After delivering positive earnings surprises for five straight quarters, Rent-A-Center, Inc. succumbed to a miss in the second quarter of 2016, which also marked the company’s fourth consecutive sales miss. Moreover, both top and bottom lines declined year over year. The dismal quarterly results caused shares of the company to plunge 14.4% in the after-market trading session yesterday.

The rent-to-own operator’s quarterly adjusted earnings of 41 cents a share fell 18% short of the Zacks Consensus Estimate and the year-ago figure of 50 cents. On a GAAP basis, the company reported earnings of 19 cents per share compared with 43 cents delivered in the year-ago quarter.

Consolidated total revenue tumbled 8.1% to $749.6 million in the reported quarter, owing to a decline witnessed across the Core U.S., Acceptance Now and Mexico segments, somewhat compensated by enhanced revenue from the Franchising segment. Revenues also came in below the Zacks Consensus Estimate of $786.2 million.

Comparable-store sales (comps) for the quarter dropped 4.9%, reflecting respective year-over-year declines of 6.7% and 1.5% in the Core U.S. and Acceptance Now segments, partly offset by a 13% jump noted at the Mexico segment. Notably, however, comps had improved 1.4%, 31.6% and 12% across the Core U.S., Acceptance Now and Mexico segments, respectively, in the year-ago period.

Delving Deeper

Revenue from the Acceptance Now segment dipped 0.5% from the prior-year quarter figure to $199.5 million, attributable to troubles faced by the oil industry affected regions coupled with management’s excess concentration on boosting profitable sales.

Revenue from the Core U.S. segment slumped 10.6% to $530.6 million, owing to continued store base rationalization and dismal comps. Comps at this segment were adversely impacted by the accelerated point of sale system rollout, persistent sluggishness across the computers and tablets categories, headwinds across the oil-impacted markets and continued smartphones recast.

The Mexico segment’s revenue came in at $13.3 million, down 18.5% year over year – attributable to foreign currency headwinds and store closures. Finally, total Franchising revenue surged 22.5% to $6.2 million during the quarter.           

Rent-A-Center’s adjusted operating profit decreased 15.4% to $46.4 million, while adjusted operating margin contracted 50 basis points to 6.2%. Adjusted EBITDA fell 10.7% to $67.2 million, whereas adjusted EBITDA margin shriveled 20 basis points to 9%.

Store Update

During the quarter, the company consolidated 174 Core U.S. locations with existing locations and closed 10 locations, bringing the total store count to 2,478. The company also opened 50 Acceptance Now Staffed stores, consolidated 108 stores with existing locations, and converted 4 stores to Acceptance Now Direct, thus taking the total count to 1,374 Acceptance Now Staffed stores. There were 545 Acceptance Now Direct stores at the end of the quarter, after taking into account 42 Acceptance Now Direct stores opened, 4 converted stores from Acceptance Now Staffed, 27 stores closed and 526 locations at the beginning of the quarter.

In Mexico, the store count at the end of the quarter was 129, while Rent-A-Center Franchising (a wholly owned subsidiary of Rent-A-Center) introduced 1 store during the quarter, taking its quarter-end store count to 228.

Other Financial Aspects

Rent-A-Center, which shares space with McGrath Rentcorp (MGRC Quick QuoteMGRC - Free Report) , AeroCentury Corp. and Aaron's, Inc. (AAN Quick QuoteAAN - Free Report) , ended the quarter with cash and cash equivalents of $88.2 million, net senior debt of $187.9 million, and shareholders’ equity of $502.5 million.

During the first half of 2016, the company generated $303.1 million as cash from operations, while it made capital expenditures of $28.2 million during the same time frame. Further, the company lowered its outstanding debt balance by $20.5 million in the second quarter, bringing its Consolidated Leverage Ratio to 2.37x as of Jun 30, 2016.

This Zacks Rank #3 (Hold) company also declared a quarterly dividend of 8 cents per share in the reported quarter, which was paid on Jul 21, 2016.

Guidance

Following the murky performance, management lowered its previously issued outlook for 2016. The company now anticipates Core U.S. revenue to decrease in the band of 8.5%−11.5% with comps decline expected in a range of 5%−8%. Management had earlier projected Core U.S. revenue to fall 4%–6% in 2016, impacted by a comps decline of 1%–3%. Rent-A-Center now projects Acceptance Now revenue between $805−$835million, down from the previous guidance range of $850−$900 million for the full year.

Based on these expectations, management envisions 2016 earnings per share to range from $1.65−$1.85. The Zacks Consensus Estimate is currently pegged at $2.05, which may witness a revision following the company’s results.

While the company’s outlook is disappointing, management remains impressed with its productivity enhancements, improved leverage ratio and solid Mexico profitability. Further, the company remains optimistic about the Acceptance Now pipeline, considering the progress made on it.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>