Business Context and Reporting Period
This Form 10-Q covers Rent-A-Center, Inc. and subsidiaries for the quarter and nine months ended September 30, 2015. The filing identifies the registrant as Rent-A-Center, Inc., not Upbound Group, Inc.; investors should verify the requested company metadata. The business operated through Core U.S., Acceptance Now, Mexico and Franchising segments, providing rent-to-own, installment-sale and related franchise services.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $791.6 million | $764.4 million | $2.485 billion | $2.361 billion |
| Gross profit | $488.6 million | $539.8 million | $1.592 billion | $1.639 billion |
| Gross margin | 61.7% | 70.6% | 64.1% | 69.4% |
| Operating profit | $6.6 million | $45.9 million | $112.9 million | $145.8 million |
| Operating margin | 0.8% | 6.0% | 4.5% | 6.2% |
| Net earnings (loss) | $(4.1) million | $25.9 million | $46.4 million | $70.9 million |
| Diluted EPS | $(0.08) | $0.49 | $0.87 | $1.34 |
| Cash flow from operations | Not separately provided | Not separately provided | $249.3 million | $63.3 million |
- Cash and cash equivalents were $60.1 million at September 30, 2015, compared with $46.1 million at December 31, 2014.
- Total debt consisted of $371.6 million of senior debt and $542.7 million of senior notes, or approximately $914.4 million in carrying value.
- At September 30, $150.0 million was outstanding under the revolving facility, with $432.7 million available after letters of credit. At November 2, 2015, availability was $430.3 million and cash was $52.8 million.
- Capital expenditures were $61.1 million for the first nine months, and management expected full-year 2015 capital expenditures of $70 million to $80 million.
- Dividends declared were $0.24 per share in the quarter and $0.72 per share year to date.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3.6% in the quarter and 5.2% year to date, driven primarily by Acceptance Now growth and higher merchandise sales.
- Acceptance Now revenue increased 26.6% in the quarter and 30.6% year to date; nine-month same-store revenue increased 30.1%. The segment represented approximately 25% of consolidated revenue.
- Core U.S. revenue declined 1.4% in the quarter and 0.9% year to date. Core U.S. operating profit declined 75.3% in the quarter and 23.9% year to date.
- Mexico revenue declined 24.1% in the quarter and 7.3% year to date, although operating losses improved from the prior year.
- Merchandise sales increased substantially, but merchandise gross margin fell to 1.4% in the quarter and 6.1% year to date, versus 18.7% and 22.9%, respectively, in 2014.
- Operating profit decreased 85.7% in the quarter and 22.6% year to date. Net earnings declined 115.8% in the quarter and 34.6% year to date.
- Operating cash flow increased by $186.0 million year to date, primarily because of a $112.5 million income-tax refund and higher merchandise sales associated with 90-day option pricing.
- Debt was reduced by $128.4 million during the first nine months, compared with a $58.9 million net increase in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management described a multi-year transformation program focused on flexible store labor, data-driven pricing, centralized sourcing and distribution, technology investments and Acceptance Now expansion. Approximately 2,100 Core U.S. locations had adopted the flexible labor model, and all five planned distribution centers were operational in July 2015.
- Management expected virtually all Core U.S. stores to transition to the flexible labor model by early 2016 and planned approximately 500 Acceptance Now direct locations by year-end 2015.
- The company recorded a $34.7 million pre-tax smartphone inventory write-down in the third quarter, including $10.3 million of on-rent merchandise and $24.4 million of held-for-rent merchandise. Older-generation smartphones performed below expectations.
- Other third-quarter charges included $5.5 million of losses on store sales, $4.3 million for Core U.S. store closures and $1.2 million related to warehouse closure and distribution activities.
- The company closed or consolidated 65 Core U.S. stores during the quarter and had closed 34 Mexico stores during 2015. The nine-month location count ended at 4,738.
- Goodwill totaled $1.4 billion, approximately 45% of total assets. Following a roughly 30% decline in market capitalization after the earnings release, management warned that a material non-cash goodwill impairment charge could be recorded in the fourth quarter, although no impairment had been identified as of September 30.
- Debt covenants were satisfied at September 30: total leverage was 2.93:1 versus a maximum of 4.50:1; senior secured leverage was 1.12:1 versus 2.75:1; and fixed-charge coverage was 1.86:1 versus a minimum of 1.50:1.
- Franchisee financing guarantees had a maximum exposure of $47.0 million, with $13.2 million outstanding at September 30. A multi-state unclaimed-property audit was in progress, but management stated that the ultimate outcome was not yet determinable.
- Management stated that operating cash flow and available credit were expected to fund liquidity needs for the next 12 months, subject to profitability and financing conditions.
Important Facts for Investors to Verify
- Confirm whether this Rent-A-Center filing is the intended filing for Upbound Group, Inc.
- Assess the risk and ultimate amount of any fourth-quarter goodwill impairment.
- Determine whether Acceptance Now growth can offset Core U.S. revenue pressure and declining merchandise margins.
- Evaluate the sustainability of operating cash flow after the one-time $112.5 million tax refund.
- Monitor smartphone inventory, charge-offs, merchandise losses and the effectiveness of new pricing and inventory controls.
- Review debt maturities, variable-rate exposure and compliance with restrictive covenants; a 1% interest-rate change was estimated to affect pre-tax earnings by approximately $2.5 million.
- Consider the impact of store closures, restructuring costs, distribution-system implementation and the pending unclaimed-property audit.