Business Context and Reporting Period
This unaudited Form 10-Q was filed by Rent-A-Center, Inc. (now associated with Upbound Group, Inc.) for the three months ended March 31, 2022. The company provides lease-to-own products and services through its Rent-A-Center Business, Acima, Mexico, and Franchising segments in the United States, Puerto Rico, and Mexico. The filing identifies the Acima acquisition completed on February 17, 2021 as a significant driver of year-over-year comparability.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $1,159.7 million | $1,036.8 million | +11.9% |
| Gross profit | $546.1 million | $510.5 million | +7.0% |
| Gross margin | 47.1% | 49.2% | Down 210 bps |
| Operating profit | $11.0 million | $70.0 million | -84.2% |
| Operating margin | 1.0% | 6.8% | Down 580 bps |
| Net income (loss) | $(4.2) million | $42.6 million | Decline of $46.8 million |
| Diluted earnings (loss) per share | $(0.08) | $0.64 | Decline |
| Cash flow from operations | $205.3 million | $135.8 million | +$69.5 million |
| Capital expenditures | $16.4 million | $11.4 million | +$5.0 million |
Cash and cash equivalents were $95.7 million at March 31, 2022, compared with $108.3 million at December 31, 2021. Total outstanding indebtedness was approximately $1.44 billion, consisting primarily of $866.2 million under the senior secured term loan, $120.0 million under the ABL facility, and $450.0 million of senior notes before debt issuance cost netting. Stockholders’ equity was $523.1 million.
The company declared a quarterly dividend of $0.34 per common share, compared with $0.31 per share in the prior-year quarter. No shares were repurchased during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased $122.9 million, primarily from the Acima segment and the inclusion of a full quarter of Acima Holdings operations.
- Acima revenue increased 31.0% to $599.4 million, while Acima operating profit decreased 61.3% to $9.6 million. Acima operating margin declined to 1.6% from 5.4%.
- Rent-A-Center Business revenue declined 1.2%, same-store revenue declined 1.1%, and operating profit declined 17.4% to $100.2 million.
- Mexico revenue increased 8.4% and operating profit increased 5.7% to $2.1 million.
- Franchising revenue decreased 34.6% to $26.1 million, primarily because franchisees purchased less inventory.
- Cost of rentals and fees increased 37.1%, and merchandise losses increased to $109.6 million from $65.3 million. Customer stolen merchandise losses increased to $99.7 million from $56.6 million.
- Other store expenses increased 33.6%, primarily due to higher customer merchandise loss rates. Store labor increased 6.3% and general and administrative expenses increased 14.8%.
- Other charges increased to $70.1 million from $51.1 million, including $36.6 million of stock compensation related to Acima acquisition consideration, $26.1 million of depreciation and amortization for acquired assets, software impairments, and severance.
- Interest expense increased to $19.0 million from $12.0 million. The prior-year period also included $8.7 million of debt refinancing charges.
- Operating cash flow improved despite the net loss, while 2021 investing and financing cash flows included the Acima acquisition and related debt financing.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management stated that operating cash flow and availability under the ABL facility are expected to be sufficient to fund operations for the next 12 months. At April 27, 2022, cash on hand was approximately $104.5 million and ABL availability was $343.6 million.
Management cited the expiration of government stimulus programs, higher consumer prices, wage inflation, labor constraints, supply-chain disruption, rising product costs, and deteriorating customer payment and merchandise-loss trends as significant operating pressures. The filing does not provide quantitative full-year revenue or earnings guidance.
- Acima customer stolen merchandise charge-offs were approximately 12.6% of revenue, compared with 8.6% in the prior-year period. Rent-A-Center Business stolen merchandise charge-offs increased to approximately 3.9% of lease-to-own revenue from 2.7%.
- The company has variable-rate exposure on the term loan and ABL facility. It estimated that a hypothetical 1.0% change in market interest rates would affect annualized pre-tax results by approximately $10.0 million.
- The Acima segment remains subject to integration, profitability, technology, consumer-credit, regulatory, and merchandise-loss risks.
- The Consumer Financial Protection Bureau is investigating Acima-related products, services, and practices. The company stated that no allegations had been made and that the timing and outcome were uncertain. Former Acima owners provided a $50 million indemnity escrow for specified claims, but the company cautioned that the escrow may be insufficient.
- The company is also addressing investigations or proposed settlements involving the California Attorney General, Massachusetts Attorney General, and a multistate Attorneys General investigation concerning virtual lease-to-own practices. No specific allegations had been made in the multistate investigation as of the filing.
- The company reported no material changes to the risk factors in its 2021 Form 10-K and concluded that disclosure controls and procedures were effective as of March 31, 2022.
Important Facts for Investors to Verify
- Whether Acima revenue growth can translate into sustainable operating profit after merchandise losses, acquired-asset amortization, and integration costs.
- Whether customer stolen merchandise losses and other loss rates normalize or remain elevated.
- The company’s ability to service approximately $1.44 billion of debt while maintaining dividends and funding rental merchandise purchases.
- Liquidity, borrowing-base availability, interest-rate exposure, and compliance with the ABL and term-loan covenants.
- The potential financial, operational, and reputational effects of the CFPB, California, Massachusetts, and multistate regulatory matters.
- The effect of inflation, labor costs, supply-chain constraints, consumer payment behavior, and the expiration of government stimulus programs on future results.
- The timing and magnitude of the remaining Acima-related restricted stock compensation, amortization, impairments, and other unusual charges.
- The filing’s historical registrant name and the company’s subsequent corporate identity, given the request identifies Upbound Group while the filing identifies Rent-A-Center, Inc.