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Can Rent-A-Center's Strategic Growth Plan Combat Comps Woes?

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Rent-A-Center, Inc.‘s (RCII - Free Report) Acceptance Now business and strategic plan to bring itself back on growth trajectory bode well. The company is concentrating on a new labor model, supply chain initiative and productivity enhancements. However, year-over-year decline in top and bottom-line along with intense competition remains a cause of concern for investors. Let’s delve deeper and find out the factors impacting the stock.

Turn Around Strategy

With an extensive network of stores, Rent-A-Center is one of the largest rent-to-own operators in North America. In our view, the sheer geographic reach enables the company to effectively penetrate its target markets. Further, it is investing in enhancing omni-channel platform so that customers can experience a seamless approach across channels, markets, retailers, products and brands.

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 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.

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.

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 anticipates achieving 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.

Hurdles to Cross

Recently, Rent-A-Center disappointed investor with dismal preliminary Core U.S. comps for the month of August. Core U.S. comps declined 5.3% in August following a decline of 5.7% in July. However, Acceptance NOW comps jumped 8.6% after increasing 7.1% in the previous month. Delinquencies rate for Core U.S. came in at 7.2%, down 30 basis points (bps) sequentially, while the same decreased 130 bps to 10.3% for Acceptance NOW. The company has been grappling with soft comparable-store sales performance for quite some time now. In the first and second quarters of fiscal 2017, comparable-store sales have declined 7.8% and 7.4%, respectively.

Further, Rent-A-Center has been witnessing a year-over-year decline across its top and bottom lines in the past six quarters. 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 company which shares space with Care.com, Inc. CRCM, Weight Watchers International, Inc. WTW and SP Plus Corporation SP 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.

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