Please ensure Javascript is enabled for purposes of website accessibility

Why Rent-A-Center Stock Plunged Today

By Jeremy Bowman – Updated Nov 5, 2021 at 3:12PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares of the rent-to-own retailer tumbled on poor guidance.

What happened

Shares of Rent-A-Center (RCII 0.87%) fell sharply today after the rent-to-own retailer posted a solid third-quarter earnings report, but lowered its full-year guidance.

As a result, the stock closed down 18.4% Thursday.

A woman shopping for a dishwasher

Image source: Getty Images.

So what

Rent-A-Center's revenue jumped 65.9% to $1.18 billion, matching estimates. Growth was driven by its recent acquisition of Acima, a lease-to-own platform. On a pro forma basis, revenue was up 13%, and Rent-A-Center same-store sales increased 12%.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 4.1% in the quarter to $170.2 million, as margins fell on higher operating costs. On the bottom line, adjusted earnings per share increased from $1.04 to $1.52, ahead of the consensus of $1.50.

CEO Mitch Fadel said, "I am pleased to say we had a productive third quarter, delivering strong top line results despite the impact on consumers from the wind down of government COVID-19 relief programs and the global supply chain disruptions. On the strategic front, we made substantial progress toward our long-term objectives, with the Acima FinTech Ecosystem rollout showing early promise and the Rent-A-Center Business advancing its best-in-class omnichannel functionality."

Now what

While the third-quarter results were strong, fiscal 2021 guidance seemed to turn off investors. The company called for revenue of $4.55 billion to $4.64 billion, down from a prior forecast of $4.55 billion to $4.67 billion. On the bottom line, it called for adjusted earnings per share of $5.90 to $6.15, below the previous range of $5.90 to $6.40 and analyst estimates of $6.26.

The company said it's cutting its guidance to reflect "recent developments in customer payment activity caused by the expiration of government programs related to COVID-19 and the supply chain disruptions." That statement indicates that default rates could be on the rise, which may explain why the company scaled back its earnings guidance.

The stock looks cheap now at a single-digit price-to-earnings ratio, but the specter of customer defaults seems to have spooked the market.

Editor's note: This article has been updated. Acima is a lease-to-own platform. 

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.