Rent-A-Center (RCII) Up 16.2% 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 16.2% 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 catalysts.

Rent-A-Center Q3 Earnings Miss Estimates, Up Y/Y

Rent-A-Center, Inc.’s positive earnings surprise streak came to an end with third-quarter 2019 results. The bottom line fell short of the Zacks Consensus Estimate, after surpassing the same in the preceding five quarters. Nevertheless, the top line surpassed the consensus mark.

Notably, both the top line and the bottom line grew year over year. Moreover, the company’s same-store sales (comps) increased for the 11th straight quarter. Following the results, the company reaffirmed and narrowed its full-year projection.

Q3 in Detail

Rent-A-Center posted adjusted earnings of 47 cents a share that missed the Zacks Consensus Estimate of 50 cents. However, the bottom line increased significantly from 32 cents reported in the year-ago quarter. We note that lower operating expenses and reduced interest expense favorably impacted the bottom line.

Total revenues of $649.4 million surpassed the Zacks Consensus Estimate of $630 million and also grew 0.7% year over year on account of decent same-store sales performance. This was offset by refranchising more than 100 locations in the past year and closures of few Core U.S. stores. Excluding effects on revenues resulting from the refranchising efforts, top line grew 2.7%.

Meanwhile, adjusted EBITDA during the quarter came in at $56.6 million, up 14.8% generated in the year-ago period. We note that adjusted EBITDA margin expanded 110 basis points to 8.7%.

The company’s initiatives are well on track. Management intends to focus on cost containment endeavors, improve traffic trends, targeted value proposition, refranchise program and augment cash flow.

Comparable-Store Sales Performance

Same-store sales during the quarter grew 4.5%, reflecting an increase of 3.7%, 6.2% and 8.1% across the Core U.S., Acceptance Now and Mexico segments, respectively.

Same-store sales for the Acceptance Now segment expanded 20 basis points on a sequential basis. However, same-store sales for the Core U.S. and Mexico segments contracted 190 and 210 basis points, respectively, on a sequential basis. Consolidated comps for the company exhibited a sequential decline of 130 basis points.

Segment Performance

Revenues at the Core U.S. segment declined 3.3% to $436.5 million owing to the refranchising efforts and continued store base rationalization. This was partly offset by same-store sales growth.

Revenues at Acceptance Now grew 6.4% from the prior-year quarter to $184.5 million driven by robust comps and acquisition of Merchants Preferred, a nationwide virtual rent-to-own provider.
Mexico segment’s revenues came in at $13.4 million, up 4.6% from the year-ago period. On a constant-currency basis, the metric improved 6.9%.

Finally, total Franchising revenues increased to $15 million during the reported quarter from $7.4 million in the year-ago period. This can primarily be attributed to refranchising over 100 locations.

Store Update

At the end of the reported quarter, there were 2,011 Core U.S. locations, 1,009 Acceptance Now Staffed stores, 128 Acceptance Now Virtual, 122 stores in Mexico and 339 Franchise stores.

Other Financial Aspects

Rent-A-Center ended the reported quarter with cash and cash equivalents of $73.7 million, net senior debt of $251 million and stockholders' equity of $431.7 million. Capital expenditures totaled $6.9 million. It generated free cash flow of $205.3 million (including acquisitions and divestitures) during the first nine months of 2019.

As of Sep 30, 2019, the company reported its outstanding debt of $260 million.

Management now anticipates net debt of $185-$200 million for 2019 with net debt to adjusted EBITDA ratio of 0.70-0.80. The company anticipates generating free cash flow of $205-$220 million during 2019.

Outlook

Rent-A-Center projects consolidated revenues between $2.635 billion and $2.670 billion for 2019 compared with $2.620-$2.670 billion projected earlier. Management still envisions consolidated same-store sales growth in the mid-single digits.

The company now expects Core U.S. revenues in the band of $1.800-$1.820 billion and Acceptance NOW revenues in the range of $735-$750 million.

The company foresees adjusted EBITDA in the band of $245-$260 million and adjusted earnings per share in the range of $2.10-$2.35 for 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

Currently, Rent-A-Center has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, 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

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, 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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