Upbound Group, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Upbound Group, Inc. is a lease-to-own provider operating in the United States, Puerto Rico, Mexico and through franchised locations. Its four operating segments are Rent-A-Center Business, Acima, Mexico and Franchising. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company changed its corporate name from Rent-A-Center, Inc. to Upbound Group, Inc. in February 2023 and trades under the ticker UPBD.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $1.016 billion | $1.160 billion | Down 12.4% |
| Gross profit | $506.3 million | $546.1 million | Down 7.3% |
| Gross margin | 49.8% | 47.1% | Up 270 bps |
| Operating profit (loss) | $(35.1) million | $11.0 million | Down $46.2 million |
| Operating margin | (3.5)% | 1.0% | Down 450 bps |
| Net earnings (loss) | $47.3 million | $(4.2) million | Improved $51.6 million |
| Diluted EPS | $0.84 | $(0.08) | Improved $0.92 |
| Operating cash flow | $105.4 million | $205.3 million | Down $99.9 million |
| Capital expenditures | $9.5 million | $16.4 million | Down $6.9 million |
Revenue declines were concentrated in store rentals and fees, down 8.6%, and merchandise sales, down 30.0%. Interest expense increased to $28.1 million from $19.0 million. The reported net profit was substantially affected by a $110.1 million income tax benefit, primarily attributable to the tax treatment of accelerated stock compensation related to the Acima acquisition.
Segment performance and material changes
- Rent-A-Center Business: Revenue decreased 6.5% to $485.0 million, with same-store sales down 6.6%. Operating profit fell 31.2% to $69.0 million, and operating margin declined to 14.2% from 19.3%. Customer stolen-merchandise charge-offs increased to approximately 4.8% of lease-to-own revenue from 3.9%.
- Acima: Revenue decreased 19.3% to $483.8 million and gross merchandise volume declined 12.6% to $348.2 million. Operating profit increased to $53.9 million from $9.6 million, primarily because of lower customer merchandise losses, lower labor costs and lower acquired-intangible amortization. Operating margin improved to 11.1% from 1.6%.
- Mexico: Revenue increased 10.9% to $17.4 million, but operating profit decreased 51.8% to $1.0 million because of higher store expenses and merchandise losses.
- Franchising: Revenue increased 14.0% to $29.8 million, primarily due to increased merchandise purchases by franchisees. Operating profit was substantially unchanged at $4.8 million.
Cash flow, liquidity and debt
Cash and cash equivalents were $171.7 million at March 31, 2023, compared with $144.1 million at December 31, 2022. Operating cash flow was reduced by increased rental-merchandise purchases and ended at $105.4 million. Financing cash outflows included $42.0 million of debt repayments and $25.5 million of dividends. The company declared a quarterly dividend of $0.34 per share for the second quarter of 2023.
Total outstanding indebtedness was approximately $1.4 billion, consisting primarily of $817.6 million under the Term Loan Facility, $90.0 million under the ABL Credit Facility and $450.0 million of senior notes. The Term Loan Facility had an 8.125% interest rate and the ABL Facility had a 6.635% interest rate at March 31, 2023. ABL availability was $397.1 million, net of borrowings and letters of credit. The company stated that it was in compliance with its debt requirements and believed operating cash flow and ABL availability would fund operations for the next twelve months.
The ABL fixed-charge coverage ratio was 1.16 to 1.00, compared with a required 1.10 to 1.00 when the applicable availability or default triggers apply. A hypothetical 1.0 percentage-point change in market interest rates would affect annualized pretax results by approximately $9.2 million.
Unusual items, outlook and risks
- Other charges increased to $127.6 million from $70.1 million. Q1 2023 included $109.5 million of stock compensation related to restricted shares issued to former Acima owners, including $78.4 million attributable to accelerated vesting associated primarily with an executive transition, plus $18.2 million of acquired software and intangible-asset depreciation and amortization.
- Management attributed weaker demand to the expiration of government stimulus benefits, inflationary pressure on consumer discretionary income, tighter underwriting and lower durable-goods demand.
- Total merchandise losses declined to $80.1 million from $109.6 million, primarily because Acima customer-stolen merchandise losses decreased. Rent-A-Center Business stolen-merchandise losses increased.
- Management expects cash flow and available ABL capacity to be sufficient for the next twelve months, but the filing provides no specific full-year revenue, earnings or cash-flow guidance.
- Material risks include macroeconomic weakness, inflation, interest-rate increases, consumer payment and merchandise-loss trends, competition, technology and cybersecurity, supply-chain disruption, integration of Acima, regulatory changes affecting lease-to-own transactions and potential impairment of goodwill or intangible assets.
- The company is cooperating with investigations involving the Consumer Financial Protection Bureau, the Massachusetts Attorney General, a coalition of state attorneys general and the New York Attorney General. The filing states that outcomes, timing and potential monetary or operational impacts cannot currently be predicted.
- The company reported no material changes to the risk factors in its 2022 Form 10-K and concluded that disclosure controls and internal controls over financial reporting were effective as of March 31, 2023.
Important facts for investors to verify
- Whether revenue and active lease-portfolio trends stabilize, particularly in the Rent-A-Center Business and Acima segments.
- Whether Acima’s improved operating margin is sustainable after the significant reduction in merchandise losses and labor costs.
- The recurring versus nonrecurring impact of Acima-related stock compensation, acquired-asset amortization and the $110.1 million tax benefit.
- Available borrowing capacity, covenant compliance, variable-rate debt exposure and the company’s ability to refinance or repay maturities beginning in 2026 and 2027.
- The status and eventual cost of CFPB, New York, Massachusetts and multistate regulatory investigations.
- Whether operating cash flow can support rental-merchandise purchases, dividends, capital expenditures and debt service while consumer payment behavior remains pressured.