Business Context and Reporting Period
This Form 10-K is for Rent-A-Center, Inc., not Upbound Group, Inc. It covers the fiscal year ended December 31, 2018, including fourth-quarter results. Rent-A-Center operates rent-to-own and installment businesses through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. At year-end, the company operated 3,763 locations, down from 3,968 in 2017.
- Core U.S.: 2,158 company-owned stores and approximately 70% of consolidated revenue.
- Acceptance Now: 1,106 staffed kiosks and 96 direct locations.
- Mexico: 122 stores.
- Franchising: 281 franchised stores in 32 states.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $2.660 billion | $2.703 billion | Down 1.6% |
| Gross profit | $1.688 billion | $1.719 billion | Down 1.8% |
| Gross margin | 63.5% | 63.6% | Down 0.1 percentage points |
| Operating profit | $56.1 million | $(63.1) million | Improved $119.2 million |
| Operating margin | 2.1% | (2.3)% | Improved 4.4 percentage points |
| Net earnings | $8.5 million | $6.7 million | Up 27.6% |
| Diluted EPS | $0.16 | $0.12 | Up $0.04 |
| Operating cash flow | $227.5 million | $110.5 million | Up $117.0 million |
| Capital expenditures | $28.0 million | $65.5 million | Down $37.5 million |
| Cash and equivalents | $155.4 million | $73.0 million | Up $82.4 million |
| Total debt | $540.0 million | $672.9 million | Down $132.8 million |
Fourth-quarter 2018 revenue was $661.8 million, operating profit was $13.6 million, and net earnings were $1.7 million, or $0.03 diluted EPS. The first quarter was loss-making, with a net loss of $19.8 million, while the second and third quarters generated net earnings of $13.8 million and $12.9 million, respectively.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because Acceptance Now revenue fell $75.4 million following kiosk closures associated with former retailer partners hhgregg and Conn’s. Core U.S. revenue increased $20.3 million, supported by a 4.4% same-store revenue increase.
- Acceptance Now operating profit increased $45.3 million to $94.0 million despite lower revenue, driven by lower labor, store expenses, merchandise losses, and closure costs.
- Core U.S. operating profit increased $61.6 million to $147.8 million, supported by cost reductions and lower store expenses.
- Consolidated merchandise losses declined to $169.9 million from $209.5 million, including a reduction in customer-stolen merchandise losses.
- The company reduced its store base through consolidation and closures, including 138 Core U.S. stores and nine Mexico locations during 2018.
- Franchising revenue increased 47.2% to $32.6 million, although segment operating profit declined 13.7% to $4.4 million.
- No goodwill impairment was recorded in 2018, compared with a $151.3 million Core U.S. impairment charge in 2016. The company reported $56.8 million of goodwill at December 31, 2018.
- The company adopted ASC 606 in 2018. The filing states that the adoption had no material effect on the consolidated statement of operations, although it changed presentation of franchise advertising fees and affected opening retained earnings by $1.3 million.
Liquidity, Debt, Outlook, Risks, and Unusual Items
- Cash flow from operations funded debt reduction, capital expenditures, and liquidity needs. The company repaid $139.3 million of debt during 2018.
- The $200.0 million revolving credit facility had no outstanding borrowings at year-end and approximately $95.9 million of availability after letters of credit and reserves. The facility was scheduled to mature on December 31, 2019.
- Senior notes consisted of $292.7 million of 6.625% notes due November 2020 and $250.0 million of 4.75% notes due May 2021. Contractual obligations totaled approximately $1.020 billion, including $408.6 million of operating lease commitments.
- Management stated that operating cash flow and credit-facility availability were expected to fund requirements for the next 12 months, but emphasized the need to recapitalize debt on favorable terms.
- 2018 other charges totaled $59.3 million and primarily reflected cost-savings initiatives, store closures, legal and advisory fees, software write-downs, and hurricane-related costs. The filing identifies approximately $30.4 million related to cost-savings initiatives, $16.4 million of incremental legal and advisory fees, and $11.6 million of store closure costs.
- The company terminated its merger agreement with Vintage Capital on December 18, 2018, and demanded a $126.5 million reverse breakup fee. Vintage Capital and B. Riley challenged the termination in Delaware litigation. A trial occurred in February 2019, with the outcome pending as of the filing date.
- The company agreed to an $11.0 million securities class-action settlement, expected to be paid by its insurance carrier, subject to final court approval.
- The Blair class action in California alleges violations of the Karnette Rental-Purchase Act and seeks statutory damages, injunctive relief, and attorneys’ fees. The filing states that the company intends to defend the matter but cannot assure that it will have no liability.
- Key risks include consumer spending and employment trends, regulatory changes affecting rent-to-own transactions, supplier and partner concentration, e-commerce competition, merchandise losses, information-technology disruptions, cybersecurity, refinancing risk, litigation, and management transitions.
- The company plans to adopt the new lease accounting standard beginning January 1, 2019. It expects recognition of substantial operating lease assets and liabilities on the balance sheet, with no significant expected effect on operating results or cash flows.
Most Important Facts for Investors to Verify
- Confirm that the filing belongs to Rent-A-Center, Inc. rather than Upbound Group, Inc.; the provided metadata and filing issuer do not match.
- Track the refinancing or recapitalization of the revolving facility before its December 2019 maturity and the senior notes due in 2020 and 2021.
- Monitor the outcome and cash implications of the $126.5 million Vintage Capital reverse breakup fee litigation.
- Assess whether Core U.S. same-store growth and cost savings can offset the smaller store base and continued Acceptance Now revenue pressure.
- Review the effect of store closures, partner concentration, merchandise losses, and the new Acceptance Now pricing strategy on sustainable margins.
- Verify final approval and insurance payment of the $11.0 million securities litigation settlement and developments in the Blair class action.
- Evaluate the cash flow impact of operating lease liabilities and the adoption of the new lease standard.