Observers of the American scene will ask, does Rent a Center make money. This question is relevant because Rent-a-Center (NASDAQ: RCII) is a bottom-feeding retailer with a heavy exposure to income inequality and wage stagnation.
Rent-a-Center generates float and makes money by selling electronics, furniture, and other items on the installment plan. However, Rent-a-Center calls its installment payments “rent” and charges them on a weekly basis. Moreover, Rent-a-Center allows customers to return items any time.
This allows Rent-a-Center to sell higher quality merchandise at a higher-price to anybody with a pulse. Furthermore, economic conditions create a growing customer base for that business model in modern America.
How Rent-a-Center profits from America’s dysfunctional economy
Retailers like Rent-a-Center profit from an increasingly dysfunctional US economy that provides less and money for average Americans.
For instance, the Median Per Capita Income; the amount of money the average American makes in a year was $31,177 between 2013 and 2017, the US Census Bureau estimates. Additionally, the median household income was $57,652 during the same period.
Finally, fewer Americans are participating in the labor force. Trading Economics estimates the US Labor Force Participation Rate was 64.5% in 2010 and 62.8% in May 2019. To clarify, the Labor Force Participation Rate is the number of Americans taking part in the civilian job market by working or looking for work.
In contrast, the unemployment rate is the number unemployed Americans actively looking for work. The Balance estimates the US Labor Force Participation Rate peaked at 67.3% in January 2000.
Rent-A-Center Profits from the “No Jobs Economy”
Thus, millions of Americans are broke and many of them no longer work. I think Rent-A-Center is well-positioned to cash in on these developments.
To explain, large numbers of Americans can not pass a credit check because they are broke and have no jobs. However, Rent-a-Center refuses to run credit checks so it can sell to those people.
Many of those people have some cash from government benefits like Social Security Supplemental Security Income (SSI), the gig-economy, self-employment, and working off the books.
The Social Security Administration estimates 13.546 million Americans were receiving SSI in May 2019. To explain, SSI is the US government’s basic income scheme for disabled people under 65.
Meanwhile, over one third; or 57 million Americans, are working in the unstable and low-pay gig economy, TJ McCue estimates at Forbes. The gig economy includes freelance work, ridehsare driving (Uber), delivery driving (Instacart and GrubHub), and online platforms like UpWork and Amazon Turk.
However, Gig Economy workers have very little money. The JP Morgan Chase Institute estimates the average monthly pay in the gig economy in March 2018 was $827.
Can Rent-A-Center Make Money?
Such numbers explain why Rent-A-Center can operate over 3,000 stores in all 50 states, parts of Canada, Puerto Rico, and the District of Colombia.
Yet Rent-A-Center is not making much money from all those rental stores. For instance, Rent-a-Center reported revenues of $696.69 million, a gross profit of $424.87 million, an operating income of $17.35 million, and a net income of $7.32 million on 31 March 2019.
Interestingly, Rent-A-Center’s revenue growth rate fell by -0.19% in the quarter ending in March 2019. Plus, Rent-A-Center generates little cash from its business.
Specifically, Rent-A-Center recorded an operating cash flow of $75.78 million, an investing cash flow of $5.97 million, a financing cash flow of $41,000, and a free cash flow of $81.74 million on 31 March 2019. As a result, Rent-A-Center had $237.74 million in cash and equivalents on 31 March 2019.
I think Rent-A-Center proves companies cannot make money from the No Jobs Economy. America could require major economic reforms to finance economic and corporate growth.
Is Rent-A-Center a Value investment?
In conclusion, I think Rent-A-Center (NASDAQ: RCII) is a terrible stock. It has not paid a dividend since July 2017 for instance. For the record, Rent-A-Center investors received an 8₵ dividend on 20 July 2017.
Plus, I conclude Mr. Market grossly overpriced Rent-Center at $25.90 on 14 June 2019. Thus, Rent-A-Center stock is junk smart investors should avoid.