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

With poor earnings and a business model that attracts plenty of controversy, what is there to like about Rent-A-Center?

Jan 30, 2014 at 10:51AM

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.

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Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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