Business Context and Reporting Period
The filing is Rent-A-Center, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The provided metadata identifies Upbound Group, Inc., but the filing itself identifies the registrant as Rent-A-Center, Inc. The company operates rent-to-own businesses through Core U.S., Acceptance Now, Mexico, and Franchising segments.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $655.9 million | $655.7 million | $1,352.6 million | $1,353.8 million |
| Gross profit | $408.1 million | $423.9 million | $832.9 million | $860.9 million |
| Gross margin | 62.2% | 64.6% | 61.6% | 63.6% |
| Operating profit | $129.8 million | $27.2 million | $147.2 million | $16.9 million |
| Operating margin | 19.8% | 4.1% | 10.9% | 1.2% |
| Net earnings (loss) | $94.5 million | $13.8 million | $101.8 million | $(6.1) million |
| Diluted EPS | $1.70 | $0.25 | $1.83 | $(0.11) |
| Operating cash flow | Not separately provided | Not separately provided | $185.4 million | $142.9 million |
At June 30, 2019, cash and cash equivalents were $353.1 million, compared with $155.4 million at December 31, 2018. Senior notes, net, were $540.7 million. There were no borrowings under the prior revolving facility, although $92 million of letters of credit were outstanding. Operating lease right-of-use assets and liabilities were $265.8 million and $271.6 million, respectively, following adoption of ASC 842.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat for the quarter and declined 0.1% for the six-month period, despite same-store revenue growth of 5.8% in the quarter and 6.3% for the six months.
- Gross profit declined 3.7% in the quarter and 3.2% year to date. Gross margin decreased primarily because of pricing and value-proposition initiatives, including substantially lower merchandise-sales margins.
- Operating profit increased by $102.7 million in the quarter and $130.3 million year to date. The improvement primarily reflected the Vintage Settlement gain, cost-savings initiatives, and store closures.
- Excluding other gains and charges, operating profit was $52.3 million, or 8.0% of revenue, in the quarter versus $43.6 million, or 6.7%, in the prior-year quarter. For the six months, adjusted operating profit on this basis was $103.0 million, or 7.6%, versus $50.8 million, or 3.8%.
- Store labor and other store expenses declined due to a smaller store base and cost reductions. The company closed 66 Core U.S. stores in the first half of 2019, compared with 109 Core U.S. stores and eight Mexico locations in the first half of 2018.
- Core U.S. revenue declined 1.3% year to date, while operating profit increased 64.4%. Acceptance Now revenue declined 0.8% and operating profit declined 0.8%. Mexico revenue increased 10.5% and operating profit increased 94.6%. Franchising revenue increased 76.4%.
- Operating cash flow increased $42.5 million, substantially influenced by approximately $80 million of net cash proceeds from the Vintage Settlement.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management stated that operating cash flow and availability under the new ABL facility are expected to fund operations for the next 12 months.
- On August 5, 2019, after the reporting date, the company refinanced its debt with a $200 million senior secured term loan and a $300 million ABL revolving facility. It drew the full $200 million term loan and $80 million under the ABL facility, and used the proceeds and cash on hand to retire the prior facility and redeem the senior notes.
- The new term loan matures in 2026 and bears interest at Eurodollar plus 4.50%. The ABL facility matures in 2024 and bears interest at Eurodollar plus 1.50% to 2.00%, subject to its borrowing base and applicable covenants.
- The company received $92.5 million in cash from the Vintage Settlement and retained approximately $80 million after related costs. This nonrecurring gain materially increased reported earnings and cash flow.
- The company recorded a $13 million proposed settlement charge related to the Blair class action, subject to court approval. It also disclosed a Massachusetts purported class action involving Acceptance Now reference calls and an FTC civil investigative demand concerning customer lease transactions.
- The company announced a planned quarterly dividend of $0.25 per share, subject to the refinancing, with the first dividend expected to be declared in September 2019 and paid in October 2019. The filing states that dividend timing and amount remain subject to board discretion.
- The company agreed to acquire substantially all assets and certain liabilities of Merchants Preferred for approximately $47.5 million, consisting of $30 million cash and approximately $15 million of stock, with closing expected in the third quarter of 2019.
- Key operating risks include consumer spending and unemployment, merchandise losses, regulatory and litigation exposure, interest-rate movements, store-consolidation execution, information technology and data security, supply-chain disruption, and the ability to realize cost savings.
Most Important Facts for Investors to Verify
- Confirm the registrant identity because the supplied metadata names Upbound Group, Inc., while the filing names Rent-A-Center, Inc.
- Separate recurring operating performance from the approximately $80 million net Vintage Settlement proceeds when evaluating earnings, margins, and cash flow.
- Review the post-quarter refinancing, including the $200 million term loan, $80 million ABL draw, debt-redemption mechanics, interest costs, collateral, and financial covenants.
- Monitor whether lower gross margins and elevated merchandise losses, particularly in Acceptance Now, persist despite same-store revenue growth.
- Track execution of store closures, refranchising, cost-savings initiatives, the Merchants Preferred acquisition, and the planned dividend.
- Assess potential financial and reputational effects of the Blair settlement, Acceptance Now litigation, FTC inquiry, and other regulatory matters.