Is Rent-A-Center Rounding the Bend?

The rent-to-own business is hit by difficult economic circumstances, but things appear to be getting better as the year goes on.

Apr 24, 2014 at 4:55PM

Is Rent-A-Center (NASDAQ:RCII) becoming a more appealing business? The rent-to-own giant delighted the Street this week with better-than-expected earnings, even though top-line and store-level sales remain weak. Rent-A-Center appeals to lower-income demographics with low up-front costs for big-ticket items, such as couches and big-screen TVs (though their offerings expand beyond the living room). The company generates some ethical concern, as plenty have expressed their ire toward the aggressive marketing tactics that encourage people to take on hefty financial obligations that they may not ultimately be able to afford. Management is guiding for better times ahead, but is this a business you want to own?

Rental recap
Hitting double-digit gains upon its earnings release, Rent-A-Center grew its revenue by only 1.8%, but ultimately won investor and market favor with strong growth in its Mexico segment and Acceptance Now kiosks, where customers can get contracts for rent-to-own furniture and electronics and have it delivered to their homes. Sales increased 37% for the latter segment and nearly 70% for the former.

Ultimately, the small top-line sales gain didn't inhibit bottom-line outperformance, as Rent-A-Center delivered an adjusted $0.57 per share. The number was lower than the year-ago figure, as expected, but better than both internal and external estimates.

In the company's core market, the U.S., poor performance continued. A 6.1% drop in U.S. sales dragged systemwide same-store sales into the negative with a 0.8% decline. Specifically, the company's recurring rental revenue (its bread and butter) was responsible for roughly 4% of the decline, while merchandise sales tacked on another 2.2% drop.

In laymen's terms
Aside from the numbers, Rent-A-Center is in a so-so state of affairs. For one thing, the company suffers from macroeconomic factors similar to that of dollar stores. In down times, the company rides high on the wave of those who need big-ticket items and don't want to shell out the cash up front. In periods of recovery, such as the one we are still in today, the sales from what could be called "transient" shoppers have drifted back into higher-market arenas, while the lower demographic still waits to feel the effects of an improving economy. This is limbo for a business like Rent-A-Center, as evidenced by its U.S. performance.

Management announced it would be closing 150 underperforming stores "by the end of the second quarter." For investors, this is a good sign, as costs will come down across the board.

There's no denying the strength of the company's kiosk operation or its Mexico segment, and these two should continue buoying results in the coming periods. Acceptance Now is responsible for nearly a quarter of the company's total sales, and its Mexico store count is approaching 150.

For a company that trades at just 10 times forward expected earnings and projected current-year same-store sales growth as high as 5.5%, investors have enough to rally behind.


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