Business Context and Reporting Period
Company: Rent-A-Center, Inc. (Note: Metadata listed "UPBOUND GROUP, INC." but the filing text identifies the registrant as Rent-A-Center, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The company is the largest operator in the U.S. rent-to-own industry, operating 3,004 company-owned stores and franchising 213 stores through ColorTyme, Inc. It offers durable goods on a rent-to-own basis and provides financial services (loans, check cashing) in 345 locations.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2009) | Value (in thousands) | YoY Change |
|---|---|---|
| Total Revenues | $2,079,043 | -4.8% |
| Net Earnings | $124,161 | +20.0% |
| Operating Profit | $221,742 | +5.3% |
| Operating Margin | 10.7% | +110 bps |
| Diluted EPS | $1.86 | +20.8% |
| Net Cash from Operating Activities | $299,349 | -4.9% |
| Cash and Cash Equivalents (Sep 30, 2009) | $39,905 | -54.3% vs. Dec 31, 2008 |
| Senior Debt Outstanding | $659,080 | -8.5% vs. Dec 31, 2008 |
| Subordinated Notes | $0 | Fully repaid in 2009 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $105.4 million (4.8%) year-over-year. Store revenues fell 4.7% primarily due to a 3.9% decrease in same-store sales and revenue attrition from stores closed in the 2007 restructuring plan.
- Profitability Increase: Despite lower revenue, Net Earnings increased by $20.7 million (20.0%). This was driven by a $11.2 million increase in operating profit and a significant $30.6 million reduction in interest expense.
- Interest Expense Reduction: Interest expense dropped 58.0% to $22.1 million, attributed to the full repayment of $225.4 million in subordinated notes and lower Eurodollar rates.
- Cost Control: Salaries and other expenses decreased by $65.3 million (5.3%) due to cost control initiatives, including better management of labor and inventory losses. Charge-offs for stolen merchandise decreased to 2.3% of rental store revenues from 2.5%.
- Intangible Amortization: Amortization and write-down of intangibles decreased by $9.7 million (80.0%) as assets from the Rent-Way acquisition were fully amortized.
Guidance, Outlook, Risks, and Unusual Items
- Debt Repayment: The company successfully repurchased all outstanding 7.5% senior subordinated notes ($225.4 million) in May and July 2009.
- Restructuring: The 2007 store consolidation plan is nearing completion. Approximately $21.5 million in cash has been used, with an estimated $2.9 million remaining for future lease obligations, expected to be completed by Q2 2013.
- Financial Services Expansion: The company aims to expand financial services to approximately 400 store locations by the end of 2010, though profitability is not guaranteed.
- Liquidity: Cash and cash equivalents decreased to $39.9 million. The company maintains a $400 million revolving credit facility with $280.5 million available as of October 27, 2009. Management believes operating cash flow and credit facilities are sufficient for the next 12 months.
- Legal Proceedings: As of September 30, 2009, the company had no accruals for probable litigation losses, having resolved previous significant matters (Shafer/Johnson and California Attorney General settlements).
- Risks: Key risks include the ability to increase revenue in mature stores, regulatory changes in rent-to-own and financial services laws, and the potential acceleration of debt in the event of a change in control.
Investor Verification Checklist
- Same-Store Sales Trend: Verify the sustainability of the 3.9% decline in same-store sales and the company's strategy to reverse this trend in mature stores.
- Financial Services Profitability: Monitor the performance of the 345 financial services locations and the timeline for achieving positive cash flow in new locations.
- Debt Covenants: Confirm continued compliance with the senior credit facility covenants (Leverage Ratio: 1.84:1 vs. 3.25:1 max; Fixed Charge Coverage: 1.96:1 vs. 1.35:1 min).
- Inventory Management: Review the "Skips and stolens" metric ($45.7 million for nine months) to ensure loss prevention initiatives remain effective.
- Capital Expenditures: Track the $53.6 million spent on capital expenditures in the first nine months against the projected $15.0 million for the remainder of 2009.