UPBOUND GROUP, INC. annual report, FY2017

Business Context and Reporting Period

The source is Rent-A-Center, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, not Upbound Group, Inc. The filing covers the full 2017 fiscal year and provides unaudited fourth-quarter results. Rent-A-Center operates rent-to-own businesses through Core U.S., Acceptance Now, Mexico, and Franchising segments.

  • 3,968 total locations at year-end, down from 4,731 in 2016.
  • Core U.S. represented approximately 70% of consolidated revenue.
  • Year-end locations included 2,381 Core U.S., 1,231 Acceptance Now, 131 Mexico, and 225 franchised locations.

Key Financial Metrics

Metric20172016Change
Total revenue$2.703 billion$2.963 billionDown 8.8%
Gross profit$1.719 billion$1.935 billionDown 11.2%
Gross margin63.6%65.3%Down 170 basis points
Operating loss$63.1 million$66.6 millionImproved $3.5 million
Net earnings (loss)$6.7 million$(105.2) millionImproved $111.8 million
Diluted EPS$0.12$(1.98)Improved
Operating cash flow$110.5 million$354.1 millionDown $243.5 million
Capital expenditures$65.5 million$61.1 millionUp $4.3 million
Cash and equivalents$73.0 million$95.4 millionDown $22.4 million
Total debt$672.9 million$724.2 millionDown $51.3 million
Stockholders’ equity$272.4 million$264.9 millionUp $7.5 million

Fourth-quarter 2017 revenue was $639.0 million, gross profit was $410.9 million, operating loss was $54.9 million, and net earnings were $34.8 million, or $0.65 diluted earnings per share. The fourth-quarter net result benefited materially from a $116.9 million full-year income tax benefit, including the impact of the Tax Cuts and Jobs Act.

Material Changes Versus the Prior Comparable Period

  • Core U.S. revenue declined 11.3% to $1.835 billion, with same-store revenue down 8.0%. Core U.S. gross margin declined to 69.5% from 70.9%.
  • Acceptance Now revenue declined 2.4% to $798.0 million, while operating profit fell 54.1% to $48.6 million. The segment was affected by hhgregg and Conn’s location closures, higher merchandise losses, and lower margins.
  • Consolidated same-store revenue declined 5.4% to $1.754 billion.
  • The company reduced its store base substantially, including closures and mergers of Core U.S. and Acceptance Now locations.
  • Operating expenses declined 11.0%, but sales deleverage and unusual charges continued to pressure profitability.
  • 2016 included a $151.3 million Core U.S. goodwill impairment charge; no goodwill impairment was recorded in 2017.
  • Cash flow from operations fell sharply, partly because 2016 benefited from approximately $80.0 million of income tax refunds.
  • The company paid down $52.5 million of debt during 2017 and paid $12.8 million of dividends. No share repurchases occurred.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management focused on cost savings, a revised value proposition, improved Acceptance Now economics, and refranchising selected brick-and-mortar locations. The filing does not provide formal numerical revenue or earnings guidance.

  • Strategic review: The Board began reviewing strategic and financial alternatives in October 2017. The filing states that no particular transaction or outcome was assured.
  • Management transition: Mitchell E. Fadel became CEO on December 30, 2017, following multiple CEO changes over the prior two years.
  • Debt and liquidity: The senior credit facility included a $350 million revolving facility, with $85.0 million drawn and $109.7 million of availability at year-end, net of required excess availability. The revolving facility matures in March 2019. Management intended to refinance it in 2018.
  • Covenant: The actual fixed charge coverage ratio was 0.11:1 versus a required minimum of 1.10:1. The consequence was a requirement to maintain $50.0 million of excess availability; the filing describes this as a borrowing-capacity restriction rather than an event of default.
  • Unusual charges: 2017 operating charges included $19.2 million for Acceptance Now closures, $18.2 million for discontinued capitalized software, $5.4 million for hurricane-related costs, $3.9 million for an intangible asset impairment, $3.4 million for workforce reductions, and incremental legal and advisory costs.
  • Tax item: The Tax Cuts and Jobs Act generated a reported $116.9 million income tax benefit and an estimated $200 million of cash tax savings over the following three years, with future cash taxes expected to increase as accelerated depreciation benefits reverse.
  • Litigation: The company disclosed securities and shareholder derivative litigation related to prior public statements, its point-of-sale system, Acceptance Now performance, governance, and executive compensation. A California class action alleged violations of rental-purchase pricing and documentation requirements. Potential damages were not quantified in the filing.
  • Business risks: Major risks include declining consumer spending, regulatory changes affecting rent-to-own transactions, competition from e-commerce and lenders, dependence on retail partners, merchandise losses, information technology disruptions, cybersecurity, refinancing risk, and interest-rate exposure.

Most Important Facts an Investor Should Verify

  • Confirm the issuer identity: the supplied filing is for Rent-A-Center, Inc. rather than Upbound Group, Inc.
  • Review the refinancing status and terms of the revolving facility maturing in March 2019.
  • Assess whether the company can improve Core U.S. same-store revenue and Acceptance Now profitability after substantial location closures.
  • Separate recurring operating performance from the $116.9 million tax benefit and the numerous 2017 restructuring and impairment charges.
  • Monitor the fixed charge coverage shortfall, borrowing-base availability, required excess availability, and supplier credit terms.
  • Track the strategic alternatives process, management stability, cooperation agreement with Engaged Capital, and related governance changes.
  • Review the status and potential exposure of the disclosed securities, derivative, and California consumer litigation.