Business Context and Reporting Period
This filing is Rent-A-Center, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, including fourth-quarter results. The request metadata identifies Upbound Group, Inc., but the filing itself identifies the registrant as Rent-A-Center, Inc. The company operates rent-to-own businesses through four segments: Core U.S., Acceptance Now, Mexico, and Franchising.
- 4,594 total locations at year-end: 2,824 Core U.S., 1,406 Acceptance Now, 177 Mexico, and 187 franchised stores.
- Core U.S. represented approximately 76% of consolidated revenue; Acceptance Now represented approximately 20%.
- The company continued a multiyear transformation program involving labor, pricing, sourcing, distribution, technology, and store consolidation.
Key Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $3.158 billion | $3.094 billion | 2.1% |
| Gross profit | $2.184 billion | $2.153 billion | 1.4% |
| Gross margin | 69.2% | 69.6% | Down 40 bps |
| Operating profit | $193.5 million | $247.0 million | Down 21.7% |
| Operating margin | 6.1% | 8.0% | Down 190 bps |
| Net earnings | $96.4 million | $128.8 million | Down 25.1% |
| Diluted EPS | $1.81 | $2.33 | Down 22.3% |
| Operating cash flow | $19.1 million | $134.3 million | Down $115.2 million |
| Capital expenditures | $83.8 million | $108.4 million | Down $24.6 million |
| Cash and equivalents | $46.1 million | $42.3 million | Up $3.9 million |
| Total debt | $1.043 billion | $916.3 million | Up $126.5 million |
Fourth-quarter 2014 revenue was $796.5 million, operating profit was $47.7 million, net earnings were $25.6 million, and diluted EPS was $0.48, compared with fourth-quarter 2013 revenue of $766.2 million, operating profit of $34.7 million, net earnings of $13.2 million, and diluted EPS of $0.25.
Cash uses during 2014 included $83.8 million of capital expenditures, $48.7 million of cash dividends, and $27.4 million for acquisitions. No shares were repurchased during the year. The company declared $0.93 per share of dividends for 2014.
Material Changes Versus the Prior Comparable Period
- Acceptance Now revenue increased 31.8% to $644.9 million, same-store revenue increased 25.5%, and operating profit increased 26.8% to $112.9 million. The company added a net 81 locations and deployed its virtual solution in 650 locations.
- Core U.S. revenue declined 4.5% to $2.415 billion, same-store revenue declined 4.0%, and operating profit declined 14.9% to $265.0 million. The company closed 150 stores and merged their customer accounts into existing stores.
- Mexico revenue increased 53.1% to $72.2 million, but the segment continued to report an operating loss of $22.0 million. Management stopped opening new stores and pursued initiatives to improve profitability.
- Franchising revenue declined 12.4% to $26.1 million, while operating profit increased 77.8% to $3.3 million, primarily because of higher royalty revenue and lower rebranding-related costs.
- Operating expenses increased 4.4%, including a 6.4% increase in other store expenses and a 10.0% increase in general and administrative expenses, reflecting Acceptance Now growth, higher merchandise charge-offs, professional fees, and transformation investments.
- Interest expense increased 20.8% to $46.9 million because of refinancing-related borrowing costs and the full-year effect of the 2013 senior notes issuance.
- The effective tax rate declined to 32.3% from 38.2%, primarily due to wage credits, research and development credits, and deferred-tax adjustments.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected to deploy a flexible Core U.S. labor model throughout 2015 and 2016, operationalize a third-party distribution-center network in the second half of 2015, and roll out virtual Acceptance Now kiosks in the second half of 2015 with a plan for 1,250 unmanned locations.
- Expected 2015 capital expenditures were $70 million to $80 million. The filing does not provide formal revenue or earnings guidance.
- The company refinanced its senior credit facility in March 2014 with $225 million of term loans and a $675 million revolving facility. At December 31, 2014, senior debt was $492.8 million and senior notes were $550.0 million. The company reported compliance with its leverage and fixed-charge covenants.
- Available liquidity consisted primarily of cash and revolving credit capacity. At February 23, 2015, the company reported $97.5 million of cash and $430.6 million available under revolving facilities, including its INTRUST line.
- Debt agreements restrict additional debt, acquisitions, dividends, share repurchases, asset sales, and other corporate actions. A change of control could accelerate debt and require repurchase of senior notes at 101% of principal plus accrued interest.
- 2014 included a $6.8 million vendor settlement credit, $5.1 million of store-closure charges, $2.8 million of corporate restructuring charges, and a $4.6 million impairment charge for unused internally developed software.
- The company identified and corrected immaterial accounting errors during the fourth quarter. The corrections affected previously reported revenue, cost, expense, tax, retained earnings, and quarterly results but did not affect annual operating cash flow.
- A comprehensive multistate unclaimed-property audit was in progress. Management stated that the ultimate outcome could not yet be determined.
- Key risks include weak or declining Core U.S. demand, execution of the transformation program and new information systems, competitive pressure from e-commerce and alternative financing, merchandise theft and charge-offs, reliance on third-party Acceptance Now retailers, Mexico losses, regulatory changes affecting rent-to-own transactions, interest-rate exposure, litigation, cybersecurity, self-insurance estimates, and goodwill impairment.
Important Facts for Investors to Verify
- Confirm the registrant identity: the supplied filing is for Rent-A-Center, Inc., not Upbound Group, Inc.
- Assess whether Acceptance Now growth can offset continued Core U.S. revenue and profitability declines without further margin deterioration.
- Monitor operating cash flow, which fell sharply to $19.1 million, and the company’s dependence on revolving debt and expected tax refunds.
- Review debt maturities, covenant headroom, variable-rate exposure, and restrictions on dividends, acquisitions, and share repurchases.
- Evaluate the sustainability of the 2014 tax-rate benefit and the timing of approximately $125 million of deferred-tax reversals expected in 2015.
- Track Mexico’s path to profitability and the consequences of planned store closures.
- Review the impact of store closures, customer-account migrations, merchandise charge-offs, and the 90-day cash option on future margins.
- Assess execution risk for the new labor model, distribution network, Enterprise system, and planned virtual kiosk rollout.
- Consider the sensitivity of approximately $1.37 billion of goodwill to Core U.S. performance; the filing states that Core U.S. fair value exceeded carrying value by only slightly more than 6%.