On Rent-A-Center's (NASDAQ:RCII) conference call Tuesday, management said that it's "very pleased with recent results."
If so, my question would be, "Why?"
Same-store sales have been skidding of late at Rent-A-Center, and December was no exception, as they dropped 3.7%. Revenue for the fourth quarter managed to grow 4.8% over the prior December as the company continues to add new stores. Looking ahead, the company says it expects same-store sales to decline by 3.5% to 4.5% in the first quarter but eventually turn positive later this year.
The company attributed the sluggish sales in the fourth quarter in part to higher gasoline prices. Frankly, I'm skeptical about the correlation between fuel prices and the demand for rent-to-own furniture and electronics. What's more, fuel prices should affect everyone more or less equally across the industry, and competitor Aaron Rents (NYSE:RNT) has been able to post strong same-store sales growth despite those high gas prices.
Though it's true that Aaron Rents posts lower margins than Rent-A-Center, the returns on assets and invested capital for the two companies are very similar. What's more, shares of Aaron Rents are up over 40% over the past year; Rent-A-Center shares are down 16%.
I'd like to discuss the balance sheet and cash flow statement as well, but Rent-A-Center doesn't provide a complete balance sheet or any sort of cash flow statement in its earnings release. To its credit, though, management did say that more than $210 million of stock was repurchased during 2004 -- a considerable return of capital to shareholders.
The company still has a large store base, a known brand name, and decent cash flow. The stock trades at only 13 times trailing earnings, and the enterprise value-to-free cash flow ratio is similarly reasonable. It must be noted, though, that an argument could be made that acquisitions should be included in the capital spending number for Rent-A-Center's free cash flow calculation, and doing so would certainly raise that multiple. On face value, then, Rent-A-Center looks as though it should be a decent turnaround candidate.
But what is needed is a plan. Blaming declining same-store sales on gasoline prices isn't going to cut it -- especially when there's a clear trend of declining same-stores growth that stretches back to 2001. Continuing to open new stores is also not going to cut it -- getting bigger without getting better is only a stop-gap solution. Rent-A-Center needs a more dynamic plan for restoring growth to its business.
This Fool believes management is not being active enough, and I would hold off until I hear a dynamic new plan or see actual improvements in same-store sales and profits.
Fool contributor Stephen Simpson, a chartered financial analyst, has no ownership interest in any stocks mentioned.
