Upbound Group, Inc. 2023 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2023; it is an annual Form 10-K rather than a standalone fourth-quarter filing. Upbound provides lease-to-own and related installment solutions in the United States, Puerto Rico, Mexico and through franchised locations.
- Rent-A-Center: Company-owned stores and rentacenter.com; 1,839 locations at year-end.
- Acima: Virtual and staffed lease-to-own solutions offered through retail partners and digital channels; approximately 48% of consolidated revenue.
- Mexico: 131 company-owned stores.
- Franchising: 440 franchised stores in 30 states.
- Total locations across Rent-A-Center, Mexico and Franchising decreased to 2,410 from 2,424 in 2022.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $3,992.4 million | $4,245.4 million | Down 6.0% |
| Gross profit | $2,022.3 million | $2,079.5 million | Down 2.8% |
| Gross margin | 50.7% | 49.0% | Up 170 bps |
| Operating profit | $162.9 million | $148.5 million | Up 9.6% |
| Operating margin | 4.1% | 3.5% | Up 60 bps |
| Net earnings | $(5.2) million | $12.4 million | Declined to a loss |
| Diluted EPS | $(0.09) | $0.21 | Declined |
| Operating cash flow | $200.3 million | $468.5 million | Down $268.2 million |
Revenue consisted primarily of $3,261.7 million of store rentals and fees, $541.8 million of merchandise sales, $63.6 million of installment sales and $122.3 million of franchising revenue. Merchandise losses totaled $313.8 million, down from $375.2 million in 2022.
At December 31, 2023, cash and cash equivalents were $93.7 million. Total indebtedness was approximately $1.3 billion, consisting primarily of $811.1 million under the Term Loan Facility, $70.0 million under the ABL Credit Facility and $450.0 million of senior notes. ABL availability was $429.6 million, net of letters of credit. The company stated that operating cash flow and ABL availability should fund operations for the next twelve months.
Cash uses included $138.6 million of debt repayments, $83.1 million of dividends, $53.4 million of capital expenditures and $50.0 million of share repurchases. The company declared a quarterly dividend of $0.37 per share for the first quarter of 2024 and had approximately $235.0 million remaining under its repurchase authorization.
Material changes versus the prior comparable period
- Rent-A-Center revenue declined $85.7 million, with same-store revenue down 4.3%; operating profit declined $61.0 million. E-commerce represented approximately 26% of segment lease-to-own store revenue versus 25% in 2022.
- Acima revenue declined $179.0 million, primarily from fewer open leases, lower merchandise sales and fewer early purchase options. Despite lower revenue, operating profit increased $84.2 million to $235.5 million as merchandise losses and labor costs declined.
- Mexico revenue increased 15.0%, but operating profit declined 22.7% because of higher store expenses, labor costs and merchandise losses.
- Franchising revenue increased 1.7%, while operating profit declined 10.7% due primarily to lower gross margin.
- Operating profit improved despite lower revenue because total operating expenses declined $71.6 million, including lower labor and other store expenses. Interest expense increased $25.7 million, contributing to the net loss.
- Cash flow from operations declined sharply because of increased inventory purchases. Rental merchandise, net, increased to $1.234 billion from $1.125 billion.
Outlook, management commentary, risks and unusual items
Management highlighted continuing uncertainty from inflation, higher interest rates, wage pressure, supply-chain conditions, consumer payment behavior and reduced discretionary income. The company tightened underwriting, which reduced active leases, lease revenue and operating cash flow. No formal financial guidance is provided in the filing text.
- Variable-rate debt totaled approximately $881 million. A 1.0% change in market interest rates would affect annualized pretax expense or income by approximately $8.8 million. No interest-rate swaps were outstanding.
- The Acima segment has higher merchandise acquisition costs and merchandise-loss exposure than Rent-A-Center and relies on retail partners, proprietary decisioning systems and virtual lease-to-own technology.
- The CFPB investigation into Acima remains unresolved. Potential remedies identified by CFPB staff include restitution, disgorgement, damages, injunctive relief and civil money penalties. Approximately $45 million remained in an indemnity escrow as of the filing date, but the company cannot determine whether it will be sufficient.
- Acima also faces a multi-state attorneys general investigation and a New York Attorney General investigation. The company disclosed that outcomes, timing and potential financial effects cannot currently be predicted.
- Upbound settled a Massachusetts Attorney General matter in November 2023 for $8.75 million and agreed to specified account-management, training and reporting requirements.
- Other charges included $137.5 million of stock compensation related to the Acima acquisition, $72.9 million of amortization and depreciation of acquired assets, and $9.2 million of accelerated depreciation for legacy point-of-sale software. Additional depreciation of approximately $6.1 million is expected after year-end.
- The company reported no material cybersecurity incident during 2023 through February 27, 2024, and management and the auditor concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether active leases, GMV, customer payment behavior and merchandise-loss rates improve, particularly in Acima.
- Whether Rent-A-Center same-store sales and operating margins stabilize after the 2023 decline.
- Whether operating cash flow recovers after the significant 2023 reduction and supports dividends, capital expenditures and debt service.
- ABL borrowing availability, fixed-charge covenant compliance and the refinancing or repayment requirements for the February 2026 ABL maturity and February 2028 Term Loan maturity.
- The ultimate resolution, monetary exposure and required business-practice changes arising from the CFPB, multi-state attorneys general and New York Attorney General matters.
- The sustainability of dividends and share repurchases given the net loss, approximately $1.3 billion of debt and restrictive debt covenants.
- The assumptions underlying merchandise-loss, receivables, self-insurance, tax and goodwill estimates, including the $84.7 million merchandise-loss reserve and $71.6 million self-insurance liability.