Business Context and Reporting Period
This unaudited Form 10-Q covers Rent-A-Center, Inc. and subsidiaries for the three and nine months ended September 30, 2020. The filing metadata identifies Upbound Group, Inc., but the registrant named in the filing is Rent-A-Center, Inc. The company operates lease-to-own businesses through four segments: Rent-A-Center Business, Preferred Lease, Mexico, and Franchising.
All operating locations that were temporarily or partially closed because of COVID-19 had reopened and were fully operational by the filing date. The company provides lease-to-own, installment-sale, merchandise-sale, virtual lease-to-own, and franchise services.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $712.0 million | $649.4 million | $2,097.7 million | $2,002.0 million |
| Gross profit | $425.0 million | $400.0 million | $1,244.7 million | $1,232.9 million |
| Operating profit | $80.2 million | $38.8 million | $182.7 million | $186.0 million |
| Net earnings | $64.0 million | $31.3 million | $151.8 million | $133.1 million |
| Diluted EPS | $1.15 | $0.56 | $2.73 | $2.39 |
| Operating cash flow | Not separately provided | Not separately provided | $296.2 million | $228.1 million |
Q3 revenue increased 9.6%, gross profit increased 6.3%, operating profit increased 106.4%, and net earnings increased 104.7% year over year. Nine-month revenue increased 4.8% and net earnings increased 14.1%, while operating profit decreased 1.8%.
- Q3 gross margin was 59.7%, compared with 61.6% in the prior-year quarter.
- Q3 operating margin was 11.3%, compared with 6.0%; nine-month operating margin was 8.7%, compared with 9.3%.
- Excluding other gains and charges, nine-month operating profit was $190.5 million, or 9.1% of revenue, compared with $144.7 million, or 7.2%, in 2019.
- Cash and cash equivalents were $227.4 million at September 30, 2020, compared with $70.5 million at December 31, 2019.
- Senior debt was $190.6 million net on the balance sheet, representing $198.0 million of principal outstanding. No borrowings were outstanding under the ABL facility, which had $209.3 million of availability.
- Total assets were $1.67 billion and stockholders’ equity was $542.3 million at September 30, 2020.
Material Changes Versus the Prior Comparable Period
- Rent-A-Center Business revenue increased 8.6% in Q3 and 2.0% for nine months. Q3 same-store revenue increased 12.9%, supported by merchandise sales and e-commerce. Segment operating profit increased 91.6% in Q3 and 48.5% for nine months.
- Preferred Lease revenue increased 9.3% in both Q3 and nine months, primarily from the virtual solution and the Merchants Preferred acquisition. However, segment operating profit declined 26.4% in Q3 and 38.7% for nine months due to higher early payouts, merchandise losses, virtual-location costs, and growth investments.
- Mexico revenue declined 9.1% in Q3 and 9.8% for nine months, negatively affected by foreign exchange. Nine-month operating profit declined 4.2%.
- Franchising revenue increased 59.6% in Q3 and 49.9% for nine months, reflecting more franchise locations and higher franchisee inventory purchases.
- Store labor declined 5.2% in Q3 and 8.2% for nine months. General and administrative expense increased 21.0% in Q3 and 7.4% for nine months, primarily due to higher incentive compensation.
- Interest expense declined materially following the August 2019 refinancing. Net interest expense decreased 51.9% in Q3 and 51.0% for nine months.
- Operating profit for the first nine months of 2019 benefited from approximately $80 million of net proceeds from the Vintage merger termination settlement, which did not recur in 2020.
- The company repurchased 1.46 million shares for $26.6 million during the first nine months of 2020. Approximately $58.4 million remained available under the repurchase authorization at September 30, 2020.
Cash Flow, Debt, Liquidity, and Capital Allocation
- Operating cash flow was $296.2 million for the first nine months, up from $228.1 million in 2019. The increase was driven partly by lower rental merchandise purchases, approximately $30 million of federal tax refunds, and favorable working-capital changes.
- Investing cash flow used $22.9 million, including $22.6 million of capital expenditures.
- Financing cash flow used $114.9 million, including $41.5 million of net debt repayments, $47.3 million of dividends, and $26.6 million of share repurchases.
- The company’s $200 million term loan matures in 2026 and carried a 4.69% margin/rate reference at September 30, 2020. The $300 million ABL facility matures in 2024 and had $90.7 million of letters of credit outstanding, primarily for workers’ compensation claims.
- The company stated that operating cash flow, cash on hand, and ABL availability should be sufficient to fund operations over the next 12 months based on current assumptions. At October 22, 2020, cash on hand was approximately $204.4 million.
- A fourth-quarter 2020 cash dividend of $0.29 per share was declared in September and paid on October 26, 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management’s strategy emphasizes e-commerce, expansion of Preferred Lease’s virtual platform, favorable adjusted EBITDA margins, free cash flow generation, and capital returns.
- COVID-19 remains the principal uncertainty. Potential effects include renewed closures, weaker customer payment capacity, reduced discretionary spending, supplier and staffing disruptions, and pressure on liquidity.
- Merchandise losses totaled $158.1 million for the first nine months, up from $129.4 million in 2019. Preferred Lease customer-stolen merchandise charge-offs increased to 13.9% of revenue for nine months from 9.5%.
- The company incurred approximately $1.0 million of COVID-related cleaning and protective-equipment costs, $0.4 million of related payroll costs, and $0.2 million of lease expense, partially offset by $0.8 million of lease-abatement credits.
- Approximately 30 stores were looted or damaged during social unrest, resulting in $0.7 million of inventory write-offs and $0.1 million of fixed-asset disposal costs.
- On October 5, 2020, after the reporting period, the company completed the sale of 99 California corporate stores for approximately $16 million, including approximately $1 million of franchise fees. Assets held for sale at September 30 included approximately $31.1 million of inventory and $0.8 million of property assets.
- The California Attorney General continues to investigate Acceptance Now business practices. Proposed settlement terms include civil penalties, revenue disgorgement, training requirements, and business-practice changes. Management states that it does not expect a material financial statement impact, but the ultimate outcome remains uncertain.
- The company adopted the current expected credit loss standard on January 1, 2020, reducing opening retained earnings by approximately $0.8 million.
- A hypothetical 1% change in market interest rates would affect annualized pretax earnings by approximately $2.0 million. The company had no interest-rate swaps at September 30, 2020.
Important Facts for Investors to Verify
- Confirm the registrant identity and subsequent corporate name change, because the supplied filing is for Rent-A-Center, Inc., while the request identifies Upbound Group, Inc.
- Assess whether Preferred Lease can convert revenue growth into improved margins given elevated merchandise losses and early payouts.
- Evaluate the sustainability of strong cash generation after considering inventory purchases, dividends, repurchases, debt service, and COVID-related working-capital effects.
- Monitor COVID-19 developments, customer payment performance, merchandise losses, and any renewed operating restrictions.
- Review the California Attorney General inquiry and any related settlement, penalties, disgorgement, or required operating changes.
- Verify the financial and operational effects of the October 2020 California refranchising transaction.
- Consider the company’s variable-rate debt, lease commitments of approximately $319.9 million, and $90.7 million of outstanding letters of credit when assessing liquidity.