Business Context and Reporting Period
The filing is Rent-A-Center, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, filed March 3, 2014. The request metadata identifies Upbound Group, Inc. and “2013 Q4,” but the source filing is an annual report for Rent-A-Center, Inc.; the filing text does not identify Upbound Group, Inc. as the registrant.
Rent-A-Center operated rent-to-own stores and kiosks offering consumer electronics, appliances, computers, furniture and accessories. Its four segments were Core U.S., Acceptance Now, International and Franchising. At year-end, the company had 4,665 total locations: 2,992 Core U.S. stores, 1,325 Acceptance Now kiosks, 169 International stores and 179 franchised stores.
Financial Highlights
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $3.104 billion | $3.083 billion | 0.7% increase |
| Gross profit | $2.149 billion | $2.134 billion | 0.7% increase |
| Operating profit | $246.2 million | $315.7 million | 22.0% decrease |
| Net earnings | $128.2 million | $181.7 million | 29.4% decrease |
| Diluted EPS | $2.32 | $3.06 | Decrease |
| Operating cash flow | $134.3 million | $217.9 million | Decrease of $83.6 million |
| Cash and equivalents at year-end | $42.3 million | $61.1 million | Decrease |
| Total debt | $916.3 million | $687.5 million | Increase of $228.8 million |
Gross margin was approximately 69.3% of revenue, compared with 69.2% in 2012. Operating margin declined to approximately 7.9% from 10.2%, while net margin declined to approximately 4.1% from 5.9%. The effective income tax rate increased to 38.2% from 36.1%.
Rental merchandise, net, increased to $1.125 billion from $1.008 billion. Capital expenditures were $108.4 million, acquisitions were $41.2 million, dividends paid were $46.8 million and share repurchases were $217.4 million.
Material Changes Versus the Prior Comparable Period
- Core U.S. revenue declined 5.6% to $2.507 billion, same-store revenue declined 6.4%, and operating profit fell 35.4% to $205.9 million. Management cited customer economic pressure, higher payroll taxes, electronic-product deflation, promotional activity and a lower recurring revenue portfolio entering 2013.
- Acceptance Now revenue increased 46.2% to $502.0 million, with same-store revenue growth of 30.1%. Operating profit increased to $66.6 million from $25.3 million.
- International revenue increased 45.3% to $58.4 million, primarily from Mexico expansion, but the segment remained unprofitable with a $28.2 million operating loss.
- Franchising revenue declined 17.2% to $36.2 million following the rebranding and conversion of ColorTyme stores. The company sold certain company-owned stores and purchased certain former franchise locations; the transactions produced an approximately $1.6 million gain net of a $7.4 million goodwill write-off.
- The company issued $250 million of 4.75% senior unsecured notes due 2021. Interest expense increased to $39.6 million from $32.1 million.
- The company repurchased 5.9 million shares for $217.4 million, including a $200 million accelerated share repurchase, and increased the annual cash dividend paid per share to $0.84 from $0.64.
- During the fourth quarter, the company corrected previously identified immaterial errors in rental merchandise reserves and doubtful-account allowances. Historical financial statements were revised, and retained earnings were reduced by $3.0 million as of January 1, 2011.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open approximately 100 Acceptance Now kiosks and approximately 30 International stores in 2014. Planned 2014 capital expenditures were approximately $100 million.
- The company launched a multi-year transformation program addressing supply chain capabilities, value-based pricing, store-footprint optimization, digital commerce and information systems. Management warned that implementation costs, disruptions or failure to achieve targeted benefits could reduce profitability.
- Management announced plans to refinance the existing credit facilities with an expected $850 million facility consisting of a $350 million term loan and a $500 million revolver. The filing stated that failure to refinance or obtain lender relief could result in an event of default under the existing facilities in 2014, potentially permitting acceleration of borrowings.
- At December 31, 2013, the company had $348.0 million outstanding under its senior credit facilities, including $187.5 million of term debt and $160.5 million of revolver borrowings, plus $18.3 million outstanding under an additional line of credit. Actual covenant ratios were 2.64x leverage versus a 3.25x maximum and 1.38x fixed-charge coverage versus a 1.35x minimum.
- The company was exposed to variable-rate debt without interest-rate hedges; a hypothetical 1% rate change would have affected annual pretax earnings by approximately $3.4 million.
- Key risks included weak Core U.S. performance, dependence on third-party Acceptance Now retail partners, consumer spending and credit conditions, e-commerce competition, regulatory changes affecting rent-to-own transactions, litigation, self-insurance estimates, information-system implementation, data security, international expansion and foreign-currency movements.
- Franchisee financing guarantees had a maximum exposure of $60 million, with $17.2 million outstanding at year-end, before considering collateral recoveries. Operating lease commitments totaled $567.0 million.
- Goodwill totaled $1.365 billion. The company recorded $1.1 million of International goodwill impairment in 2013 and concluded that no further goodwill impairment existed at year-end.
Most Important Facts to Verify
- Confirm the intended registrant and reporting period: the supplied filing is Rent-A-Center, Inc.’s 2013 Form 10-K, not an Upbound Group, Inc. filing or a quarterly report.
- Verify the sustainability of the Core U.S. business, including the 6.4% same-store revenue decline and 35.4% operating-profit decline.
- Assess whether Acceptance Now and Mexico growth can offset Core U.S. weakness without further pressure on working capital, merchandise reserves and operating cash flow.
- Verify completion and terms of the planned $850 million refinancing and the company’s compliance with debt covenants.
- Review the effect of $217.4 million of share repurchases and $46.8 million of dividends against only $134.3 million of operating cash flow.
- Examine the corrected rental-merchandise and receivable estimates, goodwill balances, self-insurance reserves and remaining litigation and tax contingencies.