Rent-A-Center Inc. (RCII), one of the largest rent-to-own operators, recently delivered lower-than-expected first-quarter 2011 results. The quarterly earnings of 79 cents a share missed the Zacks Consensus Estimate of 85 cents, but increased 2.6% from 77 cents registered in the prior-year quarter.
The quarterly earnings also failed to meet management’s own guidance range of 82 cents to 88 cents a share.
The Zacks Consensus Estimate had remained stagnant prior to the earnings release. On a reported basis, including one-time items, earnings came in at 69 cents a share, down 10.4% from 77 cents earned in the year-ago quarter.
Rent-A-Center’s total revenue, which comprises store and franchise revenues, grew 3.3% to $742.2 million from the year-ago quarter attributable to higher revenue from the RAC Acceptance business, partially offset by the discontinued financial services business. However, the total revenue fell short of the Zacks Consensus Estimate of $753 million. Comparable-store sales for the quarter were 0.1%.
The company’s new business model called RAC Acceptance is gaining traction. When a consumer is denied credit financing for a particular product from the retailer, Rent-A-Center under its RAC Acceptance program acquires that product from the retailer and offers it to the consumer under a rental-purchase transaction.
Total store revenue rose 3.2% to $731.7 million. The growth was driven by an 11% increase in merchandise sales to $99.3 million, a 10.2% jump in installment sales to $16.7 million and 4.6% advancement in rental and fees revenue to $610.4 million, offset by a 73.7% decline in other revenue to $5.3 million. Total franchise revenue climbed 7.8% to $10.5 million during the quarter under review.
Rent-A-Center’s adjusted operating profit rose 2.1% to $90.5 million, whereas operating profit margin contracted 10 basis points to 12.2%. Adjusted EBITDA inched up 1.5% to $107.1 million but the EBITDA margin shriveled by 30 basis points to 14.4%.
Financial Aspects
Rent-A-Center ended the quarter with cash and cash equivalents of $145 million, senior debt of $358.6 million, and shareholders’ equity of $1,394.7 million. During the quarter under review, the company bought back 868,765 shares, aggregating $28.5 million.
During the quarter, Rent-A-Center generated cash flow from operations of about $147.9 million. To date, the company has repurchased approximately 24.3 million shares totaling $579.7 million under its $800 million share repurchase authorization.
Stores Update
During the quarter, the company opened 8 new domestic rent-to-own locations and consolidated 2 stores into existing locations. Management now looks forward to opening 10 domestic rent-to-own locations during the second quarter. The company also opened 5 rent-to-own locations in Mexico during the quarter, and intends to add 5 more during the second quarter. At the end of first-quarter 2011, the company operated 3,018 stores nationwide, as well as in Canada and Mexico.
The company also added 109 RAC Acceptance kiosks, consolidated 6 stores into existing locations and closed 2 stores during the quarter under review, bringing the total count to 485 RAC Acceptance kiosks. The company plans to add about 125 to 150 domestic RAC Acceptance kiosks during second-quarter 2011.
For fiscal 2011, management plans to open approximately 25 domestic rent-to-own stores. Targeted rent-to-own locations for the full year are 40 to 75 in Mexico and 10 to 20 in Canada. Moreover, the company aims 325 to 375 domestic RAC Acceptance kiosk additions.
Management Guided
Second-Quarter 2011
Management now expects second-quarter 2011 earnings in the range of 68 cents to 74 cents a share. Total revenue is expected in the range of $694 million to $709 million. Rent-A-Center projects comparable-store sales in the range of flat to 1%.
The company has predicted total store revenue in the range of $687 million to $702 million. Store rental and fee revenue is estimated in the range of $619 million to $629 million.
Fiscal 2011
Management reiterated its fiscal 2011 guidance. Earnings are projected between $2.90 and $3.10 per share. Total revenue is expected in the range of $2,868 million to $2,928 million. Management expects comparable-store sales between 1.5% and 2.5%.
Total store revenue is projected between $2,835 million and $2,895 million. The company anticipates store rental and fee revenue between $2,477 million and $2,527 million.
Current Zacks Consensus Estimate
The current Zacks Consensus Estimates for the second quarter and fiscal 2011 are a respective 78 cents and $3.08 per share. Given the second-quarter 2011 earnings guidance, we could witness a correction in the Zacks Consensus Estimates, with analysts covering the stock tweaking their estimates to better align with management’s guidance range.
Rent-A-Center Holds Zacks #2 Rank
Currently, we have a long-term “Neutral” rating on the stock. However, Rent-A-Center, which competes with Aaron’s Inc. (AAN) and Advance America, holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.
Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow customers to own the merchandise upon the completion of the rental period. Due to continued tightening of the credit market, customers see rent-to-own as a more flexible and viable option compared to credit. However, sluggish recovery in economy and a fragile job market may make customers reluctant to enter new rental-purchase deals.
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