Rent-A-Center, Inc. (NASDAQ:RCII)
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The Company is a rent-to-own operator in the United States.
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The Company is a rent-to-own operator in the United States.
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Rent-A-Center operates rent-to-own stores, which offer furniture and accessories, consumer electronics, appliances and computers to customers under flexible rental purchase agreements, thereby allowing ownership to customers at the end of the agreed rental period. The company operates a total of 3,048 stores as on September 2006 of which 297 are franchises. It is the largest player in this highly fragmented industry after acquiring the third largest player Rent-Way in August 2006.
The revenue growth of the company has been quite weak over the past few years; it increased by mere 1.25% during the last 9 months. This poor show can be attributed to the easy availability of credit facilities, which enables the customers to own the appliance, rather go in for a staggered rental owning. On the contrary the costs incurred by the company to generate this revenue is increasing and thus the earnings are getting negatively affected. Of the total revenue furnitures and accessories segment contribute about 38% and consumer electronic 34%.
The acquisition of Rent-Way has given the company complete dominance in the sector, but as part of integration operations they plan to close down about 20% of stores. This action will affect the revenue as comparable store sales contribute a major portion of revenues. The company is introducing initiatives like PayDay Loan, a credit service to attract customers as credit availability is becoming easier. The competition is also becoming intense with the nearest contributor Aaron Rents growing by 19% during the past 9 months suggesting that the company is not able to keep up with changing time. The effect of the new initiatives and acquisition will take some time to reflect in the operational performance of the firm, till then, the stock is likely to under perform.
Fundamental outlook on homefurnishing retail industry currently is not very enthusiastic as macroeconomic trends such as higher interest rates, housing market decline, negative savings is damaging consumer spending in 2007. Consequently homefurnishing retailers will be hit even harder than most retailers as consumers will be hesitant to buy big-ticket furniture items. General merchandise stores such as Target and Wal-Mart are contributing to this by offering discount on home furnishings items. As a result, heavy discounting by retailers in order to meet sales forecasts and unwind excess inventory put a strain on margins.
In the recent quarter, Rent-A-Center’s revenues increased by 24% to $755.3 million primarily driven by the Rent-Way acquisition in November last year and 2.9% increase in same store sales. This increase in same store sales was primarily attributable to increase in the number of units on rent. But on the other hand net income decreased by 63% to $15.1 million offset by litigation expenses. Since the beginning of the year, company has opened 7 new rent-to-own store locations and consolidated 34 stores into existing locations. Besides, it sold 1 acquired Rent-Way store while acquiring 7 new stores, thus reducing 21 stores. Rent-A-Center is expanding the financial services operations extensively to 27 existing rent-to-own store locations.
For fiscal 2007, it expects total revenues in the range of $2.92 to $2.96 billion led by same store sales growth of a meager 1-2%. The company also expects to open around 30 new rent-to-own store locations. While the new store openings enable it to create a good supply side, but the towering inventories and petite increase of comparable sales clearly display the problem of lower demand.