Business Context and Reporting Period
The filing is Rent-A-Center, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The request metadata identifies Upbound Group, Inc., but the source filing identifies the registrant as Rent-A-Center, Inc. The company operates rent-to-own and installment-sales businesses through Core U.S., Acceptance Now, Mexico, and Franchising segments.
On June 17, 2018, the company entered into an agreement to be acquired by Vintage Rodeo Parent, LLC, an affiliate of Vintage Capital Management, for $15.00 per share in cash. Closing was expected by year-end 2018, subject to stockholder and regulatory approvals and other customary conditions.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $655.7 million | $677.6 million | $1,353.8 million | $1,419.6 million |
| Gross profit | $423.9 million | $432.5 million | $860.9 million | $895.2 million |
| Gross margin | 64.6% | 63.8% | 63.6% | 63.1% |
| Operating profit (loss) | $27.2 million | $(0.9) million | $16.9 million | $0.3 million |
| Operating margin | 4.1% | (0.1)% | 1.2% | 0.0% |
| Net earnings (loss) | $13.8 million | $(8.9) million | $(6.1) million | $(15.6) million |
| Diluted earnings (loss) per share | $0.25 | $(0.17) | $(0.11) | $(0.29) |
| Operating cash flow | Not separately provided | Not separately provided | $142.9 million | $111.9 million |
Six-month revenue declined 4.6%, while gross profit declined 3.8%. Cost reductions and lower merchandise losses more than offset the lower gross profit, resulting in substantially improved operating results. The six-month net loss narrowed despite continued reported losses.
Material Changes Versus the Prior Comparable Period
- Acceptance Now revenue declined 14.1% for the six months, primarily due to location closures associated with Conn’s and hhgregg and the effects of 2017 hurricanes. Acceptance Now gross profit declined 19.9%, but operating profit increased 13.7% because of lower merchandise losses and fewer closure-related charges.
- Core U.S. revenue declined 1.1% for the six months, while same-store revenue increased 1.8%. Core U.S. operating profit increased 29.9%, supported by lower labor and other store expenses.
- Franchising revenue increased 46.3%, partly reflecting the gross presentation of franchise advertising fees following adoption of ASC 606. Mexico revenue increased 5.3%.
- Six-month store labor expense decreased 7.1%, other store expenses decreased 8.5%, and depreciation, amortization and intangible impairment decreased 5.2%.
- Merchandise losses decreased to $82.5 million from $104.8 million, including customer stolen merchandise losses of $64.6 million versus $83.3 million.
- The company closed 109 Core U.S. stores and eight Mexico locations during the first six months of 2018. Total locations declined from 3,968 at the beginning of the year to 3,847 at June 30, 2018.
- Capital expenditures fell to $15.7 million from $40.2 million, while proceeds from property-asset sales increased to $14.8 million from $0.9 million.
Debt, Liquidity, Cash Flow, and Other Matters
- Cash and cash equivalents were $116.8 million at June 30, 2018, compared with $73.0 million at December 31, 2017.
- Reported senior debt was $38.0 million, and senior notes were $539.4 million, net of issuance costs. Gross principal included approximately $41.1 million of term loans, $292.7 million of 6.625% senior notes due 2020, and $250.0 million of 4.75% senior notes due 2021.
- The $350 million revolving facility had no borrowings outstanding at June 30, 2018, with $245.1 million of availability and $94 million of letters of credit outstanding. The facility was scheduled to mature in March 2019.
- The company’s actual fixed-charge coverage ratio was 1.15:1 versus a required minimum of 1.10:1. In July 2018, the outstanding term loans were repaid in full.
- Financing activities used $97.5 million of cash, primarily reflecting $125.0 million of debt repayments and $26.9 million of debt proceeds. No dividends were declared or paid during the six months, compared with $8.5 million paid in the prior-year period.
- Management stated that operating cash flow and available credit were expected to fund liquidity needs for the next 12 months. At July 30, 2018, cash on hand was $65.0 million.
- The company expected to redeem both senior-note issues in connection with completion of the Vintage merger. If the merger did not close before the revolving facility matured, refinancing would be required.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management emphasized cost savings, a revised pricing and value proposition, improved Acceptance Now returns, and refranchising as key strategic initiatives. Refranchising proceeds were intended in part to reduce debt.
- Six-month 2018 other charges totaled $33.9 million, including cost-savings initiatives, store closures, discontinued software projects, legal and advisory fees, severance, lease obligations, contract terminations, and asset write-downs.
- The company estimated approximately $15 million of financial advisory fees assuming completion of the merger.
- The Tax Cuts and Jobs Act was expected to generate approximately $200 million of cash tax savings over three years, although accelerated depreciation would defer taxes and create higher cash taxes as the deferral reverses. The company had not completed all Tax Act accounting as of June 30, 2018.
- Principal risks included failure or delay of the Vintage merger, financing and refinancing risk, change-of-control provisions, consumer and economic conditions, store closures, merchandise losses, execution of cost savings, regulatory requirements affecting rent-to-own transactions, interest rates, foreign exchange, information technology, and litigation.
- Pending legal matters included securities and shareholder derivative litigation related to prior operating disclosures and governance, and a California class action concerning rental-purchase pricing and executed agreements. The company believed the claims lacked merit but could not assure a favorable outcome.
- Management reported that disclosure controls and procedures were effective as of June 30, 2018, with no material changes in internal control over financial reporting during the quarter.
Most Important Facts to Verify
- Confirm the registrant identity: the source is Rent-A-Center, Inc., not Upbound Group, Inc.
- Verify completion status, consideration, financing, approvals, and any termination or litigation developments related to the Vintage merger.
- Track refinancing or repayment of the revolving facility scheduled to mature in March 2019 and the treatment of the senior notes.
- Assess whether cost savings and lower merchandise losses are sustainable, particularly given declining revenue and store closures.
- Review Acceptance Now revenue trends, location rationalization, charge-offs, and the effect of the revised value proposition.
- Evaluate the cash-tax benefits and future reversal of accelerated depreciation-related tax deferrals.
- Monitor pending litigation, potential merger-related advisory costs, and other charges that may affect reported earnings and cash flow.