Business Context and Reporting Period
The submitted Form 10-Q is for Rent-A-Center, Inc., not Upbound Group, Inc. It covers the three months ended March 31, 2014, and was filed April 25, 2014. The company operated rent-to-own businesses through Core U.S., Acceptance Now, Mexico, and Franchising segments.
At March 31, 2014, the company operated 2,997 Core U.S. stores, 1,355 Acceptance Now kiosks, 173 Mexico stores, and 178 franchised stores. Canadian stores were reclassified into Core U.S. beginning January 1, 2014.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $833.7 million | $819.3 million | 1.8% increase |
| Gross profit | $562.9 million | $550.7 million | 2.2% increase |
| Gross margin | 67.5% | 67.2% | 30 basis-point increase |
| Operating profit | $59.8 million | $78.8 million | 24.1% decrease |
| Operating margin | 7.2% | 9.6% | 240 basis-point decrease |
| Net earnings | $28.9 million | $46.1 million | 37.4% decrease |
| Diluted EPS | $0.54 | $0.79 | 31.6% decrease |
| Operating cash flow | $120.1 million | $113.5 million | 5.8% increase |
| Capital expenditures | $23.1 million | $19.6 million | Increase |
Net earnings included a $1.9 million refinancing charge. Net interest expense increased to $11.2 million from $7.7 million, primarily because of the additional $250 million of senior notes issued in May 2013. The effective income tax rate was approximately 38.1% in 2014 versus 35.1% in 2013.
Cash and cash equivalents were $81.0 million at March 31, 2014, compared with $42.3 million at December 31, 2013. Total balance-sheet debt consisted of $325.0 million of senior debt and $550.0 million of senior notes. Rental merchandise, net, totaled $1.10 billion.
Material Changes Versus the Prior Comparable Period
- Revenue growth was modest because strong Acceptance Now and Mexico growth was offset by a decline in Core U.S. revenue.
- Core U.S. revenue declined 5.6%, operating profit declined 34.6%, and same-store revenue declined 6.1%. Core U.S. operating margin fell to 6.9% from 10.0%.
- Acceptance Now revenue increased 37.0%, supported by 26.1% same-store growth and 592 additional kiosks over the prior 12 months. Operating profit increased 37.9%.
- Mexico revenue increased 67.2%, but the segment remained loss-making, with an operating loss of $6.3 million compared with $4.6 million in the prior year.
- Salaries and other expenses increased 5.9% to $457.6 million, primarily because of labor costs associated with new Acceptance Now and Mexico locations. General and administrative expenses increased 15.3% to $44.7 million because of the modernization program and added corporate support.
- No common stock was repurchased during the quarter, compared with $17.4 million of repurchases in Q1 2013. Dividends declared increased to $0.23 per share from $0.21.
- The company corrected an immaterial prior-period accounting error related to rental merchandise reserves and doubtful accounts. The correction reduced reported Q1 2013 net earnings by approximately $0.3 million after tax.
Liquidity, Debt, Outlook, and Risks
On March 19, 2014, the company refinanced its senior secured facilities with a $900 million credit facility comprising $225 million of term loans and a $675 million revolving facility. At March 31, $225 million of term loans and $100 million of revolving debt were outstanding; $104.7 million of the revolver was used for letters of credit and $470.3 million was available. At April 21, 2014, total revolving availability, including the separate $20 million INTRUST line, was reported at $505.3 million.
The company was in compliance with its financial covenants at March 31, 2014: total leverage was 2.59:1 versus a maximum of 4.50:1, senior secured leverage was 0.85:1 versus 2.75:1, and fixed-charge coverage was 1.96:1 versus a minimum of 1.50:1.
Management stated that operating cash flow and available credit were expected to be sufficient for the next 12 months. The company expected approximately $100 million of 2014 capital expenditures, approximately 100 new Acceptance Now kiosks, and approximately 30 new Mexico stores.
Management was implementing a multi-year modernization program focused on supply chain improvements, value-based pricing, store-footprint optimization, and digital commerce. Approximately 150 Core U.S. stores were expected to be consolidated by the end of the second quarter, with an anticipated second-quarter charge of approximately $4 million and approximately $8 million of remaining lease obligations through 2016.
- Debt agreements restrict additional borrowing, acquisitions, dividends, share repurchases, asset sales, liens, and other corporate actions. A default could permit acceleration of secured debt and enforcement against substantially all company assets.
- Variable-rate debt creates interest-rate exposure; management estimated that a 1% rate change would affect annual pre-tax earnings by approximately $1.9 million. No interest-rate hedges were in place.
- Customer charge-offs increased in both Core U.S. and Acceptance Now, reaching approximately 2.8% and 6.3% of revenue, respectively.
- The company had $60 million of maximum guarantees related to franchisee financing, with $17.1 million outstanding at March 31, 2014.
- Tax examinations and litigation were ongoing, but management did not expect them to have a material effect. A favorable Tax Court decision concerning a disputed 2003-2007 tax issue remained subject to IRS appeal.
- Self-insurance reserves were $119.5 million at March 31, 2014.
Important Facts for Investors to Verify
- Verify the issuer identity: the filing text identifies the company as Rent-A-Center, Inc., while the request metadata identifies Upbound Group, Inc.
- Assess whether the Core U.S. turnaround and modernization program can offset declining same-store revenue and higher operating costs.
- Monitor Acceptance Now and Mexico growth, including charge-offs, new-location profitability, and the continued operating losses in Mexico.
- Reconcile reported debt, covenant-defined funded debt of $819.0 million, available revolver capacity, and future mandatory debt and lease payments.
- Evaluate the effect of the planned Core U.S. store consolidations, the expected $4 million charge, and remaining lease obligations.
- Confirm the sustainability of the $0.23 quarterly dividend and any future share repurchases under the credit agreement’s restricted-payment limitations.