Business Context and Reporting Period
Filing mismatch: The request identifies Upbound Group, Inc., but the supplied Form 10-Q is for Rent-A-Center, Inc. and its subsidiaries. The filing covers the unaudited quarter ended March 31, 2011, and was filed April 29, 2011.
Rent-A-Center operated 3,018 company-owned stores, 485 RAC Acceptance kiosks, and 208 franchised ColorTyme stores at quarter-end. Its primary business was leasing household durable goods on a rent-to-own basis, supplemented by merchandise sales, installment sales, franchise activity, and international operations.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $742.2 million | $718.4 million | +3.3% |
| Operating profit | $80.4 million | $88.7 million | -9.3% |
| Operating margin | 10.8% | 12.3% | -150 bps |
| Net earnings | $44.2 million | $51.5 million | -14.1% |
| Net margin | 6.0% | 7.2% | Down |
| Diluted EPS | $0.69 | $0.77 | -10.4% |
| Operating cash flow | $147.9 million | $71.9 million | +$76.0 million |
| Capital expenditures | $27.1 million | $16.1 million | +$11.0 million |
Revenue growth was driven primarily by the RAC Acceptance business and the acquisition of The Rental Store, Inc., partly offset by the discontinuation of the financial services business. Same-store revenue increased 0.1% to $638.4 million. Franchise revenue increased 7.8% to $10.5 million.
Cash and cash equivalents were $145.0 million at March 31, 2011, compared with $70.7 million at December 31, 2010. Total assets were $2.679 billion and stockholders’ equity was $1.395 billion.
Debt consisted of $358.6 million of senior term debt and $300.0 million of 6.625% senior notes due 2020. The senior notes had a fair value of $295.5 million. At April 25, 2011, the company reported $170.9 million of cash and $258.0 million of aggregate availability under revolving credit facilities, although $137.0 million of the revolving facility was utilized for letters of credit.
Material Changes Versus the Prior Comparable Period
- Total revenue increased $23.8 million, or 3.3%, but operating expenses grew faster than revenue.
- Operating profit declined $8.3 million, primarily because of a $7.3 million impairment charge related to the discontinued financial services business and higher general and administrative costs.
- Interest expense increased 60.4% to $9.8 million, reflecting the 2010 senior notes issuance and higher average borrowing rates.
- Operating cash flow more than doubled, primarily because of approximately $110.0 million of tax refunds received during the quarter and changes in prepaid expenses.
- The company repurchased 868,765 shares for approximately $28.5 million and paid $3.8 million of dividends; the company had repurchased $579.7 million of shares cumulatively under its $800.0 million authorization.
- The company opened 13 stores, added 109 RAC Acceptance kiosks, consolidated two stores, and acquired accounts from two locations for approximately $525,000.
- Merchandise inventory increased to $860.9 million from $772.9 million a year earlier, reflecting higher purchases and the larger operating platform.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that operating cash flow and available credit were expected to be sufficient to fund liquidity requirements for the next twelve months. It expected approximately $58.0 million of additional capital expenditures for the remainder of 2011. No formal earnings or revenue guidance was provided.
- The company expects first-quarter results to benefit seasonally from merchandise purchases and early purchase options funded by customer tax refunds; third-quarter revenue and rental agreement growth are typically slower.
- Operating performance depends on same-store sales, new store openings, acquisitions, customer-account retention, and the success of RAC Acceptance and international expansion.
- Variable-rate term debt exposed the company to higher interest costs; management estimated that a 1% rate increase would produce approximately $3.6 million of additional annualized pre-tax expense based on the quarter-end exposure.
- Senior credit facilities required a maximum consolidated leverage ratio of 3.25x and a minimum fixed-charge coverage ratio of 1.35x. Actual ratios were 1.33x and 1.76x, respectively, at March 31, 2011.
- A $2.8 million litigation settlement accrual was recorded for prospective settlements of California putative class actions involving wage-and-hour claims.
- A tax dispute covering certain 2003–2007 issues was docketed for U.S. Tax Court trial in November 2011. Management did not expect a material financial statement impact, but the ultimate outcome remained uncertain.
- Self-insurance reserves totaled $132.1 million at March 31, 2011. Actual losses could exceed recorded reserves.
- Contractual obligations totaled approximately $1.398 billion, including debt, senior-note interest, operating leases, and capital leases.
- Major risks included consumer spending and unemployment trends, fuel costs, regulation of rent-to-own transactions, litigation, debt covenant compliance, refinancing and interest-rate risk, international expansion, information systems, and data security.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Rent-A-Center, Inc., not Upbound Group, Inc.
- Assess whether revenue growth and near-flat same-store revenue can offset margin pressure from impairment charges, higher interest expense, and strategic investment.
- Separate recurring operating cash generation from the approximately $110.0 million tax refund benefit received in the quarter.
- Review debt maturities, variable-rate exposure, credit-facility availability, and compliance with leverage and fixed-charge coverage covenants.
- Monitor the discontinued financial services business for additional impairment, disposal, or restructuring costs.
- Evaluate the California litigation settlement, tax dispute, self-insurance reserves, and franchisee guarantee exposure, which was $19.3 million outstanding against maximum guarantees of $45.0 million.
- Confirm the effectiveness of new point-of-sale and management-information systems and the related implementation costs and disruption risk.