UPBD

Business Context and Reporting Period

Company: Rent-A-Center, Inc. (filing as Rent-A-Center, Inc., formerly Renters Choice, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1999
Business Overview: The largest operator in the U.S. rent-to-own industry with approximately 26% market share based on store count. The company operates 2,075 company-owned stores and 365 franchised stores (ColorTyme) across 49 states, D.C., and Puerto Rico. The business model involves renting durable goods (electronics, appliances, furniture) under flexible rental-purchase agreements.

Key Financial Metrics (Year Ended Dec 31, 1999)

Note: Operating cash flow decreased due to significant investment in new rental merchandise and litigation settlements, despite strong profitability.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 75.0% to $1.417 billion, driven primarily by the full-year inclusion of stores acquired from Central Rents and Thorn Americas in 1998. Comparable store revenue grew 7.7%.
• Profitability: Operating profit increased 109.2% to $190.0 million. Net earnings rose 139.7% to $59.4 million. This growth was aided by the absence of the $11.5 million class action litigation settlement and $5.0 million non-recurring financing costs incurred in 1998.
• Acquisition Activity: No new stores were acquired or opened in 1999; the focus was entirely on integrating and improving the performance of the 1,585 stores acquired in 1998.
• Debt Reduction: Despite high debt levels from the 1998 acquisitions, the company prepaid approximately $35.7 million of term loans in 1999 and an additional $43.2 million in early 2000.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Strategy: Management resumed a strategy of increasing the store base in 2000 through new store openings and opportunistic acquisitions, targeting a 10-15% annual increase in store count over the next several years.
• Marketing: Launched a new national advertising campaign in April 2000 featuring John Madden as the national spokesman.
• Liquidity: Management believes cash flow from operations and available credit facilities ($94.1 million available at year-end) are sufficient to fund debt service, working capital, and expansion plans for 2000.

Risks and Contingencies

• Significant Debt: The company carries approximately $804 million in debt (as of March 2000). Debt covenants restrict additional borrowing, capital expenditures, and dividend payments.
• Litigation: Pending class action lawsuits (e.g., Murray v. Rent-A-Center, Colon v. Thorn Americas) allege violations of state consumer protection laws and usury statutes. While the company settled major New Jersey litigation in late 1999, adverse rulings in remaining cases could have a material adverse effect.
• Regulatory Environment: The rent-to-own industry is heavily regulated in 46 states. New or revised legislation could materially impact operations.

Investor Verification Checklist

• Debt Covenants: Verify compliance with fixed charge coverage and leverage ratios required by the $800 million senior credit facility.
• Litigation Exposure: Monitor the status of pending class actions in New York (Colon) and Missouri (Murray) for potential liability.
• Integration Success: Assess whether the acquired Thorn Americas and Central Rents stores have achieved the projected operating margins and revenue per unit.
• Cash Flow vs. Earnings: Reconcile the divergence between strong net earnings ($59.4M) and negative operating cash flow ($29.3M) to ensure inventory investment is sustainable.
• Preferred Stock: Note the obligation to pay preferred dividends (currently in stock) and the potential cash impact if the company elects to pay in cash after 2003.