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Why Rent-A-Center (RCII) Bombed on Tuesday

NEW YORK (TheStreet) -- Rent-A-Center (RCII - Get Report) shares are sinking over Tuesday's session after reporting weaker-than-expected earnings a day earlier. By late morning, the stock has unloaded 17.4% to $25.80.

The rent-to-own retailer recorded fourth-quarter net income of 25 cents a share, a far cry from consensus of 75 cents a share according to analysts surveyed by Thomson Reuters. Full-year net income of $2.32 a share was 50 cents short of expectations and 24% lower than a year earlier.

The Plano, Tex.-based business said the steep decline in profitability was due to challenging economic conditions in its domestic business, particularly over December which was "the most challenging in years."

"We continue to face meaningful headwinds in our domestic U.S. rent-to-own business, including a customer under severe economic pressure and an intensified promotional environment," said CEO Mark E. Speese in a statement. "Obviously, we are deeply disappointed in the conclusion of 2013 and recognize the challenges we face to improve the results in our Core U.S. segment in 2014 and beyond."

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Revenue in the December-ended quarter increased 1.5% year-over-year to $769.6 million, but missed expectations by $18.3 million. Likewise, full-year revenue of $3.1 billion fell short of consensus by $18.4 million.

Guidance for fiscal 2014 indicates a slow recovery for the small-cap retailer. Full-year earnings are expected in the range of $2.30 to $2.50 a share, far less than an analyst-estimated $3.08 a share. Management forecasts 4.5% to 7.5% revenue growth, in line with consensus for a 7.4% increase.

"Our initial 2014 revenue and earnings guidance incorporates the year-end position of our portfolios, our expectations that the macroeconomic trends will continue throughout 2014, and the investments we plan to make in strategic initiatives and to improve execution in the Core U.S. segment," said CFO Robert D. Davis.

TheStreet Ratings team rates RENT-A-CENTER INC as a Buy with a ratings score of B-. The team has this to say about their recommendation:

"We rate RENT-A-CENTER INC (RCII) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

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