Upbound Group, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Upbound Group is a lease-to-own provider operating through Rent-A-Center, Acima, Mexico and Franchising segments in the United States, Puerto Rico and Mexico. The filing covers the unaudited three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Total revenue | $979.2 million | $1,071.3 million | Down 8.6% |
| Gross profit | $506.2 million | $532.5 million | Down 4.9% |
| Gross margin | 51.7% | 49.7% | Up 200 bps |
| Operating profit | $84.0 million | $58.1 million | Up 44.7% |
| Operating margin | 8.6% | 5.4% | Up 320 bps |
| Net income (loss) | $(45.6) million | $19.7 million | Down $65.3 million |
| Diluted earnings (loss) per share | $(0.83) | $0.33 | Unfavorable change |
For the six months ended June 30, 2023, revenue was $1.995 billion, down 10.6%; gross profit was $1.012 billion, down 6.1%; operating profit was $48.9 million, down 29.2%; and net income was $1.7 million versus $15.5 million in the prior-year period. Six-month gross margin was 50.7% versus 48.3%, while operating margin was 2.5% versus 3.1%.
Interest expense was $28.2 million in Q2 and $56.3 million for the first six months, compared with $19.1 million and $38.1 million, respectively, in the prior-year periods. Q2 income tax expense was unusually high at $102.4 million, resulting in a net loss despite pretax income of $56.8 million. The six-month effective tax rate was 128.6%, primarily affected by the tax treatment of accelerated Acima-related stock compensation.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $142.0 million, down from $287.1 million.
- Capital expenditures were $21.4 million, compared with $30.9 million.
- Debt repayments were $134.2 million; dividends paid were $44.3 million.
- Cash and cash equivalents were $86.8 million at June 30, 2023, versus $144.1 million at December 31, 2022.
- Total outstanding indebtedness was approximately $1.3 billion, consisting primarily of $815.5 million under the Term Loan Facility and $450 million principal amount of senior notes.
- The Term Loan Facility matures in February 2028 and carried an interest rate of 8.563% at June 30, 2023. Its margin was scheduled to increase from 3.25% to 3.51% beginning July 31, 2023.
- The senior notes bear fixed interest of 6.375% and mature in February 2029.
- No ABL borrowings were outstanding at June 30, 2023; availability was $487.1 million net of letters of credit. Management stated that operating cash flow and ABL availability should fund operations for the next twelve months.
- A hypothetical one-percentage-point change in market interest rates would affect annualized pretax results by approximately $8.3 million.
Material changes versus the prior comparable period
- Rent-A-Center revenue declined 5.7% for the six months, with same-store sales down 5.8% and the lease portfolio balance down 4.7%. Segment operating profit declined 25.8% to $147.9 million.
- Acima revenue declined 16.1% for the six months, principally because of lower gross merchandise volume, fewer open leases and fewer early purchase options. However, operating profit increased 157.5% to $117.0 million as customer stolen-merchandise losses and labor costs declined.
- Mexico revenue increased 10.7% for the six months, but operating profit declined 42.9% to $2.3 million, primarily because of higher store expenses and merchandise losses.
- Consolidated merchandise losses declined to $154.0 million for the six months from $203.7 million, including a reduction in customer stolen-merchandise losses to $139.5 million from $185.2 million.
- Other charges increased to $155.4 million for the six months from $123.8 million, primarily reflecting $118.7 million of Acima-related stock compensation and $36.5 million of acquired software and intangible-asset depreciation and amortization. The stock compensation included $78.4 million related to accelerated vesting, primarily following an Acima executive’s transition to an advisory role.
- E-commerce represented approximately 26% of Rent-A-Center lease-to-own store revenue for the six months, compared with 23% in 2022.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative full-year revenue or earnings guidance. Management emphasized a strategy centered on e-commerce and omnichannel growth, expanding Acima merchant penetration, technology integration, data analytics, cost efficiencies and complementary financial products.
Management cited continuing pressure from inflation, reduced consumer disposable income, tighter underwriting, delinquency and merchandise-loss trends, labor costs, supply-chain conditions and potential economic slowdown. The filing states that the full effect of these conditions remains uncertain and could adversely affect revenue, operating cash flow, liquidity and capital resources.
The CFPB notified Acima staff in May 2023 that enforcement action might be recommended concerning potential violations of consumer financial protection laws, including the Consumer Financial Protection Act, Truth in Lending Act, Electronic Fund Transfer Act and Fair Credit Reporting Act. Acima submitted a response disputing the potential allegations. The company cannot predict the outcome, timing or potential financial impact. An indemnity escrow of $45 million remained available for certain covered losses, subject to the transaction agreement and release provisions.
Additional regulatory matters include investigations or inquiries by the Massachusetts Attorney General, a coalition of state attorneys general and the New York Attorney General. The company also faces risks relating to consumer-credit recharacterization, litigation, interest rates, data security, technology execution, competition and the realization of Acima integration benefits.
The company declared a third-quarter 2023 dividend of $0.34 per share, paid July 11, 2023. No shares were repurchased during the first six months, and approximately $285 million remained available under the repurchase authorization at June 30, 2023.
Most important facts for investors to verify
- Whether declining Rent-A-Center and Acima revenue, active leases and Acima gross merchandise volume stabilize or continue to contract.
- Whether Acima’s lower merchandise losses and operating-cost reductions are sustainable.
- The ultimate outcome, timing and potential cost of the CFPB, state attorneys general and other regulatory matters, including the adequacy of the $45 million indemnity escrow.
- Liquidity and debt-service capacity given $1.3 billion of debt, variable-rate exposure and the February 2028 Term Loan maturity.
- Whether operating cash flow recovers from the six-month decline to $142.0 million while funding rental-merchandise purchases, dividends and debt repayments.
- The effect of the unusually high tax expense and Acima-related stock compensation on future earnings comparability.
- Management’s ability to sustain dividends while executing technology, e-commerce, integration and cost-saving initiatives.