Filing Context and Reporting Period
This filing is a Form 10-K for Rent-A-Center, Inc. for the fiscal year ended December 31, 2012, filed February 25, 2013. The request metadata identifies Upbound Group, Inc. and “2012 Q4,” but the source filing is an annual Rent-A-Center report, not an Upbound Group quarterly filing.
Rent-A-Center operated four segments: Core U.S., RAC Acceptance, International, and ColorTyme. At year-end, it had 4,288 total locations, including 2,990 Core U.S. stores, 966 RAC Acceptance kiosks, 108 International stores, and 224 franchised ColorTyme stores.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $3.083 billion | $2.882 billion | Up 7.0% |
| Gross profit | $2.134 billion | $2.053 billion | Up 4.0% |
| Gross margin | 69.2% | 71.2% | Down 2.0 points |
| Operating profit | $318.5 million | $293.2 million | Up 8.6% |
| Operating margin | 10.3% | 10.2% | Up 0.1 point |
| Net earnings | $183.5 million | $164.6 million | Up 11.5% |
| Diluted EPS | $3.09 | $2.66 | Up 16.2% |
| Operating cash flow | $217.9 million | $286.6 million | Down $68.7 million |
| Cash and equivalents | $61.1 million | $88.1 million | Down $27.0 million |
| Total debt | $687.5 million | $740.7 million | Down $53.2 million |
Rental merchandise, net, increased to $1.021 billion from $953.2 million. Total assets were $2.869 billion and stockholders’ equity was $1.470 billion at December 31, 2012.
Cash uses included $102.5 million of capital expenditures, $61.9 million of share repurchases, $53.2 million of net debt repayment, and $37.9 million of cash dividends. Capital expenditures were expected to approximate $120 million in 2013.
Material Changes Versus the Prior Comparable Period
- RAC Acceptance revenue increased 77% to $343.3 million, and the segment moved from a $14.0 million operating loss to a $28.0 million operating profit. Locations increased from 750 to 966.
- International revenue increased 117% to $40.2 million, but the segment remained loss-making, with a $30.3 million operating loss. Mexico locations increased to 90, while Canada locations declined to 18 following the sale of 15 stores.
- ColorTyme revenue increased 12% to $43.7 million, while operating profit declined to $2.3 million from $3.2 million, partly reflecting management reorganization costs.
- Core U.S. revenue increased modestly, but the mature store base remained the principal source of financial performance, contributing approximately 86% of consolidated revenue and substantially all operating profit.
- Gross margin declined because RAC Acceptance has higher merchandise costs and because of promotional strategy changes in Core U.S. Cost of rentals and fees rose to 24.3% of rental and fee revenue from 22.8%.
- Same-store revenue increased 1.4%, compared with 0.8% in 2011. Unusually high early purchase activity accelerated revenue recognition but reduced the number of agreements remaining on rent later in the year.
- Operating cash flow declined primarily because 2011 included approximately $113 million of tax refunds. Reversals of prior bonus-depreciation tax benefits also created an estimated $39 million net cash-flow use in 2012.
- The company repurchased 1.8 million shares for $61.9 million in 2012. Cumulative repurchases under the $1.0 billion authorization totaled $777.3 million at year-end.
Debt, Liquidity, Outlook, and Risks
- Debt consisted of $387.5 million under senior credit facilities and $300.0 million of 6.625% senior notes due 2020. The senior facilities mature July 14, 2016.
- At December 31, 2012, the company reported a consolidated leverage ratio of 1.64x versus a maximum of 3.25x and a fixed-charge coverage ratio of 1.68x versus a minimum of 1.35x.
- At February 18, 2013, $232.7 million was available under revolving credit facilities and cash was $77.8 million. Management believed operating cash flow and available credit were sufficient for the next twelve months.
- Variable-rate debt exposed the company to interest-rate risk; a hypothetical 1.0% rate change would affect annual pretax earnings by approximately $3.9 million. No interest-rate hedges were in place.
- Management expected to add approximately 350 RAC Acceptance locations and 60 International stores in 2013. These plans depend on retail-partner relationships, execution of international expansion, customer demand, and capital availability.
- Principal risks include the maturity of the Core U.S. store base, dependence on Core U.S. performance, concentration among RAC Acceptance retail partners, regulatory changes affecting rent-to-own transactions, consumer financial stress, foreign-exchange and political risks in Mexico, litigation, information-security failures, and debt covenant or refinancing risk.
- The company recorded a $1.0 million goodwill impairment charge in the International segment during the third quarter of 2012 because of sustained underperformance by certain Canadian stores. No additional goodwill impairment was identified at year-end.
- ColorTyme guarantees up to $50.0 million of franchisee financing; $24.9 million was outstanding under those arrangements at December 31, 2012.
- The company disclosed a disputed tax matter involving tax years 2003 through 2007. Management did not expect the matter or state examinations to result in a material impact, but a Tax Court decision was expected during 2013.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2012.
Investor Verification Points
- Verify the issuer identity: the supplied filing is for Rent-A-Center, Inc. under ticker RCII, not Upbound Group, Inc.
- Reconcile revenue growth with the declining gross margin and determine whether RAC Acceptance expansion can sustain acceptable returns.
- Assess the effect of early purchase activity on future rental-agreement growth, recurring revenue, merchandise utilization, and cash generation.
- Review the decline in operating cash flow, expected 2013 capital expenditures, tax-deferral reversals, and available borrowing capacity.
- Monitor Core U.S. same-store trends, past-due percentages, stolen-merchandise charge-offs, and the maturity of the store base.
- Review debt covenants, variable-rate exposure, scheduled 2013 debt maturities, change-of-control provisions, and restrictions on dividends and repurchases.
- Evaluate International losses, Canadian store performance, Mexico expansion risks, and potential future goodwill impairments.
- Review regulatory developments, litigation reserves, the unresolved tax matter, self-insurance reserves of $116.1 million, and the $24.9 million of outstanding guaranteed franchisee financing.