Business Context and Reporting Period
The source is Rent-A-Center, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, not Upbound Group, Inc. The filing covers the full 2017 fiscal year and provides unaudited fourth-quarter results. Rent-A-Center operates rent-to-own businesses through Core U.S., Acceptance Now, Mexico, and Franchising segments.
- 3,968 total locations at year-end, down from 4,731 in 2016.
- Core U.S. represented approximately 70% of consolidated revenue.
- Year-end locations included 2,381 Core U.S., 1,231 Acceptance Now, 131 Mexico, and 225 franchised locations.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $2.703 billion | $2.963 billion | Down 8.8% |
| Gross profit | $1.719 billion | $1.935 billion | Down 11.2% |
| Gross margin | 63.6% | 65.3% | Down 170 basis points |
| Operating loss | $63.1 million | $66.6 million | Improved $3.5 million |
| Net earnings (loss) | $6.7 million | $(105.2) million | Improved $111.8 million |
| Diluted EPS | $0.12 | $(1.98) | Improved |
| Operating cash flow | $110.5 million | $354.1 million | Down $243.5 million |
| Capital expenditures | $65.5 million | $61.1 million | Up $4.3 million |
| Cash and equivalents | $73.0 million | $95.4 million | Down $22.4 million |
| Total debt | $672.9 million | $724.2 million | Down $51.3 million |
| Stockholders’ equity | $272.4 million | $264.9 million | Up $7.5 million |
Fourth-quarter 2017 revenue was $639.0 million, gross profit was $410.9 million, operating loss was $54.9 million, and net earnings were $34.8 million, or $0.65 diluted earnings per share. The fourth-quarter net result benefited materially from a $116.9 million full-year income tax benefit, including the impact of the Tax Cuts and Jobs Act.
Material Changes Versus the Prior Comparable Period
- Core U.S. revenue declined 11.3% to $1.835 billion, with same-store revenue down 8.0%. Core U.S. gross margin declined to 69.5% from 70.9%.
- Acceptance Now revenue declined 2.4% to $798.0 million, while operating profit fell 54.1% to $48.6 million. The segment was affected by hhgregg and Conn’s location closures, higher merchandise losses, and lower margins.
- Consolidated same-store revenue declined 5.4% to $1.754 billion.
- The company reduced its store base substantially, including closures and mergers of Core U.S. and Acceptance Now locations.
- Operating expenses declined 11.0%, but sales deleverage and unusual charges continued to pressure profitability.
- 2016 included a $151.3 million Core U.S. goodwill impairment charge; no goodwill impairment was recorded in 2017.
- Cash flow from operations fell sharply, partly because 2016 benefited from approximately $80.0 million of income tax refunds.
- The company paid down $52.5 million of debt during 2017 and paid $12.8 million of dividends. No share repurchases occurred.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management focused on cost savings, a revised value proposition, improved Acceptance Now economics, and refranchising selected brick-and-mortar locations. The filing does not provide formal numerical revenue or earnings guidance.
- Strategic review: The Board began reviewing strategic and financial alternatives in October 2017. The filing states that no particular transaction or outcome was assured.
- Management transition: Mitchell E. Fadel became CEO on December 30, 2017, following multiple CEO changes over the prior two years.
- Debt and liquidity: The senior credit facility included a $350 million revolving facility, with $85.0 million drawn and $109.7 million of availability at year-end, net of required excess availability. The revolving facility matures in March 2019. Management intended to refinance it in 2018.
- Covenant: The actual fixed charge coverage ratio was 0.11:1 versus a required minimum of 1.10:1. The consequence was a requirement to maintain $50.0 million of excess availability; the filing describes this as a borrowing-capacity restriction rather than an event of default.
- Unusual charges: 2017 operating charges included $19.2 million for Acceptance Now closures, $18.2 million for discontinued capitalized software, $5.4 million for hurricane-related costs, $3.9 million for an intangible asset impairment, $3.4 million for workforce reductions, and incremental legal and advisory costs.
- Tax item: The Tax Cuts and Jobs Act generated a reported $116.9 million income tax benefit and an estimated $200 million of cash tax savings over the following three years, with future cash taxes expected to increase as accelerated depreciation benefits reverse.
- Litigation: The company disclosed securities and shareholder derivative litigation related to prior public statements, its point-of-sale system, Acceptance Now performance, governance, and executive compensation. A California class action alleged violations of rental-purchase pricing and documentation requirements. Potential damages were not quantified in the filing.
- Business risks: Major risks include declining consumer spending, regulatory changes affecting rent-to-own transactions, competition from e-commerce and lenders, dependence on retail partners, merchandise losses, information technology disruptions, cybersecurity, refinancing risk, and interest-rate exposure.
Most Important Facts an Investor Should Verify
- Confirm the issuer identity: the supplied filing is for Rent-A-Center, Inc. rather than Upbound Group, Inc.
- Review the refinancing status and terms of the revolving facility maturing in March 2019.
- Assess whether the company can improve Core U.S. same-store revenue and Acceptance Now profitability after substantial location closures.
- Separate recurring operating performance from the $116.9 million tax benefit and the numerous 2017 restructuring and impairment charges.
- Monitor the fixed charge coverage shortfall, borrowing-base availability, required excess availability, and supplier credit terms.
- Track the strategic alternatives process, management stability, cooperation agreement with Engaged Capital, and related governance changes.
- Review the status and potential exposure of the disclosed securities, derivative, and California consumer litigation.