What: Shares of Rent-A-Center, (RCII -1.11%) were breaking down in October, falling 24% according to data from S&P Capital IQ. As you can see from the chart below, the stock tumbled after its third-quarter earnings report came out.
So what: The rent-to-own specialist posted an adjusted earnings per share of $0.47, which beat estimates at $0.45, and revenue was up 3.6% on a same-store sales increase of 5.2%. However, weak guidance turned off the market as the company projected fourth-quarter earnings of just $0.52-$0.62 per share, below analyst estimates at $0.68. On a GAAP basis, the company also reported a loss of $4.1 million due to a writedown of smartphone inventory of $34.7 million.
Though comparable sales at its core U.S. stores, continued to be flat, declining by 0.2%, its Acceptance Now kiosks located in third-party retailers have been a standout segment for Rent-A-Center. In the third quarter, comparable sales were up 24% in that category and a similar increase in the number of locations. Its Acceptance Now locations currently make up about a quarter of overall revenue and should be a continuing engine of growth. However, the company closed about 100 underperforming core stores during the quarter, though that drove improved profitability in that segment.
Now what: After the stock slide following the earnings report, Rent-A-Center shares trade at a P/E of less than 9 based on this year's expected earnings per share of $2.00-$2.10. Analysts project a revenue growth rate of just 1.8% next year, but the company's store rationalization strategy and growth through Acceptance Now should help earnings improve as adjusted operating profit was up more than 10% last quarter. Though the market is focused on the short-term effect of the lowered earnings guidance, the pullback in the stock could present a good entry point if the company can execute on its strategy. Even if growth slows, it remains a solid cash flow generator with a dividend yield of 5.4%.
