Business Context and Reporting Period
This unaudited Form 10-Q covers Rent-A-Center, Inc. and subsidiaries for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. The filing describes a rent-to-own business operating through Core U.S., Acceptance Now, Mexico and Franchising segments. The supplied request metadata identifies Upbound Group, Inc.; however, the filing itself identifies the registrant as Rent-A-Center, Inc. and should be verified for entity accuracy.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $877.6 million | $828.5 million | 5.9% increase |
| Gross profit | $564.6 million | $562.6 million | 0.4% increase |
| Gross margin | 64.3% | 67.9% | Down 3.6 percentage points |
| Operating profit | $56.6 million | $59.5 million | 4.8% decrease |
| Operating margin | 6.4% | 7.2% | Down 0.8 percentage points |
| Net earnings | $27.3 million | $27.3 million | Essentially flat |
| Diluted EPS | $0.51 | $0.51 | Flat |
| Operating cash flow | $228.0 million | $120.1 million | 90.0% increase |
| Capital expenditures | $14.2 million | $23.1 million | Decrease |
Cash and cash equivalents were $93.1 million at March 31, 2015, versus $46.1 million at December 31, 2014. The company received a $112.5 million income tax refund, which was used to reduce debt.
Total debt comprised $348.8 million of senior debt, including $222.8 million of term loans, $120.0 million drawn under the revolving facility and $6.0 million under an INTRUST line, plus $550.0 million of senior notes. The revolving facility had $450.6 million of availability after $104.4 million of letters of credit. Actual covenant ratios were within stated limits: total leverage of 2.92:1 versus a maximum of 4.50:1, senior secured leverage of 0.97:1 versus 2.75:1, and fixed-charge coverage of 1.82:1 versus a minimum of 1.50:1.
The declared quarterly dividend was $0.24 per share, compared with $0.23 in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Acceptance Now revenue increased 32.5% to $224.3 million, with same-store revenue growth of 34.1%; operating profit increased 17.0% to $34.5 million. Gross margin declined to 48.7% from 54.6%.
- Core U.S. revenue declined 1.1% to $629.2 million and operating profit declined 8.0% to $67.6 million. Same-store revenue increased 1.0%, but results were affected by the prior-year consolidation of 150 stores and higher smartphone-related losses and service costs.
- Mexico revenue increased 13.1% to $17.9 million, while the operating loss narrowed to $3.5 million from $5.9 million. Eight Mexico stores were closed during the quarter.
- Franchising revenue decreased 9.9% to $6.2 million, but operating profit doubled to $1.2 million due primarily to a higher royalty revenue mix and lower expenses.
- Merchandise sales increased 26.1%, while cost of merchandise sold increased 47.9%. Merchandise gross margin fell to 13.6% from 26.3%, primarily because of lower-margin merchandise sales, including the impact of 90-day option pricing.
- Net interest expense increased 11.0% to $12.4 million, reflecting higher debt and higher rates on the senior credit facility.
- Cash flow from operations increased primarily because of the $112.5 million tax refund; the improvement was not solely attributable to recurring operating performance.
- Prior-year figures were revised for immaterial accounting errors. The revision reduced Q1 2014 net earnings by $1.6 million, to $27.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects the flexible labor model to begin broad deployment in the second quarter of 2015 and to reach virtually all Core U.S. stores by early 2016.
- The company completed initial integration work for a third-party logistics provider and planned to open five U.S. distribution centers, with full operation targeted for the second half of 2015.
- Management planned approximately 1,250 Acceptance Now Direct locations by year-end 2015; one such location opened in the first quarter.
- Smartphones represented more than 8% of Core U.S. total store revenue, but smartphone-related skip and stolen merchandise losses increased Core U.S. charge-offs to approximately 3.8% of revenue from 2.8%.
- Capital expenditures were expected to total $70 million to $80 million in 2015. Management stated that operating cash flow and available credit were expected to fund requirements for the next 12 months.
- Restructuring charges totaled approximately $0.4 million in the quarter, comprising early lease termination costs and Mexico store closure costs. Approximately $1.4 million of future lease obligations remained from the Core U.S. closures.
- A 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, with $16.2 million outstanding at March 31, 2015, before consideration of collateral recoveries.
- Variable-rate debt exposes the company to higher interest costs. Management estimated that a hypothetical 1% interest-rate change would affect annual pretax earnings by approximately $2.2 million.
- Key risks include consumer spending and unemployment, execution of store consolidation and technology initiatives, smartphone losses, regulatory changes affecting rent-to-own transactions, data security, foreign exchange, litigation, tax reserves and compliance with debt covenants.
Investor Verification Checklist
- Confirm the registrant identity: the supplied metadata says Upbound Group, Inc., while the filing text says Rent-A-Center, Inc.
- Verify that the reported Q1 2014 comparatives are the revised figures following the immaterial error correction.
- Separate the $112.5 million tax refund from recurring operating cash flow when assessing liquidity and cash-generation quality.
- Monitor Acceptance Now growth against declining gross margins and increasing skip or stolen merchandise charge-offs.
- Assess execution of the flexible labor model, distribution-center rollout, new store information system and Acceptance Now Direct expansion.
- Review debt maturities, variable-rate exposure, covenant headroom and the restrictions governing dividends, repurchases and additional debt.
- Track the multi-state unclaimed-property audit and the potential outcome of the franchisee financing guarantees.