Zacks Consensus Estimate but plummeted 50% from the year-ago quarter, due to higher operating costs and softness across the Core U.S. segment.

Rent-A-Center held a tough retail environment responsible for the sluggish demand. To overcome this, the company rolled out smart phones and no-contract airtime plans at its Core U.S. outlets.

Total revenue of this rent-to-own operator grew 1.7% to $773.2 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $781 million. The increase in the top line was attributable to higher revenues from the Acceptance Now and Mexico segments, partly offset by a decline in the Core U.S. segment.

Rent-A-Center’s business is seasonal in nature and typically generates stronger sales during the first quarter, characterized by federal income tax refunds, which are used by the company’s customers to exercise early purchase option on existing rental agreements. As a result, the company is exposed to significant risks should the quarter fail to deliver expected operating performance.

Rent-A-Center also faces stiff competition from national chains and regional rent-to-own businesses, which may further dent its sales and margins.

Moreover, customers remain susceptible to macroeconomic factors like interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels, which may negatively impact their discretionary spending, and in turn the company’s growth and profitability.

The soft economic recovery may make customers reluctant to enter new rental purchase deals. This bearish mood is a drag upon the Zacks Consensus Estimate.

Rent-A-Center currently has a Zacks Rank #5 (Strong Sell).

Key Picks from the Sector

Some better-ranked retail stocks worth investing include AerCap Holdings N.V. (AER - Snapshot Report), American Capital Agency Corp. (AGNC - Analyst Report) with a Zacks Rank #1 (Strong Buy), and AeroCentury Corp. (ACY), with a Zacks Rank #2 (Buy).
 

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