Shares of Rent-A-Center, Inc. (RCII) nosedived 14.1% during after-market trading hours yesterday following the disappointing fourth-quarter 2014 performance of this rent-to-own operator. The company’s quarterly earnings of 50 cents a share and total revenue of $796.5 million fell short of the Zacks Consensus Estimate of 63 cents and $805 million, respectively.
Management hinted that subdued margins and higher skip/stolen losses weighed upon the company’s earnings per share that failed to meet its expectations.
However, Rent-A-Center managed to attain a twofold jump in its bottom line, while top line grew 4%. The increase in the top line was attributable to higher revenues from the Acceptance Now and Mexico segments, partly offset by a decline in the Core U.S. segment. Management is now focusing on a new labor model for its Core U.S. unit, implementing a new supply chain and concentrating on value-based pricing strategy.
Comparable-store sales (comps) for the fourth quarter grew 4.7%, reflecting a year-over-year increase of 28.4% and 17% in the Acceptance Now and Mexico segments, respectively, with a 0.6% decline recorded in the Core U.S. segment. Comps across the Core U.S. segment, however, improved 300 basis points (bps) sequentially.
The company’s business model, called Acceptance Now, continues to gain traction. Revenue from Acceptance Now surged 30.4% to $169.2 million from the prior-year quarter figure, whereas revenue from the Core U.S. segment declined 2.4% to $600.5 million. The Mexico segment’s revenue came in at $19.6 million, up 38.5% from the year-ago quarter. Total franchise revenue increased 1.6% to $7.3 million during the quarter.
Rent-A-Center’s gross profit inched up 0.9% to $545 million, whereas gross margin contracted 210 bps to 68.4%. Adjusted operating profit surged 40.9% to $48.9 million, while adjusted operating margin expanded 160 bps to 6.1%. Adjusted EBITDA advanced 19.8% to $75.8 million, whereas adjusted EBITDA margin increased 120 bps to 9.5%.
Stores Update
During the quarter, the company acquired four Core U.S. locations and closed 21 locations, bringing the total store count to 2,824. The company also opened 69 Acceptance Now stores and consolidated 22 stores with existing locations, resulting in a total of 1,406 stores.
In Mexico, the store count increased to 177 due to the opening of one location. Rent-A-Center Franchising, which is a wholly owned subsidiary of Rent-A-Center, added seven new locations and closed eight locations, with the total store count coming to 187.
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 $46.1 million, senior debt of $492.8 million and shareholders’ equity of $1,389.4 million. Capital expenditures for the quarter were $22.1 million.
A Glance at the Guidance for 2015
Rent-A-Center now projects 2015 earnings in the band of $2.05 to $2.30 per share, including dilution of 10–12 cents related to its Mexican expansion initiatives. The current Zacks Consensus Estimate for the year is $2.55 per share, which could witness a downward revision in the coming days to better align with management’s guidance.
Management now forecasts sales for 2015 to be in the range of $3.250 billion to $3.350 billion, reflecting growth of 3% to 6%. Comps across the Core U.S. segment is expected between negative 1% and positive 1%. Gross profit margin is expected to shrink 50–100 bps.
Acceptance Now revenue is envisioned between $800 million and $825 million, reflecting 15% to 20% comps growth, 150 new manned locations, 1150 new unmanned locations and the closing of 50 stores.
Management anticipates capital expenditures in the band of $70–$80 million, while it projects free cash flow generation of approximately $100 million.
Management expects to attain annual revenue growth of 3% to 5% in the long run, expand operating margin by 400 bps by 2017 and a leverage ratio of 2.2x on a debt to EBITDA basis.
Zacks Rank
Currently, Rent-A-Center carries a Zacks Rank #3 (Hold). A better-ranked stock is AerCap Holdings N.V. (AER), which carries a Zacks Rank #2 (Buy).
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