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Rent-A-Center (RCII) Strategic Plans Bode Well for the Stock

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Rent-A-Center, Inc. (RCII - Free Report) strategic plan to bring itself back on growth trajectory has been received well by investors, evident from the stock’s gain of 42.3% in the last six months. Rent-A-Center is concentrating on a new labor model, supply chain initiative and productivity enhancements.

However, in the past month the stock has lost momentum and witnessed a marginal decline of 0.5%. In fact, the stock has underperformed the industry which has witnessed a gain of 4%. Let’s delve deeper.

Hidden Catalyst

Management has undertaken initiatives to strengthen the performance of its Core U.S. segment. The company expects to reap benefits from its Flexible Labor and Sourcing & Distribution endeavors. Moreover, management has been gradually making a shift in its pricing strategy at the Core U.S. unit – from a cost-based pricing technique to a data-driven, market-responsive model. In an attempt to augment cash flow generation from Core U.S. business, the company is focusing on rates, terms and purchase options that are much more aligned with the customer’s needs.

Management believes that if strategic growth endeavors are well executed it will help attain revenue growth of low-single digits in 2018 and mid-single digits in 2019. Rent-A-Center expects to achieve EBITDA margin of 7.5-8.5% in 2018 and 9.5-10.5% in 2019. The company projects free cash flow generation of $70-$90 million and $110-$130 million in 2018 and 2019, respectively. The company envisions earnings in the band of $1.20-$1.40 per share for 2018 and between $2.00 and $2.25 for 2019.

The company’s Acceptance Now business model is gaining traction as it enhances consumers’ shopping experience. When the consumer is denied credit financing for a particular product from the retailer, Rent-A-Center under its Acceptance Now program acquires that product from the retailer and offers it to the consumer under a rental-purchase transaction. The company has moved a step ahead by introducing the Acceptance Now value proposition across retail partner websites.

Hurdles to Overcome

Since the past six quarters, Rent-A-Center has been witnessing a year-over-year decline across its top and bottom lines. In second-quarter 2017 adjusted loss of 1 cent per share fell substantially from 41 cents earned in the year-ago period. Total revenues of $677.6 million declined 9.6% year over year. Total revenues tumbled due to decline witnessed across the Core U.S., Mexico and Franchising segments, partially mitigated by growth registered at Acceptance Now segment.

Further, the Zacks Rank #3 (Hold) company faces intense competition from national chains as well as regional rent-to-own businesses. Furthermore, Rent-A-Center also competes with mass merchandisers and traditional consumer electronics chains such as Wal-Mart and Best Buy. This may dent the company’s sales and margins.

3 Retail Stocks Likely to Steal the Show

Better-ranked stocks in the retail sector include The Children's Place, Inc. (PLCE - Free Report) , Burlington Stores, Inc. (BURL - Free Report) and Big Lots, Inc. (BIG - Free Report) . Children's Place sports a Zacks Rank # 1 (Strong Buy), while Burlington Stores and Big Lots carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Children's Place delivered an average positive earnings surprise of 16.3% in the trailing four quarters and has a long-term earnings growth rate of 9%.

Burlington Stores delivered an average positive earnings surprise of 22.6% in the trailing four quarters and has a long-term earnings growth rate of 15.9%.

Big Lots delivered an average positive earnings surprise of 83% in the trailing four quarters and has a long-term earnings growth rate of 13.5%.

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