What: Shares of Rent-A-Center, (NASDAQ:RCII) 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%.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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