PROG Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. PROG Holdings provides point-of-sale lease-to-own financing through Progressive Leasing and second-look revolving credit through Vive Financial; Four is a smaller buy-now-pay-later business.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $649.4 | $660.0 | $1,359.9 | $1,381.0 |
| Operating profit | $36.9 | $92.3 | $86.4 | $198.4 |
| Earnings before taxes | $27.3 | $91.9 | $67.2 | $197.5 |
| Net earnings | $19.5 | $68.8 | $46.6 | $148.3 |
| Diluted EPS | $0.37 | $1.02 | $0.86 | $2.19 |
| Operating margin | 5.7% | 14.0% | 6.4% | 14.4% |
- Q2 revenue fell 1.6%; lease revenue declined 2.3% to $631.3 million, while loan interest and fees rose 30.0% to $18.1 million. For the first half, revenue decreased 1.5%.
- Q2 earnings before taxes declined 70.3% and net earnings declined 71.7%. Higher lease merchandise write-off provisions, operating expenses and interest expense more than offset lower revenue and slightly lower merchandise depreciation.
- Q2 GMV was $552.4 million, down 0.9% year over year: Progressive Leasing $494.0 million, down 2.4%; Vive $47.0 million, down 9.1%. Progressive Leasing e-commerce represented 15.6% of GMV versus 13.0% a year earlier. Active customers totaled 1.077 million versus 986,000.
- Six-month operating cash flow was $155.7 million, down from $238.8 million. Investing used $22.0 million; financing used $176.6 million, largely reflecting $176.5 million of share repurchases. Cash declined $42.8 million to $127.3 million.
- At June 30, total assets were $1.478 billion, total liabilities $921.6 million and shareholders’ equity $556.8 million. Debt was $590.3 million on the balance sheet; the company reports $600 million principal amount of 6.00% senior notes due 2029. The $350 million revolver was undrawn, leaving $350 million available.
Material changes and drivers
- Progressive Leasing’s provision for uncollectible renewal payments was $97.0 million in Q2 versus $39.8 million a year earlier, reducing lease revenue. Its lease merchandise write-off provision rose to $61.8 million from $31.3 million; as a share of lease revenue, it increased to 9.8% from 4.8%.
- For the first half, the provision for uncollectible renewal payments was $185.5 million versus $76.3 million, and lease merchandise write-off provisions were $112.1 million versus $49.9 million.
- Q2 operating expenses rose 15.4% to $111.6 million. The increase included higher loan-loss provisions, personnel and software costs, and $4.3 million of restructuring charges. Q2 interest expense was $9.6 million versus $0.4 million, principally reflecting the senior notes issued in November 2021.
- Vive’s loan portfolio delinquency rate (30 days or more past due) was 15.3%, up from 13.4% at year-end 2021; 90-or-more-day delinquencies were 4.4% versus 4.0%. The allowance for loan losses was $40.8 million.
Outlook, risks and contingencies
- Management expects a challenging and volatile macroeconomic environment for the remainder of 2022, with inflation pressuring customers and potentially sustaining or worsening delinquencies and write-offs. The filing provides no numerical earnings or revenue guidance.
- Management tightened lease decisioning in response to rising delinquencies, which reduced approvals and GMV. Inflation, reduced consumer demand, the end of pandemic-era stimulus, COVID-19 effects and supply-chain disruptions may also constrain originations and results.
- Management initiated cost reductions and restructuring to align expenses with its near-term revenue outlook, including Progressive Leasing workforce reductions and relocation of Vive’s headquarters. It stated further restructuring charges may occur if conditions worsen.
- The revolver became fully secured because the defined total net debt-to-EBITDA ratio exceeded 1.25; the company stated it remained compliant with debt covenants. Its covenant maximum for that ratio is 2.50, and minimum interest coverage is 3.00. The notes carry fixed 6.00% interest.
- Vive had $522.7 million of unconditionally cancellable unused lending commitments. The company does not expect all commitments to be drawn, and they do not necessarily represent future cash needs.
- Legal matters include a California regulator inquiry into consumer-law compliance and a securities class action; the company intends to defend these matters and reported immaterial accrued and reasonably possible loss ranges, while noting litigation outcomes remain uncertain.
- Management identified significant estimation uncertainty in receivable and merchandise allowances given inflation, customer payment trends and pandemic effects. Actual losses may differ materially from estimates.
Important facts for investors to verify
- Whether customer delinquencies, uncollectible lease renewals and merchandise write-offs stabilize or continue rising, and how allowance estimates compare with realized losses.
- Whether tighter lease approval standards and weaker demand affect GMV, revenue, customer counts and future portfolio growth.
- Liquidity and covenant headroom, including the impact of the revolver’s secured status and ongoing 6.00% note interest costs.
- The company’s capital allocation: it repurchased $176.5 million of shares in the first half and had $384.4 million remaining under its authorization at June 30, despite lower earnings and cash.
- Developments in the California regulatory inquiry and securities litigation, as well as any additional restructuring costs.