Business Context and Reporting Period
The filing is Rent-A-Center, Inc.’s Form 10-K for the fiscal year ended December 31, 2019. The request metadata identifies Upbound Group, Inc., but the filing text identifies the registrant as Rent-A-Center, Inc. (Nasdaq: RCII). The company provides lease-to-own and installment-sale products through company-owned stores, retail-partner locations, virtual channels, Mexico operations and franchised stores.
The company reported four segments: Rent-A-Center Business, Preferred Lease, Mexico and Franchising. At year-end, it operated 1,973 Rent-A-Center Business stores, 998 Preferred Lease staffed locations, 123 Mexico stores and 372 franchised stores; virtual locations are excluded from these counts.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $2.670 billion | $2.660 billion | 0.4% |
| Gross profit | $1.644 billion | $1.688 billion | (2.6)% |
| Gross margin | 61.6% | 63.5% | Down 1.9 points |
| Operating profit | $253.9 million | $56.1 million | 352.2% |
| Operating margin | 9.5% | 2.1% | Up 7.4 points |
| Net earnings | $173.5 million | $8.5 million | Up $165.1 million |
| Diluted EPS | $3.10 | $0.16 | Up $2.94 |
| Cash flow from operations | $215.4 million | $227.5 million | Down $12.1 million |
| Capital expenditures | $21.2 million | $28.0 million | Down $6.8 million |
| Cash and equivalents at year-end | $70.5 million | $155.4 million | Down $84.9 million |
| Total debt, net | $230.9 million | $540.0 million | Down $309.1 million |
Net earnings and operating profit benefited materially from unusual gains, including approximately $80 million of net proceeds from the Vintage Settlement and a $21.8 million gain on the sale and partial leaseback of the corporate headquarters. Excluding other charges, management reported 2019 profit of $193.1 million, or 7.2% of revenue, versus $115.5 million, or 4.3%, in 2018.
Quarterly fourth-quarter 2019 revenue was $667.9 million, operating profit was $67.8 million and net earnings were $40.5 million, compared with fourth-quarter 2018 revenue of $661.8 million, operating profit of $13.6 million and net earnings of $1.7 million.
Material Changes Versus the Prior Comparable Period
- Rent-A-Center Business revenue decreased 3.0% to $1.800 billion, mainly because of refranchising and store rationalization. Same-store revenue increased 4.1%, and operating profit rose 59.7% to $236.0 million.
- Preferred Lease revenue increased 3.7% to $749.3 million, supported by the Merchants Preferred acquisition and higher same-store revenue. Operating profit declined 11.6% to $83.1 million because of lower gross margin and higher merchandise losses.
- Mexico revenue increased 8.8% to $54.0 million and operating profit increased 105.6% to $5.4 million.
- Franchising revenue more than doubled to $66.1 million, primarily because company-owned stores were converted or sold to franchisees. Operating profit increased 64.3% to $7.2 million.
- Store labor expense declined 7.8% and other store expenses declined 6.1%, reflecting cost-savings initiatives and a smaller company-owned store base.
- Customer stolen merchandise losses increased to $158.3 million from $136.7 million. Total merchandise losses increased to $184.2 million from $169.9 million.
- The company acquired Merchants Preferred on August 13, 2019, for approximately $46.4 million, including cash and stock consideration, to expand virtual lease-to-own capabilities.
- The company refinanced its senior notes in August 2019 with a $200 million term loan and a $300 million asset-based revolving facility. Debt repayments exceeded new borrowings by approximately $303.2 million during 2019.
Liquidity, Debt and Capital Allocation
Management stated that operating cash flow and borrowing availability were sufficient to fund operations for the next 12 months. At December 31, 2019, the company had $239.5 million of outstanding senior debt: $199.5 million under the term loan and $40.0 million under the ABL facility. The ABL facility had approximately $168.2 million of availability at year-end, subject to borrowing-base limitations. The facilities mature in 2026 and 2024, respectively.
Contractual obligations included $568.9 million of debt principal and operating lease commitments, including $118.7 million due in 2020. Variable-rate debt created interest-rate exposure; management estimated that a 1% change in market rates would affect annual pre-tax earnings by approximately $2.4 million.
The company paid $13.7 million in dividends during 2019 and declared dividends of $0.54 per share. It repurchased 58,730 shares during the fourth quarter and had $253.9 million remaining under its authorized repurchase program at year-end. Dividends and repurchases remain subject to debt-agreement and liquidity restrictions.
Outlook, Commentary, Risks and Unusual Items
- Management’s strategy emphasizes virtual and e-commerce growth, the integrated Preferred Lease offering, continued Rent-A-Center Business same-store improvement, EBITDA-margin expansion and free-cash-flow generation.
- Management cautioned that the Merchants Preferred integration and virtual lease-to-own technology may be more difficult or costly than expected and could cause margin pressure because of higher merchandise costs and losses.
- Cost-savings benefits improved 2019 results, but management does not expect to realize those benefits at the same annualized rate in future periods.
- The $92.5 million Vintage Settlement payment, $21.8 million headquarters-sale gain, $13.0 million Blair class-action settlement and acquisition, store-closure and cost-reduction charges materially affected reported results.
- The FTC accepted a proposed consent order after year-end concerning transactions involving the purchase and sale of customer lease agreements. No fines or penalties were assessed, and the order was not expected to require material changes to current business practices.
- Preferred Lease concentration is significant: approximately 69% of segment revenue originated at kiosks located inside stores operated by four retail partners.
- Other key risks include consumer spending and employment conditions, regulatory changes affecting lease-to-own transactions, merchandise losses, dependence on suppliers and retail partners, cybersecurity and systems disruptions, litigation, self-insurance estimates and compliance with debt covenants.
- The company adopted the new lease standard in 2019, recording $281.6 million of operating lease right-of-use assets and $285.0 million of operating lease liabilities at year-end. Management expected the 2020 credit-loss standard adoption to have no material impact.
Important Facts for Investors to Verify
- Confirm the intended issuer: the supplied filing is for Rent-A-Center, Inc., not an entity named Upbound Group, Inc.
- Separate recurring operating performance from the Vintage Settlement and headquarters-sale gain when assessing 2019 profitability and cash flow.
- Track Preferred Lease merchandise-loss rates, gross margin and operating profit as the Merchants Preferred integration proceeds.
- Review ABL borrowing-base availability, collateral, covenant triggers, variable-rate exposure and scheduled maturities.
- Assess whether same-store growth can offset continued store closures, refranchising and revenue pressure in the Rent-A-Center Business segment.
- Monitor FTC consent-order implementation, state and federal lease-to-own regulation, class-action litigation and other legal contingencies.
- Evaluate the sustainability of dividends, share repurchases and free cash flow after merchandise purchases, lease obligations and debt service.