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Rent-A-Center Inc. (RCII - Analyst Report)), one of the largest rent-to-own operators, recently delivered better-than-expected fourth-quarter 2011 results. The quarterly earnings of 85 cents a share outdid the Zacks Consensus Estimate of 82 cents, and increased 19.7% from 71 cents earned in the prior-year quarter, aided by growth registered in the top line.

The quarterly earnings also surpassed the higher end of management’s guidance range of 78 cents to 84 cents a share. On a reported basis, including one-time items, earnings came in at 83 cents a share, up from 49 cents delivered in the year-ago quarter.

Let's Unveil the Picture

Rent-A-Center’s total revenue, which comprises store and franchise revenues, grew 8.9% to $737.5 million from the year-ago quarter. The rise in revenues was attributable to higher revenue from the RAC Acceptance business, partially offset by the discontinued financial services business.

However, total revenue marginally fell short of the Zacks Consensus Estimate of $738 million. The growth in the top line was somewhat limited, as core rent-to-own customers remain cautious about their spending. Comparable-store sales for the quarter rose 2.7%.

The company’s new business model, called RAC Acceptance, is gaining traction. When a consumer is denied credit financing for a particular product from the retailer, Rent-A-Center acquires that product from the retailer by virtue of the RAC Acceptance program, and thereby offers it to the consumer under a rental-purchase transaction.

Total store revenue rose 8.8% to $726.2 million. The growth was driven by 9.7% advancement in rental and fees revenue to $646.2 million, a 30.3% increase in merchandise sales to $56.8 million and a 2.2% jump in installment sales to $19 million, offset by a 73.6% decline in other revenue to $4.3 million. Total franchise revenue climbed 17.6% to $11.3 million during this quarter.

High Operating Costs Shrinking Margins

Rent-A-Center’s gross profit grew 4.5% to $517.3 million, however, gross margin shrunk 300 basis points to 70.1%. Adjusted operating profit rose 1.8% to $83.2 million, however, operating profit margin contracted 80 basis points to 11.3%. Adjusted EBITDA climbed 3.8% to $101.9 million, however, adjusted EBITDA margin shriveled 70 basis points to 13.8%.

Cost of rentals and fees rose 15.9% to $152.8 million, whereas cost of merchandise sold soared 44.9% to $50.6 million. Salaries and other expenses climbed 3.9% to $396.6 million, whereas general and administrative expenses increased 14.3% to $36.1 million.

Stores Update

During the quarter, the company opened 17 new domestic rent-to-own locations, acquired 21 stores, consolidated 4 stores into existing locations and closed 2 stores. The company also opened 28 and 8 rent-to-own locations in Mexico and Canada, respectively. The company also opened 4 retail installment sales stores under the names “Get It Now” and “Home Choice”. The company currently operates 3,075 stores nationwide, as well as in Canada, Mexico and Puerto Rico.

The company also added 86 RAC Acceptance kiosks, consolidated 54 stores into existing locations and closed 3 stores during the quarter, bringing the total count to 750.

For fiscal 2012, management plans to open approximately 50 domestic rent-to-own stores. Through the year, the company targets to open 60 rent-to-own locations in Mexico and 10 in Canada. Moreover, the company aims 200 domestic RAC Acceptance kiosk additions.

Financial Aspects

Rent-A-Center ended fiscal 2011 with cash and cash equivalents of $88.1 million, senior debt of $440.7 million, and shareholders’ equity of $1,359.2 million. During the year, the company generated cash flow from operations of about $286.6 million.

During fiscal 2011, the company bought back 5,852,408 shares, aggregating $164.3 million. Till date, the company has repurchased approximately 29.3 million shares, totaling $715.5 million under its $800 million share repurchase authorization.

Strolling Through Guidance

Despite a turbulent economy, Rent-A-Center witnessed healthy demand for its product and services. The company now projects fiscal 2012 top-line growth between 7% and 10%, attributable to low-single digit jump in the core U.S. and more than $300 million contribution from RAC Acceptance.Management expects comparable-store sales between 2.5% and 4.5%.

Earnings for fiscal 2012 are projected between $3.00 and $3.20 per share, including a 20 cents cost related to its international expansion initiatives. The current Zacks Consensus Estimate for fiscal 2012 is $3.19, which lies at the higher-end of the guidance range. 

Management also forecasted a 100 basis points contraction in gross profit margin for fiscal 2012. It also hinted at a 50 basis points reduction in operating profit margin for the year.

Rent-A-Center Holds Zacks #2 Rank

Currently, we have a long-term “Neutral” rating on the stock. Moreover, Rent-A-Center, which competes with Aaron’s Inc. (AAN - Snapshot Report) and Advance America, holds a Zacks #2 Rank that translates into a short-term “Buy” recommendation.

Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow customers to own the merchandise upon the completion of the rental period. Due to continued tightening of the credit market, customers see rent-to-own as a more flexible and viable option compared to credit.

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