SEC Form 10-Q Summary
Source and period: The supplied filing is for Rent-A-Center, Inc., not Upbound Group, Inc. It covers the unaudited three months ended March 31, 2017, with comparison to the three months ended March 31, 2016. The company operated Core U.S., Acceptance Now, Mexico and Franchising segments.
Business Context and Reporting Period
Rent-A-Center provides rent-to-own and installment-sale access to household durable goods, including electronics, appliances, computers, smartphones and furniture. At March 31, 2017, the company reported 4,298 locations, down from 4,731 at the beginning of the quarter, primarily due to store consolidations and closures.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $742.0 million | $835.7 million | Down 11.2% |
| Gross profit | $462.7 million | $534.9 million | Down 13.5% |
| Gross margin | 62.4% | 64.0% | Down 160 bps |
| Operating profit | $1.2 million | $48.4 million | Down 97.6% |
| Operating margin | 0.2% | 5.8% | Down 560 bps |
| Net income (loss) | $(6.7) million | $25.1 million | Decline of $31.7 million |
| Diluted EPS | $(0.13) | $0.47 | Decline of $0.60 |
| Cash flow from operations | $59.3 million | $226.7 million | Down $167.4 million |
| Capital expenditures | $22.0 million | $14.4 million | Up $7.6 million |
Rentals and fees, the largest revenue category, declined 11.7% to $595.4 million. Merchandise sales declined 7.6% to $121.7 million. Same-store revenue decreased 7.8% overall, with Core U.S. down 12.5% and Acceptance Now up 2.9%.
Operating expenses declined 5.1% to $461.5 million, but other charges increased to $13.7 million from $2.4 million. Excluding other charges, operating profit was $14.8 million, or 2.0% of revenue, versus $50.9 million, or 6.1%, in the prior-year quarter.
At March 31, 2017, cash and cash equivalents were $58.1 million, compared with $95.4 million at December 31, 2016. Total assets were $1.495 billion and stockholders’ equity was $258.4 million.
Debt, Liquidity and Cash Flow
- Senior debt, net, was $115.6 million and senior notes, net, were $537.8 million at March 31, 2017. Gross debt outstanding was approximately $662.9 million, before applicable presentation adjustments.
- The company repaid $157.9 million of debt and borrowed $86.4 million during the quarter, resulting in a net debt reduction of $71.6 million.
- The $900 million credit agreement included $50.3 million of term loans and $70.0 million drawn on the revolving facility at March 31, 2017. Letters of credit used $91.1 million of revolving capacity.
- At March 31, 2017, the company’s actual Consolidated Total Leverage Ratio was 4.25:1 versus a required maximum of 4.00:1, and its Fixed Charge Coverage Ratio was 1.37:1 versus a required minimum of 1.50:1. The company was in compliance with other reported covenants.
- On May 1, 2017, lenders waived these covenant breaches through June 30, 2017. During the waiver period, borrowings were capped at $225 million and restricted to working-capital purposes.
- Management stated that operating cash flow was expected to fund liquidity requirements for the next 12 months, but additional amendments, waivers or refinancing were being pursued.
Material Changes Versus the Prior Comparable Period
- Core U.S. revenue fell 16.0% to $490.9 million, gross profit fell 18.0% to $338.0 million, and operating profit fell 60.8% to $24.4 million. The decline reflected lower same-store revenue, a reduced store base, lower portfolio balances and lower average ticket size.
- Acceptance Now revenue increased 1.8% to $234.5 million and gross profit increased 3.0% to $114.4 million, but operating profit decreased 29.8% to $20.6 million because of closure-related charges and higher merchandise losses. Excluding other charges, segment operating profit increased 2.8%.
- Mexico revenue decreased 19.3% to $11.1 million, but the segment moved from a $2.6 million operating loss to $0.2 million of operating profit.
- Merchandise losses increased to $57.1 million from $55.2 million. Acceptance Now customer-stolen merchandise losses were approximately 11.7% of revenue, or 9.4% excluding other charges, versus 9.0% in the prior-year quarter.
- Operating cash flow declined substantially, principally because the prior-year period benefited from approximately $80 million of income-tax refunds and favorable working-capital changes.
Guidance, Outlook, Risks and Unusual Items
- On April 10, 2017, management announced a strategy focused on strengthening Core U.S., optimizing and growing Acceptance Now, and expanding digital and technology-enabled channels. The filing provides no quantified revenue or earnings guidance.
- During the quarter, the company closed 76 Acceptance Now manned locations and nine direct locations and initiated plans to close another 115 locations. It recorded $13.7 million of other charges, including store-closure costs, a $3.9 million intangible-asset impairment, workforce-reduction costs and litigation-related items.
- Following hhgregg’s bankruptcy and liquidation activity, the company expected approximately $1 million to $2 million of additional closure-related charges in future periods for affected Acceptance Now locations.
- The company terminated its Conn’s referral agreement because of underperforming customer accounts.
- If the company could not obtain additional covenant relief, an amendment or refinancing by June 30, 2017, lenders could terminate commitments or accelerate borrowings. Such acceleration could also trigger defaults under the senior notes.
- Management and finance leadership were in transition: Mark E. Speese became chief executive officer effective April 10, 2017, and Maureen B. Short was interim chief financial officer.
- Other risks included declining customer demand, store and account consolidation, execution of the new strategy, technology and point-of-sale implementation, data security, regulatory changes affecting rent-to-own operations, litigation, foreign exchange exposure and interest-rate increases.
- A multi-state unclaimed-property audit was ongoing, and management stated that the ultimate outcome could not yet be determined.
- The company adopted stock-compensation accounting changes in 2017 with immaterial financial statement impact. Revenue-recognition and lease standards had not yet been adopted; the company was still evaluating their effects.
Most Important Facts to Verify
- Confirm the issuer identity: the supplied filing is Rent-A-Center, Inc., while the request identifies Upbound Group, Inc.
- Review the May 1, 2017 credit agreement waiver, covenant requirements and any subsequent amendments or refinancing.
- Assess whether the company can stabilize Core U.S. same-store revenue and reduce merchandise losses, particularly in Acceptance Now.
- Track the financial and operational impact of hhgregg-related closures, the additional planned Acceptance Now closures and the Conn’s contract termination.
- Evaluate liquidity after debt repayments, the $225 million borrowing cap, $91.1 million of letters of credit and upcoming 2019–2021 debt maturities.
- Monitor execution of the April 2017 strategy, management succession and the outcome of pending litigation and the unclaimed-property audit.