Business Context and Reporting Period
The filing is Rent-A-Center, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2020. The request metadata identifies Upbound Group, Inc.; however, the filing text identifies the registrant as Rent-A-Center, Inc. and the Nasdaq ticker as RCII.
The company operates lease-to-own businesses through the Rent-A-Center Business, Preferred Lease, Mexico, and Franchising segments. COVID-19 began affecting operations during the latter half of March 2020.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $701.9 million | $696.7 million | 0.8% increase |
| Gross profit | $420.2 million | $424.9 million | 1.1% decrease |
| Gross margin | 59.9% | 61.0% | Down 1.1 percentage points |
| Operating profit | $48.9 million | $17.3 million | 181.7% increase |
| Operating margin | 7.0% | 2.5% | Up 4.5 percentage points |
| Net earnings | $49.3 million | $7.3 million | 573.1% increase |
| Diluted earnings per share | $0.88 | $0.13 | Increase |
| Cash flow from operations | $47.4 million | $75.8 million | Decrease of $28.4 million |
Interest expense declined to $4.4 million from $9.4 million. The company recorded a $4.7 million income tax benefit, compared with $1.5 million of tax expense in the prior-year period, primarily due to CARES Act net operating loss carrybacks and stock compensation benefits.
At March 31, 2020, cash and cash equivalents were $182.9 million, compared with $70.5 million at December 31, 2019. Total senior debt was $362.0 million, consisting of $199.0 million under the term loan and $163.0 million under the ABL facility. ABL availability was $48.2 million, and outstanding letters of credit totaled $88.8 million.
Cash flow from investing activities used $9.0 million, including $9.2 million of capital expenditures. Financing activities provided $76.0 million, including $198.0 million of debt proceeds, partly offset by $75.5 million of debt repayments, $26.5 million of share repurchases, and $15.9 million of dividends.
Material Changes Versus the Prior Comparable Period
- Total revenue increased modestly, with Preferred Lease and Franchising growth largely offsetting lower Rent-A-Center Business revenue.
- Rent-A-Center Business revenue declined $19.1 million, primarily because of refranchising approximately 60 corporate stores and store-base rationalization. Same-store revenue increased 1.7%.
- Preferred Lease revenue increased $19.6 million, or 10.0%, primarily from the Merchants Preferred virtual lease-to-own acquisition completed in August 2019. Its operating profit declined $3.3 million, and operating margin fell to 8.4% from 10.9%, due to higher merchandise losses, merchandise costs, and growth investments.
- Franchising revenue rose $4.5 million, or 35.5%, primarily from additional franchise locations and higher inventory purchases by franchisees.
- Gross profit declined despite higher revenue, as cost of rentals and fees increased 6.5% and gross margin fell to 59.9%.
- Operating profit benefited substantially from lower other charges: $1.7 million versus $33.4 million in Q1 2019. The prior-year amount included an approximately $13.0 million legal settlement reserve and merger-related professional fees.
- Store labor decreased $7.9 million, partly due to a lower store base, cost savings initiatives, and COVID-19-related furloughs. General and administrative expense increased $6.3 million, primarily due to the Merchants Preferred virtual solution, headquarters sale-leaseback rent, and timing of stock awards.
- Merchandise losses increased to $53.0 million from $46.6 million. Customer stolen merchandise losses increased to $46.9 million from $39.7 million.
- The company adopted the current expected credit loss standard on January 1, 2020, reducing opening retained earnings by $0.8 million.
- The company repurchased 1.46 million shares for $26.5 million during the quarter, then temporarily suspended additional repurchases in response to COVID-19.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide formal earnings or revenue guidance in the filing. It stated that COVID-19 would adversely affect 2020 results but that the full impact could not be predicted.
- At the filing date, approximately 29% of Preferred Lease locations remained temporarily closed and 17% of Rent-A-Center Business locations remained partially closed. The company was using e-commerce, curbside, and ship-from-store models where permitted.
- Management implemented executive pay reductions, employee furloughs, reduced store hours, lower inventory purchases and capital expenditures, lease renegotiations, and suspended share repurchases.
- In March 2020, the company drew approximately $118.0 million on its ABL facility as a precautionary measure. Management believed operating cash flow and available borrowing capacity would fund operations for the next 12 months under its then-current assumptions.
- Management expected approximately $30 million of federal tax refunds, including approximately $12 million related to CARES Act net operating loss carrybacks, and approximately $19 million of deferred employer payroll taxes.
- By May 11, 2020, approximately 440 lease agreements had been renegotiated, producing approximately $2.3 million of near-term rent abatements and $1.8 million of rent deferrals.
- The ABL facility matures in August 2024 and the term loan matures in August 2026. A 1.0% change in market interest rates would have an estimated $3.7 million annualized pretax effect.
- The California Attorney General proposed settlement terms concerning Acceptance Now business practices, including civil penalties, disgorgement, training, and business-practice changes. The company continued discussions and stated that it did not expect a material impact, but the ultimate outcome was uncertain.
- COVID-19, reduced consumer spending, unemployment, store closures, merchandise losses, liquidity, variable interest rates, foreign exchange, regulatory compliance, litigation, and data-security risks were identified as key uncertainties.
Important Facts for Investors to Verify
- Confirm the registrant identity because the supplied metadata names Upbound Group, Inc., while the filing names Rent-A-Center, Inc. and reports under ticker RCII.
- Assess whether COVID-19 store closures, consumer-credit conditions, merchandise losses, and reduced operating cash flow persisted beyond March 31, 2020.
- Reconcile the company’s $182.9 million of quarter-end cash, $362.0 million of debt, $48.2 million of ABL availability, and subsequent cash balance of approximately $259.3 million reported as of May 4, 2020.
- Evaluate the sustainability of reported earnings growth, given that the improvement was heavily influenced by a $31.7 million year-over-year reduction in other charges and a CARES Act tax benefit.
- Monitor Preferred Lease profitability and merchandise-loss rates, particularly customer stolen merchandise charge-offs of 12.2% of revenue versus 10.0% in the prior-year period.
- Follow the California Attorney General inquiry and any resulting settlement payments or operating restrictions.
- Verify compliance with debt covenants, including the ABL fixed-charge coverage ratio, reported at 1.50 to 1.00 at March 31, 2020.