After posting a negative earnings surprise of 20.6% in the final quarter of 2014, Rent-A-Center, Inc. RCII commenced 2015 on a firmer note. The company’s first quarter earnings of 52 cents a share beat the Zacks Consensus Estimate by a couple of cents, resulting in a positive earnings surprise of 4%. Shares of this rent-to-own operator jumped over 8% during after-market trading hours yesterday.
However, earnings declined 7.1% year over year due to an increase in cost of rentals and fees as well as cost of merchandise sold.
Rent-A-Center’s top line grew 5.9% to $877.6 million, attributable to higher revenues from the Acceptance Now and Mexico segments, partly offset by a decline in the Core U.S. segment. Revenues also surpassed the Zacks Consensus Estimate of $859 million. Management is now focusing on a new labor model for its Core U.S. unit in addition to implementing a new supply chain and undertaking a value-based pricing strategy.
Comparable-store sales (comps) for the reported quarter grew 8%, reflecting a year-over-year increase of 34.1%, 15.1% and 1% in the Acceptance Now, Mexico and Core U.S. segments, respectively. Comps across the Core U.S. segment improved 160 basis points (bps) sequentially on account of the new smartphone product category and an increase in merchandise sales.
The company’s business model, called Acceptance Now, continues to gain traction. Revenue from Acceptance Now surged 32.5% to $224.3 million from the prior-year quarter figure, whereas revenue from the Core U.S. segment declined 1.1% to $629.2 million. The Mexico segment’s revenue came in at $17.9 million, up 13.1% from the year-ago quarter. Total franchise revenue decreased 9.9% to $6.2 million during the quarter.
Rent-A-Center’s gross profit inched up 0.4% to $564.6 million, whereas gross margin contracted 360 bps to 64.3%. Adjusted operating profit declined 4.2% to $57 million, while adjusted operating margin shrunk 70 bps to 6.5%. Adjusted EBITDA fell 3.3% to $76.8 million, whereas adjusted EBITDA margin decreased 90 bps to 8.7%.
Stores Update
During the quarter, the company acquired four Core U.S. locations, consolidated four stores with the existing locations and closed four locations, bringing the total store count to 2,820. The company also opened 53 Acceptance Now stores and consolidated 27 stores with the existing locations, resulting in a total of 1,432 stores. The company opened one Acceptance Now Direct store.
In Mexico, the store count decreased to 169 due to the consolidation of eight stores with the existing locations. Rent-A-Center Franchising, which is a wholly owned subsidiary of Rent-A-Center, added four new locations and closed seven locations, with the total store count coming to 184.
Other Financial Aspects
Rent-A-Center, which competes with McGrath Rentcorp MGRC and AeroCentury Corp. ACY, ended the quarter with cash and cash equivalents of $93.1 million, senior debt of $348.8 million and shareholders’ equity of $1,405.4 million. Capital expenditures for the quarter were $14.2 million.
Zacks Rank
Currently, Rent-A-Center carries a Zacks Rank #3 (Hold). A better-ranked stock in the same industry is Aaron's, Inc. AAN, which sports a Zacks Rank #1 (Strong Buy).
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