Rent-A-Center Inc. (RCII), one of the largest rent-to-own operators, recently delivered better-than-expected third-quarter 2011 results. The quarterly earnings of 60 cents a share beat the Zacks Consensus Estimate of 58 cents, but dropped 3.2% from the prior-year quarter due to steeper operating expenses.
The quarterly earnings reached the higher end of management’s guidance range of 55 cents to 61 cents a share. On a reported basis, including one-time items, earnings came in at 52 cents a share, down 16.1% from the year-ago quarter.
Rent-A-Center’s total revenue, which comprises store and franchise revenues, grew 6% to $704.3 million from the year-ago quarter attributable to higher revenue from the RAC Acceptance business, partially offset by the discontinued financial services business.
Total revenue was way ahead of the Zacks Consensus Estimate of $699 million. Comparable-store sales for the quarter rose 2%.
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 6% to $695.8 million. The growth was driven by an 8.1% advancement in rental and fees revenue to $622.5 million, a 19.1% increase in merchandise sales to $52.8 million and a 4.8% jump in installment sales to $16.3 million, offset by a 79.7% decline in other revenue to $4.1 million. Total franchise revenue climbed 3.7% to $8.5 million during the quarter under review.
High Operating Costs Shrinking Margins
Rent-A-Center’s adjusted operating profit fell 5.8% to $65.4 million, whereas operating profit margin contracted 110 basis points to 9.3%. Adjusted EBITDA slipped 3.3% to $82.8 million, whereas adjusted EBITDA margin shriveled by 120 basis points to 11.7%.
Cost of rentals and fees rose 11.9% to $142.8 million, whereas cost of merchandise sold soared 24% to $43.2 million. Salaries and other expenses climbed 4.2% to $405.6 million, whereas general and administrative expenses rose 8.6% to $33.4 million.
Financial Aspects
Rent-A-Center ended the quarter with cash and cash equivalents of $76 million, senior debt of $388.3 million, and shareholders’ equity of $1,319.4 million. In the first nine months of the year, Rent-A-Center generated cash flow from operations of about $266.7 million.
During the nine-month period, the company bought back 5,852,408 shares, aggregating $164.3 million. To date, the company has repurchased approximately 29.3 million shares totaling $715.5 million under its $800 million share repurchase authorization. Rent-A-Center’s board of directors approved a dividend of 16 cents a share for the fourth quarter, representing its sixth successive quarterly dividend.
Stores Update
During the quarter, the company opened 14 new domestic rent-to-own locations, acquired 5 stores, consolidated 16 stores into existing locations and closed 28 stores. Management now looks forward to open 20 domestic rent-to-own locations during the fourth quarter.
The company also opened 9 rent-to-own locations in Mexico during the quarter, and intends to add 20 more during the fourth quarter. The company opened 2 rent-to-own locations in Canada in the quarter under review, and plans to open 5 rent-to-own stores in the upcoming quarter. At the end of the third quarter, the company operated 3,002 stores nationwide, as well as in Canada and Mexico.
The company also added 120 RAC Acceptance kiosks, acquired 2 stores, consolidated 3 stores into existing locations and closed 9 stores during the quarter under review, bringing the total count to 721. The company plans to add about 45 domestic RAC Acceptance kiosks during the fourth quarter.
For fiscal 2012, management plans to open approximately 50 domestic rent-to-own stores. Targeted rent-to-own locations for the full year are 60 in Mexico and 10 in Canada. Moreover, the company aims 200 domestic RAC Acceptance kiosk additions.
Management Guided
Fourth-Quarter 2011
Management now expects earnings in the range of 78 cents to 84 cents a share. Total revenue is expected between $739 million and $754 million. Rent-A-Center projects comparable-store sales in the range of 3% to 5%.
The company has predicted total store revenue between $731 million and $746 million. Store rental and fee revenue is estimated in the range of $652 million to $664 million.
Fiscal 2012
Despite turbulence in the economic market, Rent-A-Center witnessed healthy demand for its product and services. The company now projects top-line growth of 8% to 11%, and earnings per share increase between 8% and 15% for fiscal 2012.
Earnings are projected between $3.10 and $3.30 per share. Total revenue is expected in the range of $3,128 million to $3,198 million. Management expects comparable-store sales between 3.5% and 5.5%.
Total store revenue is projected between $3,091 million and $3,161 million. The company anticipates store rental and fee revenue in the range of $2,713 million to $2,773 million.
Rent-A-Center Holds Zacks #3 Rank
Currently, we have a long-term Neutral rating on the stock. Moreover, Rent-A-Center, which competes with Aaron’s Inc. (AAN) and Advance America, holds a Zacks #3 Rank, which translates into a short-term Hold’ recommendation. The current Zacks Consensus Estimate for fourth-quarter 2011 is 81 cents and for fiscal 2012 it is $3.26 per share, both of which dovetails with management’s guidance range.
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.
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