Business Context and Reporting Period
This unaudited Form 10-Q covers Rent-A-Center, Inc. and subsidiaries for the quarter and six months ended June 30, 2020. The filing identifies the registrant as Rent-A-Center, Inc. (NASDAQ: RCII), although the request metadata identifies Upbound Group, Inc.; investors should verify the issuer and filing identity.
The company provides lease-to-own and installment-sale products through four segments: Rent-A-Center Business, Preferred Lease, Mexico, and Franchising. Operations were materially affected by COVID-19-related closures and restrictions during the first half of 2020. By June 30, 2020, the company reported that affected locations had reopened and were fully operational.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenues | $683.7 million, up 4.2% | $1.386 billion, up 2.4% |
| Gross profit | $399.5 million, down 2.1%; margin 58.4% | $819.7 million, down 1.6%; margin 59.2% |
| Operating profit | $53.6 million, down 58.7%; margin 7.8% | $102.5 million, down 30.3%; margin 7.4% |
| Net earnings | $38.5 million, down 59.2% | $87.8 million, down 13.7% |
| Diluted EPS | $0.70, versus $1.70 | $1.58, versus $1.83 |
| Cash flow from operations | Not separately provided | $254.7 million, versus $185.4 million |
- Six-month merchandise sales increased 19.5% to $209.5 million, while store rentals and fees declined 1.1% to $1.103 billion.
- Merchandise losses increased to $115.7 million for the six months, from $85.5 million, including approximately $5.6 million of incremental reserves for COVID-19-related skip and stolen losses.
- Cash and cash equivalents were $206.4 million at June 30, 2020, compared with $70.5 million at December 31, 2019.
- Senior debt was $198.5 million, net senior debt on the balance sheet was $190.7 million, and no borrowings were outstanding under the ABL facility. ABL availability was $211.2 million, subject to borrowing-base conditions.
- Stockholders’ equity was $486.6 million at June 30, 2020, compared with $459.0 million at year-end 2019.
- The six-month effective tax rate was 6.9%, versus 22.0%, primarily because of CARES Act-related net operating loss carrybacks.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven mainly by the Preferred Lease virtual solution, introduced following the August 2019 acquisition of Merchants Preferred, higher merchandise sales, and increased franchising activity.
- Preferred Lease revenue increased 9.2% for the six months, but operating profit fell 44.7% to $24.5 million. Gross margin declined to 39.2% from 44.7%, reflecting early customer payouts, higher merchandise losses, COVID-19-related reserves, and a larger virtual-location mix.
- Rent-A-Center Business six-month revenue declined 1.2%, primarily because of refranchising and store-base rationalization. Operating profit increased 29.5% to $153.1 million because of lower labor and other store expenses.
- Mexico revenue declined 10.2%, partly because of currency effects and COVID-19-related closures. Franchising revenue increased 44.6% to $40.0 million.
- Operating profit was negatively affected by the absence of approximately $80 million of net proceeds from the 2019 Vintage litigation settlement. Other charges were $9.6 million in the first half of 2020, compared with a $44.2 million gain in the prior-year period.
- Operating expenses reflected cost reductions, employee furloughs, lower store labor, lease concessions, and reduced activity during the pandemic. Approximately 500 lease agreements were renegotiated, producing near-term rent abatements of approximately $2.3 million and deferrals of approximately $2.2 million.
- The company closed 18 Rent-A-Center Business stores and two Mexico stores during the first six months of 2020 and ended the period with 2,445 total locations across the Rent-A-Center Business, Mexico, and Franchising segments.
- The company repurchased 1.46 million shares for $26.5 million during the first half of 2020. The repurchase program was temporarily suspended in response to COVID-19, with approximately $58.5 million remaining available under the authorization.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal full-year revenue, earnings, or cash-flow guidance. Management states that, based on current assumptions, operating cash flow and available ABL liquidity should be sufficient to fund operations for the next 12 months.
- Management emphasizes continued growth in the Rent-A-Center Business through e-commerce and expanded product categories, growth of the Preferred Lease virtual platform, favorable EBITDA margin, free cash flow generation, and potential strategic transactions.
- COVID-19 remains the principal uncertainty. Risks include renewed government restrictions, weaker consumer spending, higher unemployment, customers’ inability to meet lease obligations, supply-chain disruptions, staffing challenges, and reduced liquidity.
- Preferred Lease faces elevated operating-margin risk because of higher merchandise costs and loss rates. Preferred Lease customer stolen-merchandise charge-offs were 15.1% of revenue for the first six months, compared with 9.8% in 2019.
- Approximately 30 Rent-A-Center Business stores were looted or damaged during civil unrest, resulting in approximately $0.6 million of inventory write-offs and $0.1 million of fixed-asset disposals.
- The California Attorney General has proposed settlement terms relating to alleged violations involving Acceptance Now business practices. The company disputes the allegations, is cooperating, and states that it does not expect a material financial impact, but the ultimate outcome remains uncertain.
- Variable-rate debt creates interest-rate exposure. A hypothetical 1.0% change in market rates would affect annualized pretax expense or income by approximately $2.0 million. The company had no interest-rate swaps at June 30, 2020.
- The company adopted the current expected credit loss standard on January 1, 2020, reducing opening retained earnings by approximately $0.8 million. The allowance for doubtful accounts increased to $8.2 million at June 30, 2020 from $5.6 million at year-end 2019.
Most Important Facts for Investors to Verify
- Verify the issuer discrepancy: the supplied metadata names Upbound Group, Inc., while the filing names Rent-A-Center, Inc. and reports ticker RCII.
- Assess whether the elevated Preferred Lease merchandise-loss rate and lower segment margin are temporary pandemic effects or structural consequences of the virtual business model.
- Monitor COVID-19 developments, renewed location closures, customer payment performance, and merchandise-loss reserves.
- Reconcile reported cash of $206.4 million, $198.5 million of term debt, $211.2 million of ABL availability, and the company’s ability to maintain dividends and any resumed share repurchases.
- Separate recurring operating performance from unusual items, particularly the prior-year Vintage Settlement Proceeds, 2020 COVID-19 and social-unrest charges, lease concessions, and CARES Act tax benefits.
- Follow the California Attorney General inquiry and any resulting penalties, disgorgement, business-practice changes, or litigation expense.