Is Rent-A-Center Collapsing and is that bad for the Economy?

There are some stocks that I regard as indicators of economic health, and one of them is Rent-A-Center (NYSE: RCII). Disturbingly the most recent earnings report indicates that Rent-A-Center might be collapsing, which might indicate serious economic distress in America’s heartland.

Rent-A-Center is an interesting economic indicator because it operates a chain of rent to own stores in working class areas across America. Its stores provide items like appliances, furniture and electronics to people with limited incomes, and poor credit.

That means it is a pretty good gauge of the level of economic activity in many communities and of the financial health of the working class. We should be scared because Rent-A-Center’s revenues and income have been falling dramatically.

Rent-A-Center had a Terrible Year in 2016

Rent-A-Center had a very terrible year in 2016, for starters its revenues fell by $315 million. The chain started the year with $3.278 billion in revenues in December 2015 and finished with $2.963 billion a year later.

Then there was net income which was in the negative all year. Disturbingly the -$105.19 million in negative net income that Rent-A-Center reported in December 2016 was a substantial improvement. The chain reported -$953.52 million in net income in December 2015. That means Rent-A-Center’s income increased by $848.33 million during the year which can be viewed as good.

Beyond net income there was a free cash flow of -$35.17 million and a “profit margin” of -21.4% at the end of the year. That indicates Rent-A-Center might be operating at a loss despite the $353.74 million in cash from operations it reported on December 31, 2016.

Then there is the question of float, Rent-A-Center reported cash and short-term investments of $95.4 million, an increase over $60.36 million in fourth quarter 2015, and assets of $1.603 billion at the end of 2016. This means the company’s business model of collecting weekly payments on items might not be generating that much float.

What can Rent-A-Center’s Finances Tell Us about the Economy

There are two possible explanations for Rent-A-Center’s revenue drop from the economy. The first is that the economy is improving dramatically so many families no longer needs its’“services.”

The second is that many Americans are now so poor they can no longer afford to buy from Rent-A-Center. Anybody who has been reading the economic news for the past few years will favor the second argument.

There is some evidence that economic productivity and growth is falling off. Wharton finance Jeremy Siegel pointed out that productivity growth in the United States was at .5% rather than the normal 2.3% in a recent ValueWalk discussion. Based on that he thinks wages are 10% to 12% lower than they should be.

This of course brings us to the debate about wage stagnation Dartmouth Economist Bruce Sacerdote estimated that real wages grew by 24% between 1975 and 2015, Bloomberg reported. Data based on the consumer price index (CPI) indicates the opposite that wages stayed about the same between 2005 and 2015.

Even if Sacerdote is right some groups might not be participating in the growth. The Economic Policy Institute reported that wages for low-income workers (Rent-A-Center’s target demographic) fell by 5% between 1979 and 2013. During the same period wages for high-wage workers rose by 41% which might explain Sacerdote’s thesis.

 

This means that the people most likely to use Rent-A-Center have less money. Yes there is economic growth but it is benefiting the Costco and Nordstrom shoppers not the Rent-A-Center crowd.

The situation at Rent-A-Center indicates that wage stagnation and income inequality in the United States might be getting worse and is now threatening some businesses. Investors need to pay careful attention because that might threaten some value stocks.

Is Rent-A-Center a Value Investment?

Despite all that some people will be wondering if Rent-A-Center is a value investment. After all it had a market cap of $516.85 million and an enterprise value of $1.133 billion on April 7, 2017.

There’s also the possibility of a turnaround, particularly if the economy picks up. Some people might be optimistic that President Trump makes good on his pledge to restore manufacturing jobs, something I don’t believe will happen. Others might be betting on the $15 minimum wage movement which is spreading through the country. The hope being that either development would give the lower classes a wage boost and increase the income of Rent-A-Center customers.

My observation is that Rent-A-Center is not a value investment, because a large increase in lower-class incomes is probably not in the cards. Instead RCII investors will probably get burned again by a negative return on equity of 24.43% that ate up the dividend yield of 3.29%.

Stay away from Rent-A-Center folks, this stock has nowhere to go but down. It will be a miracle if this chain can survive in the present economy.