Upbound Group, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Upbound Group operates lease-to-own businesses through Rent-A-Center, Acima, Mexico and Franchising. The filing covers the unaudited three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The company had 2,413 locations at September 30, 2023 and 54.3 million common shares outstanding as of October 24, 2023.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $979.1 million | $1,024.0 million | $2,974.3 million | $3,254.9 million |
| Gross profit | $497.2 million | $505.5 million | $1,509.7 million | $1,584.2 million |
| Gross margin | 50.8% | 49.4% | 50.8% | 48.7% |
| Operating profit | $58.1 million | $37.1 million | $107.0 million | $106.2 million |
| Operating margin | 5.9% | 3.6% | 3.6% | 3.3% |
| Net earnings (loss) | $4.4 million | $(5.8) million | $6.1 million | $9.7 million |
| Diluted EPS | $0.08 | $(0.10) | $0.11 | $0.16 |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $219.9 million | $412.1 million |
Revenue declined 4.4% in Q3 and 8.6% for the first nine months. Net interest expense increased 17.1% in Q3 and 34.4% for the first nine months, reflecting higher borrowing costs. The nine-month effective tax rate was 76.1%, compared with 78.7% in 2022.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $105.7 million at September 30, 2023, down from $144.1 million at December 31, 2022. Management reported approximately $50.3 million of cash on hand at October 24, 2023.
- Total outstanding indebtedness was approximately $1.3 billion, consisting principally of $815.5 million under the Term Loan Facility and $450 million principal amount of senior notes. The balance-sheet carrying value of senior notes was $439.4 million.
- The Term Loan Facility matures in February 2028 and had an interest rate of 8.881% at September 30, 2023. The senior notes bear fixed interest at 6.375% and mature in February 2029.
- The ABL facility had no outstanding borrowings and approximately $485.6 million of availability, net of letters of credit, at September 30, 2023. The company stated that operating cash flow and ABL availability should fund operations for the next 12 months.
- Operating cash flow was $219.9 million, while cash uses included $134.2 million of debt repayments, $64.4 million of dividends, $36.2 million of capital expenditures and $24.0 million of share repurchases.
- The company declared a quarterly dividend of $0.34 per share and had approximately $258.0 million remaining under its share repurchase authorization at September 30, 2023.
Material changes versus the prior comparable period
- Rent-A-Center revenue decreased 5.2% for the nine months, with same-store revenue down 5.2%; operating profit fell 22.0% to $211.6 million. Its lease portfolio value declined 2.7% year over year.
- Acima revenue decreased 12.9% for the nine months, primarily due to lower gross merchandise volume, fewer open leases and fewer early payout elections. Despite lower revenue, operating profit increased 85.7% to $175.1 million, helped by lower merchandise losses, labor costs and acquired-intangible amortization.
- Mexico revenue increased 14.6% for the nine months, but operating profit decreased 31.8% because of higher store expenses, labor costs and customer stolen merchandise losses.
- Consolidated operating profit was broadly stable for the nine months because lower gross profit was offset by a $75.3 million reduction in operating expenses, including lower labor, other store expenses and other charges.
- Operating cash flow declined $192.2 million, primarily because of increased rental merchandise purchases. Rental merchandise on rent decreased to $969.0 million from $989.9 million at December 31, 2022.
- E-commerce represented approximately 26% of Rent-A-Center lease-to-own store revenue for the nine months, up from 23% in 2022.
Guidance, outlook, unusual items and risks
- The filing does not provide specific full-year revenue, earnings or cash-flow guidance.
- Management cited persistent macroeconomic pressure, including inflation, reduced consumer disposable income, interest-rate increases, labor-cost inflation and possible recessionary conditions. These factors have contributed to delinquency, merchandise losses and tighter underwriting, reducing active leases and operating cash flow.
- Q3 other charges included $9.4 million of stock compensation related to Acima acquisition consideration, $18.2 million of acquired software and intangible-asset depreciation and amortization, and $4.6 million of accelerated depreciation for the existing point-of-sale system.
- Nine-month other charges included $128.1 million of Acima-related stock compensation, including $78.4 million attributable to accelerated vesting, and $54.7 million of acquired-asset depreciation and amortization. The filing states that approximately $10.8 million of additional accelerated software depreciation is expected after September 30, 2023.
- Acima remains subject to a Consumer Financial Protection Bureau investigation. The CFPB staff notified Acima in May 2023 that it may allege violations of several consumer-protection laws and may seek restitution, disgorgement, damages, injunctive relief and civil penalties. The ultimate outcome and financial impact are not predictable.
- Additional investigations or proposed resolutions involve the Massachusetts Attorney General, the New York Attorney General and a multistate state Attorneys General investigation relating to lease-to-own practices.
- The company reported compliance with its ABL facility requirements and no defaults. A hypothetical 1% change in market interest rates would affect annualized pretax earnings by approximately $8.3 million.
- Management stated that disclosure controls were effective as of September 30, 2023 and that there were no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether lower Acima and Rent-A-Center revenue, active leases and consumer demand stabilize or continue to decline.
- Whether Acima’s improved operating profit is sustainable after the benefit of lower merchandise losses and other cost reductions.
- The timing and ultimate financial, regulatory and operational consequences of the CFPB, state attorney general and other consumer-protection matters.
- Whether operating cash flow can support rental merchandise investment, dividends, debt service and share repurchases while interest rates remain elevated.
- Future cash requirements related to the $815.5 million term loan, the $450 million senior notes, operating leases and the pending accelerated software depreciation.
- The impact of the Rent-A-Center point-of-sale system rollout planned for the first half of 2024.
- The sustainability of reported earnings given the high effective tax rate and substantial non-cash Acima-related stock compensation and amortization charges.