Business Context and Reporting Period
The filing is a Form 10-Q for Rent-A-Center, Inc. and subsidiaries, not Upbound Group, Inc. It covers the unaudited three months ended March 31, 2013, with comparison to March 31, 2012. The company operates rent-to-own stores and kiosks, installment-sales locations, international stores, and a franchise business through four segments: Core U.S., RAC Acceptance, International, and ColorTyme.
At March 31, 2013, the company operated 2,983 Core U.S. stores, 1,053 RAC Acceptance kiosks, 128 International stores, and 224 ColorTyme franchised stores. Common shares outstanding as of April 22, 2013 were 57.8 million.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $819.3 million | $835.3 million | Down 1.9% |
| Gross profit | $550.7 million | $560.4 million | Down 1.7% |
| Gross margin | 67.2% | 67.1% | Up 0.1 percentage point |
| Operating profit | $79.3 million | $92.0 million | Down 13.9% |
| Operating margin | 9.7% | 11.0% | Down 1.3 percentage points |
| Net earnings | $46.5 million | $51.9 million | Down 10.6% |
| Diluted EPS | $0.80 | $0.87 | Down $0.07 |
| Operating cash flow | $113.5 million | $138.5 million | Down $25.1 million |
Interest expense was $8.0 million, versus $9.0 million in the prior-year quarter. The effective income tax rate declined to 35.1% from 37.6%, primarily because of tax credits recognized in 2013. The company declared dividends of $0.21 per share, compared with $0.16 in the prior-year quarter.
At March 31, 2013, cash and cash equivalents were $82.3 million. Rental merchandise totaled $1.05 billion, including $832.7 million on rent and $216.1 million held for rent. Total assets were $2.91 billion and stockholders’ equity was $1.49 billion.
Debt, Liquidity, and Cash Uses
- Senior debt was $341.3 million, consisting of $206.3 million under the term loan and $135.0 million under the revolving facility.
- The company had $300.0 million of 6.625% senior notes due 2020.
- At March 31, 2013, $255.4 million remained available under the revolving credit facility after $109.6 million of letters of credit usage. Including a separate $20.0 million line of credit, revolving capacity available at April 22, 2013 was reported as $275.4 million.
- Debt repayments totaled $141.4 million and new debt proceeds totaled $95.2 million during the quarter, resulting in a net debt reduction of approximately $46.2 million.
- Cash uses also included $19.6 million of capital expenditures, $17.4 million of share repurchases, and $12.2 million of dividends.
- Senior credit facility covenants were satisfied: actual consolidated leverage was 1.52x versus a maximum of 3.25x, and fixed-charge coverage was 1.64x versus a minimum of 1.35x.
Management stated that operating cash flow and available borrowing capacity should be sufficient for the next twelve months, but noted that reduced profitability or adverse credit-market conditions could weaken liquidity.
Material Changes Versus the Prior Comparable Period
- Core U.S. revenue declined approximately $58.3 million, and same-store revenue fell 8.8% to $598.8 million. Management attributed pressure to a lower recurring revenue portfolio, delayed federal tax refunds, higher fuel prices, and higher payroll taxes.
- RAC Acceptance revenue increased 45%, same-store revenue increased 33.8%, and operating profit rose to $15.9 million from $2.9 million. The segment added 87 locations during the quarter.
- International revenue increased 60% and gross profit increased 62%; 20 stores were added in Mexico. New-store losses continued to offset some profitability from more mature locations.
- Total store revenue decreased 1.7%, while same-store store revenue declined 4.3%.
- Cost of rentals and fees rose 2.8%, and as a percentage of store rentals and fees increased to 24.9% from 24.1%, primarily due to RAC Acceptance merchandise costs and Core U.S. promotional changes.
- Merchandise-sales margin improved to 24.0% from 22.7%, partly because of fewer early purchase options.
- Operating profit declined primarily because of a $26.6 million decrease in Core U.S. operating profit, partially offset by a $13.0 million increase in RAC Acceptance operating profit.
- Operating cash flow declined because of increased investment in rental merchandise. Capital expenditures declined to $19.6 million from $27.4 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to add approximately 350 RAC Acceptance kiosks and approximately 60 International stores during 2013.
- Management expected 2013 capital expenditures of approximately $120.0 million.
- The company used approximately $2.1 million to acquire locations and customer accounts in six transactions during the quarter.
- Effective January 1, 2013, the company changed the depreciation method and timing for certain rental merchandise held for rent. Management did not expect a significant effect on cost of revenues, gross profit, net earnings, or EPS.
- A $3.0 million reclassification of 2012 stock-based compensation between operating expense categories had no impact on net earnings or EPS.
- Goodwill totaled $1.35 billion, and management reported no indication of impairment at March 31, 2013.
- Self-insurance reserves were $118.0 million, compared with $116.1 million at December 31, 2012.
- The IRS selected the 2010 federal tax return for audit. A disputed tax issue covering 2003–2007 was awaiting a Tax Court decision expected in 2013; management did not expect a material effect.
- Unrecognized tax benefits increased approximately $1.5 million from year-end 2012. Contractual obligations included $1.37 billion of debt, lease, and other minimum cash commitments, excluding uncertain tax positions.
- The company guaranteed up to $50.0 million of franchisee financing obligations; $23.3 million was outstanding under those arrangements at March 31, 2013.
- Key risks include weaker consumer disposable income, unemployment, industry regulation, customer payment and merchandise-loss trends, interest-rate increases, foreign-currency movements, litigation, tax matters, information security, and the ability to grow and improve new or acquired locations.
- A hypothetical 1.0% change in applicable interest rates would have affected pretax earnings by approximately $3.5 million annually based on the company’s reported exposure. The company had no interest-rate hedges.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied metadata names Upbound Group, Inc., while the filing identifies Rent-A-Center, Inc.
- Assess whether the Core U.S. same-store revenue decline and lower operating margin are temporary or reflect deterioration in the mature store base.
- Evaluate whether rapid RAC Acceptance and Mexico expansion can offset Core U.S. weakness without excessive merchandise investment or new-store losses.
- Reconcile reported cash generation with the increased rental-merchandise investment and planned $120.0 million of 2013 capital expenditures.
- Monitor variable-rate debt exposure, covenant headroom, refinancing requirements, and the 2020 senior notes.
- Follow the IRS audit, Tax Court matter, state examinations, self-insurance reserves, franchisee guarantees, and other contingencies.
- Verify the effect of tax credits, bonus depreciation, dividends, and share repurchases on recurring earnings and cash flow.