Rent-A-Center (RCII) Up On Q2 Earnings Beat, Raised View

Shares of Rent-A-Center, Inc. (NASDAQ:RCII) have increased approximately 5% on Aug 8, following the company’s second-quarter 2019 results. The company’s bottom line surpassed the Zacks Consensus Estimate and also grew year over year. Notably, this marked the fifth successive quarter of positive earnings surprise. Moreover, management raised its view for fiscal 2019.

This rent-to-own operator posted adjusted earnings of 60 cents a share that beat the Zacks Consensus Estimate of 56 cents and also increased 27.7% from the year-ago quarter. We note that lower operating expenses and reduced interest expense favorably impacted the company’s bottom line.

Total revenues of $655.9 million remained almost flat year over year on account of refranchising more than 100 locations since the first quarter of 2018 and closures of few Core U.S. stores. This was mitigated by sturdy same-store sales performance.

Rent-A-Center, Inc. Price, Consensus and EPS Surprise

Meanwhile, adjusted EBITDA during the quarter came in at $67.4 million, up 10.4% generated in the year-ago period. We note that adjusted EBITDA margin expanded 100 basis points to 10.3%.

Clearly, 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. Recently, Rent-A-Center declared its agreement to acquire Merchants Preferred, a nationwide virtual rent-to-own provider. This buyout will accelerate the company’s existing virtual rent-to-own capabilities. Further, it is rationalizing store base and lowering debt load.

Notably, shares of this Zacks Rank #3 (Hold) company have increased 54% compared with the industry’s growth of 4.3% in the past six months.

Comparable-Store Sales Performance

Same-store sales during the quarter grew 5.8%, reflecting an increase of 5.6%, 6% and 10.2% across the Core U.S., Acceptance Now and Mexico segments, respectively. This was the 10th straight quarter of comps improvement.

However, we noted that same-store sales for the Core U.S. and Mexico segments contracted 20 and 290 basis points, respectively, on a sequential basis. Also, same-store sales for the Acceptance Now segment decreased 410 basis points on a sequential basis. Consolidated comps for the company exhibited a sequential decline of 100 basis points.

Segment Performance

Revenues at the Core U.S. segment declined around 1% to $451.1 million owing to the refranchising efforts and continued store base rationalization. This was partly offset by same-store sales growth.

Revenues at Acceptance Now fell 1.5% from the prior-year quarter to $176.4 million on account of closure of company’s locations. This was partly mitigated by healthy comps.

Mexico segment’s revenues came in at $13.6 million, down 10.1% from the year-ago period. On a constant-currency basis, the metric improved 8.7%.

Finally, total Franchising revenues surged to $14.9 million during the reported quarter from $8.7 million in the year-ago period. This can primarily be attributed to refranchising over 80 locations.

Store Update

At the end of the quarter under review, there were 2,035 Core U.S. locations, 1,031 Acceptance Now Staffed stores, 112 Acceptance Now Virtual, 122 stores in Mexico and 334 Franchise stores.

Other Financial Aspects

Rent-A-Center ended the reported quarter with cash and cash equivalents of $353.1 million, net senior notes of $540.7 million and stockholders' equity of $391.9 million. The company incurred capital expenditures of $2.6 million. It generated free cash flow of around $195 million (including acquisitions and divestitures) during the first six months of 2019.

As of August 5, 2019, the company reported its outstanding debt of $280 million, around $260 million lower than outstanding debt as of June 30, 2019.

Management now anticipates net debt of $165-$195 million for 2019 with net debt to EBITDA ratio of 0.60-0.90x. The company anticipates generating free cash flow of $200-$225 million during 2019.

Outlook

Rent-A-Center projects consolidated revenues between $2.595 billion and $2.640 billion for 2019 compared with $2.585-$2.630 billion projected earlier. Management now envisions consolidated same-store sales growth in the mid-single digits.

The company now expects Core U.S. revenues of $1.800-$1.825 billion compared with the prior view of $1.790-$1.815 billion. Acceptance NOW revenues are still anticipated to be in the range of $700-$715 million.

The company foresees adjusted EBITDA in the band of $240-$265 million and adjusted earnings per share in the range of $2.05-$2.40 for 2019. The Zacks Consensus Estimate currently stands at $2.12. Management had previously projected adjusted EBITDA of $230-$260 million and adjusted earnings per share in the range of $1.85-$2.25.

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