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Rent-A-Center Beats, Keeps Guidance

RCII AAN

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Rent-A-Center Inc. (RCII - Analyst Report), one of the largest rent-to-own operators, recently delivered better-than-expected second-quarter 2012 results. The quarterly earnings of 74 cents a share outdid the Zacks Consensus Estimate of 71 cents, and increased 8.8% from 68 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 7.4% to $749.7 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $757 million. Comparable-store sales for the quarter rose 2.8%. The increase in the top line was attributable to higher revenue from the RAC Acceptance segment.

The company’s 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.

Revenue from the RAC Acceptance business almost doubled to $77 million from the prior-year quarter, whereas revenue from Core U.S. segment climbed 1.6%.

Total store revenue rose 7.4% to $740.3 million. The growth was driven by 6.7% advancement in rental and fees revenue to $659 million, an 18.9% increase in merchandise sales to $60.6 million and a 9.5% jump in other revenue to $4.5 million, offset by a 2.4% decline in installment sales to $16.2 million. Total franchise revenue climbed 7% to $9.4 million during the quarter.

Higher Expenses Weighing Upon Margins

We observe that higher cost of revenues kept the gross margin under pressure. Although, Rent-A-Center’s gross profit grew 4.1% to $527 million, gross margin shrunk 220 basis points to 70.3%. Cost of rentals and fees rose 14.7% to $159.8 million, whereas cost of merchandise sold soared 25.3% to $49.5 million.

Adjusted operating profit rose 1.2% to $79 million, whereas operating profit margin contracted 70 basis points to 10.5% due to an increase of 4.3% in salaries and other expenses, and a jump of 7.4% in general and administrative expenses.

Adjusted EBITDA climbed 3.6% to $98.8 million; however, adjusted EBITDA margin shriveled 50 basis points to 13.2%.

Stores Update

During the quarter, the company opened 8 new Core U.S. locations, consolidated 15 stores into existing locations and closed 3 stores bringing the total store count to 2,973. The company also opened 77 RAC Acceptance stores and consolidated 29 stores into existing locations, resulting in 811 stores.

Thirteen international locations were opened and 1 store was shuttered during the quarter bringing the count to 99 stores. ColorTyme, which is a wholly owned subsidiary of Rent-A-Center, added 2 new locations and closed 1 store, taking the total store count to 219. 

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 the quarter with cash and cash equivalents of $101.1 million, senior debt of $367.8 million, and shareholders’ equity of $1,433.5 million. During the first-six months, the company generated cash flow from operations of about $161.1 million. Management projected capital expenditures of approximately $105 million for fiscal 2012.

During the first half of 2012, the company bought back 488,731 shares for approximately $16.5 million. Since the inception of the share buyback program, the company has repurchased 29,811,484 shares and has employed approximately $732 million out of the $800 million authorized.

Strolling Through Guidance

Rent-A-Center witnessed healthy demand for its products and services during the quarter, and reiterated its fiscal 2012 outlook. The company continues to expect top-line growth between 7% and 10%, attributable to a low single-digit jump in 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%.

Management maintained its fiscal 2012 earnings projection of $3.00 to $3.20 per share, including a 25–30 cents cost related to its international expansion initiatives. The current Zacks Consensus Estimate for fiscal 2012 is $3.13, which dovetails with management’s guidance range. 

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

Rent-A-Center Holds Zacks #2 Rank

Currently, we have a long-term Neutral recommendation on the stock. Moreover, Rent-A-Center, which competes with Aaron’s Inc. (AAN - Snapshot Report) and Advance America, holds a Zacks #3 Rank that translates into a short-term Hold rating.

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. However, the sluggish recovery and a fragile job market may make customers reluctant to enter new rental-purchase deals.

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