Business Context and Reporting Period
This unaudited Form 10-Q covers Rent-A-Center, Inc. and subsidiaries for the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The filing describes a rent-to-own business operating through Core U.S., Acceptance Now, Mexico and Franchising segments.
Filing identity note: The supplied metadata identifies Upbound Group, Inc., but the filing itself identifies the registrant as Rent-A-Center, Inc. Investors should verify the issuer and filing association.
Financial Highlights
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $698.0 million | $742.0 million | Down 5.9% |
| Gross profit | $437.0 million | $462.7 million | Down 5.6% |
| Gross margin | 62.6% | 62.4% | Up 0.2 percentage points |
| Operating income/(loss) | $(10.3) million | $1.2 million | Declined $11.4 million |
| Operating margin | (1.5)% | 0.2% | Down 1.7 percentage points |
| Net income/(loss) | $(19.8) million | $(6.7) million | Loss increased $13.2 million |
| Diluted loss per share | $(0.37) | $(0.13) | Higher loss |
| Operating cash flow | $84.5 million | $59.3 million | Up $25.2 million |
| Capital expenditures | $8.6 million | $22.0 million | Down $13.4 million |
| Cash and equivalents at period end | $81.4 million | $58.1 million | Up $23.3 million |
Revenue and Segment Performance
- Store revenue decreased 6.2% to $691.1 million; rentals and fees declined 5.2% and merchandise sales declined 11.8%.
- Core U.S. revenue declined 1.8% to $482.0 million, while operating profit increased 16.3% to $28.4 million. Same-store revenue increased 0.3%.
- Acceptance Now revenue fell 16.0% to $197.0 million and operating profit declined 25.2% to $15.4 million. The decline reflected Conn’s and hhgregg location closures, hurricane impacts and sales deleverage. Same-store revenue increased 3.3%.
- Mexico revenue increased 8.4% to $12.0 million, partly because of foreign-exchange translation; revenue was flat on a constant-currency basis.
- Franchising revenue increased 28.4% to $7.0 million, partly due to the adoption of ASC 606 and gross presentation of franchise advertising fees.
Cash Flow, Liquidity and Debt
- Operating cash flow was $84.5 million. Financing activities used $77.4 million, including $104.4 million of debt repayments and $26.9 million of new borrowings. No dividend was paid in Q1 2018, compared with $4.3 million paid in Q1 2017.
- Senior debt consisted of $41.7 million of term loans and $20.0 million drawn on the revolving facility, for $61.7 million before issuance-cost adjustments.
- Senior notes had carrying values of approximately $292.7 million at 6.625% and $250.0 million at 4.75%, or approximately $542.7 million in aggregate.
- The $350 million revolving facility matures March 19, 2019; the term loans mature March 19, 2021. Letters of credit totaled $94 million.
- The company was below its consolidated fixed-charge coverage covenant: actual ratio of 0.22:1 versus the required 1.10:1. Consequently, it was required to maintain $50 million of excess revolver availability. Reported availability, net of this requirement, was $172.8 million.
- Management stated that operating cash flow and available credit were expected to fund operations for the next 12 months, while refinancing options for the credit agreement and senior notes were under consideration.
Material Changes Versus the Prior Comparable Period
- Revenue declined $43.9 million and the company moved from a $1.2 million operating profit to a $10.3 million operating loss.
- Net loss increased from $6.7 million to $19.8 million despite higher operating cash flow.
- Acceptance Now was the principal operating pressure, with revenue down $37.6 million and gross profit down $25.6 million.
- General and administrative expense increased 12.8% to $44.9 million, while other charges increased 27.9% to $17.5 million.
- The company closed 61 Core U.S. stores and eight Mexico locations during the quarter. Total locations decreased from 3,968 to 3,905.
- Merchandise losses declined to $43.1 million from $57.1 million, including customer-stolen merchandise losses of $34.9 million versus $45.6 million.
- ASC 606 was adopted using the modified retrospective method. The reported income-statement impact was not material, although franchise advertising fees were presented gross and initial franchise fees were recognized over the franchise term.
Guidance, Outlook, Risks and Unusual Items
- Management’s strategy focused on cost savings, a revised value proposition, improved Acceptance Now returns, store consolidation and refranchising to generate proceeds for debt reduction.
- Q1 2018 cost-savings and store-consolidation actions generated approximately $14.9 million of charges. These included severance, lease obligations, asset write-offs, legal and advisory fees and shutdown costs.
- In April 2018, the company gave notice terminating a distribution-partner contract and expected approximately $7 million of termination fees to be recorded in Q2 2018.
- Management expected the Tax Cuts and Jobs Act to provide approximately $200 million of cash tax savings over three years, while noting that accelerated depreciation would create additional future cash taxes as the deferral reverses.
- Key risks include refinancing the revolving facility before its March 2019 maturity, covenant noncompliance, declining Acceptance Now performance, execution of cost-saving and store-consolidation programs, consumer spending conditions, regulatory changes affecting rent-to-own transactions, information-technology disruption and data security.
- Pending litigation includes securities and shareholder derivative actions concerning prior disclosures and management decisions, and a California class action alleging violations of the Karnette Rental-Purchase Act. The company states that it believes the claims lack merit but cannot assure a favorable outcome.
- The company reported effective disclosure controls and procedures as of March 31, 2018, with no material changes in internal control over financial reporting.
Facts Investors Should Verify
- Confirm whether this filing belongs to Rent-A-Center, Inc. or the Upbound Group, Inc. entity identified in the request metadata.
- Assess refinancing progress and available liquidity before the March 2019 revolving-facility maturity.
- Monitor compliance with the 1.10:1 fixed-charge coverage covenant and the $50 million minimum excess-availability requirement.
- Evaluate whether Acceptance Now revenue and margins stabilize after location closures and revised pricing and ownership initiatives.
- Track the recurring versus nonrecurring nature of the $17.5 million of Q1 other charges and the estimated $7 million Q2 distribution-contract termination fee.
- Review the potential cash-tax benefit and later reversal effects of the Tax Cuts and Jobs Act.
- Follow the disclosed securities, derivative and California consumer litigation for possible financial or operational consequences.