Business Context and Reporting Period
The submitted filing is a Form 10-Q for Rent-A-Center, Inc. and subsidiaries, not Upbound Group, Inc. The period ended March 31, 2012, with comparative results for the three months ended March 31, 2011. Rent-A-Center operated four segments: Core U.S., RAC Acceptance, International, and ColorTyme. At March 31, 2012, it operated or franchised 4,051 locations, including 2,983 Core U.S. stores, 763 RAC Acceptance kiosks, 87 International stores, and 218 ColorTyme franchised stores.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $835.3 million | $742.2 million | Up 12.5% |
| Gross profit | $560.4 million | $523.1 million | Up 7.1% |
| Gross margin | 67.1% | 70.5% | Down 340 bps |
| Operating profit | $92.0 million | $80.4 million | Up 14.4% |
| Operating margin | 11.0% | 10.8% | Up 20 bps |
| Net earnings | $51.9 million | $44.2 million | Up 17.4% |
| Diluted EPS | $0.87 | $0.69 | Up $0.18 |
| Operating cash flow | $138.5 million | $147.9 million | Down $9.4 million |
Store revenue increased 12.5% to $823.3 million. Same-store revenue increased 7.1% to $690.7 million across 2,960 comparable stores. Core U.S. generated $727.8 million of revenue and $95.2 million of operating profit; RAC Acceptance generated $87.7 million of revenue and $2.9 million of operating profit; International generated $7.7 million of revenue and an operating loss of $6.8 million; and ColorTyme generated $12.0 million of revenue and $0.7 million of operating profit.
Cash and cash equivalents were $107.0 million at March 31, 2012, compared with $88.1 million at December 31, 2011. Cash used in investing activities was $27.6 million, principally for $27.4 million of capital expenditures. Cash used in financing activities was $92.3 million, including $235.1 million of debt repayments, $146.1 million of new borrowings, and $9.5 million of dividends. Management expected 2012 capital expenditures of approximately $105.0 million.
Total debt consisted of $351.7 million of senior debt and $300.0 million of 6.625% senior notes due 2020. The senior credit facilities had $278.8 million available at March 31, 2012, after considering letters of credit. Actual covenant ratios were within requirements: consolidated leverage was 1.42x versus a maximum of 3.25x, and fixed-charge coverage was 1.64x versus a minimum of 1.35x. A 1.0% change in interest rates was estimated to affect pretax earnings by approximately $3.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by RAC Acceptance expansion, higher merchandise sales, and increased same-store revenue.
- Cost of rentals and fees increased 20.4%, and the related cost ratio rose to 24.1% from 22.2%.
- Merchandise sales margin declined to 22.7% from 30.9%, primarily due to higher RAC Acceptance merchandise costs and promotional strategy changes in Core U.S.
- Gross margin declined materially, but operating margin improved because of revenue growth, expense management, lower interest expense, and the absence of prior-year unusual charges.
- Q1 2011 included a $7.3 million impairment charge related to the discontinued financial services business and a $2.8 million litigation charge; neither charge was recorded in Q1 2012.
- Interest expense declined 8.0% to $9.0 million, reflecting lower debt and a lower weighted-average interest rate of 4.96% versus 5.72%.
- Operating cash flow declined because Q1 2011 benefited from approximately $110.0 million of tax refunds. Q1 2012 nevertheless generated sufficient cash to fund capital expenditures, dividends, and substantial debt reduction.
- RAC Acceptance locations increased from 482 to 763, International locations from 28 to 87, and total locations from 3,708 to 4,051 year over year.
Guidance, Outlook, Risks, and Unusual Items
Management expected to open approximately 200 RAC Acceptance kiosks, 10 Canadian stores, and 60 Mexican stores during 2012. Management stated that operating cash flow and available credit were expected to fund liquidity requirements over the next twelve months. No formal earnings or revenue guidance was provided.
Key risks include dependence on the mature Core U.S. segment, execution of RAC Acceptance and International expansion, reliance on third-party retail partners, consumer spending and unemployment trends, regulatory changes affecting rent-to-own transactions, foreign exchange and political risks in Canada and Mexico, interest-rate exposure, litigation, information-system implementation, and compliance with debt covenants.
The company had no reserves for probable litigation losses at March 31, 2012, although it noted a history of regulatory and class-action litigation. An IRS dispute concerning tax years 2003 through 2007 was awaiting a Tax Court decision expected later in 2012; management did not expect a material financial statement impact. Self-insurance reserves were $115.0 million. ColorTyme franchise financing guarantees had a maximum exposure of $45.0 million, with $23.2 million outstanding.
Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Rent-A-Center, Inc., while the request identifies Upbound Group, Inc.
- Assess whether RAC Acceptance and International expansion can deliver growth without further margin deterioration or operating losses.
- Monitor merchandise margins, customer merchandise losses, early purchase activity, and the effect of promotional pricing.
- Review debt maturities, variable-rate exposure, covenant headroom, and revolving-credit availability.
- Evaluate the potential outcome and financial impact of the IRS dispute and any regulatory or class-action litigation.
- Verify the sustainability of operating cash flow after tax benefits, rental merchandise purchases, capital expenditures, dividends, and debt repayments.
- Consider the seasonality of first-quarter merchandise sales, which management linked partly to customer tax refunds.