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Rent-A-Center (RCII) Down 0.7% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Rent-A-Center (RCII - Free Report) . Shares have lost about 0.7% 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 its most recent earnings report in order to get a better handle on the important drivers.

Rent-A-Center Q2 Earnings Top, Strategic Plan on Track

Rent-A-Center, Inc. reported second-quarter 2018 results, wherein both the top and bottom lines surpassed the Zacks Consensus Estimate, thus breaking the streak of negative earnings and sales surprises. Analysts pointed that sequential increase in customer in the Core segment, sturdy demand in Acceptance NOW on account of value proposition enhancements and cost containment efforts cumulatively played a major role in shaping the company’s better-than-expected results.

Let’s Delve Deep

The company delivered adjusted earnings of 47 cents a share that beat the Zacks Consensus Estimate of 23 cents and improved considerably from a loss of 1 cent reported in the year-ago period. Total revenue of $655.7 million also came ahead of the consensus mark of $642.3 million, after missing the same in the preceding three quarters.

However, total revenue tumbled 3.2% on account of closures of certain Core U.S. and Acceptance NOW locations. This was partially offset by solid comparable-store sales (comps) growth. Meanwhile, adjusted EBITDA came in at $61.1 million, up significantly from $28.9 million in the year-ago quarter. Moreover, adjusted EBITDA margin expanded 500 basis points to 9.3%.

Quite apparent, the company’s strategic initiatives are well on track. Management intends to focus more on cost containment endeavors, improving traffic trends, targeted value proposition, refranchising program and augmenting cash flow. Further, the company is rationalizing store base and lowering debt load. Markedly, the company’s cost-saving initiatives are much ahead of track, making it hopeful of generating annual run-rate savings of more than $100 million and savings of roughly $70 million in 2018.

Comparable-Store Sales Performance

Comps for the quarter grew 3.7%, reflecting growth of 3.5%, 3.7% and 7.1% across the Core U.S., Acceptance Now and Mexico segments, respectively. Consolidated comps for company also portray a sequential improvement of 290 basis points.

Notably, comps for the Core U.S. and Mexico segments have improved 320 and 640 basis points sequentially, respectively, while for the Acceptance Now the same has increased 40 basis points on a sequential basis.

Segment Performance

Revenues from the Core U.S. segment fell 0.3% to $455.7 million due to continued store base rationalization, offset by improved comps performance.

Revenues from the Acceptance Now segment slumped 12% from the prior-year quarter to $179 million on account of closures of the company’s Conn’s and HHGregg locations. These were partly mitigated by healthy comps performance.

Mexico segment’s revenues came in at $12.3 million, up marginally from $12 million reported in the year-ago period but improved 6.7% on a constant currency basis.

Finally, total Franchising revenues surged 64.8% to $8.7 million during the quarter attributable to recent change in the accounting standard for franchise advertising fees and higher merchandise sales due to increased store count.
 
Store Update

At the end of the quarter, there were 2,233 Core U.S. locations, 1,124 Acceptance Now Staffed stores, 119 Acceptance Now Direct stores, 123 stores in Mexico and 248 Franchise stores.

Other Financial Aspects

Rent-A-Center ended the quarter with cash and cash equivalents of $116.8 million, net Senior debt of $38 million, net Senior notes of $539.4 million and stockholders' equity of $268.3 million. The company incurred capital expenditures of $7 million during the reported quarter. During the first half of 2018, the company generated $142.9 million of cash from operations and lowered debt load by $98.2 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 9.28% due to these changes.

VGM Scores

Currently, Rent-A-Center has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. 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.

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Rent-A-Center has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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