Rent-A-Center (RCII) Up 28.1% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Rent-A-Center (RCII). Shares have added about 28.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Rent-A-Center due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Rent-A-Center Surpasses Earnings Estimates in Q1

Rent-A-Center posted sturdy first-quarter 2020 results, wherein both the top and the bottom line beat the Zacks Consensus Estimate and grew year over year. This marked the company’s second straight earnings beat.

Moreover, management is encouraged by the robust e-commerce demand seen in April. However, the pandemic will impact its second-quarter performance. The company anticipates revenue decline of nearly 10% or less year over year, with lower impact on EBITDA. Moreover, second-quarter earnings are likely to remain essentially flat year over year. Nevertheless, the company expects to witness sequential growth in cash flow for the upcoming quarter and anticipates strong profit margin for the year. It also expects to a favorable trend in lease-to-own due to primary and subprime lenders tightened credit measures.

Q1 in Detail

Rent-A-Center posted adjusted earnings of 67 cents a share that outpaced the Zacks Consensus Estimate of 59 cents. Also, the bottom line increased 14.6% from 59 cents in the year-ago quarter.

Total revenues of $701.9 million slightly beat the Zacks Consensus Estimate of $701 million and grew a meager 0.8% year over year on higher same-store sales. This was partly mitigated by revenues from refranchised locations. Excluding effects of the refranchising efforts, revenues grew 1.9%.

Meanwhile, adjusted EBITDA came in at $65.5 million, down 1.5% from the year-ago quarter. We note that adjusted EBITDA margin contracted 20 basis points to 9.3%.

Segment Performance

Rent-A-Center will now report results for its retail partner business under the Preferred Lease segment, which was earlier known as Acceptance Now. The new segment includes the virtual, staffed and hybrid offerings. Again, it will report results for its corporate-owned stores in the United States and e-commerce platform via rentacenter.com under the Rent-A-Center Business segment, which was earlier known as Core U.S. These are in addition to the company’s existing Mexico, Franchise and Corporate segments.

Revenues at the Rent-A-Center Business segment declined 4% to $455 million owing to refranchising efforts and continued store base rationalization. This was partly offset by same-store sales growth of 1.7%.

Revenues at Preferred Lease segment grew 10% from the prior-year quarter to $216.1 million driven by invoice volumes, robust comps and contributions from the buyout of Merchants Preferred, a nationwide virtual rent-to-own provider. Notably, the invoice volumes rose 16.9% to $150.5 million.

Mexico segment’s revenues totaled $13.5 million, up 5.6% on a constant-currency basis. Its same-store sales grew 7.1% in the reported quarter.

Finally, total Franchising revenues increased 35.5% to $17.3 million. This can primarily be attributed to the refranchising of about 60 stores over the past 12 months and rise in inventory purchases by franchisees.

Store Update

At the end of the reported quarter, Rent-A-Center operated nearly 2,100 stores in the United States, Mexico and Puerto Rico. It had roughly 1,000 Preferred Lease staffed locations across the United States and Puerto Rico as well as 370 franchised stores. As of Mar 31, 2020, the Mexico business operated 123 locations.

Other Financial Aspects

Rent-A-Center ended the reported quarter with cash and cash equivalents of $182.9 million, net senior debt of $353.8 million and stockholders’ equity of about $476 million. Further, it had an outstanding indebtedness of $362 million at quarter-end. Capital expenditures totaled $9.2 million in the quarter. The company generated cash of roughly $47.4 million from operations and free cash flow of $38.4 million (including acquisitions and divestitures) during the first quarter.

Moreover, the company has declared a cash dividend of 29 cents a share for the second quarter, payable Jun 1, 2020 to stockholders of record as on May 18.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted 53.88% due to these changes.

VGM Scores

At this time, Rent-A-Center has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Rent-A-Center has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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