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Earnings Preview: Rent-A-Center

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Rent-A-Center Inc. (RCII - Free Report) , one of the largest rent-to-own operators in the U.S., is scheduled to report its third-quarter 2011 financial results on Monday, October 24, 2011. The current Zacks Consensus Estimate for the quarter is 58 cents a share. For the quarter under review, revenue is $698 million, according to the Zacks Consensus Estimate.

Second-Quarter 2011, a Synopsis

Rent-A-Center’s earnings of 68 cents a share missed the Zacks Consensus Estimate of 72 cents, and fell 5.6% from the prior-year quarter.

However, the quarterly earnings met the lower end of management’s guidance range of 68 cents to 74 cents a share. On a reported basis, including one-time items, earnings came in at 63 cents a share, down 12.5% from 72 cents earned in the year-ago quarter.

Rent-A-Center’s total revenue, comprising store and franchise revenues, grew 4% to $698.3 million from the year-ago quarter attributable to higher revenue from the RAC Acceptance business, partially offset by the discontinued financial services business. However, total revenue fell short of the Zacks Consensus Estimate of $702 million.

Third Quarter & Fiscal 2011 Guidance

Management expects third-quarter 2011 earnings in the range of 55 cents to 61 cents a share. Total revenue is expected in the range of $691 million to $706 million. Rent-A-Center projects comparable-store sales in the range of 0.5% to 1.5%.

For fiscal 2011, earnings are projected between $2.85 and $3.00 per share. Total revenue is expected in the range of $2,868 million to $2,908 million. Management expects comparable-store sales between 1% and 2%.

Third-Quarter 2011 Consensus

Analysts considered by Zacks, expect Rent-A-Center to post third-quarter 2011 earnings of 58 cents a share, reflecting a decline of 6.5% from the year-ago quarter. The current Zacks Consensus Estimates for the quarter range from a low of 56 cents to a high of 61 cents.

Zacks Agreement & Magnitude

Of the 11 analysts following the stock, only one analyst revised the estimate downward, having an immaterial impact on the Zacks Consensus Estimate. However, none of the analysts have revised their estimate upwards or downwards in the last 7 days, keeping the current Zacks Consensus Estimate unchanged at 58 cents a share.

Mixed Earnings Surprise History

With respect to earnings surprises, Rent-A-Center has topped as well as missed the Zacks Consensus Estimate over the last four quarters in the range of negative 7.1% to positive 12.7%. The average remained at 1.1%. This suggests that Rent-A-Center has beaten the Zacks Consensus Estimate by an average of 1.1% in the trailing four quarters.

Rent-A-Center Expands in Sacramento

Rent-A-Center is all set to serve the residents of Sacramento, California by opening new store and providing them additional avenue to own luxury furnishings, electrical devices, electronics and computers.

The new 4,500-square-foot showroom will offer brands like HP, Ashley, Sony, Serta and Whirlpool. Rent-A-Center operates through 144 locations in California.

The residents of these places will get the benefit of acquiring goods with flexible payment options allowing them to pay weekly, biweekly or monthly. Further, the company provides a lifetime recall service while facilitating its customers to re-rent the same or a comparable item and get payments.

Rent-A-Center is one of the largest rent-to-own operators in the U.S.and leverages an extensive network of more than 3,000 stores to effectively penetrate into its target markets, and gain a competitive advantage over its competitors Aaron’s Inc. (AAN - Free Report) and Advance America.

However, Rent-A-Center’s business is seasonal in nature and typically generates stronger sales during the first quarter characterized by federal income tax refunds, used by the company’s customers to exercise early purchase option on the existing rental agreements. As a result, the company is exposed to significant risks if the quarter fail to deliver expected operating performance.

Moreover, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn, the company’s growth and profitability.

Currently, we have a long-term Neutral rating on the stock. However, Rent-A-Center’s shares maintain a Zacks #4 Rank, which translates into a short-term Sell recommendation.

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