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Analyst Blog

On Apr 8, we downgraded our recommendation on Rent-A-Center, Inc. (RCII - Analyst Report), one of the largest rent-to-own operators in the U.S. to Underperform based on the company’s dismal fourth-quarter 2012 results. The stock currently carries a Zacks Rank #4 (Sell).

Why the Downgrade?

Estimates for Rent-A-Center have shown a downtrend since the company reported its fourth quarter results on Jan 28. The company’s quarterly earnings of 81 cents a share missed the Zacks Consensus Estimate by a couple of cents, and dropped 4.7% from 85 cents earned in the prior-year quarter.

Although total revenue rose 2.8% to $758.4 million, it fell short of the Zacks Consensus Estimate of $781 million. Comparable-store sales for the quarter fell 0.2%.

Consequently, management projected a 4% decline in the Core U.S. segment during the first quarter of 2013. Comparable-store sales are forecasted to drop 2% in the quarter. The Zacks Consensus Estimate for 2013 and 2014 decreased by 6% and 6.1% to $3.28 and $3.72, respectively in the last 90 days.

Cause for Concern

The sluggish recovery and a fragile job market are making customers reluctant to enter new rental-purchase deals. We also observe that higher cost of revenue kept the gross margin under pressure. Gross margin shrunk 60 basis points to 69.5% during the fourth quarter of 2012.

Rent-A-Center, which competes with Aaron’s Inc. (AAN - Snapshot Report), forecasted a 50 basis points contraction in gross profit margin for 2013. A 4.3% rise in salaries and other expenses impacted the operating profit. Operating profit fell 4.7% to $79.3 million, whereas operating profit margin contracted 80 basis points to 10.5%.

Other Stocks That Warrant a Look

While we prefer to avoid Rent-A-Center until we see signs of improvement in the company's performance, other stocks worth considering in the finance-leasing industry are AeroCentury Corp. (ACY), which carries a Zacks Rank #1 (Strong Buy) and Electro Rent Corp , which holds a Zacks Rank #3 (Hold).

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