Business Context and Reporting Period
This unaudited Form 10-Q is for Rent-A-Center, Inc. and subsidiaries, not Upbound Group, Inc., for the three and nine months ended September 30, 2019. The company operates rent-to-own and installment-sales businesses through Core U.S., Acceptance Now, Mexico, and Franchising segments.
The company completed the acquisition of Merchants Preferred, a nationwide virtual rent-to-own provider, on August 13, 2019, for approximately $46.6 million of total consideration.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | First 9 Months 2019 | First 9 Months 2018 |
|---|---|---|---|---|
| Revenue | $649.4 million | $644.9 million | $2,002.0 million | $1,998.7 million |
| Gross profit | $400.0 million | $407.7 million | $1,232.9 million | $1,268.6 million |
| Gross margin | 61.6% | 63.2% | 61.6% | 63.5% |
| Operating profit | $38.8 million | $25.6 million | $186.0 million | $42.5 million |
| Operating margin | 6.0% | 4.0% | 9.3% | 2.1% |
| Net earnings | $31.3 million | $12.9 million | $133.1 million | $6.8 million |
| Diluted EPS | $0.56 | $0.24 | $2.39 | $0.13 |
| Operating cash flow | Not separately provided | Not separately provided | $228.1 million | $183.9 million |
At September 30, 2019, cash and cash equivalents were $73.7 million, compared with $155.4 million at December 31, 2018. Senior debt was $251.0 million net, consisting of a $200.0 million term loan and $60.0 million drawn under the ABL facility, net of related issuance costs and discounts. The ABL facility had $148.0 million of availability at September 30, 2019, and $92.0 million of letters of credit had been issued. Management stated that operating cash flow and ABL availability should be sufficient to fund operations for the next 12 months.
Operating lease right-of-use assets and operating lease liabilities were $268.1 million and $272.5 million, respectively, following adoption of the new lease standard. Total liabilities were $1.066 billion and stockholders’ equity was $431.7 million at September 30, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue increased 0.7% in the third quarter and 0.2% for the first nine months, despite Core U.S. revenue declines related to refranchising, store closures, and store-base rationalization.
- Same-store revenue increased 4.5% in the third quarter and 5.7% for the first nine months. Core U.S. same-store revenue increased 3.7% and 5.0%, respectively; Acceptance Now increased 6.2% and 7.2%.
- Gross margin declined because of higher rental merchandise costs and the company’s strategy to enhance its value proposition. Acceptance Now gross margin declined to 43.4% in the quarter from 47.0%.
- Operating profit benefited from lower labor, store, general and administrative expenses, cost-savings initiatives, and store closures. Excluding other charges and gains, nine-month operating profit was $144.7 million, or 7.2% of revenue, versus $83.2 million, or 4.2%, in 2018.
- The first nine months included approximately $80 million of net pre-tax proceeds from the Vintage Settlement, materially increasing reported operating profit and net earnings.
- Operating cash flow increased $44.2 million, while financing activities used $287.1 million, primarily because the company repaid approximately $282.7 million of debt.
- The company closed 83 Core U.S. stores during the first nine months and ended the period with 3,609 reported locations, excluding certain Merchants Preferred locations from the location table.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal numerical earnings or revenue guidance. Management’s strategy emphasizes virtual growth, Acceptance Now expansion, e-commerce and digital capabilities, selective refranchising, cost optimization, and improved customer experience.
- The company refinanced its prior debt on August 5, 2019, with a seven-year $200 million term loan and a five-year $300 million ABL facility. The former $540 million of senior notes were redeemed in August.
- Variable-rate debt creates interest-rate exposure. Management estimated that a 1.0% change in market interest rates would affect annual pre-tax earnings by approximately $2.6 million.
- Merchandise losses increased to $129.4 million for the first nine months from $123.5 million, including customer-stolen merchandise of $110.3 million.
- The company recorded a $13 million pre-tax charge for the Blair class-action settlement, approved in October 2019 and expected to be paid in November 2019.
- The FTC is investigating transactions involving the purchase and sale of customer lease agreements. The inquiry could lead to enforcement action, a consent order, and substantial costs; the filing does not provide a loss estimate.
- A separate Massachusetts purported class action involving calls to customer references remains pending. Potential statutory damages are stated as $25 per reference, potentially tripled to $75.
- The company adopted ASC 842 on January 1, 2019, recording substantial operating lease assets and liabilities and a $2.0 million decrease to opening retained earnings related to impairments.
- The effective tax rate was unusually low at negative 4.2% in the quarter and 17.2% for the first nine months, primarily because previously recorded uncertain-tax-position reserves were reversed.
- Management identified consumer spending, unemployment, funding availability, execution of cost savings, store consolidation, virtual-business integration, regulatory compliance, litigation, data security, foreign exchange, and merchandise losses as key risks.
Facts Investors Should Verify
- Confirm that the filing relates to Rent-A-Center, Inc. rather than the company identified in the request metadata as Upbound Group, Inc.
- Assess the sustainability of earnings excluding the approximately $80 million Vintage Settlement gain and other unusual items.
- Review ABL availability, borrowing-base calculations, letters of credit, debt covenants, and variable-rate exposure.
- Evaluate whether Core U.S. store closures and refranchising are improving profitability without causing further revenue erosion.
- Monitor Acceptance Now merchandise losses, declining gross margins, and the integration and performance of Merchants Preferred.
- Track the FTC inquiry, Massachusetts litigation, Blair settlement payment, and any related reserves or cash costs.
- Consider future cash-tax requirements as bonus-depreciation benefits reverse; the filing estimated approximately $161 million of related tax deferrals would reverse during 2019.