Rent-A-Center's Growth Plan On Track, Cost-Saving View Raised

Rent-A-Center, Inc. RCII is through with the previously announced “comprehensive review of strategic and financial alternatives,” as part of which management also explored a possible divestiture of the company. However, Rent-A-Center did not get any buyout offers that suited its main business sale objectives such as maximizing shareholders’ value.

Following a detailed review of various alternatives, management believes that continuing with its previously unveiled strategic plan would be best for the company as well as its shareholders. Well, Rent-A-Center has been well on track with its strategic plan, which is yielding solid results. This is clearly reflected by the company’s revised financial guidance and its core April and May operating metrics.

Preliminary April & May Sales Data

In April, core U.S. same store sales rose 3.3%, while same store sales of Acceptance NOW (“ANow”) increased 2.3%. Core U.S. same store sales jumped 3.6% in May and that of ANow increased 2.5%.

The better-than-expected performance across both the business was backed by robust portfolio performance. Further, improved pricing and better marketing endeavors fueled core customer growth for the first time ever, during April and May. Also, customer retention increased considerably, in comparison to historical averages. Same store sales of ANow were also driven by a double-digit rise in demand, courtesy of the recently executed value plans at most ANow locations.

Updated Cost-Savings Forecasts

With its strategic initiative underway, Rent-A-Center is moving exceedingly well toward solidifying its financial status and enhancing results. Markedly, the company’s cost-saving initiatives are much ahead of track, making it hopeful of generating annual run-rate savings of more than $100 million and savings of roughly $70 million in 2018. This fares better than management’s February and April forecasts.

In February, Rent-A-Center forecasted annual savings in a range of $65-$85 million, with $43-$57 million delivered in 2018. In April, management upgraded this outlook and predicted annual savings of $75-$95 million, with $50-$63 million generated in 2018.

2018 & Q2 Outlook
 

This Zacks Rank #3 (Hold) company envisions consolidated revenues to range between $2.640 billion and $2.690 billion in 2018, including Core U.S. revenues of $1.835-$1.865 billion and ANow revenues of $730-$750 million. Further, adjusted EBITDA is expected to range from $160-$180 million. Finally, management envisions adjusted earnings for 2018 in a band of 65-90 cents. Free cash flow for the year is anticipated between $210 million and $230 million, up from at least $170 million expected in April.

For the second quarter of 2018, Rent-A-Center projects consolidated revenues in a range of $640-$660 million. While Core U.S. revenues are expected to range from $450 million to $460 million, revenues of ANow are likely to come in a band of $170-$180 million. Management expects adjusted EBITDA to be roughly $40-$50 million and adjusted earnings to be about 20-30 cents per share. Free cash flow for 2018 is likely to be $30-$40 million.

Clearly, this guidance reflects management’s confidence in the company’s capability to drive profitability, while enriching shareholders’ value. Let’s see if these factors can drive further growth at the stock that has gained 9.6% in the past three months, when the industry grew 12.4%.

Interested in the Same Space? Check These Stocks

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H&R Block HRB, with a Zacks Rank #2 (Buy), has long-term earnings growth rate of 11%.

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