Business Context and Reporting Period
The source text is a Form 10-K for Rent-A-Center, Inc., not Upbound Group, Inc. It covers the fiscal year ended December 31, 2010, with fourth-quarter data included. The requested company and period metadata therefore do not match the filing.
Rent-A-Center operated 3,008 company-owned stores, 384 RAC Acceptance kiosks, and 209 franchised ColorTyme stores at year-end. Its core business was rent-to-own merchandise, supplemented by installment sales, franchising, international operations, and financial services.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $2.732 billion | $2.752 billion | Down 0.7% |
| Operating profit | $303.8 million | $296.3 million | Up 2.5% |
| Operating margin | 11.1% | 10.8% | Up 0.3 percentage points |
| Net earnings | $171.6 million | $167.9 million | Up 2.3% |
| Diluted EPS | $2.60 | $2.52 | Up 3.2% |
| Operating cash flow | $216.5 million | $330.1 million | Down $113.6 million |
| Total debt at year-end | $701.1 million | $711.2 million | Down $10.0 million |
| Cash and equivalents at year-end | $70.7 million | $101.8 million | Down $31.1 million |
Fourth-quarter 2010 revenue was $677.1 million, operating profit was $62.8 million, net earnings were $31.9 million, and diluted EPS was $0.49. Fourth-quarter operating and net margins were 9.3% and 4.7%, respectively.
Cash uses included $93.0 million of capital expenditures, $74.4 million for acquisitions, $84.6 million for share repurchases, and $7.8 million of dividends. Rental merchandise, net, increased to $836.9 million from $750.0 million.
At December 31, 2010, senior debt was $401.1 million and senior unsecured notes were $300.0 million. The company issued $300.0 million of 6.625% senior notes due 2020 and used proceeds to repay term debt and repurchase shares. Revolving credit availability was $231.6 million before considering the separate Intrust line of credit; availability reported at February 18, 2011 was approximately $247.6 million across revolving facilities. The filing states that cash flow and available credit were expected to fund requirements for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly, primarily reflecting the 2009 divestiture of a prepaid telecommunications and energy subsidiary, while installment sales and other revenue increased.
- Same-store revenue decreased 0.4%, although operating profit increased due principally to expense reductions and cost controls.
- Cost of rentals and fees declined 2.0%; salaries and other expenses declined 0.8%; general and administrative expenses declined 8.2%.
- Merchandise-sales gross margin declined to 25.5% from 28.0%, partly because of the divested business in the prior-year comparison.
- Operating cash flow fell substantially because of increased rental-merchandise purchases and approximately $110.0 million of federal estimated tax payments. Approximately $65.0 million of the expected tax refund had been received by February 18, 2011.
- The company added 318 RAC Acceptance kiosks, including 158 acquired through The Rental Store, Inc., and opened five stores in Mexico.
- The company exited its financial services business. It recorded an $18.9 million fourth-quarter pre-tax impairment charge, including fixed-asset disposals, goodwill impairment, loan write-downs, and other items.
- The company initiated quarterly dividends of $0.06 per share in the third and fourth quarters and repurchased 3.6 million shares during 2010.
Guidance, Outlook, Risks, and Unusual Items
- Management expected approximately $75.0 million of capital expenditures in 2011 and planned to add approximately 300 RAC Acceptance kiosk locations.
- Growth initiatives focused on increasing existing-store productivity, expanding kiosks and international operations, acquiring stores or customer accounts, and investing in technology and point-of-sale systems.
- The filing provides no formal earnings or revenue guidance. Management cautioned that new distribution channels and international operations may not be profitable.
- Collections remained a concern: average weekly past-due agreements increased to 6.90% in 2010 from 6.50% in 2009, versus a stated goal of no more than 5.99%.
- Regulatory risk is significant because rent-to-own transactions are subject to state and consumer-protection laws and could face adverse federal legislation or litigation. No probable litigation loss was accrued at year-end, but the company has historically paid material settlements.
- The company had $130.3 million accrued for self-insurance liabilities and $6.7 million of unrecognized tax benefits. A disputed tax matter for 2003 through 2007 was scheduled for Tax Court trial in late 2011.
- Debt agreements contain financial covenants, restrictions on dividends and repurchases, and change-of-control provisions that could accelerate repayment. Actual year-end leverage and fixed-charge coverage ratios were 1.69:1 and 1.85:1, compared with maximum or minimum requirements of 3.25:1 and 1.35:1.
- Variable-rate debt exposed the company to interest-rate risk; management estimated that a hypothetical 1% rate change would affect pre-tax earnings by approximately $3.9 million annually. No interest-rate swaps were in place.
- Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Rent-A-Center, Inc. with ticker RCII, whereas the metadata identifies Upbound Group, Inc.
- Reconcile the requested “2010 Q4” period with the filing’s fiscal-year reporting and the separately presented unaudited fourth-quarter results.
- Review the financial-services exit, including the $18.9 million impairment charge and remaining loan balances.
- Assess liquidity against 2011 debt maturities, lease obligations, tax-related cash flows, capital expenditures, and revolving-credit availability.
- Monitor same-store revenue, past-due rates, merchandise inventory growth, and cash conversion.
- Review the senior credit agreement, 6.625% senior notes, change-of-control provisions, guarantees of franchisee financing, regulatory proceedings, and disputed tax positions.