Business Context and Reporting Period
Rent-A-Center, Inc. (now associated with Upbound Group, Inc. in the request metadata) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company operates lease-to-own businesses through its Rent-A-Center Business, Acima, Mexico and Franchising segments.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 |
|---|---|---|
| Total revenue | $1,024.0 million | $3,254.9 million |
| Gross profit | $505.5 million; 49.4% margin | $1,584.2 million; 48.7% margin |
| Operating profit | $37.1 million; 3.6% margin | $106.2 million; 3.3% margin |
| Net earnings | $(5.8) million | $9.7 million |
| Diluted earnings per share | $(0.10) | $0.16 |
| Operating cash flow | Not separately provided | $412.1 million |
At September 30, 2022, cash and cash equivalents were $165.6 million. Senior debt, net, was $932.0 million and senior notes, net, were $437.5 million, for reported debt of approximately $1.37 billion. The company also had $90.0 million outstanding under its ABL facility, $373.8 million of ABL borrowing capacity and $86.2 million of outstanding letters of credit. Operating lease liabilities were $310.1 million.
The company declared quarterly dividends of $0.34 per share and paid $60.4 million of dividends during the first nine months. It repurchased $29.8 million of common stock during the quarter and reported $285 million remaining under the repurchase authorization after subsequent repurchases.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 13.3% and nine-month revenue declined 4.6% year over year.
- Third-quarter net results moved to a $5.8 million loss from $21.3 million of earnings; nine-month earnings fell 92.2% to $9.7 million from $125.1 million.
- Nine-month operating profit declined 56.4% to $106.2 million, and operating margin fell to 3.3% from 7.1%.
- Gross profit declined 5.0% for the nine-month period. Other store expenses increased 15.5%, principally due to higher merchandise losses, while labor expense increased 1.4%.
- Rent-A-Center Business revenue declined 3.2% for the nine months, with same-store revenue down 3.2%. Acima revenue declined 4.8%, and Acima operating profit fell 34.9%.
- Customer stolen merchandise losses increased to $262.2 million for the nine months from $202.9 million. Total merchandise losses increased to $288.8 million from $227.7 million.
- Operating cash flow increased to $412.1 million from $326.2 million, primarily due to lower inventory purchases and working-capital effects, despite substantially lower earnings.
- Debt declined from approximately $1.57 billion at December 31, 2021 to approximately $1.37 billion at September 30, 2022, reflecting $296.6 million of debt repayments partially offset by $90.0 million of new borrowings.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide specific quantitative full-year revenue, earnings or cash-flow guidance. Management expects operating cash flow and ABL availability to fund operations for the next 12 months.
Management attributed weaker performance to the expiration of government stimulus programs, inflation and reduced consumer discretionary income, tighter underwriting, wage inflation, supply-chain disruptions, lower product availability and higher merchandise losses. E-commerce represented approximately 23% of Rent-A-Center Business store revenue in the quarter, compared with 21% in the prior-year quarter.
Unusual or largely non-cash charges included $111.5 million of stock compensation related to Acima acquisition consideration, $62.5 million of depreciation and amortization of acquired software and intangible assets, $6.8 million of asset impairments and $5.2 million of employee severance during the first nine months. The effective tax rate was unusually high at 78.7%, primarily due to differences between book and tax goodwill related to the Acima acquisition.
The company settled a California Attorney General matter for $15.5 million in August 2022, including consumer restitution, civil penalties and injunctive requirements. Ongoing matters include a Consumer Financial Protection Bureau investigation of Acima, a Massachusetts Attorney General inquiry and a multistate state Attorneys General investigation. The company stated that outcomes cannot currently be predicted.
Interest-rate exposure is material: a hypothetical 1.0% change in market rates would affect annualized pretax results by approximately $9.7 million. The ABL facility was amended to replace LIBOR with Term SOFR. The company also identified inflation, recession risk, consumer credit performance, regulatory recharacterization of lease-to-own transactions, integration of Acima, data security, litigation and merchandise losses as significant risks.
Important Facts for Investors to Verify
- Confirm the registrant’s corporate name and ticker because the supplied filing identifies the registrant as Rent-A-Center, Inc., while the request metadata identifies Upbound Group, Inc.
- Assess whether higher merchandise losses, delinquency trends and tighter underwriting are temporary or represent a persistent deterioration in lease economics.
- Review Acima’s revenue, operating margin and customer-loss trends separately from the legacy Rent-A-Center Business.
- Evaluate debt-service capacity, variable-rate exposure, 2026 ABL maturity and the large 2028 term-loan maturity.
- Monitor the CFPB, multistate Attorneys General and Massachusetts matters, including potential liabilities beyond the $45 million Acima-related indemnity escrow.
- Separate recurring operating performance from Acima-related stock compensation, amortization, impairments, severance and other charges.
- Verify the sustainability of dividends and share repurchases given sharply lower earnings and the company’s approximately $1.37 billion of reported debt.