UPBD

SEC Filing Summary: Rent-A-Center, Inc. (10-Q)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1999. The registrant is Rent-A-Center, Inc. (formerly Renters Choice, Inc.), the largest operator in the U.S. rent-to-own industry with approximately 26% market share. The company operates 2,093 company-owned stores and 335 franchised stores across 50 states, D.C., and Puerto Rico. The reporting period reflects the post-acquisition integration of Central Rents, Inc. (acquired May 1998) and Thorn Americas, Inc. (acquired August 1998), which added 1,637 stores to the company's base.

Key Financial Metrics

Note: Q1 1998 figures are historical and do not include the acquired stores of Central Rents or Thorn Americas, which were acquired in 1998. Pro-forma comparisons show revenue of $339.2M and diluted EPS of $0.04 for Q1 1998.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 282.2% to $344.7 million, driven primarily by the inclusion of 1,615 acquired stores. Same-store revenue increased 8.5% to $84.6 million due to higher unit counts and revenue per unit.
• Profitability: Operating profit rose 204.4% to $41.7 million. However, operating margin decreased to 12.1% from 15.2% due to lower margins at newly acquired stores and higher initial integration costs.
• Expenses: Depreciation of rental merchandise surged 316.1% to $64.5 million. Salaries and other expenses increased as a percentage of revenue to 55.7% due to immediate payroll costs for acquired staff.
• Cash Flow: Operating cash flow decreased $4.1 million to $11.7 million, primarily due to payments on liabilities assumed in the Thorn Americas acquisition. Investing cash outflows increased to $8.8 million due to capital expenditures for store refurbishment.

Guidance, Outlook, and Risks

Management Commentary: Management reports that the integration of Central Rents and Thorn Americas is largely complete, with synergies realized ahead of schedule. The company is focusing on improving efficiency and profitability in acquired stores. Future growth strategies include selective acquisitions and new store development, with a typical new store reaching break-even in 12-15 months.

Liquidity and Debt: The company holds $785 million in debt ($610M senior credit facility, $175M subordinated notes). Interest rate risk is managed via swap agreements fixing rates on $500 million of debt. Management believes cash flow and credit facilities are sufficient to fund operations and debt service for 1999.

Legal Contingencies: Significant litigation risks remain from the Thorn Americas acquisition:

• Robinson v. Thorn Americas (NJ): Settled in principle for ~$48.5 million; final court approval expected Fall 1999.
• Gallagher & Boykin (NJ): Settled in principle for ~$11.5 million combined; final approval expected Fall 1999.
• Colon v. Thorn Americas (NY): Ongoing class action regarding disclosure of effective interest; no damages specified.
• Fogie v. Thorn Americas (MN): Judgment of ~$30 million entered; appeal pending. Thorn plc has indemnified the company with a $40 million escrow.

Year 2000 Compliance: The company believes its IT systems are compliant. Costs incurred to date are approximately $290,000. Non-IT systems (elevators, alarms) are being identified and remediated.

Investor Verification Checklist

• Verify the final court approval status and payment timing for the Robinson ($48.5M) and Gallagher/Boykin ($11.5M) settlements.
• Monitor the outcome of the Fogie appeal in Minnesota and the status of the Colon class certification in New York.
• Assess the trajectory of same-store revenue growth to confirm the integration of acquired stores is stabilizing margins.
• Review the company's ability to meet debt covenants (net worth and fixed charge coverage) given the high leverage from acquisitions.
• Confirm the timeline for the conversion of the letter of credit facility ($85M) into a term loan once litigation exposure is resolved.