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Rent-A-Center (RCII) Q3 Earnings Top; Sales Miss Hits Stock

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After witnessing a negative earnings surprise of 18% in the second quarter of 2016, Rent-A-Center, Inc. managed to deliver a positive earnings surprise of 22.2% in the third quarter. However, the company’s total revenue fell short of the estimate for the fifth straight quarter. Further, both the top and bottom lines declined year over year. The technical snags and outages after the execution of new store information management system within Core U.S. stores adversely impacted the operating results.

Shares of this rent-to-own operator fell 6.6% in the after-market trading hours yesterday. The company posted adjusted quarterly earnings of 11 cents a share that beat the Zacks Consensus Estimate by a couple of cents but plunged from 47 cents reported in the year-ago period. On a GAAP basis, the company reported earnings of 12 cents a share against a loss of 8 cents in the prior-year quarter.

Total revenue tumbled 12.3% to $693.9 million in the quarter under review, 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 fell short of the Zacks Consensus Estimate of $698.4 million.

Comparable-store sales (comps) for the quarter dropped 8.4%, reflecting respective declines of 12% and 0.9% in the Core U.S. and Acceptance Now segments, partly offset by a 10.1% jump noted at the Mexico segment.

Delving Deeper

Revenue from the Acceptance Now segment dipped 1.1% from the prior-year quarter figure to $194.4 million.

Revenue from the Core U.S. segment slumped 16.3% to $481.8 million, owing to continued store base rationalization and dismal comps. Comps at this segment were adversely impacted by store information management system implementation and system outages, softness across the televisions, computers and tablets categories as well as continued smartphones recast.

The Mexico segment’s revenue came in at $12.5 million, down 14.3% year over year – attributable to foreign currency headwinds and store closures. Finally, total Franchising revenue increased 3% to $5.2 million during the quarter.

Rent-A-Center’s adjusted operating profit decreased 66.2% to $17.7 million, while adjusted operating margin contracted 410 basis points to 2.5%. Adjusted EBITDA fell 47.8% to $37.7 million, whereas adjusted EBITDA margin shriveled 370 basis points to 9%.

Store Update

At the end of the quarter, there was 2,469 Core U.S. locations, 1,373 Acceptance Now Staffed stores, 495 Acceptance Now Direct stores, 130 stores in Mexico and 231 Franchise stores.

Other Financial Aspects

Rent-A-Center, which shares space with McGrath Rentcorp (MGRC - Free Report) , AeroCentury Corp. and Aaron's, Inc. (AAN - Free Report) , ended the quarter with cash and cash equivalents of $130.3 million, net senior debt of $187.8 million and shareholders’ equity of $506.1 million.

During the first nine months of 2016, the company generated $374.6 million as cash from operations, while it made capital expenditures of $46.8 million during the same time frame.

RENT-A-CENTER Price and EPS Surprise

RENT-A-CENTER Price and EPS Surprise | RENT-A-CENTER Quote

Guidance

Rent-A-Center now projects Core revenue in the band of $2,065–$2,100 million and Acceptance Now revenue in the range of $805−$835 million. The company expects adjusted earnings between $1.05 and $1.15 per share for the full year. The Zacks Consensus Estimate for 2016 currently stands at $1.29, which could witness a downward revision in the coming days.

Currently, Rent-A-Center carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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