Business Context and Reporting Period
This unaudited Form 10-Q covers Rent-A-Center, Inc. and subsidiaries for the three and six months ended June 30, 2017. The source filing identifies the registrant as Rent-A-Center, Inc.; the request metadata identifies Upbound Group, Inc., so the issuer name should be verified. The company operates rent-to-own and installment-sales businesses through Core U.S., Acceptance Now, Mexico, and Franchising segments.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $677.6 million, down 9.6% | $1.420 billion, down 10.4% |
| Gross profit | $432.5 million, down 13.5%; 63.8% margin | $895.2 million, down 13.5%; 63.1% margin |
| Operating profit | $(0.9) million versus $27.6 million | $0.3 million versus $76.0 million |
| Net income (loss) | $(8.9) million versus $9.9 million | $(15.6) million versus $35.0 million |
| Diluted EPS | $(0.17) versus $0.19 | $(0.29) versus $0.66 |
| Operating cash flow | Not separately presented | $111.9 million versus $303.2 million |
| Capital expenditures | Not separately presented | $40.2 million versus $28.2 million |
At June 30, 2017, cash and cash equivalents were $73.8 million, down from $95.4 million at December 31, 2016. Senior debt, net, was $97.6 million and senior notes, net, were $538.1 million. Gross debt before issuance-cost reductions was approximately $647.4 million, comprising $49.7 million of term loans, $55.0 million of revolver borrowings, $292.7 million of 6.625% senior notes, and $250.0 million of 4.75% senior notes.
Cash used in financing activities was $95.7 million, including $174.7 million of debt repayments, $87.6 million of new debt proceeds, and $8.5 million of dividends paid. The company declared dividends of $0.08 per share in each quarter and was limited to $15 million of annual dividends under its credit agreement.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because Core U.S. revenue fell 15.0% year to date and Core U.S. same-store revenue fell 11.4%. Total six-month same-store revenue declined 7.6%.
- Acceptance Now revenue increased 1.9% year to date, supported by a 4.1% increase in same-store revenue, but operating profit declined 31.1% because of store-closure charges and higher merchandise losses.
- Gross margin declined to 63.1% year to date from 65.3%, reflecting pricing actions, inventory-mix changes, and the new value proposition. Merchandise-sales margin fell to 6.2% from 11.4%.
- Operating profit fell to $0.3 million from $76.0 million, while net income turned into a loss. Excluding other charges, six-month operating profit was $25.0 million, or 1.8% of revenue, versus $97.3 million, or 6.1%, in 2016.
- Operating cash flow decreased by $191.3 million, primarily because 2016 benefited from approximately $80 million of income-tax refunds and because of weaker earnings and working-capital changes.
- The company closed or merged 771 locations during the first six months, including 370 Acceptance Now staffed and 381 Acceptance Now direct locations. Ending locations declined to 4,091 from 4,731 at the beginning of the period.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management announced a strategy focused on strengthening Core U.S., optimizing and growing Acceptance Now, and expanding digital, technology, and omni-channel capabilities. The filing does not provide quantitative earnings or revenue guidance. Management stated that operating cash flow and available credit were expected to fund liquidity requirements for the next 12 months, but also noted that liquidity could deteriorate if profitability does not meet expectations.
On June 6, 2017, the company amended its credit agreement. Revolving capacity was reduced from $675 million to $350 million, additional collateral protections were provided, and borrowing became subject to a borrowing-base calculation. The company recorded $1.9 million of debt-refinancing charges and capitalized approximately $5.1 million of arrangement and amendment fees.
The actual consolidated fixed-charge coverage ratio was 0.77:1 at June 30, 2017, below the amended 1.10:1 requirement. The consequence was a requirement to maintain $50.0 million of excess revolver availability. Reported revolver availability, net of this requirement, was $143.4 million. Letters of credit totaled $91.1 million.
Other charges totaled $24.8 million for the first six months, including Acceptance Now closure costs, a $3.9 million intangible-asset impairment, corporate severance, litigation settlements, and legal and advisory costs. Acceptance Now closures included locations affected by the Conn's referral-contract termination and hhgregg's bankruptcy and store liquidations.
Material risks include continued Core U.S. sales deterioration, merchandise losses and customer delinquencies, execution of store-consolidation and technology initiatives, liquidity and covenant compliance, variable-rate debt exposure, potential change-of-control acceleration or note repurchase obligations, litigation, unclaimed-property audits, data-security issues, regulatory changes affecting rent-to-own operations, and executive-management transitions.
The company disclosed shareholder securities and derivative lawsuits concerning statements about its point-of-sale system, Acceptance Now performance, financial results, executive compensation, and debt-agreement change-of-control provisions. Management believes the claims lack merit but cannot assure that there will be no liability. A multi-state unclaimed-property audit was also in progress; management did not expect a material adverse impact.
Management concluded that disclosure controls and procedures were effective as of June 30, 2017, and reported no material changes to internal control over financial reporting during the quarter.
Most Important Facts to Verify
- Confirm whether the filing should be attributed to Rent-A-Center, Inc. or Upbound Group, Inc., given the discrepancy between the filing and request metadata.
- Assess whether the fixed-charge coverage shortfall and $50 million minimum-availability requirement could restrict operating liquidity or trigger further lender actions.
- Evaluate the sustainability of cash flow after the 37% year-over-year decline in operating cash flow and continued rental-merchandise investment requirements.
- Track Core U.S. same-store revenue, portfolio balances, store closures, and the effectiveness of the announced turnaround strategy.
- Monitor Acceptance Now merchandise-loss rates, closure-related charges, partner relationships, and performance following the Conn's and hhgregg developments.
- Reconcile debt maturities, interest costs, revolver availability, letters of credit, and change-of-control provisions with the company’s liquidity needs.
- Review the potential financial impact of disclosed securities, derivative, unclaimed-property, and other legal matters.