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Rent-A-Center Looks Like a Steal

How can a small-cap stock be eleven-fold higher yet still qualify for the bargain bin? If it’s Texas-based Rent-A-Center (Nasdaq: RCII), the nationwide rent-to-own operation offering brand-name durable consumer goods such as furniture and appliances at 2,700 locations.

At about $17.30 a share, the stock is roughly 1,000% above the IPO price of two decades ago but almost 60% off its summer 2013 peak, having taken several nasty spills in the past couple years. However, a stock isn’t automatically a bargain just because the price is way down. There must also be evidence of a sustainable turnaround at the underlying company.

A key new growth initiative at Rent-A-Center: Acceptance Now, a program in which customers who can’t obtain store credit from retailers receive flexible leases. The leases are available through kiosks set up at retail outlets with retailer permission. Under these agreements, Rent-A-Center buys items outright and leases them back to customers for a relatively low monthly fee.

Unmanned Acceptance Now kiosks offering a direct virtual interface with retailers are especially popular, as CEO Robert Davis described during the third-quarter conference call on October 27:

Retailers with lower volumes have been anxiously awaiting our direct program and are rapidly signing up. It is still early in the rollout but the volume we’re seeing in the direct locations is meeting our expectations, and we’re even finding some locations are doing enough business that they are very likely to become staffed locations. We strongly believe that retailers that do not currently have a lease-to-own option in their stores are missing out on a significant sales growth opportunity.

Importantly, Rent-A-Center is also progressing quickly toward full online e-commerce capability, an area where it has severely lagged historically. During the third quarter, for example, the company launched a pilot version of Rentacenter.com, made inroads with social media and established an online focus group to regularly obtain customer feedback.

Despite losing $0.08 a share for the quarter, Rent-A-Center showed marked improvement in numerous other performance metrics, including a 15% gain in Acceptance Now locations to 1,690, nearly a 4% increase in total revenue to $792 million and 5.2% overall growth in same-store sales (sales at locations open for more than a year). The company slashed debt by nearly $42 million, bringing its debt-to-equity ratio to 0.7 or about a fifth that of the typical competitor.

At less than eight times 2016 estimates, Rent-A-Center’s stock looks awfully cheap. It looks like a downright steal when you consider its hefty 5.5% yield and that Rent-A-Center could easily grow profits at a mid-to-high single-digit pace the next couple years, at least.


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