Rent-A-Center Kept at Neutral

With an extensive network of more than 3,000 stores, Rent-A-Center Inc. ( RCII - Analyst Report ) is one of the largest rent-to-own operators in the U.S. The sheer geographic reach enables the company to effectively penetrate its target markets and gain a competitive 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 enhance consumers’ shopping experience has developed 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.

Despite sluggish recovery in the economy, Rent-A-Center is witnessing healthy demand for its products and services, as evident from its first-quarter 2012 results. The quarterly earnings of 87 cents a share outdid the Zacks Consensus Estimate of 84 cents, and increased 10.1% from 79 cents earned in the prior-year quarter, aided by growth in the top line.

Rent-A-Center’s total revenue, which comprises store and franchise revenues, grew 12.5% to $835.3 million from the year-ago quarter, and handily beat the Zacks Consensus Estimate of $807 million. Comparable-store sales for the quarter rose 7.1%. The increase in the top line was attributable to higher revenue from the RAC Acceptance and Core U.S. segments.

Revenue from the RAC Acceptance business more than doubled to $87.7 million from the prior-year quarter, whereas revenue from Core U.S. climbed 5.6% to $727.8 million.

Rent-A-Center remains optimistic about its future growth as it opens stores in international markets and accelerates the rollout of RAC Acceptance kiosks. Management maintained its fiscal 2012 earnings projection of $3.00 to $3.20 per share.

The company also reiterated its revenue growth forecast of 7% to 10% for the year, attributable to a low single-digit jump in the Core U.S. and more than $300 million contribution from the RAC Acceptance business. Management expects comparable-store sales between 2.5% and 4.5%.

Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow customers 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. 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 recommendation on the stock. However, Rent-A-Center’s shares maintain a Zacks #2 Rank that translates into a short-term Buy rating given its better-than-expected quarterly performance even amidst unstable economic recovery.