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Risk-Reward Balances Rent-A-Center

RCII AAN

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Rent-A-Center Inc. ((RCII - Analyst Report)) is one of the largest rent-to-own operators in the U.S. and leverages an extensive network of about 3,000 stores to effectively penetrate its target markets, and gain an advantage over its competitors, such as Aaron’s Inc. ((AAN - Snapshot Report)), and Advance America.

The company is taking prudent steps to optimize rental merchandise levels in accordance with sales trends. Rent-A-Center recently implemented a centralized inventory management system, including automated merchandise replenishment. Moreover, a new centralized purchasing system allows better management of rental merchandise.

The company in order to make the consumers’ shopping experience enjoyable is working on a new business model called RAC Acceptance. When the consumer is denied credit financing for a particular product from the retailer, Rent-A-Center under its RAC Acceptance program, acquires that product from the retailer and offers it to the consumer under a rental-purchase transaction.

Rent-A-Center remains optimistic about its future growth as it opens stores in international markets and accelerates the rollout of RAC Acceptance kiosks. For fiscal 2011, management plans to open approximately 25 domestic rent-to-own stores.

Targeted rent-to-own locations for the full year are 40 to 75 in Mexico and 10 to 20 in Canada. Moreover, the company aims at adding 325 to 375 domestic RAC Acceptance kiosks.

Management now expects second-quarter 2011 earnings in the range of 68 cents to 74 cents a share. Total revenue is expected in the range of $694 million to $709 million. The company has predicted total store revenue in the range of $687 million to $702 million.

Rent-A-Center reiterated its fiscal 2011 guidance. Earnings are projected between $2.90 and $3.10 per share. Total revenue is expected in the range of $2,868 million to $2,928 million. Total store revenue is projected between $2,835 million and $2,895 million.

Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow the customer to own the merchandise on the completion of the rental period. Due to the continued tightening of the credit market, customers see rent-to-own as a more flexible and viable option compared to credit., which is hard to come by. However, the sluggish recovery and a fragile job market may make customers reluctant to even enter new rental purchase deals.

Currently, we have a long-term Neutral rating on the stock. Moreover, Rent-A-Center’s shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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