Business Context and Reporting Period
Rent-A-Center, Inc. reported unaudited results for the three and nine months ended September 30, 2017. The filing describes four operating segments: Core U.S., Acceptance Now, Mexico and Franchising. The supplied metadata identifies Upbound Group, Inc.; the filing itself names Rent-A-Center, Inc.
The company provides rent-to-own, installment-sale and related services for consumer electronics, appliances, computers, smartphones, furniture and accessories. As of September 30, 2017, it operated 4,015 locations, compared with 4,731 at the beginning of the year.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $644.0 million | $693.9 million | $2.064 billion | $2.279 billion |
| Gross profit | $412.5 million | $457.2 million | $1.308 billion | $1.492 billion |
| Gross margin | 64.1% | 65.9% | 63.4% | 65.5% |
| Operating income (loss) | $(8.4) million | $16.7 million | $(8.2) million | $92.7 million |
| Operating margin | (1.3)% | 2.4% | (0.4)% | 4.1% |
| Net income (loss) | $(12.6) million | $6.2 million | $(28.2) million | $41.2 million |
| Diluted EPS | $(0.24) | $0.12 | $(0.53) | $0.77 |
| Cash flow from operations | Not separately provided | Not separately provided | $135.4 million | $374.9 million |
Nine-month same-store revenue declined 6.3%; Core U.S. same-store revenue declined 9.4%, while Acceptance Now same-store revenue increased 4.9%. Merchandise sales gross margin fell to 3.5% from 10.0% for the nine-month period.
At September 30, 2017, cash and cash equivalents were $76.2 million, compared with $95.4 million at December 31, 2016. Total assets were $1.430 billion and stockholders’ equity was $237.2 million.
Debt, Liquidity and Cash Flow
- Senior debt consisted of $49.1 million of term loans, $55.0 million drawn under the revolving facility and $1.1 million under an INTRUST line of credit.
- Senior notes had principal amounts of $292.7 million at 6.625% due 2020 and $250.0 million at 4.75% due 2021.
- Nine-month financing activity included $216.9 million of debt proceeds and $303.5 million of debt repayments, for a net debt reduction of $86.6 million.
- Capital expenditures were $53.5 million, and dividends paid were $12.8 million during the first nine months.
- The June 2017 credit amendment reduced revolving capacity from $675 million to $350 million and added collateral and borrowing-base requirements. Revolving availability was $147.5 million at September 30, 2017, after the required $50 million excess-availability reserve.
- The actual fixed-charge coverage ratio was 0.45:1 versus a required 1.10:1. The covenant breach required maintenance of the $50 million availability reserve. Management stated that operating cash flow and available credit were expected to fund operations for the next 12 months.
- The company had issued letters of credit totaling $86 million at September 30, 2017. A 1% change in market interest rates was estimated to affect annualized pretax results by approximately $1.1 million.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue decreased 9.5%, gross profit decreased 12.4%, and operating results declined from $92.7 million of income to an $8.2 million loss.
- Core U.S. revenue declined 12.9% and operating profit declined 37.6%, primarily due to lower same-store revenue, a reduced store base, hurricanes and pricing actions.
- Acceptance Now revenue decreased 0.3%, but operating profit decreased 42.7%. The segment closed 319 staffed and nine direct locations related primarily to the hhgregg bankruptcy and Conn’s contract termination.
- Operating expenses decreased 6.0% for the first nine months, but general and administrative expenses increased 7.6% and other charges increased 42.0% to $31.6 million.
- Operating cash flow decreased $239.5 million, primarily reflecting the absence of approximately $80 million of tax refunds received in 2016, lower earnings and other working-capital changes.
- Rental merchandise on rent decreased to $670.4 million from $795.1 million at December 31, 2016.
Outlook, Management Commentary, Risks and Unusual Items
- Management’s April 2017 strategy focused on strengthening Core U.S., optimizing and growing Acceptance Now, and expanding technology, digital and omnichannel capabilities.
- Hurricanes Harvey, Irma and Maria generated approximately $1.9 million of third-quarter pretax costs. Management expected additional Maria-related charges in the fourth quarter.
- Other charges included Acceptance Now closures, a $3.9 million intangible-asset impairment, approximately $3.4 million of workforce-reduction costs, litigation and advisory expenses, and hurricane-related costs.
- On October 30, 2017, after the quarter ended, the board initiated a process to explore strategic and financial alternatives and suspended the quarterly cash dividend until the process concluded. The chairman resigned effective October 31, 2017.
- The company identified risks related to declining consumer demand, store and segment performance, labor and cost control, information technology and cybersecurity, regulatory changes affecting rent-to-own transactions, litigation, executive transitions, interest rates, foreign exchange and liquidity.
- A shareholder securities class action, several derivative lawsuits and a California pricing-related class action were outstanding. The company stated that it believed the claims lacked merit but could not assure that no liability would result.
- The company had a maximum $27.0 million guarantee obligation related to franchisee financing; $1.1 million was outstanding at September 30, 2017.
- The filing states that adoption of the new revenue-recognition standard was required beginning January 1, 2018, but the company had not completed its impact assessment.
Investor Verification Items
- Verify the company identity and corporate-name continuity because the filing is for Rent-A-Center, Inc., while the request metadata references Upbound Group, Inc.
- Assess the implications of the 0.45:1 fixed-charge coverage ratio versus the 1.10:1 requirement, the $50 million availability reserve and the reduced revolving facility.
- Review fourth-quarter hurricane costs and the continuing effects of hhgregg and Conn’s-related Acceptance Now closures.
- Evaluate whether Core U.S. same-store revenue and gross-margin deterioration stabilized after the reported pricing and value-proposition changes.
- Monitor the strategic-alternatives process, dividend suspension, leadership changes and potential change-of-control consequences under the debt agreements.
- Reconcile the material decline in operating cash flow with debt maturities, lease commitments and ongoing rental-merchandise funding needs.