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

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In the modern world, having a system outage for a single day can wreak havoc on any company.  But when you combine weeks of system issues with a double digit decline in same store sales, a company’s top and bottom line are bound to be negatively impacted.  These are some of the issues facing our Zacks Bear of the Day, Rent-A-Center Inc. (RCII - Free Report) .  

This Zacks Rank #5 (Strong Sell) company operates company owned rent-to-own stores which offer high-quality, durable goods such as consumer electronics, appliances, furniture and accessories to consumers under flexible rental purchase arrangements that allow the customer to obtain ownership of the merchandise at the conclusion of an agreed-upon rental period.

Recent Earnings Report

On October 26, RCII posted Q3 earnings where they beat the Zacks consensus earnings estimate but came up short against the Zacks consensus revenue estimate.  On a year over year basis the company saw declines in Diluted earnings per share -76.6%, Total revenues -12.3%, Core U.S. revenues -16.3%, Same store sales -12.0%, and EBITDA fell by 370 basis points.

Management’s Take

According to Robert D. Davis, CEO, “As previously announced, our third quarter operating results were negatively impacted by unexpected capacity-related system outages following the full implementation of our new store information management system within our Core U.S. stores. Consequently, I am terribly disappointed in the results for the quarter, both top and bottom line. Toward the end of the third quarter we had seen significant improvement in system availability and a reduction in the frequency of system outages. However, over the past two weeks on a couple of instances we have experienced system slowness and outages similar to but less impactful than what we saw earlier in the third quarter. Despite these recent challenges, over the past 6 weeks, past due percentages have been lower than they were a year ago.”

Price and Consensus Graph

As you can see from the graph below, RCII’s stock price and future estimates have been falling for the majority of 2016.

RENT-A-CENTER Price and Consensus

RENT-A-CENTER Price and Consensus | RENT-A-CENTER Quote

Declining Estimates

Due to the poor earnings report, estimates for Q4 16, Q1 17, FY 16 and FY 17 have all seen declines over the past 30 days.  Q4 16 fell from $0.46 to $0.32, Q1 17 dropped from $0.54 to $0.39, FY 16 plummeted from $1.74 to $1.12, and FY 17 slipped from $1.74 to $1.40.

Bottom Line

While management is currently working on improving their new store information management system within their Core U.S. stores, it will take a bit of time for all the issues to be ironed out.  Therefore, it would be wise to stay on the sidelines till these issues are fully behind them.

If you are inclined to invest in the Consumer Services/Misc. sector, you would be best served to look into Inc. (CRCM - Free Report) , Monro Muffler (MNRO - Free Report) , and or China Online Education , all of which currently carry a Zacks Rank #3 (Hold).  The remainder of the sector holds either a Zacks Rank #4 (Sell), or a Zacks Rank #5 (Strong Sell).

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