Why Rent-A-Center, Inc. Stock Dropped 25% Last Year

By Jeremy Bowman Markets Fool.com

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Image source: The Motley Fool.

What happened

Shares of rent-to-own specialist Rent-A-Center, Inc. (NASDAQ: RCII) dipped 25% last year, according to data from S&P Global Market Intelligence. The stock fell as the retailer's sales declined, and it posted a series of underwhelming earnings reports. As the chart below shows, the stock sold off sharply following three of its four earnings reports last year:

RCII data by YCharts.

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So what

The stock first plummeted in February, falling 26% after it reported fourth-quarter results. The company took a massive goodwill impairment charge during the quarter of $1.17 billion. The writedown resulted from annual testing for goodwill impairment, which found intangible assets in the core U.S. business, from the company's acquisition strategy during the period 1993 to 2006, that needed to be written down. The charge came as the company had closed a significant portion of its core U.S. stores.

Aside from the impairment charge, results were decent as same-store sales increased 1.7% and operating profit grew slightly. However, guidance for 2016 was less encouraging, as management called for a same-store sales decline of 1% to 3%, though it saw improving operating margin and free cash flow.

Shares quickly rebounded from that slide, but sold off again when the company reported second-quarter earnings, falling 18%, as earnings per share fell from $0.43 the year before to $0.19 and comparable sales dropped 4.9%.

The stock recovered nearly all of those losses, but fell even further after its preliminary third-quarter report came out. The stock plunged 29% on Oct. 11, after the company reported a comparable-sales decline of 12% in its core U.S. business. It also adjusted earnings per share, predicting that EPS would come in at just $0.05 to $0.15, compared to $0.47 the year before.

Now what

There's no question the core U.S. business, which represents more than half the company's stores, is in trouble: comparable sales are plummeting even as Rent-A-Center is shuttering locations.

Rent-A-Center shares are already down 10% this year, as the stock dropped on the broad retail sell-off following downbeat reports from department-store chains in the first week of the year, and continued to slide after the company announced the immediate resignation of CEO Robert Davis. Founder Mark Speese will take his place as interim CEO until a permanent successor has been found. Perhaps a management shake-up is what the company needs, but the move seems to signal another weak performance during the holiday season. In the short term, at least, I'd expect Rent-A-Center shares to remain challenged.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.