Rent-A-Center Tanks Out, Leaves Little to Love

Rent-A-Center (NASDAQ: RCII  ) is trading at its lowest price in a year as the company reported extremely troubling profits and incited an investor sell-off to the degree of 22%. Profit tanked by nearly three-quarters of the prior year's number, and management called the company's December one of the most challenging in recent memory. While quarter-to-quarter earnings should not be investors' sole focus, Rent-A-Center's numbers tell an important tale about the nature of its business. Without attractive financials to compensate for the controversial business model, what does Rent-A-Center offer investors?

Tanked
For Rent-A-Center's fiscal fourth quarter, revenue actually climbed nearly 2% to $769.6 million. Still, analysts had expected far more, at an average of $787.9 million.

Management noted extreme consumer reluctance to spend -- a tone that even the suffering quick-service restaurant space hasn't neared in its recent management comments.

With rising costs and impossibly slow U.S. business, the company's margins deteriorated completely and left net income 72% lower than it was in 2012, at just $0.25 per share. The Street had expected an average of $0.76 per share. On the same-store sales front, things didn't look as dreadful, with an overall decrease of just 1.1%, led by U.S. rent-to-own stores down 5.5%.

Any company can have a bad quarter, but this highlights a fundamental crack in Rent-A-Center's business model.

Bottom feeding
The rent-to-own appliance and furniture business has long been called predatory. The companies engage in intense promotion aimed at very low-income consumers who may want a big screen TV or a recliner, but couldn't afford one. These companies post attractive interest rates that are often misleading and convince people to spend money they really shouldn't spend.

While that is just an ethical issue, there is a financial implication that goes hand in hand with it. The U.S. economy is improving, albeit at a slow pace. Retailers in general showed disappointing results from the holiday shopping season as consumers are cautiously approaching this GDP-expanding period, but it wasn't nearly as bad as Rent-A-Center's experience.

That's because Rent-A-Center's intense focus on low- to low-middle-income consumers only works in certain situations. When good times are had by all, the company does just fine. When times are tough, some higher-market shoppers may step down from a normal retailer to use Rent-A-Center's typical zero- and low-money-down offers. But at this point, when middle America is recovering and the rich are richer than ever before, the working and lower classes are the last ones to feel the pressure come off. Rent-A-Center's target customer doesn't feel the joy that the Consumer Confidence Index exhibits. Many are still looking for work, and most don't have a penny to spare, even with the Fed's easy money policy. So here, Rent-A-Center is left with a very small customer base.

With little to rally behind and a customer base that falls between the cracks, Rent-A-Center holds little appeal.

A much more appealing stock choice
U.S. News & World Report says this "Will drive the U.S. economy." And Business Insider calls it "The growth force of our time." In a special report entitled "America's $2.89 Trillion Super Weapon Revealed," you'll learn specific steps you can take to capitalize on this massive growth opportunity. But act now, because this is your shot to cash in before the fat cats on Wall Street beat you to the potentially life-changing profits. Click here now for instant access to this free report.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2816459, ~/Articles/ArticleHandler.aspx, 4/20/2014 10:11:46 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASD 4,095.52 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/17/2014 3:59 PM
RCII $26.13 Down -0.06 -0.23%
Rent-A-Center CAPS Rating: ***

Advertisement