Business Context and Reporting Period
This unaudited Form 10-Q covers Rent-A-Center, Inc. for the three months ended March 31, 2021. The filing identifies the registrant as Rent-A-Center, Inc., although the request metadata names Upbound Group, Inc.; investors should verify the issuer identity.
The company operates lease-to-own businesses in the United States, Puerto Rico, and Mexico through the Rent-A-Center Business, Acima, Mexico, and Franchising segments. On February 17, 2021, the company completed its approximately $1.4 billion acquisition of Acima Holdings, a virtual lease-to-own platform.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $1,036.8 million | $701.9 million | Up 47.7% |
| Gross profit | $510.5 million | $420.2 million | Up 21.5% |
| Gross margin | 49.2% | 59.9% | Down 10.7 percentage points |
| Operating profit | $70.0 million | $48.9 million | Up 43.3% |
| Operating margin | 6.8% | 7.0% | Down 0.2 percentage points |
| Net earnings | $42.6 million | $49.3 million | Down 13.7% |
| Diluted EPS | $0.64 | $0.88 | Down $0.24 |
| Cash flow from operations | $135.8 million | $47.4 million | Up $88.4 million |
| Capital expenditures | $11.4 million | $9.2 million | Up $2.2 million |
Cash and cash equivalents were $123.0 million at March 31, 2021, compared with $159.4 million at December 31, 2020. Total assets were $3.0 billion and stockholders’ equity was $742.2 million.
Debt consisted of $875.0 million outstanding under the term loan facility, $55.0 million under the ABL facility, and $450.0 million of senior unsecured notes issued at 6.375% due February 2029. ABL borrowing availability was $405.2 million at March 31, 2021. The fixed-charge coverage ratio was 1.99 to 1.00.
The company declared a quarterly dividend of $0.31 per share and paid $17.1 million of dividends during the quarter. The effective tax rate was 13.8%, compared with a tax benefit rate of 10.6% in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Acima contributed $210.6 million of revenue and $19.0 million of net earnings from the February 17 acquisition date through March 31, 2021. Acima segment revenue increased 111.7% to $457.4 million, substantially reflecting the acquisition.
- Rent-A-Center Business revenue increased 15.4% to $524.9 million, including same-store revenue growth of 23.4%, driven in part by e-commerce. Segment operating profit increased 78.5% to $121.3 million.
- Franchising revenue increased 131.0% to $40.0 million, primarily due to the refranchising of approximately 100 California stores and increased franchisee inventory purchases.
- Gross margin declined because of higher rental depreciation, a greater mix of merchandise sales and the acquired Acima virtual business. Acima gross margin fell to 29.3% from 40.9%.
- Other charges increased to $51.1 million from $1.7 million. Q1 2021 charges primarily included Acima transaction and integration costs, stock compensation related to restricted acquisition shares, and acquired asset depreciation and amortization.
- Debt refinancing charges of $8.7 million and higher interest expense of $12.0 million reduced earnings. Diluted share count also increased following issuance of Acima acquisition shares.
- Operating cash flow improved substantially, but investing cash outflows of $1.279 billion for the acquisition produced a $36.4 million net decrease in cash during the quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide explicit quantitative full-year earnings or revenue guidance. Management expects operating cash flow and ABL availability to fund operations for the next 12 months; at April 28, 2021, cash on hand was approximately $95.9 million and ABL availability was approximately $430.2 million.
Management’s strategy emphasizes growth in traditional and virtual lease-to-own offerings, e-commerce, digital payments, retail-partner integration, customer retention, and Acima integration. The filing cautions that anticipated acquisition synergies may not be realized and that integration costs, working-capital needs, and capital requirements may exceed expectations.
- The CFPB is investigating Acima’s products, services, and practices. The company completed its production of records in response to existing requests in March 2021, but the scope and outcome remain uncertain. Former Acima owners provided a $50 million indemnity escrow, which is the company’s principal recourse for specified matters.
- The California Attorney General continues to investigate practices associated with the former Acceptance Now business. Proposed settlement terms have included penalties, disgorgement, training, and business-practice changes, but no final resolution is disclosed.
- COVID-19 may continue to affect customer demand, retail partners, collections, staffing, supply chains, store operations, and liquidity.
- Variable-rate debt creates interest-rate exposure. Management estimated that a one-percentage-point rate increase would increase annualized pretax interest expense by approximately $9.4 million.
- The company had approximately $21.8 million of uncertain tax positions and approximately $260 million of remaining tax deferrals associated with bonus depreciation at December 31, 2020, with most expected to reverse in 2021 through 2023.
- The purchase-price allocation for Acima remained preliminary and included $520 million of identifiable intangible assets, $241.8 million of goodwill, and $170 million of developed technology.
Most Important Facts for Investors to Verify
- Confirm the issuer discrepancy: the supplied metadata says Upbound Group, Inc., while the filing is for Rent-A-Center, Inc.
- Assess whether Acima’s revenue growth can be sustained after acquisition-related effects and whether its lower gross margin and higher merchandise-loss profile improve.
- Reconcile reported debt, including the $875 million term loan, $55 million ABL balance, and $450 million senior notes, with liquidity, scheduled amortization, and covenant requirements.
- Evaluate the recurring versus nonrecurring portions of the $51.1 million in other charges and the ongoing stock compensation from the Acima restricted shares.
- Monitor the CFPB investigation, California Attorney General inquiry, and adequacy of the $50 million indemnity escrow.
- Verify cash generation after increased rental-merchandise investment, dividends, debt service, integration costs, and deferred payroll-tax repayments.