Rent-A-Center Inc. (RCII”>RCII) is one of the largest rent-to-own operators in the U.S. and leverages an extensive network of about 3,000 stores to effectively penetrate its target markets, and gain a competitive advantage over its competitors, such as Aaron’s Inc. (AAN”>AAN), and Advance America.
The company is taking prudent steps to optimize rental merchandise levels in accordance with sales trends. Rent-A-Center implemented a centralized inventory management system, including automated merchandise replenishment. Moreover, a new centralized purchasing system allows better management of rental merchandise.
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.
Rent-A-Center remains optimistic about its future growth as it opens stores in international markets and accelerates the roll-out of RAC Acceptance kiosks. Management plans to open approximately 40 domestic rent-to-own stores during fiscal 2011. Targeted rent-to-own locations for the full year are 40 to 55 in Mexico and 10 to 20 in Canada. Moreover, the company aims 350 to 375 domestic RAC Acceptance kiosk additions.
Earlier, Rent-A-Center delivered lower-than-expected second-quarter 2011 results. The quarterly earnings of 68 cents a share missed the Zacks Consensus Estimate of 72 cents, and fell 5.6% from the prior-year quarter. The quarterly earnings met the lower-end of management’s guidance range of $0.68 to $0.74 per share.
However, Rent-A-Center’s total revenue, which comprises 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, the total revenue fell short of the Zacks Consensus Estimate of $702 million.
Management now 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. The company has predicted total store revenue in the range of $683 million to $698 million.
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. Total store revenue is projected between $2,835 million and $2,875 million.
The current Zacks Consensus Estimates for the third quarter and fiscal 2011 are 58 cents and $2.87, respectively.
Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow the customer to own the merchandise on the completion of the rental period. Due to the continued tightening of the credit market, customers see rent-to-own as a more flexible and viable option compared to credit. However, the sluggish recovery and a fragile job market may make customers reluctant to even enter new rental purchase deals.
Consequently, we maintain our long-term ‘Neutral’ rating on the stock. However, given the global economic unrest, Rent-A-Center’s shares maintain a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation.
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