Business Context and Reporting Period
The filing is an unaudited Form 10-Q for Rent-A-Center, Inc. for the quarter and six months ended June 30, 2013. The provided metadata identifies Upbound Group, Inc., but the filing text identifies the registrant as Rent-A-Center, Inc.; this entity discrepancy should be verified.
Rent-A-Center operated rent-to-own stores and kiosks in the United States, Puerto Rico, Mexico, and Canada, plus the ColorTyme franchise business. At June 30, 2013, it operated 2,972 Core U.S. stores, 1,153 RAC Acceptance kiosks, 148 International stores, and 221 ColorTyme franchised stores.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
|---|---|---|
| Revenue | $760.5 million, up 1.4% | $1.580 billion, down 0.3% |
| Gross profit | $530.6 million; 69.8% margin | $1.081 billion; 68.4% margin |
| Operating profit | $77.4 million; 10.2% margin | $156.7 million; 9.9% margin |
| Net earnings | $42.0 million | $88.5 million |
| Diluted EPS | $0.76 | $1.56 |
| Operating cash flow | Not separately provided | $115.5 million |
- Six-month revenue was essentially flat because strong RAC Acceptance and International growth offset weakness in Core U.S.
- Six-month net earnings declined 8.0% from $96.1 million, while diluted EPS declined 3.1% from $1.61. Second-quarter net earnings declined 4.9%, but diluted EPS increased from $0.74 to $0.76 because of share repurchases.
- Cash and cash equivalents were $78.5 million at June 30, 2013, compared with $61.1 million at December 31, 2012.
- Rental merchandise, net, was $1.072 billion, including $849.3 million on rent and $218.3 million held for rent.
- Capital expenditures were $44.8 million for the first six months; management expected approximately $115.0 million for full-year 2013.
- Cash dividends declared were $0.21 per share in the second quarter and $0.42 per share for the first six months, versus $0.16 and $0.32, respectively, in the prior-year periods.
Debt and Liquidity
- At June 30, 2013, senior debt was $323.8 million and senior notes were $550.0 million. The senior notes comprised $300.0 million of 6.625% notes due 2020 and $250.0 million of 4.75% notes due 2021.
- The $750.0 million senior credit facilities included a $200.0 million term loan and $109.0 million drawn on the revolving facility; $109.6 million of revolving capacity was used for letters of credit and $281.4 million was available at June 30.
- A separate $20.0 million unsecured revolving line had an outstanding balance of $14.8 million at June 30, 2013.
- Actual debt covenant ratios were within requirements: consolidated leverage was 2.10:1 versus a maximum of 3.25:1, and fixed-charge coverage was 1.60:1 versus a minimum of 1.35:1.
- Operating cash flow declined from $161.1 million to $115.5 million, primarily because of increased investment in rental merchandise and changes in accounts payable.
- Management stated that operating cash flow and available credit facilities were expected to be sufficient for liquidity requirements over the next twelve months.
Material Changes Versus the Prior Comparable Period
- Core U.S. same-store revenue declined 7.4% for the first six months and 5.9% in the second quarter. Management cited delayed federal tax refunds, higher payroll taxes, macroeconomic conditions, and a weaker recurring revenue portfolio.
- RAC Acceptance revenue increased 48% for the first six months, and segment operating profit increased to $33.5 million from $9.8 million. The company added 187 locations during the period.
- International revenue increased 59% for the first six months, with 40 new Mexico stores added; segment operating losses improved to $12.7 million from $14.6 million.
- Six-month gross margin declined to 68.4% from 68.6%, primarily because RAC Acceptance growth carried lower margins. Cost of rentals and fees increased to 25.1% of rental and fee revenue from 24.2%.
- Operating margin declined to 9.9% from 10.8% for the first six months, reflecting a $40.0 million reduction in Core U.S. operating profit, partially offset by RAC Acceptance and International improvements.
- On May 2, 2013, the company issued $250.0 million of 4.75% senior notes due 2021. Proceeds funded a $200.0 million accelerated stock buyback and repayment of revolving debt.
- The company repurchased 4.6 million shares in the second quarter for approximately $160.0 million under the accelerated buyback and had repurchased 36.2 million shares for $994.8 million under its broader program through June 30.
- A revised depreciation method for certain held-for-rent merchandise became effective January 1, 2013; management said the change did not have a significant impact on reported earnings or margins.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected the Core U.S. portfolio to exceed prior-year levels in the third quarter and expected positive Core U.S. same-store sales growth in the fourth quarter of 2013.
- Management expected to add approximately 325 RAC Acceptance kiosks and approximately 60 Mexico stores during 2013.
- Management expected approximately $115.0 million of 2013 capital expenditures.
- The accelerated stock buyback had a forward-contract component with final settlement expected by or before February 2014; the company could receive additional shares or, under certain circumstances, deliver shares or cash.
- Key risks include consumer income and unemployment trends, customer payment and merchandise-loss experience, regulation of the rent-to-own industry, interest-rate exposure, foreign currency fluctuations, execution of new-store growth, acquired-store performance, litigation, tax matters, and data-security costs.
- The company had variable-rate debt with no interest-rate hedges. A hypothetical 1% change in interest rates was estimated to affect pretax earnings by approximately $3.1 million.
- The IRS commenced a limited-scope audit of the 2010 consolidated return. A separate dispute involving tax years 2003 through 2007 was awaiting a Tax Court decision; management did not expect a material financial impact.
- ColorTyme financing arrangements carried maximum guarantee obligations of $50.0 million, with $22.5 million outstanding at June 30, 2013.
- Self-insurance reserves were $117.6 million, and uncertain tax positions totaled $12.3 million at June 30, 2013.
- Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the correct registrant and ticker because the supplied metadata says Upbound Group, Inc., while the filing identifies Rent-A-Center, Inc.
- Reconcile the decline in Core U.S. same-store revenue with management’s forecast for improvement in the second half of 2013.
- Assess whether RAC Acceptance and International expansion can offset Core U.S. weakness without further compressing consolidated margins.
- Review debt maturities, variable-rate exposure, covenant headroom, and the availability of revolving credit after letters of credit.
- Verify the final share count and cash or share settlement of the accelerated stock buyback forward contract.
- Monitor the IRS and state tax examinations, self-insurance reserves, franchisee financing guarantees, litigation, and potential regulatory changes.