Moody's also believes that the company could take advantage of an opportunity to increase its market presence if a sizable chain or several smaller chains of rent-to-own retailers were to become available.
Moodys.com

Moody's Investors Service upgraded Rent-A-Center Inc. to Ba3 and affirmed all other ratings today.

The continuation of the positive outlook reflects Moody's opinion that ratings could be upgraded over the medium-term once the company establishes a lengthier track record of sales improvement and Moody's becomes more comfortable with the company's financial policy.

In their upgrade statement, Moody's stated, "Although some of Rent-A-Center's key rating drivers are consistent with a low investment grade profile, the company's corporate family rating remains Ba2 primarily due to Moody's concern regarding the historic use of most free cash flow for share repurchases, the company's position as a consolidator within the rent-to-own industry, the unproven success of initiatives designed to stimulate average unit volume growth, and the challenges in expanding the personal loan business beyond the test stage. While leverage is moderate, there has been little net debt repayment over the previous several years. Moody's also believes that the company could take advantage of an opportunity to increase its market presence if a sizable chain or several smaller chains of rent-to-own retailers were to become available. Partially offsetting these risks are the lower cyclicality and seasonality of rent-to-own stores compared to many other retailing segments and Rent-A-Center's consumer credit efficiency, geographic diversity, and strong market position."

Moody's continued, "The continued positive outlook recognizes that an upgrade remains possible within the medium-term. The potential upgrade assumes that comparable store sales growth will not become negative (in spite of the potentially adverse impact of high motor fuel prices), that the business line expansion into financial services is profitable, and that the company remains measured with its uses of discretionary free cash flow. Over the next several quarters, ratings could move upward if the company establishes a lengthier track record of sales stability and margin improvement, if financial flexibility were to strengthen such that EBIT covers interest expense by more than 3 times, leverage stays below 2.5 times, and Free Cash to Debt can be sustained above 12%, and if possible incremental acquisitions do not meaningfully impact credit metrics. Given the positive outlook, Moody's believes that a downgrade is unlikely. However, the outlook could be revised to stable as a result of financial policy decisions such as material leverage increases, share repurchases, or capital expenditures or for operating reasons that prevent the company from improving operating margin. A stable outlook would result if comparable store sales become negative, free cash flow to debt does not improve from the current level of 4%, or Debt to EBITDA approaches 3 times."