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Bear of the Day: Rent-A-Center (RCII)

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Headquartered in Plano, TX, Rent-A-Center (RCII - Free Report) is a company that provides consumers the opportunity to own high-quality, durable, name-brand furniture, electronics, appliances, computers, and accessories under flexible rental purchase agreements, with no long-term obligation.

The company offers same-day delivery, 90 days same as cash, and an early purchase option for customers. Rent-A-Center owns and operates over 3,000 stores across the U.S., Canada, and Puerto Rico.

RCII currently sits at a #5 (Strong Sell) on the Zacks Rank after a disappointing fourth quarter. Lack of progress on a deal to sell the company has also hurt shares. Is there hope for a turnaround for RCII?

Q4 Results

Both the top and bottom line fell short of analyst expectations.

RCII posted an adjusted loss of 41 cents per share (which marks a loss per share for the third straight quarter). Total revenues were $639 million, tumbling 6.6% year-over-year due to a decline in the Core U.S. and Acceptance Now segments.

Management did note that hurricane-related disruptions and soft comparable store sales also hurt results.

Total comps dropped 2% in Q4, reflecting declines of 3.6% and 2.3% in the Core U.S. and Mexico segments, respectively, partly mitigated by 6.7% increase noted at the Acceptance Now segment.

Deal to Sell?

For a while now, investors have become deeply concerned about the rent-to-own company’s business model, as well as its top and bottom line performance. Many were hoping that the retailer would end up being acquired.

At the end of January, news broke that a potential buyout deal with Vintage Capital Management would not be moving forward sent shares on a downward slide that continued well into February.

However, under pressure from its largest shareholder, Engaged Capital, to sell, is now back in active talks with multiple parties.

RCII is currently valued at around $557 million.

Earnings Outlook

For the current quarter, five analysts slashed their outlook in the last 60 days, and the consensus has dipped from $0.22 to $0.06 per share. But, earnings are expected to grow about 50% for this time period.

Seven analysts have revised their estimates downward for the current fiscal year, and the consensus has also fallen, declining 46 cents in the last 60 days.

Looking at the next fiscal year, the current earnings consensus has dipped from $2.08 to 0.78 per share in the last 60 days.

What’s Next for RCII

Shares of Rent-A-Center have experienced a ton of volatility over the last year, as the movement of its share price has unfortunately been tied to news of the company potentially being sold. The stock is down 4.6%, and year-to-date, shares have fallen over 20%.

Since sales are declining, Rent-A-Center hopes that some cost-cutting measures will improve earnings.

The company, in collaboration with AlixPartners, has identified cost savings opportunities in the range of $65-$85 million, roughly two-thirds of which is anticipated to be realized this year. It identified working capital benefits of $20-$25 million, which is expected to be realized fully this year as well.

Management also stated that the new tax legislation is likely to result in a cash tax benefit of about $200 million over the next three years, which Rent-A-Center intends to utilize in lowering its debt load.

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