Rent-A-Center Inc. (RCII), one of the largest rent-to-own operators, recently delivered better-than-expected third-quarter 2010 results. The quarterly earnings of 62 cents a share, outpaced the Zacks Consensus Estimate of 55 cents, and soared 12.7% from 55 cents registered in the prior-year quarter.
Despite a low-single digit decline in the top-line, the company posted a double-digit growth in the bottom-line on the heels of effective cost and inventory management. Direct store expenses slid 1.7% to $563.9 million, whereas general and administrative expenses tumbled 5.9% to $30.8 million.
Rent-A-Center’s total revenue, which comprise store and franchise revenues, dropped 1% to $664.6 million, compared with the year-ago quarter, and also fell short of the Zacks Consensus Revenue Estimate of $666 million. However, comparable-store sales rose marginally by 0.3% during the quarter.
The fall in revenues was principally the result of the November 2009 divestiture of the company’s subsidiary, dPi Teleconnect, engaged in the prepaid telecommunications and energy business, which had delivered about $14.6 million in merchandise sales in the prior-year quarter.
Total Store revenue dropped 1.1% to $656.4 million due to a 24.9% fall in merchandise sales to $44.4 million, partially offset by a 20.1% increase in installment sales to $15.6 million and a 34% jump in other revenues to $20.4 million. Rental and fees revenue remained flat at $576 million. Total franchise revenues climbed 4.8% to $8.2 million during the quarter under review.
The company in order to enhance consumers’ shopping experience is working on a new business model called RAC Acceptance. When the consumer is denied credit financing for a particular product from the retailer, Rent-A-Center under its RAC Acceptance program acquires that product from the retailer and offers it to the consumer under a rental-purchase transaction.
Rent-A-Center’s operating profit jumped 7.8% to $69.4 million, whereas the operating profit margin expanded 80 basis points to 10.4%. EBITDA rose 5.6% to $85.6 million, whereas, the EBITDA margin expanded by 80 basis points to 12.9%.
Financial Aspects
Rent-A-Center ended the quarter with cash and cash equivalents of $80.8 million, senior debt of $596.1 million, reflecting a debt-to-capitalization ratio of 30.6%, and shareholders’ equity of $1,352.9 million.
During the nine-month period, Rent-A-Center generated cash flow from operations of about $192.7 million. The company deployed its cash from operations to lower its debt-load by about $115.1 million in 2010, or approximately 16% from fiscal year-end 2009. During the nine-month period, the company bought back 2,181,502 shares for approximately $45.9 million. To date, the company has repurchased approximately 22.1 million shares aggregating $512.5 million under its $600 million share repurchase authorization.
Rent-A-Center declared its second quarterly dividend of 6 cents a share for fourth-quarter 2010 payable on November 23, 2010 to shareholders of record as of November 5, 2010.
Stores Update
During the quarter, the company opened 8 new domestic rent-to-own locations, acquired 1 location, consolidated 2 stores into existing locations, and closed 6 stores. Management now expects to open 10 domestic rent-to-own locations during fourth-quarter 2010. The company also intends to open 5 rent-to-own locations in Mexico during the fourth quarter. At the end of the quarter under review, the company operated 3,001 stores nationwide, and in Canada and Puerto Rico.
The company also added 48 RAC Acceptance kiosks and closed one store during the quarter under review, bringing the total count to 151 RAC Acceptance kiosks. The company plans to add about 70 domestic RAC Acceptance kiosks during the fourth quarter.
Rent-A-Center also provides various financial services, such as short-term secured and unsecured loans, debit cards and money transfer services under the trade name RAC Financial Services. During the quarter, Rent-A-Center added financial services to 30 stores bringing the total to 326 stores.
Management now plans to open approximately 25 domestic rent-to-own stores in fiscal 2011. Rent-A-Center targets 25 to 75 rent-to-own locations in Mexico and 10 to 20 rent-to-own locations in Canada in fiscal 2011. During fiscal 2011, the company plans to add 100 to 150 domestic RAC Acceptance kiosks.
Management Guidance
Fourth-Quarter 2010
Management now expects fourth-quarter 2010 earnings in the range of 64 cents to 70 cents a share. Total revenue are expected in the range of $666 million to $681 million. Rent-A-Center projects comparable-store sales would remain in the range of flat to 1% for the quarter.
The company has predicted total store revenues in the range of $658 million to $673 million for fourth-quarter 2010. The company projected store rental and fee revenues in the range of $576 million to $588 million for the quarter.
Fiscal 2011
For fiscal 2011, earnings are projected between $2.85 and $3.05 per share. Total revenue are expected in the range of $2,806 million to $2,866 million. Management expects comparable-store sales between 1% and 2%.
The company has forecast total store revenue between $2,773 million and $2,833 million for fiscal year 2011. The company anticipates store rental and fee revenues between $2,368 million and $2,418 million.
Competitive Position
Rent-A-Center is one of the largest rent-to-own operators in the U.S. and leverages an extensive network of about 3,000 stores to effectively penetrate its target markets, and gain a competitive advantage over its competitors, such as Aaron’s Inc. (AAN) and Advance America.
Aaron’s posted third-quarter 2010 earnings of 32 cents a share that surpassed the Zacks Consensus Estimate of 30 cents, and rose 6.7% from the prior-year quarter. Aaron’s now forecasts earnings between 32 cents and 36 cents a share for the fourth quarter and between $1.39 and $1.43 for fiscal 2010. For fiscal 2011, the company expects earnings in the range of $1.54 to $1.70.
Rent-A-Center Holds Zacks #3 Rank
Currently, we have a ‘Neutral’ rating on the stock. Moreover, Rent-A-Center holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation and correlates with our long-term view.
Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow the customer to own the merchandise on the completion of the rental period. Due to the continued tightening of the credit market, customers see rent-to-own as a more flexible and viable option compared to credit. However, the sluggish recovery and a fragile job market may make customers reluctant to even enter new rental-purchase deals.
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