UPBOUND GROUP, INC. annual report, FY2022

Upbound Group, Inc. Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. The filing was submitted February 24, 2023. Although the request references 2022 Q4, the source is an annual Form 10-K and reports full-year results. The company changed its name from Rent-A-Center, Inc. to Upbound Group, Inc. in February 2023 and began trading under the ticker UPBD on February 27, 2023.

Business Context

Upbound is a lease-to-own provider operating in the United States, Puerto Rico and Mexico. Its principal segments are Rent-A-Center Business, Acima, Mexico and Franchising. Acima provides virtual and staffed lease-to-own solutions through third-party retailers and e-commerce channels. At year-end, the company operated 1,851 Rent-A-Center stores, 126 Mexico stores and 447 franchised stores; Acima locations are not included in these counts.

Acima represented approximately 50% of consolidated revenue and Rent-A-Center Business approximately 46% in 2022. The company employed 12,690 coworkers at December 31, 2022.

Financial Results and Key Metrics

Metric	2022	2021	Change
Total revenue	$4.245 billion	$4.583 billion	Down 7.4%
Gross profit	$2.080 billion	$2.235 billion	Down 7.0%
Gross margin	49.0%	48.8%	Up 20 basis points
Operating profit	$148.5 million	$280.5 million	Down 47.1%
Operating margin	3.5%	6.1%	Down 260 basis points
Net earnings	$12.4 million	$134.9 million	Down 90.8%
Diluted EPS	$0.21	$2.02	Down 89.6%
Operating cash flow	$468.5 million	$392.3 million	Up $76.2 million

Store rentals and fees declined 4.2% to $3.375 billion; merchandise sales declined 18.6% to $675.3 million.
Interest expense, net, increased to $87.1 million from $70.7 million.
The effective tax rate increased to 79.9% from 30.6%, driven primarily by lower pretax income, nondeductible Acima-related stock compensation and the absence of certain 2021 benefits.
Merchandise losses increased to $375.2 million from $331.9 million, including customer stolen merchandise losses of $336.5 million.
Rent-A-Center Business revenue declined 4.3%, same-store revenue declined 4.5%, and operating profit declined 25.5% to $334.5 million.
Acima revenue declined 9.4% to $2.110 billion, gross merchandise volume declined 17.2% to $1.584 billion, and operating profit declined 14.3% to $151.3 million.
Mexico revenue increased 5.7%, but operating profit declined 20.2% to $6.3 million. Franchising revenue declined 22.9% to $120.3 million.
Rent-A-Center e-commerce revenue represented approximately 25% of segment store revenue, compared with 24% in 2021.

Cash Flow, Liquidity and Capital Structure

Year-end cash and cash equivalents were $144.1 million, compared with $108.3 million at December 31, 2021.
Total debt outstanding was approximately $1.4 billion, consisting primarily of $859.7 million under the Term Loan Facility, $90.0 million under the ABL Credit Facility and $450.0 million of senior notes.
The company had $395.6 million of available ABL borrowing capacity at December 31, 2022, net of letters of credit of approximately $64.4 million.
Cash uses included $298.8 million of debt repayments, $79.2 million of dividends, $75.1 million of share repurchases and $61.4 million of capital expenditures. Debt proceeds were $90.0 million.
Variable-rate debt was approximately $950 million. Management estimated that a 1% change in market interest rates would affect annualized pretax expense or income by approximately $9.6 million.
The company stated that operating cash flow and ABL availability should be sufficient to fund operations for the next 12 months. The ABL fixed-charge coverage ratio was 1.17 to 1.00 at year-end, and the company reported compliance with its debt requirements.
The quarterly dividend was $0.34 per share for the first quarter of 2023. The board’s ability to pay dividends and repurchase shares remains subject to cash generation, debt covenants and other restrictions.

Material Changes Versus 2021

Revenue and operating profit fell substantially as stimulus programs wound down, inflation reduced customers’ discretionary income, underwriting was tightened and product availability remained constrained by supply-chain disruption.
Customer payment behavior deteriorated, increasing delinquent payments, merchandise losses and charge-offs. Rent-A-Center skip/stolen losses rose to 4.9% of lease-to-own revenue from 3.1%; Acima losses rose to 10.6% of revenue from 9.6%.
Gross margin improved modestly, but operating margin declined because of lower revenue, higher merchandise losses, wage inflation and other store expenses.
Operating cash flow improved despite lower earnings, primarily because of lower inventory purchases and working-capital effects.
Other charges remained significant at $235.3 million, including $143.2 million of Acima-related stock compensation, $80.8 million of acquired software and intangible amortization, $6.8 million of asset impairments and $5.0 million of severance.
The company repurchased 3.54 million shares for approximately $75.1 million during 2022. Approximately $285.0 million remained available under the repurchase authorization.
No goodwill impairment was recorded after the October 1, 2022 quantitative assessment.

Outlook, Management Commentary and Risks

Management characterized the macroeconomic environment as challenging and stated that the full impact of inflation, consumer payment behavior, interest rates, supply-chain conditions and possible recession remains uncertain. The company expects its lease-to-own model to remain relevant for credit-constrained consumers, while continuing to invest in virtual lease-to-own technology, e-commerce, data analytics, retail-partner expansion and integration of Acima.

Material risks include weaker consumer spending, reduced disposable income, higher unemployment, increased delinquencies and merchandise losses, inflation, wage pressure and supply-chain disruption.
Acima purchases merchandise generally at retail prices rather than wholesale prices, creating lower gross-margin exposure and higher risks related to virtual transactions, merchant fraud, consumer fraud and retail-partner dependence.
The company faces significant legal and regulatory risk, including potential recharacterization of lease-to-own transactions as credit sales and increased consumer-protection scrutiny.
The CFPB investigation into certain Acima practices remained unresolved. The filing states that no allegations had been made, but potential outcomes include monetary penalties, restitution, litigation, sanctions or changes to business practices. Remaining indemnity escrow of $45 million was scheduled for release on the earlier of February 17, 2024 or final resolution of the CID, subject to pending claims.
In August 2022, the company paid $15.5 million to settle a California Attorney General matter, including restitution, civil penalties and compliance requirements, without admitting wrongdoing. A Massachusetts Attorney General inquiry and a multistate Attorneys General investigation remained unresolved.
Debt service and refinancing risk are significant. The ABL matures in February 2026, the Term Loan Facility in February 2028 and the senior notes in February 2029.
Critical estimates include merchandise loss reserves of $93.6 million, trade receivable accruals and allowances, self-insurance liabilities of $81.2 million, income taxes and impairment assessments.

Facts Investors Should Verify

Whether revenue and active lease trends stabilize after the 2022 decline and underwriting tightening.
Whether merchandise losses, delinquency rates and customer payment behavior improve or remain elevated.
Acima’s ability to restore growth and margins while managing retail-partner, regulatory, fraud and technology risks.
The ultimate scope, timing and financial impact of the CFPB, Massachusetts and multistate Attorneys General matters.
Liquidity headroom under the ABL facility, compliance with fixed-charge and other debt covenants, and the effect of higher variable interest rates.
The sustainability of dividends and share repurchases given leverage, cash-flow requirements and debt restrictions.
Whether Acima integration benefits and anticipated revenue or cost synergies are realized.
The impact of the $303 million estimated 2023 reversal of deferred tax benefits related to bonus depreciation.
The company’s ability to manage significant non-cash charges, including Acima-related stock compensation and amortization.
The filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2022.