Rent-A-Center, Inc. RCII posted sturdy third-quarter 2020 results, wherein both the top and bottom lines beat the Zacks Consensus Estimate and grew year over year. Notably, this marked the company’s fourth-straight earnings beat and fifth-consecutive revenue surprise. Better-than-expected performance, prompted management to raise view for 2020.
Quarterly results were driven by the company’s efforts to address challenges tied to the pandemic. The company witnessed strong demand for home-related goods and continues to see positive trends without any further stimulus gains. It has also been making digital investments, and is on track to widen its target-customer demographic and customer retention. Rent-A-Center has launched a digital initiative across the Preferred Lease brand and is focused to accelerate mobile and web strategy. Management remains on track to end 2020 on a solid note, given the healthy lease portfolios as well as robust underlying trends across virtual and omni-channel businesses.
Over the past three months, this rent-to-own operator has seen its shares increase 10.7% against the industry’s 11% decline.
Q3 in Detail
Rent-A-Center posted adjusted earnings of $1.04 a share that outshone the Zacks Consensus Estimate of $1.01. Moreover, the bottom line rose significantly from 47 cents earned in the year-ago quarter.
RentACenter, Inc. Price, Consensus and EPS Surprise
RentACenter, Inc. price-consensus-eps-surprise-chart | RentACenter, Inc. Quote
Total revenues of $712 million came ahead of the Zacks Consensus Estimate of $703 million and grew 9.6% year over year. This was mainly driven by same-store sales growth in the Rent-A-Center Business segment and higher Preferred Lease revenues.
Meanwhile, adjusted EBITDA came in at $92.1 million, up 62.7% from the year-ago period. We note that adjusted EBITDA margin expanded 420 basis points to 12.9%.
Revenues at the Rent-A-Center Business segment rose 8.6% to $474.2 million owing to same store sales revenue growth of 12.9% stemming from a 71% increase in e-commerce sales. As of Sep 30, 2020, the segment had 1,947 company-operated locations. Considering the California refranchising transaction, the Rent-A-Center Business unit has nearly 1,850 company-operated locations.
Revenues at Preferred Lease segment grew 9.3% from the prior-year quarter to $201.7 million, mainly buoyed by the virtual retail-partner growth. Moreover, invoice volumes rose 34.4%, driven by virtual retail-partner additions along with organic growth in virtual and staffed locations.
Mexico segment’s revenues totaled $12.2 million, up 3.6% on a constant-currency basis. Also, the segment’s same-store sales rose 4.3%. As of Sep 30, the unit had 121 company-operated locations.
Finally, Franchising revenues jumped 59.6% to $24 million. This can primarily be attributed to increased store count and higher inventory purchases by franchisees. As of Sep 30, the company had 363 franchise-operated locations. Following the California refranchising transaction, it had roughly 460 franchise operated locations.
Other Financial Aspects
Rent-A-Center ended the reported quarter with cash and cash equivalents of $227.4 million, net senior debt of $190.6 million and stockholders' equity of about $542.3 million. Further, it had an outstanding indebtedness of $198 million at quarter end. The company had $209 million available under its revolving credit facility.
Capital expenditures totaled $7.8 million in the quarter. This Zacks Rank #2 (Buy) company generated cash of roughly $296.2 million from operations and free cash flow, including acquisitions and divestitures of $273.3 million during the nine months of 2020.
On Jul 22, 2020, the company entered into an asset-purchase agreement to divest its entire 99 Rent-A-Center Business stores in California to an experienced franchisee. The divestiture was consummated on Oct 5, 2020 for cash of nearly $16 million, which consists of $1 million paid for related franchise fees.
Following a sturdy quarter, management raised view for 2020, reflecting the refranchising of 99 California Rent-A-Center locations. Revenues are now projected in the bracket of $2.795-$2.825 billion, versus the earlier guided range of $2.780-$2.830 billion provided on Sep 21.
Further, adjusted EBITDA is now forecast between $308 and $323 million, compared to the prior range of $295-$320 million. Meanwhile, free cash flow is predicted in the band of $200-$215 million versus $155-$180 million guided earlier. Adjusted earnings are now envisioned between $3.35 and $3.50 per share, up from the prior projection of $3.15-$3.45. The renewed guidance suggests year-over-year growth of 49-56% from $2.24 earned in 2019. The Zacks Consensus Estimate for 2020 earnings is currently pegged at $3.35.
For the Preferred Lease segment, revenues are likely to fall in the band of $812-$822 million and adjusted EBITDA in the range of $66-$71 million. For the Rent-A-Center Business segment, management anticipates revenues of $1.825-$1.840 billion and adjusted EBITDA of $352-$362 million.
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