Rent-A-Center's (NYSE:RCII) quarterly results were tepid. Earnings increased a mere 3.6%, to $0.58 a share. Investors can take little consolation in the top and bottom lines coming in within management's guidance. Worse, management's outlook for the rest of the year has dimmed, as it now expects the company to earn $2.06 to $2.14 a share.
The company rents major consumer electronics, appliances, computers, and furniture, generally to those who can't afford to purchase it right away or lack the credit. Under the agreements, the customer usually purchases the merchandise at the end of the rental period. You can believe it when Rent-A-Center says its customers are facing challenges. Headwinds include high gas and food prices.
Still, its competitor, Aaron Rents (NYSE:RNT), lowered its expectations by a nickel, to $1.50 to $1.55. But this was due to higher start-up costs at its stores as it continues to expand. It posted a solid 5% increase in comps, and there was no mention of a slowdown when it announced results last week.
Rent-A-Center has expanded into financial services, and this seems a little aggressive. It's always risky to lend to people with shaky credit, and this may be contributing to its slowdown. CompuCredit (NASDAQ:CCRT), a specialist in subprime lending, ran into problems when the cycle turned negative earlier this decade. In addition, while most of the attention in the subprime area has been on home mortgages, more stringent requirements will no doubt be coming. This could very well affect all subprime loans.
Rent-A-Center says that this struggle will be temporary. However, "temporary" can mean different things to different people; it can be an awfully long time. Rent-A-Center is investing in its business and initiatives to improve things at the store level. As a general concept -- the devil is in the details -- this is good. The company may end up in an even stronger position, taking market share and adding to its leading position. But with Rent-A-Center's trailing P/E of 22, if this is a long cycle, investors may be in for more of the same before things start looking brighter.
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Rent-A-Center is a Motley Fool Inside Value recommendation, and CompuCredit is a Stock Advisor selection. Both market-beating newsletters are available for a free 30-day trial.
Fool contributor Larry Rothman is happy to receive feedback, and promises to read it when not being wrestled by his three children. He doesn't have any positions in the companies mentioned. The Fool has a disclosure policy.
