A couple of months ago, I laid into Rent-A-Center
Same-store sales declined 5% for the first quarter -- worse than the prior quarter and below management's guidance. With new store openings, the company was able to boost revenue growth by slightly less than 3% for the quarter.
Margins suffered as a combined result of lower sales and higher expenses at newer stores. Operating margin fell to 13% (from 15.8%) and operating income fell about 16% for the period. Both of those numbers exclude an $8 million litigation credit that was booked in the quarter.
The company does deserve considerable kudos for its commitment to share repurchase (though no repurchases were made in the first quarter). Diluted shares outstanding fell about 8% on a year-over-year basis and, as a result of the decline in EPS, ended up muted to about 11%.
Management continues to blame poor sales on high fuel expenses and the resulting financial impact on lower-income families. To that end, management reported that it's seeing higher delinquencies and, as a result, higher merchandise pick-ups as well. Given that fuel prices aren't showing any immediate signs of weakness, RAC management went ahead and lowered guidance for both the second quarter and full year of 2005.
When last I criticized RAC, I got an interesting deluge of email. Some of it was supportive and suggested that RAC had management philosophy issues that needed to be addressed. Others attacked me for ignoring the "obvious advantage" presented by the company's store count and brand name.
I certainly won't argue that RAC has a huge lead in terms of store count and has a well-known brand name. But then, so did Montgomery Ward and Woolworth -- and where are they now?
What's more, looking back through the company's 10-Ks, it seems as though RAC attracts more than its fair share of class-action lawsuits. In addition to past "unpleasantness" in the states of New Jersey, Wisconsin, and California, there are ongoing cases in other states, such as New York and Texas.
While I realize that today's legal environment makes cash-rich companies look like giant piggy banks to class-action lawyers, I do wonder why RAC seems to be more of a litigation lightning rod than competitors like Aaron Rents
Perhaps I'm being stubborn, but I'm sticking to my earlier conclusion on RAC. Heck, I don't think it's even the best stock in its industry, let alone one of the best stocks in general. This could be a fine company, and the stock valuation is undeniably low. Nevertheless, until and unless I see a commitment to real change from top management (and recent experiments with lower pricing is a good start), I can't think of any reason to own the stock.
Remember, real turnarounds require change from management, not just holding down the fort in the hopes that conditions will improve and boost results.
For more Foolishness on the rent-to-own world:
- Aaron Rents Reaps Rewards
- You'll Want to Own, Not Rent, This Prize
- Rent-A-Center Needs Change
- Rent-A-Center's Hot Seat
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).