Form 10-Q Summary: Rent-A-Center, Inc.
Filing identity: The provided filing is for Rent-A-Center, Inc., not Upbound Group, Inc. Investors should verify the issuer before relying on this summary.
Business Context and Reporting Period
Unaudited results cover the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Rent-A-Center operates rent-to-own and installment-sales businesses through Core U.S., Acceptance Now, Mexico and Franchising segments. The company was executing a multi-year transformation focused on store optimization, flexible labor, pricing, supply-chain improvements, technology, e-commerce and growth in Acceptance Now.
Financial Performance and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Change |
|---|---|---|---|
| Total revenue | $749.6 million | $815.3 million | Down 8.1% |
| Gross profit | $500.2 million | $538.5 million | Down 7.1% |
| Gross margin | 66.7% | 66.0% | Up 70 basis points |
| Operating profit | $27.6 million | $49.7 million | Down 44.6% |
| Operating margin | 3.7% | 6.1% | Down 240 basis points |
| Net earnings | $9.9 million | $23.1 million | Down 57.0% |
| Diluted EPS | $0.19 | $0.43 | Down $0.24 |
| Six-month metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $1.585 billion | $1.693 billion | Down 6.4% |
| Gross profit | $1.035 billion | $1.103 billion | Down 6.2% |
| Gross margin | 65.3% | 65.2% | Up 10 basis points |
| Operating profit | $76.0 million | $106.3 million | Down 28.5% |
| Operating margin | 4.8% | 6.3% | Down 150 basis points |
| Net earnings | $35.0 million | $50.4 million | Down 30.6% |
| Diluted EPS | $0.66 | $0.95 | Down $0.29 |
- Six-month same-store revenue declined 3.6%; Core U.S. same-store revenue declined 5.1% and Acceptance Now declined 0.7%.
- Q2 Core U.S. revenue declined 10.6%, while Acceptance Now revenue declined 0.5%. Six-month Acceptance Now revenue increased 1.2%.
- Mexico generated Q2 operating profit of $0.6 million versus a $7.2 million loss in the prior year; the six-month operating loss was $2.0 million.
- Operating cash flow increased to $303.1 million in the first half from $189.2 million, aided by an approximately $80 million tax refund and lower merchandise purchases.
- Capital expenditures were $28.2 million versus $42.9 million; management expected full-year 2016 capital expenditures of $70 million to $80 million.
- Cash and equivalents were $88.2 million at June 30, 2016, versus $60.4 million at December 31, 2015.
- Dividends declared were $0.08 per share in Q2 and $0.16 per share for the first half, versus $0.24 and $0.48, respectively, in 2015.
Debt, Liquidity and Balance Sheet
- Senior debt, net, was $187.9 million at June 30, 2016, versus $419.6 million at year-end 2015. Term loans had principal outstanding of $192.9 million; the revolving facility had no borrowings.
- Senior notes consisted of $292.7 million of 6.625% notes due 2020 and $250.0 million of 4.75% notes due 2021. Total senior notes, net, were $536.8 million.
- Total debt, based on carrying amounts of senior debt and senior notes, was approximately $724.7 million, excluding other obligations and before considering cash.
- The $675 million revolving facility had $94.7 million utilized for letters of credit and $580.3 million available at June 30, 2016. The company also had a $20 million INTRUST line with no outstanding balance.
- Credit agreement covenant ratios were within requirements: total leverage of 2.37x versus a maximum of 4.25x, senior secured leverage of 0.46x versus 2.75x, and fixed-charge coverage of 1.83x versus a minimum of 1.75x.
- Management stated that operating cash flow and available credit were expected to fund liquidity requirements for the following 12 months, although additional financing availability was not assured.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings declined substantially, primarily because of Core U.S. store rationalization, lower same-store sales, smartphone and computer/tablet weakness, oil-affected markets and the effect of the new store information system rollout.
- Gross margins improved modestly because of pricing and supply-chain initiatives, revenue mix and lower smartphone loss reserves, but sales deleverage reduced operating margins.
- Q2 2016 included $18.8 million of restructuring charges related to closing 167 U.S. Core and 96 Acceptance Now locations. The first half also included $2.4 million of Mexico store-closure charges.
- The company closed or merged numerous locations and ended the first half with 4,754 locations, compared with 5,018 at the beginning of the period.
- Debt repayments totaled $284.3 million in the first half, partly offset by $51.6 million of new borrowings, producing a reported net debt reduction of approximately $232.7 million.
- Management completed implementation of the Core U.S. store information management system, began piloting e-commerce in Q2 and expected to roll out e-commerce to all Core U.S. stores by Q4 2016.
Guidance, Outlook, Risks and Unusual Items
- Management expected Mexico to achieve approximately break-even results for full-year 2016 and expected full-year capital expenditures of $70 million to $80 million.
- The company continued to emphasize profitable sales rather than revenue growth, which management acknowledged negatively affected same-store sales but supported gross margins.
- Key risks include continued consumer and economic weakness, unemployment and disposable-income trends, execution of store consolidation and technology initiatives, supply-chain disruptions, data security, regulatory changes affecting rent-to-own transactions, interest-rate exposure, foreign-currency fluctuations and merchandise theft or other losses.
- Customer stolen-merchandise losses increased to $82.1 million for the first half from $78.4 million. Acceptance Now stolen-merchandise losses were approximately 9.5% of revenue versus 7.7% in the prior-year period.
- A comprehensive multi-state unclaimed-property audit was in progress. Management stated that the ultimate outcome could not yet be determined.
- Franchisee financing guarantees had a maximum exposure of $47.0 million, excluding collateral recoveries, with $8.3 million outstanding at June 30, 2016.
- New revenue-recognition, lease-accounting and stock-compensation standards had not yet been adopted, and the filing did not provide a clear quantified estimate of their effects.
- A hypothetical 1% change in market interest rates was estimated to affect annual pre-tax earnings by approximately $1.4 million.
Investor Verification Checklist
- Verify whether the intended issuer is Rent-A-Center, Inc. or Upbound Group, Inc.; the supplied filing names Rent-A-Center throughout.
- Reconcile the substantial revenue decline and determine whether store closures, same-store trends and pricing discipline are improving future profitability.
- Assess whether Acceptance Now theft losses and Core U.S. merchandise losses are stabilizing.
- Review debt maturities, covenant headroom, variable-rate exposure and the company’s ability to sustain debt repayment.
- Evaluate the results of the e-commerce rollout, store information system and broader transformation program.
- Monitor the multi-state unclaimed-property audit, franchisee guarantees and other contingencies for potential cash effects.
- Confirm the eventual impact and transition method for the pending accounting standards.