Another Step Forward for Rent-A-Center

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Having disliked Rent-A-Center (Nasdaq: RCII) for a good, long while, I find it tough to reverse course. Still, I have to call 'em as I see 'em, and it's pretty clear that Rent-A-Center is at long last making progress instead of excuses.

Revenue was still rather weak in the fourth quarter, with a 0.2% decline in same-store sales ultimately feeding into a 0.4% overall drop in revenue. Uninspiring as that may be, it's still better than what the company had been doing early in the year on a same-store basis.

Likewise on the profitability side. In absolute terms, an 18% drop in operating income and a 230-basis-point drop in operating margin is nothing to celebrate. But those numbers are meaningfully better on a sequential basis. Given that the company has been actively restructuring its store base and looking to improve operating efficiency, I have to say that this is progress.

My hunch on Rent-A-Center is that investors will have to appreciate it for what it is and forget about what competitors such as Aaron Rents (NYSE: RNT) or Rent-Way (NYSE: RWY) are doing. What I mean is this: Rent-A-Center is a huge company, and while there are avenues for growth (including the offering of payday loans at its stores), the bulk of the positive story on this company is going to be about enhancing profitability and squeezing more free cash flow out of the business model.

And investors will also have to accept certain risks to this story. The sheer number of emails I've received from store managers and employees suggests that there is still a real morale problem. What's more, rent-to-own stores and payday lenders (should Rent-A-Center expand into the latter concept) are often the targets of self-appointed defenders of the public, and there will always be the threat of more litigation or regulation on this type of business as a result.

All that said, I'll hand it to the Fool's Inside Value team -- they identified (and recommended) this one back in November, and although they didn't hit the absolute bottom, the stock has already been a good pick. Provided that management continues to make progress and doesn't relapse into the ridiculous excuses of yesterday, there could still be plenty of upside to these shares.

For more Foolish thoughts on the rent-to-own world:

• Is Rent-A-Center Finally a Value?
• Rent, Own, or Flee?
• Aaron Rents -- and Keeps Growing

Philip Durell's team is all about value. If you'd like to find some of the market's best bargains, sign up for a 30-day free trial to Inside Value today.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).