Business Context and Reporting Period
The filing is Rent-A-Center, Inc.’s audited Form 10-K for the fiscal year ended December 31, 2020, not an Upbound Group filing as identified in the request metadata. Rent-A-Center provides lease-to-own products through company-owned stores and e-commerce, retail-partner locations and virtual channels, Mexico stores, and franchised stores. The company reported four segments: Rent-A-Center Business, Preferred Lease, Mexico, and Franchising.
The filing covers the full fiscal year and includes unaudited quarterly data. The fourth quarter of 2020 generated revenue of $716.5 million, operating profit of $54.6 million, and net earnings of $56.3 million.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $2.814 billion | $2.670 billion | +5.4% |
| Gross profit | $1.672 billion | $1.644 billion | +1.7% |
| Gross margin | 59.4% | 61.6% | Down 220 basis points |
| Operating profit | $237.3 million | $253.9 million | -6.5% |
| Operating margin | 8.4% | 9.5% | Down 110 basis points |
| Adjusted operating profit excluding other charges and gains | $273.9 million | $193.1 million | +41.8% |
| Net earnings | $208.1 million | $173.5 million | +19.9% |
| Diluted earnings per share | $3.73 | $3.10 | +20.3% |
| Operating cash flow | $236.5 million | $215.4 million | +9.8% |
| Cash and cash equivalents at year-end | $159.4 million | $70.5 million | +126.2% |
| Gross debt at year-end | $197.5 million | $239.5 million | Down $42.0 million |
Rent-A-Center Business revenue increased 2.9% to $1.853 billion, with same-store revenue growth of 9.0% and operating profit growth of 41.3% to $333.4 million. Preferred Lease revenue increased 8.1% to $810.2 million, but operating profit declined 30.4% to $57.8 million as gross margin fell to 39.6% from 44.6%.
Mexico revenue declined 6.3% to $50.6 million, while operating profit increased 8.2% to $5.8 million. Franchising revenue increased 52.4% to $100.8 million and operating profit increased 74.5% to $12.6 million.
Cash uses included $34.5 million of capital expenditures, $63.1 million of dividends, $26.6 million of share repurchases, and $42.0 million of debt repayment. The company reported $1.751 billion of total assets, $1.159 billion of total liabilities, and $592.1 million of stockholders’ equity at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher Rent-A-Center Business same-store sales, e-commerce growth, Preferred Lease virtual-channel expansion, and increased Franchising activity.
- Profitability was mixed: Rent-A-Center Business operating profit improved substantially through lower labor and other store expenses, while Preferred Lease profitability deteriorated because of early customer payouts, merchandise losses, a higher virtual-location mix, and investment spending.
- Gross margin declined primarily because of higher cost of rentals and fees and merchandise-related costs.
- Store labor expense declined 8.1%, and other store expenses declined 1.3%, partly reflecting store closures, refranchising, furloughs, and cost controls.
- Other charges and gains shifted from a $60.7 million net gain in 2019 to a $36.6 million net charge in 2020. The 2019 results benefited from approximately $80 million of net proceeds from the Vintage litigation settlement and a $21.8 million gain on the headquarters sale.
- The company sold all 99 California corporate stores to a franchisee in October 2020, receiving approximately $16 million and recording a $16.6 million loss.
- Customer stolen merchandise losses increased to $174.5 million from $158.3 million, while total merchandise losses increased to $205.2 million from $184.2 million.
- The effective tax rate declined to 6.6% from 22.4%, primarily because of CARES Act net operating loss carryback benefits and releases of valuation allowances.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide specific quantitative 2021 revenue, earnings, or cash-flow guidance in the provided filing text. Management stated that operating cash flow and ABL availability were expected to fund operations for the next 12 months as of February 19, 2021, when cash on hand was approximately $70.7 million and ABL availability was approximately $294 million.
COVID-19 caused temporary closures or restrictions at approximately 65% of staffed Preferred Lease locations and partial closures at approximately 24% of Rent-A-Center Business stores. Management reduced expenses, inventory purchases, capital expenditures, and store hours, temporarily furloughed employees, renegotiated leases, and suspended repurchases for part of the year. The filing states that future pandemic restrictions, consumer spending, unemployment, supply-chain disruptions, and customer payment behavior remain uncertain.
On February 17, 2021, after the reporting date, the company completed its acquisition of Acima for approximately $1.273 billion in cash and 10.8 million shares valued at approximately $551 million. Financing included an $875 million senior secured term loan, a $550 million ABL facility, and $450 million of 6.375% senior unsecured notes. Pro forma total indebtedness was approximately $1.490 billion, with approximately $294 million of ABL availability after letters of credit.
The Acima acquisition materially increases leverage and integration risk. The Consumer Financial Protection Bureau is investigating Acima’s products and practices under a Civil Investigative Demand. Former Acima owners provided a $50 million indemnity escrow, but the filing states that the investigation’s outcome, potential liabilities, and sufficiency of the escrow remain uncertain.
Other significant risks include regulatory recharacterization of lease-to-own transactions as credit sales, competition from retailers and online providers, dependence on retail partners and third-party data, merchandise losses, cybersecurity and privacy exposures, supply-chain constraints, variable-rate debt, restrictive debt covenants, litigation, self-insurance estimates, and the ability to realize Acima synergies.
Material estimates included an $88.3 million self-insurance reserve and a $58.1 million merchandise-loss reserve. The company reported effective disclosure controls and internal control over financial reporting, with an unqualified independent auditor opinion.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Rent-A-Center, Inc. under ticker RCII, while the request identifies Upbound Group, Inc.
- Reconcile reported 2020 earnings and cash flow with nonrecurring items, particularly the 2019 Vintage settlement, the 2020 California store-sale loss, COVID-19 costs, legal reserves, and merger expenses.
- Assess the effect of the Acima acquisition on leverage, interest expense, dilution, covenant compliance, liquidity, and integration performance.
- Monitor the CFPB investigation of Acima and the potential for penalties, restitution, litigation, regulatory restrictions, or changes to business practices.
- Evaluate whether Preferred Lease can restore margins while expanding virtual channels and managing merchandise losses and retail-partner concentration.
- Review customer payment performance, merchandise-loss trends, reserve adequacy, and the impact of changing COVID-19 conditions on lease renewals and charge-offs.
- Verify dividend and repurchase capacity under the post-merger debt agreements, including restrictions triggered by liquidity or covenant conditions.
- Review the company’s detailed financial statements and subsequent Form 10-Q filings for Acima’s pro forma results, purchase accounting, and updated debt and liquidity information.