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In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

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Is Income Inequality Profitable at Rent-A-Center?

Everything can be an opportunity for a shrewd investor; even income inequality. There are businesses such as Rent-A-Center (NASDAQ: RCII) which cater to households with modest means and limited incomes.

The financial numbers for companies like Rent-A-Center can give us a pretty good idea of how the poor are doing financially. For those of you unfamiliar with it Rent-A-Center offers appliances, electronics, furniture, smartphones, and other big-ticket items to customers on a “rent-to-own basis.”

Rent to own means no down payment, no deposit, and no credit check. Instead, the customer agrees to make a weekly payment or Rent-A-Center will send the repo man to get the item back.

Rent-A-Center’s Revenues are Collapsing

Income inequality should be a blessing for companies like Rent-A-Center because it should provide them with more customers. Unfortunately, that does not seem to be the case because Rent-A-Center’s revenues are in free-fall.

Rent-A-Center reported revenues of $3.254 billion in June 2015, that fell to $3.171 billion in June 2016, and $2.798 billion in June 2017, according to Ycharts. That indicates Rent-A-Center’s business is contracting.

Optimists would claim that means income inequality or poverty is declining because there might be less demand for Rent-A-Center’s products. Cynics would say that this means there are fewer poor people that can afford Rent-A-Center’s “services.” Either way, it looks bad for Rent-A-Center’s stock.

Is Rent-A-Center Making Money?

Marketing to the poor might be a very good business strategy because Rent-A-Center is losing money.

It reported a loss of -$155.77 million on June 30, 2017, that was a vast improvement over the -$968.96 million reported on June 30, 2016, but it’s still terrible. Despite that Rent-A-Center does generate some cash it reported a free cash flow of $34.46 million on 30 June 2017.

The amount of money that Rent-A-Center is bringing in keeps falling which proves its business model might be unsustainable. Rent-A-Center made $344.43 million in cash from operations in June 2016 and $162.44 million in June 2017. It looks as if the company is losing cash flow.

That led to very little float in the form of $1.473 billion worth of assets and $73.83 million in cash and short-term investments on June 30, 2017. It also made for a very cheap company with a market capitalization of $610.31 million and an enterprise value of $1.174 billion on 5 October 2017.

Is Rent-A-Center a Junk Stock?

Also in decline in Rent-A-Center’s dividend, the last one was 8¢ on June 29, 2017. That was down from 24¢ in December 2015. That takes away the only reason to buy Rent-A-Center stock, which was the high dividend.

That made Rent-A-Center more like a junk bond than a stock, people bought it for the low price and high potential return. It also underscores the big danger from both junk bonds and junk stocks. They can lose their ability to pay a high return almost instantly.

This means you should stay away from Rent-A-Center even at the low price of $11.45 a share it reached on October 5, 2017. Unless of course, you think Rent-A-Center is about to explode in value because of growing income inequality.

Betting on Income Inequality

Income inequality is a double-edged sword to companies like Rent-A-Center. The available data indicates it is getting worse, creating more potential customers, but those customers have less money to spend because of economic changes.

Households earning the bottom 20% of U.S. incomes; Rent-A-Center’s probable customers, did see their incomes grow by 46% between 1979 and 2013, The Center on Budget and Policy Priorities reported. Despite that the bottom 20% only had around 4% of the nation’s wealth, meaning they had little left over to pay Rent-A-Center’s bills.

The middle 60% of income earners were a little better off their percentage of the nation’s income was 46% in 2013. The problem that holds for Rent-A-Center is obvious; those people have access to cheaper and more flexible alternatives to its services such as credit cards and store credit.

Rent-A-Center’s Dismal Future

Income inequality is good news for Rent-A-Center but technology is bad news for it. The rise of digital payment options makes it easier than ever for a wide variety of companies to offer really good financing deals.

A great example is PayPal Holdings (NASDAQ: PYPL) which is offering no interest and no payments for six months on purchases over $99 for preapproved customers through its PayPal Credit program. PayPal credit looks like a stake directed right at Rent-A-Center’s heart. It offers a better deal at a lower price that can be used at a wide variety of retailers. PayPal even offers MasterCard products to make it easy to buy with PayPal Credit all over town.

How Fin-Tech will Kill Rent-A-Center

Programs like PayPal Credit explain why Millennials (people under 35) almost never go to places like Rent-A-Center. They have better and cheaper options right on their phones. To things worse for Rent-A-Center new options are appearing on those phones every day.

Coming fast behind PayPal are competitors such as China’s fin-tech giant; Ant Financial, the force behind Alipay and startups such as the blockchain-based MicroMoney. MicroMoney plans to make microloans via smartphone apps, a business strategy that Ant is already engaging in, in China.

Even if income inequality gets worse, which it probably will, Rent-A-Center is finished. Technology will kill it off by giving the poor better borrowing options even if their incomes do not grow. Expect to see Rent-A-Center die off at some point in the near future.