Business Context and Reporting Period
This Form 10-Q covers the three and nine months ended September 30, 2021. The filing identifies the registrant as Rent-A-Center, Inc. (Nasdaq: RCII), not Upbound Group, Inc.; investors should verify the company and filing mapping.
The company operates lease-to-own businesses through its Rent-A-Center Business, Acima, Mexico and Franchising segments. Acima Holdings was acquired on February 17, 2021 and materially changed the company’s scale, revenue mix and capital structure.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $1.181 billion | $712.0 million | $3.412 billion | $2.098 billion |
| Gross profit | $568.8 million | $425.0 million | $1.667 billion | $1.245 billion |
| Operating profit | $67.1 million | $80.2 million | $243.7 million | $182.7 million |
| Net earnings | $21.3 million | $64.0 million | $125.1 million | $151.8 million |
| Diluted EPS | $0.31 | $1.15 | $1.85 | $2.73 |
| Operating cash flow | Not separately provided | Not separately provided | $326.2 million | $296.2 million |
- Consolidated gross margin was 48.1% in Q3 and 48.8% for the first nine months, compared with 59.7% and 59.3%, respectively, in the prior-year periods.
- Operating margin was 5.7% in Q3 and 7.1% for the first nine months, compared with 11.3% and 8.7% in the prior-year periods.
- Q3 merchandise-sales gross margin was negative 18.8%, compared with negative 4.3% in 2020; the nine-month merchandise-sales gross margin was negative 11.1%, compared with positive 1.3%.
- Cash and cash equivalents were $158.8 million at September 30, 2021, compared with $159.4 million at December 31, 2020.
- Total outstanding indebtedness was approximately $1.32 billion, consisting primarily of $870.6 million under the Term Loan Facility and $450.0 million of senior notes, net of reported issuance costs.
- The company had no ABL borrowings, $463.6 million of available ABL capacity after letters of credit, and a fixed-charge coverage ratio of 1.66 to 1.00.
- Capital expenditures were $45.9 million for the first nine months, compared with $22.6 million in 2020. Dividends paid were $53.2 million, and share repurchases were $20.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 65.9% in Q3 and 62.7% for the first nine months, primarily because of the Acima acquisition. Acima contributed $623.4 million of Q3 revenue and $1.716 billion of nine-month revenue.
- Rent-A-Center Business revenue increased 5.6% in Q3 and 10.3% for the first nine months. Same-store revenue increased 12.3% and 12.3%, respectively, for the reported periods.
- Gross profit increased, but margins contracted because of the larger Acima virtual-business mix, higher rental merchandise costs, merchandise losses and product-cost pressures.
- Operating profit declined 16.3% in Q3 despite higher revenue, reflecting acquisition-related costs, stock compensation, acquired-asset depreciation and amortization, higher general and administrative expenses, refinancing charges and increased interest expense.
- For the first nine months, operating profit increased 33.4%, but net earnings declined 17.6% because of higher interest expense, taxes and significant acquisition-related charges.
- Other charges increased to $88.3 million in Q3 and $212.1 million for the first nine months. These included $93.1 million of Acima-related restricted-stock compensation, $81.7 million of acquired-asset depreciation and amortization, transaction and integration costs, and legal settlement reserves.
- Acima acquisition consideration included approximately $1.273 billion in cash and 10.8 million common shares. Approximately 8.1 million employee-related shares are subject to 36-month vesting and are being recognized as stock compensation.
Outlook, Risks, Contingencies and Unusual Items
Management stated that operating cash flow and available ABL capacity are expected to fund operations for the next 12 months. No specific revenue, earnings or margin guidance is provided in the filing.
- Management reported more normalized customer payment and loss activity after the expiration of government stimulus programs, along with labor-market tightness, wage inflation, supply-chain disruption, reduced product availability and rising product costs.
- Customer stolen-merchandise losses were $85.3 million in Q3 and $227.7 million for the first nine months, compared with $42.4 million and $158.1 million, respectively, in 2020. Acima’s stolen-merchandise charge-offs were approximately 9.3% of revenue in Q3 and 8.9% for the first nine months.
- The company is exposed to variable-rate debt. A hypothetical 1% change in market rates would change annualized pretax interest expense by approximately $8.8 million.
- The company is cooperating with a Consumer Financial Protection Bureau investigation involving Acima. A $50 million escrow is the stated indemnity holdback for certain regulatory and tax matters, but the company cannot predict the investigation’s scope, timing or outcome.
- California and Massachusetts Attorneys General inquiries remain unresolved, and a multistate investigation involving Nebraska and 38 other state Attorneys General was initiated after quarter-end.
- The company recorded $10.7 million of legal settlement reserves and $0.2 million of state sales-tax assessment reserves during the first nine months. Potential ultimate losses may differ materially from recorded amounts.
- Acima represented approximately 36% of consolidated revenue in Q3 and 31% for the first nine months. Management’s assessment of internal-control effectiveness excluded Acima while integration was ongoing.
- The company approved a $250 million share-repurchase program and repurchased approximately $20.0 million of shares during the quarter. It also declared a $0.31 per-share quarterly dividend.
Important Facts for Investors to Verify
- Confirm whether this Rent-A-Center Form 10-Q is the intended filing for Upbound Group, Inc.; the supplied filing does not identify Upbound Group.
- Assess the sustainability of Acima’s growth, its lower gross margin profile, merchandise-loss rates and integration benefits.
- Reconcile reported net earnings and operating profit with the substantial acquisition-related stock compensation, amortization, integration costs and legal reserves.
- Evaluate leverage, variable-rate exposure, debt maturities, covenant compliance and the company’s ability to maintain dividends and repurchases.
- Monitor the CFPB, state Attorneys General and other consumer-protection matters, including whether the $50 million escrow is sufficient.
- Consider the effects of labor inflation, supply-chain constraints, merchandise availability, customer credit performance and future COVID-19-related restrictions.