Business Context and Reporting Period
The filing is Rent-A-Center, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed March 1, 2017. The request metadata identifies Upbound Group, Inc.; the supplied filing text identifies the registrant as Rent-A-Center, Inc. and trades under “RCII.”
Rent-A-Center operates rent-to-own and installment-sales businesses through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. At year-end, it operated 4,731 locations, including 2,463 Core U.S. stores, 1,431 staffed Acceptance Now kiosks, 478 Acceptance Now Direct locations, 130 Mexico stores, and 229 franchised stores.
Key Financial Metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $2.963 billion | $3.278 billion | Down 9.6% |
| Gross profit | $1.935 billion | $2.118 billion | Down 8.6% |
| Gross margin | 65.3% | 64.6% | Up 70 basis points |
| Operating loss | $66.6 million | $1.008 billion | Improved by $941.3 million |
| Net loss | $105.2 million | $953.5 million | Improved by $848.3 million |
| Diluted loss per share | $1.98 | $17.97 | Improved |
| Cash flow from operations | $353.7 million | $230.5 million | Up $123.2 million |
| Capital expenditures | $61.1 million | $80.9 million | Down $19.8 million |
| Cash and cash equivalents | $95.4 million | $60.4 million | Up $35.0 million |
| Total debt | $724.2 million | $955.8 million | Down $231.6 million |
Operating results included a $151.3 million non-cash goodwill impairment charge in the Core U.S. segment. Excluding goodwill impairment and other charges, operating margin was approximately 3.5% in 2016 versus 5.6% in 2015.
Core U.S. generated $2.070 billion of revenue, down 12.7%, with same-store revenue down 9.0%. Acceptance Now revenue was essentially flat at $817.8 million, but operating profit declined 14.6% to $105.9 million. Mexico revenue declined 20.2% to $50.9 million, while its operating loss improved to $2.4 million. Franchising revenue increased 1.3% to $24.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of weaker Core U.S. same-store performance, store closures and continued rationalization of the Core U.S. store base. The company closed, sold or converted 209 Core U.S. stores during 2016.
- Core U.S. results were negatively affected by capacity-related outages following implementation of a new store information management system in the third quarter. Management reported no additional capacity-related outages in the fourth quarter after software and hardware improvements, but stated that recovery was taking longer than expected.
- Acceptance Now remained relatively flat in revenue, but customer stolen-merchandise charge-offs rose to approximately 10.0% of revenue from 8.5%, reducing operating profitability.
- Goodwill was reduced to $55.3 million at year-end, all attributable to Acceptance Now, after the $151.3 million Core U.S. impairment charge.
- Operating cash flow increased substantially, supported in part by an approximately $84.9 million income-tax refund and lower merchandise purchases. The company used cash flow to repay $233.8 million of debt.
- Quarterly performance deteriorated sharply in the fourth quarter: revenue was $684.1 million, operating loss was $159.3 million, and net loss was $146.4 million, including the goodwill impairment and other items.
- Quarterly dividends declined from $0.24 per share in each quarter of 2015 to $0.08 per share in each quarter of 2016. No shares were repurchased during 2016 or 2015.
Guidance, Outlook, Risks, Contingencies and Unusual Items
Management did not provide formal numerical earnings or revenue guidance in the supplied filing. Its stated priorities were to improve product mix and pricing, restore store-level staffing, improve customer service and collections, use technology and e-commerce capabilities, and reduce delinquencies and collection times. Management expects operating cash flow to fund liquidity requirements for the next 12 months, subject to covenant compliance and operating performance.
- Debt and covenant risk: At December 31, 2016, the company reported a consolidated fixed-charge coverage ratio of 1.50:1 against a minimum of 1.50:1 and a senior secured leverage ratio of 0.65:1 against a maximum of 2.50:1. Management expected a mandatory excess-cash-flow term-loan prepayment of approximately $135 million to $145 million in the first quarter of 2017.
- Liquidity: At February 21, 2017, the company reported $77.9 million of cash and $583.9 million of revolving-facility availability after $91.1 million of outstanding letters of credit. Access to the facilities depends on continued compliance with debt covenants.
- Debt maturities: Senior term debt was $191.8 million, the 6.625% senior notes had $292.7 million of principal outstanding, and the 4.75% senior notes had $250.0 million outstanding. The revolving facility matures in March 2019, the 6.625% notes in November 2020, the 4.75% notes in May 2021, and the term loans in March 2021.
- Management transition: The CFO resigned in December 2016 and the CEO resigned in January 2017. The company was operating with interim CFO and CEO leadership while searching for permanent replacements.
- Legal and regulatory matters: A multi-state unclaimed-property audit was in progress, with the ultimate outcome not yet determinable. A putative securities class action filed in December 2016 alleged misleading statements regarding the company’s business and prospects and sought unspecified damages.
- Guarantees: The company guaranteed up to $47.0 million of financing arrangements for franchisees; $2.8 million was outstanding under those arrangements at year-end.
- Other unusual items: 2016 included approximately $22.5 million of restructuring charges, primarily related to store and location closures, partially offset by a $2.2 million litigation settlement gain. The company also corrected an immaterial prior-period deferred-tax error related to the 2015 goodwill impairment.
- Internal controls: Management and KPMG concluded that internal control over financial reporting was effective as of December 31, 2016. A material weakness related to tax accounting in 2015 was reported as remediated in 2016.
Important Facts for Investors to Verify
- Confirm the registrant identity: the supplied filing is for Rent-A-Center, Inc., not explicitly Upbound Group, Inc.
- Reconcile fourth-quarter losses and the $151.3 million Core U.S. goodwill impairment with full-year results.
- Monitor whether Core U.S. same-store revenue and account recovery improve following the information-system outages and store rationalization.
- Verify compliance with the 1.50:1 fixed-charge coverage covenant after the expected $135 million to $145 million debt prepayment.
- Assess whether Acceptance Now can control the increase in stolen-merchandise charge-offs and remain profitable.
- Track CEO and CFO succession, liquidity, debt maturities and any amendments, waivers or refinancing discussions with lenders.
- Review developments in the multi-state unclaimed-property audit and the consolidated securities litigation.
- Evaluate the sustainability of dividends given losses, debt restrictions and the company’s near-covenant-level fixed-charge coverage ratio.