Business Context and Reporting Period
This filing is a Form 10-Q for the quarter and nine months ended September 30, 2018. The filing identifies the registrant as Rent-A-Center, Inc., not Upbound Group, Inc.; investors should verify the company and filing metadata. The business operates rent-to-own stores and franchise operations across Core U.S., Acceptance Now, Mexico and Franchising segments.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $644.9 million, up 0.2% | $2.0 billion, down 3.1% |
| Gross profit | $407.7 million, down 1.1%; 63.2% margin | $1.269 billion, down 3.0%; 63.5% margin |
| Operating profit | $25.6 million versus $(8.4) million | $42.5 million versus $(8.2) million |
| Net earnings | $12.9 million versus $(12.6) million; $0.24 diluted EPS | $6.8 million versus $(28.2) million; $0.13 diluted EPS |
| Operating cash flow | Not separately provided | $183.9 million versus $135.4 million |
- Excluding other charges, nine-month operating profit was $83.2 million, or 4.2% of revenue, versus $23.4 million, or 1.1%, in the prior-year period.
- Cash and cash equivalents were $111.0 million at September 30, 2018, compared with $73.0 million at December 31, 2017.
- Capital expenditures were $22.5 million versus $53.5 million in the prior-year period. Investing cash use was $8.1 million.
- Financing activities used $138.5 million, including $166.4 million of debt repayments and $27.1 million of new borrowings. No dividends were paid during the period.
- Senior debt under the term loans and revolving facility was fully repaid at quarter-end. Senior notes, net, totaled $539.7 million, consisting primarily of $292.7 million of 6.625% notes due 2020 and $250.0 million of 4.75% notes due 2021.
- The $350 million revolving facility had no borrowings but supported $92.2 million of letters of credit; reported availability was $247.3 million. The facility matures in March 2019.
- The actual consolidated fixed-charge coverage ratio was 2.03:1 versus a required minimum of 1.10:1.
Material Changes Versus the Prior Comparable Period
- Revenue declined for the nine-month period primarily because of Acceptance Now closures associated with Conn's and hhgregg, store-base reductions and the effects of 2017 hurricanes. Same-store revenue increased 3.3% for the nine months and 5.7% for the quarter.
- Acceptance Now revenue declined 11.7% for the nine months, while operating profit increased 42.9% because of lower labor, store expenses and merchandise losses.
- Core U.S. nine-month revenue was essentially flat, while operating profit increased 45.3% to $115.1 million, supported by cost reductions and lower operating expenses.
- Mexico revenue increased 5.0% for the nine months and returned to operating profitability. Franchising revenue increased 50.0%, partly reflecting the gross presentation of franchise advertising fees after adoption of ASC 606.
- Gross profit margin improved modestly for the nine-month period but declined in the quarter. Acceptance Now’s gross margin declined to 46.7% for the nine months from 49.9%.
- Labor expense declined 6.8% and other store expenses declined 9.9% for the nine months, reflecting cost savings and a smaller store base. Merchandise losses declined to $123.5 million from $152.6 million.
- The company closed 129 Core U.S. stores and nine Mexico locations during the first nine months and ended the period with approximately 3,798 locations.
Guidance, Outlook, Risks and Unusual Items
- The company expected the proposed Vintage Capital merger, approved by stockholders on September 18, 2018, to close in the first quarter of 2019, subject to FTC clearance and other customary conditions. The transaction contemplated cash consideration of $15.00 per share and was not subject to a financing condition.
- Management expected to redeem both senior note issues in connection with the merger. If the merger did not close before the revolving facility matured, the company expected to refinance the facility and stated that it was evaluating amendment, extension and alternative financing options.
- Management believed operating cash flow and available credit would fund operations for the next 12 months, but noted risks from profitability, refinancing availability, interest rates, consumer demand and merger execution.
- First-nine-month other charges totaled $40.7 million, including cost-savings initiatives, store closures, IT project discontinuations, legal and advisory costs, asset impairments and hurricane-related costs.
- During the quarter, Hurricane Florence caused approximately $0.2 million of recorded costs. Additional fourth-quarter storm costs were expected, although management did not expect the ultimate losses to be material.
- The company agreed to an $11 million settlement of a securities class action, subject to court approval; the settlement was expected to be fully funded by insurance. Other litigation included a California rent-to-own pricing class action that management intended to defend.
- ASC 606 was adopted prospectively through a modified retrospective approach beginning January 1, 2018. Reported operating and net income effects were not material. The company expected ASC 842 lease adoption on January 1, 2019 to add substantial operating lease assets and liabilities to the balance sheet, without significant income-statement or cash-flow effects.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm that this Rent-A-Center filing corresponds to the requested issuer, since the request metadata names Upbound Group, Inc.
- Track FTC review, financing, closing conditions and potential termination of the Vintage merger.
- Assess the March 2019 revolving-facility maturity, refinancing plans, letters of credit and liquidity after any merger delay.
- Evaluate whether cost savings and lower merchandise losses can offset declining Acceptance Now revenue and store closures.
- Verify the treatment and timing of senior-note redemptions, merger-related advisory fees and any change-of-control obligations.
- Monitor hurricane-related costs, pending litigation and the potential exposure from the California rent-to-own pricing action.
- Assess the balance-sheet effect of adopting the new lease accounting standard in 2019 and the reversal of deferred tax benefits.