Why Rent-A-Center Inc. Shares Sank

Is Rent-A-Center's stock move today meaningful or just another movement?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Jul 11, 2014 at 11:36AM
Consumer Goods

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of rent-to-own operator Rent-A-Center (NASDAQ:RCII) plunged 11% on Friday after its preliminary second-quarter results disappointed Wall Street.

So what: Rent-A-Center shares have been strong in recent months on signs of rebounding demand, but today's downbeat quarterly view is forcing Mr. Market to quickly sober up. Management even warned that same-store sales would increase just 0.6% over the year-ago period, suggesting that its competitive position continues to weaken.

Now what: Management now sees second-quarter earnings per share of $0.36-$0.38 on revenue of about $773 million, well below the consensus of $0.48 and $786.4 million, respectively. "We are not satisfied with our second quarter results and hold ourselves accountable for improving our performance," said CEO Robert Davis in a press release. "To that end, we are excited to announce a new product line in our domestic retail stores with our entrance into the burgeoning smartphone business." When you couple Rent-A-Center's worrisome growth trajectory with its still-hefty debt load, however, I'd hold out for an even wider margin of safety before betting too heavily on the success of that smartphone rollout.