Business Context and Reporting Period
The filing is a Form 10-K for Rent-A-Center, Inc. for the fiscal year ended December 31, 2015, including fourth-quarter results. The request metadata identifies Upbound Group, Inc.; however, the supplied filing text identifies the registrant as Rent-A-Center, Inc. (Nasdaq: RCII), so the company identity should be verified.
Rent-A-Center operates rent-to-own and installment-sales businesses through four segments: Core U.S., Acceptance Now, Mexico and Franchising. At year-end, it operated 5,018 total locations, including 2,672 Core U.S. stores, 1,444 staffed Acceptance Now locations, 532 Acceptance Now Direct locations, 143 Mexico stores and 227 franchised stores.
Financial Performance and Key Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $3.278 billion | $3.158 billion | +3.8% |
| Gross profit | $2.118 billion | $2.184 billion | -3.0% |
| Gross margin | 64.6% | 69.2% | -460 bps |
| Operating profit (loss) | $(1.008) billion | $193.5 million | Declined $1.201 billion |
| Net earnings (loss) | $(866.6) million | $96.4 million | Declined $963.1 million |
| Diluted EPS | $(16.34) | $1.81 | Declined $18.15 |
| Operating cash flow | $230.5 million | $19.1 million | Increased $211.4 million |
| Capital expenditures | $80.9 million | $83.8 million | Declined $2.9 million |
Store revenue increased 3.9% to $3.254 billion. Same-store revenue increased 5.7% to $2.642 billion, driven primarily by Acceptance Now. Acceptance Now revenue rose 26.9% to $818.3 million and operating profit rose 9.8% to $124.0 million, although its operating margin declined to 15.1% from 17.5%. Core U.S. revenue declined 1.8% to $2.372 billion, and the segment reported a $959.4 million operating loss after a goodwill impairment charge. Mexico revenue declined 11.6% to $63.8 million, while its operating loss improved to $14.1 million from $22.0 million.
Labor expense declined 3.9% to $854.6 million, reflecting the flexible labor model and store rationalization. Merchandise losses increased to $206.8 million from $178.9 million, including $154.8 million of customer-stolen merchandise.
At December 31, 2015, cash and cash equivalents were $60.4 million, total debt was $968.4 million, total liabilities were $1.517 billion and stockholders’ equity was $470.5 million. Rental merchandise, net, was $1.136 billion. The company declared $0.96 per share of dividends for the year and paid approximately $51.0 million in dividends.
Material Changes Versus the Prior Comparable Period
- Fourth-quarter 2015 included a $1.170 billion non-cash Core U.S. goodwill impairment charge, producing a fourth-quarter operating loss of $1.121 billion and net loss of $913.0 million.
- The company recorded a $34.7 million smartphone inventory write-down in 2015; 2014 instead included a $6.8 million vendor settlement credit.
- Gross margin declined primarily because of the increasing mix of Acceptance Now revenue, lower-margin 90-day option transactions and merchandise sales, including smartphones.
- Core U.S. store count declined from 2,824 to 2,672. The company closed, sold or converted 157 Core U.S. stores during 2015 and continued consolidating underperforming locations.
- Acceptance Now expanded materially, adding 532 virtual/direct locations and increasing its share of consolidated revenue to approximately 25% from 20.4%.
- Total debt declined by approximately $74.4 million during 2015, while cash flow from operations improved substantially, partly due to lower rental merchandise purchases and tax refunds.
Outlook, Management Commentary, Risks and Unusual Items
Management is executing a multi-year transformation program focused on flexible labor, value-based pricing, centralized sourcing and distribution, new store and enterprise systems, Acceptance Now technology and e-commerce. E-commerce capabilities for the Core U.S. segment were planned for introduction in 2016. Management expected 2016 capital expenditures of approximately $70 million to $80 million and stated that operating cash flow plus available credit should fund requirements for the next 12 months.
The company expected a first-quarter 2016 mandatory excess-cash-flow prepayment of approximately $25 million to $30 million. As of February 22, 2016, it reported $89.4 million of cash and $460.3 million available under revolving credit facilities, subject to borrowing-base and other restrictions.
- Core U.S. performance remains the principal risk because it represented approximately 72% of 2015 consolidated revenue and has a mature, declining store base.
- Acceptance Now growth depends heavily on third-party retailers; approximately 71% of that segment’s revenue originated at kiosks located in stores operated by six retail partners.
- Debt agreements impose leverage, fixed-charge coverage, dividend, repurchase and other covenants. December 31, 2015 actual covenant ratios were 3.13:1 total leverage, 1.26:1 senior secured leverage and 1.87:1 fixed-charge coverage, compared with limits of 4.25:1, 2.75:1 and a minimum of 1.75:1, respectively.
- Approximately $1.647 billion of contractual cash obligations were disclosed, including debt, interest and operating leases. Operating lease commitments totaled $516.5 million.
- A comprehensive multi-state unclaimed-property audit was in progress, and management stated that the outcome was too early to determine.
- The company guarantees up to $47.0 million of franchisee financing obligations; $9.3 million was outstanding under those arrangements at year-end.
- Self-insurance reserves for workers’ compensation, general liability and vehicle liability totaled $115.4 million.
- A 1% increase in interest rates was estimated to increase annual pretax expense by approximately $3.4 million.
- The auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal control over financial reporting were effective.
Most Important Facts for Investors to Verify
- Confirm that the filing belongs to the intended issuer: the supplied document is for Rent-A-Center, Inc., not Upbound Group, Inc.
- Assess normalized profitability excluding the $1.170 billion goodwill impairment, $34.7 million smartphone write-down and other restructuring and store-closure charges.
- Evaluate whether Core U.S. same-store trends, store closures and labor savings can offset continued revenue and margin pressure.
- Review Acceptance Now’s lower-margin growth, charge-off rate and concentration among six retail partners.
- Reconcile reported operating cash flow with recurring cash generation, tax refunds, rental merchandise purchases and required debt repayments.
- Monitor compliance with debt covenants, the 2016 mandatory prepayment, maturities and restrictions on dividends or share repurchases.
- Follow the multi-state unclaimed-property audit, regulatory developments affecting rent-to-own transactions and potential litigation or self-insurance claims.
- Verify execution and costs of the new store information, finance/HR, distribution and e-commerce systems, including the planned 2016 rollout.