A month has gone by since the last earnings report for Rent-A-Center (RCII - Free Report) . Shares have lost about 5.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Rent-A-Center due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Rent-A-Center Surpasses Earnings & Sales Estimates in Q2
Rent-A-Center, Inc. (RCII - Free Report) posted sturdy second-quarter 2020 results, wherein both the top and bottom lines beat the Zacks Consensus Estimate and grew year over year. Notably, this marked the company’s third-straight earnings beat. Moreover, management has raised free cash flow projection for 2020 and reaffirmed sales and earnings view, which was originally issued on Feb 24.
Quarterly results, which outpaced management’s expectations, were driven by the company’s efforts to immediately address challenges tied to the pandemic. Same-store sales were positive in every month of the reported quarter, with furniture and appliance sales reverting to pre-pandemic trends. Moreover, disciplined operating expense, gains from a pullback in traditional lending, and impressive e-commerce and digital payments have been aiding Rent-A-Center’s business.
Q2 in Detail
Rent-A-Center posted adjusted earnings of 80 cents a share that outshone the Zacks Consensus Estimate of 60 cents. Also, the bottom line increased 33% from the year-ago quarter.
Total revenues of $683.7 million came above the Zacks Consensus Estimate of $607 million and grew 4.2% year over year. The implementation of the Preferred Lease virtual solution, along with gains from Merchants Preferred buyout and higher same-store sales, drove revenue growth. This was partly offset by refranchising of about 60 namesake locations in the prior 15 months. Excluding effects of the refranchising efforts, consolidated revenues grew 5.1%.
Meanwhile, adjusted EBITDA came in at $75.9 million, up 12.6% from the year-ago period. This was pressured by $5.6 million with respect to the pandemic-related skip/stolen losses, with additional reserves for expected future losses. We note that adjusted EBITDA margin expanded 80 basis points to 11.1%.
Revenues at the Rent-A-Center Business segment rose 1.8% to $459.2 million owing to same-store sales growth of 7.8%. This was partly offset with refranchising of stores. Excluding revenue impact from the refranchising efforts, the metric grew 4%. Further, same-store sales were backed by government stimulus associated with COVID-19, higher early payouts, robust demand, better collections, and increased digital-payment penetration.
Revenues at Preferred Lease segment grew 8.4% from the prior-year quarter to $191.2 million, mainly buoyed by the implementation of the Preferred Lease virtual solution and contributions from the buyout of Merchants Preferred. Moreover, invoice volumes rose 25.4% to $136.5 million in spite of many temporary retail-store closures due to the pandemic.
Mexico segment’s revenues totaled $10.6 million, down 4.6% on a constant-currency basis. Also, the segment’s same-store sales declined 2.6%.
Finally, Franchising revenues jumped 52.5% to $22.7 million. This can primarily be attributed to increased store count, with the refranchising of about 60 stores over the past 15 months and rise in inventory purchases by franchisees.
Other Financial Aspects
Rent-A-Center ended the reported quarter with cash and cash equivalents of $206.4 million, net senior debt of $190.7 million and stockholders' equity of about $486.6 million.
Capital expenditures totaled $5.6 million in the quarter. The company generated cash of roughly $254.7 million from operations and free cash flow, including acquisitions and divestitures of $240.3 million during the first half of 2020.
Given the company’s performance in first-half 2020, management reaffirmed view for the year. However, the guidance excludes the effects of new franchising transactions. Revenues are projected in the band of $2.755-$2.875 billion, indicating growth from $2.670 billion recorded in 2019. Moreover, adjusted EBITDA is anticipated between $255 million and $285 million, compared with $254.2 million in 2019.
Further, adjusted earnings per share are envisioned to be $2.45 to $2.85. This guidance suggests year-over-year growth of 9-27% from $2.24 earned in 2019 and is above the Zacks Consensus Estimate of $2.27 for 2020. It now projects free cash flow in the range of $135-$165 million, up from the guided range of $105-$135 million provided on Feb 24.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 43.87% due to these changes.
At this time, Rent-A-Center has a strong Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Rent-A-Center has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.