SEC Form 10-Q Summary
Filing identity: The supplied filing identifies the registrant as Rent-A-Center, Inc., not Upbound Group, Inc. The report covers the quarter and nine months ended September 30, 2011, and was filed October 28, 2011. Financial statements are unaudited.
Business Context and Reporting Period
Rent-A-Center operates rent-to-own stores and RAC Acceptance kiosks, with additional installment-sales and franchised operations. At September 30, 2011, it operated 3,002 company-owned stores, 721 RAC Acceptance locations, and 213 ColorTyme franchised stores. The company also operated in Canada, Mexico and Puerto Rico.
Key Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $704.3 million; up 6.0% | $2.145 billion; up 4.4% |
| Operating profit | $57.8 million; 8.2% margin | $211.4 million; 9.9% margin |
| Net earnings | $31.2 million; down 22.9% | $115.3 million; down 17.5% |
| Diluted EPS | $0.52, versus $0.62 | $1.84, versus $2.11 |
| Operating cash flow | Not separately provided | $266.7 million, versus $192.7 million |
Revenue growth was driven primarily by RAC Acceptance. Nine-month same-store revenue increased 0.4% to $1.753 billion; third-quarter same-store revenue increased 2.0% to $589.5 million. Merchandise-sales gross margin declined to 25.5% from 26.9% for the nine-month period and to 18.2% from 21.5% in the third quarter.
At September 30, 2011, cash and cash equivalents were $76.0 million. Senior debt was $388.3 million and senior notes were $300.0 million. The company reported $1.347 billion of total liabilities and $1.319 billion of stockholders’ equity.
Material Changes Versus Prior Comparable Period
- Operating profit declined 12.3% for the nine months and 16.7% for the quarter, primarily because of restructuring and impairment charges and higher strategic-growth expenses.
- Net earnings declined despite higher revenue, reflecting lower operating profit and higher interest expense.
- Interest expense increased 54.7% for the nine months to $28.2 million and 44.8% for the quarter to $8.8 million. The weighted-average interest rate increased to 5.52% for the nine months and 5.19% for the quarter.
- Operating cash flow increased by $74.0 million, aided by approximately $110.0 million of tax refunds, deferred taxes and other noncash items, partially offset by higher rental-merchandise purchases.
- Capital expenditures increased to $92.0 million from $57.4 million. Management expected approximately $25.0 million of additional capital expenditures for the remainder of 2011.
- The company repurchased 5.85 million shares for approximately $164.3 million during the first nine months, including 2.91 million shares for $71.5 million in the third quarter.
Debt, Liquidity and Unusual Items
- In July 2011, the company refinanced its senior secured debt with a $250.0 million five-year term loan and a $500.0 million five-year revolving facility, both maturing July 14, 2016.
- At September 30, the company reported a 1.66x consolidated leverage ratio versus a maximum of 3.25x and a 1.53x fixed-charge coverage ratio versus a minimum of 1.35x.
- At October 24, 2011, management reported $65.2 million of cash and $292.1 million of availability under revolving credit facilities. Management believed operating cash flow and available credit would fund requirements for the next twelve months.
- The company recorded $12.5 million of restructuring charges and a $7.3 million impairment charge during the first nine months. Third-quarter restructuring charges of $7.6 million related to store and kiosk closures, including eight Home Choice stores, 24 RAC Limited locations and 26 core rent-to-own stores.
- The company recorded a $2.8 million litigation settlement accrual for putative California wage-and-hour class actions.
- Self-insurance liabilities were $121.9 million at September 30, compared with $130.3 million at December 31, 2010.
Outlook, Commentary and Risks
Management expected continued operating cash flow strength but noted that liquidity could deteriorate if profitability weakened. Growth initiatives included new stores, acquisitions, RAC Acceptance kiosks, international expansion and investments in point-of-sale and management information systems. The filing provides no specific earnings or revenue guidance.
- Key risks include weak consumer spending, unemployment, disposable-income pressure, slower same-store growth, merchandise loss and theft, and lower margins in RAC Acceptance.
- Rent-to-own operations are subject to extensive state and local regulation; adverse legislation or litigation could require changes in business practices or result in material costs.
- Variable-rate debt exposes the company to higher interest expense; management estimated that a 1.0% rate change would affect pretax earnings by approximately $3.8 million.
- Debt agreements restrict additional borrowing, acquisitions, capital expenditures, dividends and share repurchases, and contain change-of-control and cross-default provisions.
- The company guaranteed up to $45.0 million of franchisee financing obligations, of which $20.4 million was outstanding at September 30, 2011.
- An IRS dispute concerning tax years 2003–2007 was scheduled for trial in November 2011. Management did not expect the matter or state examinations to materially affect the financial statements.
Investor Verification Items
- Verify the registrant and ticker: the supplied document is a Rent-A-Center 2011 Form 10-Q, despite the request identifying Upbound Group, Inc.
- Assess whether revenue growth from RAC Acceptance is sustainable after the reported decline in merchandise-sales margins.
- Reconcile reported operating cash flow with tax refunds, deferred taxes, restructuring charges and rental-merchandise investment.
- Monitor leverage, fixed-charge coverage, variable-rate debt exposure and revolving-credit availability.
- Evaluate the recurring effects of store closures, restructuring obligations, litigation, regulatory developments and self-insurance estimates.
- Consider the effect of substantial share repurchases and increased dividends on liquidity and debt-covenant capacity.