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Introduction

Rent-A-Center, Inc. (NASDAQ:RCII) is a leader in the rent-to-own industry. The company offers its customers products in small installments over time on flexible lease-purchase agreements. Although the company has seen little growth other than years, a recent acquisition has bolstered the company’s earnings. With just 12x 2021 EPS and offering a 5% dividend while posting a further uptick in EPS, RCII stock appears to be cheap.

Financial history

Rent-A-Center turnover

Revenue from Rent-A-Center (SEC.gov)

Rent-A-Center Revenue by Type

Rent-A-Center Revenue by Type (SEC.gov)

Rent-A-Center Revenue by Segment

Rent-A-Center Revenue by Segment (SEC.gov)

As can be seen above, Rent-A-Center saw fairly consistent revenue until a significant jump in 2021. This jump was due to the completion of the acquisition of Acima Holdings announced in 2020. In addition to this acquisition, the company only increased revenue by a total of 4.1% over the previous four years. Acima’s purchase increased Rent-A-Center’s store footprint and revenue by 63%. Although only a fraction of its size, the company has also seen its franchise revenue grow by 47% annually. Examining the breakdown by segment not only shows the further growth of Acima’s operations, but also that the Rent-A-Center business grew by 10% last year. For a company with little or no growth, this is a refreshing change.

Rent-A-Center operating and net income

Rent-A-Center Operating and Net Income (SEC.gov)

Rent-A-Center Margins

Rent-A-Center Margins (SEC.gov)

Rent-A-Center has also just started to see profitability after 2017. Costs over the past few years have come down. Labor costs and interest charges declined, while a few one-time items, such as the Vintage settlement and the tax law, benefited the bottom line. All this while the cost of revenue has slowly increased. The recent acquisition of Acima is one of the main reasons for the consistency of operating income and net income after 2019.

Overall, Rent-A-Center has been a slow to no growth business with weak bottom lines, but the Acima purchase has boosted scale and delivered profits.

Q1 2022

While 2021 looked pretty rosy, the start of 2022 shows a different picture. Total revenue was up 12%, but operating profit and net profit were down 84% and 110%, respectively, for the quarter. This is due to the 34% increase in costs at other stores. This cost increased due to higher rates of stolen goods compared to the previous year. And it jumped with a 1.2% increase in Rent-A-Center business and a 4% increase in Acima.

On top of that, labor costs increased 6%, general and administrative expenses increased 15%, and other expenses increased 37% due to executive equity compensation. Revenue growth is nice to see continuing into 2022, but in-store merchandise losses are concerning and need to be watched closely.

Balance sheet

As of the last quarter, Rent-A-Center has a rather weak balance sheet. The company lacks cash and is heavily indebted. The company only has a current ratio of 0.48x, which means that the company cannot pay off its current debts at this time. Rent-A-Center is also lightly leveraged, with a leverage ratio of 4.31x. It’s not the best balance sheet I’ve ever seen, especially considering that only a few years ago the company was struggling with profitability.

Evaluation

As of this writing, Rent-A-Center is trading at around $25. At this level, the company is at a P/E of 12x using 2021 EPS. Rent-A-Center also trades at a P/BV of 2.57x and offers a dividend yield of around 5%. The low EPS estimate for the year is $4.50, even despite the last quarter. If it holds up, the company has real market value here.

Conclusion

In previous years, Rent-A-Center was a very low-growth business with mostly consistent revenue. In 2020, the company announced the acquisition of Acima Holdings, which strengthened the business towards higher profitability. While Rent-A-Center had a lackluster first quarter, just 12x 2021 earnings and yielding 5%, the company appears to be a bargain. This is especially true if the 2022 EPS of $4.50 holds up.

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