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Rent-A-Center (RCII) Down 10.7% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Rent-A-Center (RCII - Free Report) . Shares have lost about 10.7% 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 the most recent earnings report in order to get a better handle on the important drivers.

Rent-A-Center Beats Earnings Estimates in Q2

Rent-A-Center posted better-than-expected results for second-quarter 2022. Both the top and the bottom line surpassed the Zacks Consensus Estimate but declined on a year-over-year basis.

It posted adjusted earnings of $1.15 a share, surpassing the Zacks Consensus Estimate of $1. However, the bottom line decreased significantly from $1.63 earned in the year-ago quarter.

Total revenues of $1,071.3 million came above the Zacks Consensus Estimate of $1,062 million. However, the metric fell 10.3% year over year, mainly due to lower merchandise sales revenues and rental revenues from the respective year-earlier period’s figures. Also, soft sales across all the segments except for Mexico and same-store sales hurt the metric.

Adjusted EBITDA came in at $128.9 million, down 31.3% from the year-ago period’s level, mainly due to lower revenues, increased loss rates on lease vintages underwritten in late 2021 and elevated operating costs due to higher wages and delivery expenses. Adjusted EBITDA margin contracted 370 basis points year over year to 12%.

Segmental Performance

Revenues at the Rent-A-Center Business segment dipped 3.1% to $490.2 million due to same-store sales decline of 3.3%. Same-store sales fell due to lower merchandise sales and early payout options in the reported quarter, which had gained from government stimulus programs in the year-ago period. E-commerce accounted for 22.7% of the quarterly revenues compared with 20.4% in the prior-year period. Also, the segment’s lease portfolio value grew 5.6% year over year. As of Jun 30, 2022, the segment had 1,852 company-operated locations.

Revenues at the Acima segment (formerly known as the Preferred Lease segment) declined 16.5% from the prior-year quarter’s level to $530.2 million, mainly due to lower rental and fees revenues and merchandise sales. Also, gross merchandise volume (GMV) declined 24.2% due to changes in underwriting in the first half of the year. On a two-year stacked basis, GMV increased 19%.

Mexico segment’s revenues totaled $16.7 million, up 9.4% on a constant-currency basis. Also, the segment’s same-store sales rose 7.3%. As of Jun 30, the unit had 123 company-operated locations.

Franchising revenues tumbled 9.1% to $34.2 million. As of Jun 30, Rent-A-Center had 457 franchise-operated locations.

Other Financial Aspects

Rent-A-Center ended the reported quarter with cash and cash equivalents of $112.2 million, net senior debt of $933 million and a stockholders' equity of $558.8 million. RCII had an outstanding debt of $1.4 billion at the quarter end. RCII ended the quarter with $500 million of liquidity, including $388 million of undrawn revolving credit availability. RCII paid down $30 million on its revolving credit facility.

During the first six months of 2022, Rent-A-Center generated cash of $287.1 million from operations and a free cash flow of $67.2 million, including acquisitions and divestitures. Capital expenditures totaled $14.5 million in the aforementioned period.
 
In the first quarter of 2022, management returned $18.4 million of cash to its shareholders via dividends.

Outlook

Consolidated revenues are projected in the bracket of $4.265-$4.385 billion for 2022, lower than the earlier view of $4.450-$4.600 billion and $4.583 billion generated in 2021. Adjusted EBITDA excluding stock-based compensation is forecast between $480 million and $525 million, indicating a decline from $611 million recorded a year ago and a drop from $515-$565 million predicted earlier. Adjusted earnings per share are now envisioned in the band of $4.00-$4.50, indicating a decline from $5.57 earned last year and a fall from $4.50-$5.00 projected previously. Free cash flow is estimated in the band of $390-$440 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

The consensus estimate has shifted -8.09% due to these changes.

VGM Scores

At this time, Rent-A-Center has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Rent-A-Center has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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