As shocking as it is to me, I see hints in this quarter that the business may be bottoming out. Revenue performance was still anemic, up less than 1%, but same-store sales were down less than one-half of one percent. That's feeble, yes, but it's considerably less bad than what the company has done of late. Operating profit is still a mess (down 27%), but cash flow was all right.
Management has a dicey history of meeting its own guidance, but perhaps this quarter marks the beginning of a change. If so, next year's forecast of flat same-store sales will be a welcome change after a long period of declines. One item of note for this quarter: Rental revenues were flat, while merchandise sales were up 8%. I am not sure what, if anything, to make of that, but it might be worth watching.
Cash flow is the name of the game here. I don't like management any more today than I did yesterday, but I do happen to believe that there is a fair price for every going concern. When I turn to my cash flow model and plug in some rather conservative numbers (growth of 10% initially, declining to 4% at 10 years) and a margin of safety discount, I get a fair value of about $19 per share. That's not bad, especially considering that I don't think I did the shares any favors in terms of optimistic assumptions.
I certainly won't be rushing to buy these shares. One less bad quarter does not mean that the prior bad quarters didn't happen, and it doesn't guarantee that management has solved the operational problems. Moreover, I don't generally buy into a turnaround story just because of one better quarter, unless there are other fundamental changes within management or the business. Still, value is value, and patient investors who believe that the business won't get any worse could finally be in a position where the shares look interesting.
For more Takes all our own:
- Rent, Own, or Flee?
- A Small Step for Rent-A-Center
- Aaron Rents -- and Keeps Growing
- More of the Same at Rent-A-Center
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).