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, 2015. The source metadata identifies the company as Upbound Group, Inc., but the filing itself identifies the registrant as Rent-A-Center, Inc.; this discrepancy should be verified.
The company operates rent-to-own and installment-sales businesses through four segments: Core U.S., Acceptance Now, Mexico and Franchising. Management is executing a multi-year transformation focused on flexible store labor, pricing, sourcing and distribution, technology, and expansion of Acceptance Now.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $815.3 million, up 6.1% | $1.693 billion, up 6.0% |
| Gross profit | $538.5 million; 66.0% margin | $1.103 billion; 65.2% margin |
| Operating profit | $49.7 million; 6.1% margin | $106.3 million; 6.3% margin |
| Net earnings | $23.1 million | $50.4 million |
| Diluted EPS | $0.43 | $0.95 |
| Cash flow from operations | Not separately provided | $189.2 million |
- Cash and cash equivalents were $70.5 million at June 30, 2015, compared with $46.1 million at December 31, 2014.
- Total debt comprised $406.2 million of senior debt and $550.0 million of senior notes. Debt declined from $492.8 million and $550.0 million, respectively, at December 31, 2014.
- The company had $400.6 million available under its revolving facility at June 30, 2015, after $170.0 million of borrowings and $104.4 million of letters of credit.
- Capital expenditures were $42.9 million, acquisitions used $14.1 million, and dividends paid were $25.5 million during the first six months.
- The company declared dividends of $0.24 per share for the second quarter and $0.48 per share for the first six months.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased $46.9 million, or 6.1%; first-half revenue increased $96.1 million, or 6.0%.
- Net earnings increased 30.9% in the second quarter and 12.2% in the first half. Diluted EPS increased from $0.33 to $0.43 and from $0.85 to $0.95, respectively.
- Operating profit increased 23.1% in the second quarter and 6.5% in the first half, helped by lower Core U.S. labor costs and lower total operating expenses.
- Gross margins declined from 69.9% to 66.0% in the second quarter and from 68.9% to 65.2% in the first half. Merchandise sales had substantially lower margins, partly reflecting Acceptance Now 90-day option pricing and smartphone sales.
- Acceptance Now revenue grew 32.6% in both the quarter and first half, while same-store revenue increased 31.6% and 32.9%, respectively. Its operating margin declined to 15.8% and 15.6% from 18.0% and 17.7%.
- Core U.S. revenue declined 0.1% in the quarter and 0.6% in the first half, primarily reflecting the 150-store consolidation completed in 2014. Core U.S. operating profit increased 10.8% in the quarter and 0.5% in the first half.
- Mexico remained unprofitable, with operating losses of $7.2 million in the quarter and $10.6 million in the first half. Thirty-four Mexico stores were closed during the first half.
- Operating cash flow increased from $69.0 million to $189.2 million, primarily because of a $112.5 million income tax refund. The company used the refund to reduce debt.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2015 capital expenditures of $70 million to $80 million. It planned approximately 500 Acceptance Now Direct locations by year-end and expected nearly all Core U.S. stores to transition to the flexible labor model by early 2016.
- Three of five planned distribution centers were operational at June 30; the remaining two became operational in July. The company incurred approximately $1.7 million of one-time logistics start-up costs.
- Smartphones represented approximately 9% of Core U.S. total store revenue in the second quarter. Smartphone-related losses and product-service costs affected merchandise-loss metrics.
- Other charges included $3.1 million of first-half Mexico store-consolidation charges, approximately $1.7 million of sourcing and distribution start-up costs, and a $0.6 million loss on the sale of six Core U.S. stores.
- The company closed 34 Mexico stores and reported $2.8 million and $3.1 million of related pre-tax charges in the quarter and first half, respectively.
- At June 30, the company complied with its debt covenants: total leverage was 3.09:1 versus a maximum of 4.50:1; senior secured leverage was 1.18:1 versus 2.75:1; and fixed-charge coverage was 1.85:1 versus a minimum of 1.50:1.
- Variable-rate debt creates interest-rate exposure; a hypothetical 1.0% change in rates was estimated to affect annual pre-tax earnings by approximately $2.7 million. No interest-rate swaps were outstanding.
- Franchisee financing guarantees had a maximum exposure of $47.0 million, with $14.6 million outstanding at June 30.
- A comprehensive multi-state unclaimed-property audit was in progress. Management stated that the ultimate outcome was not yet determinable.
- Management stated that operating cash flow and available credit were expected to fund liquidity requirements for the next 12 months, while noting risks from profitability, consumer spending, regulation, technology execution, merchandise losses, foreign exchange, interest rates and debt-related change-of-control provisions.
- Prior-period financial information was revised for immaterial accounting errors affecting revenues, cost of revenues and store expenses. The six-month 2014 net earnings adjustment was a $1.4 million reduction.
Important Facts for Investors to Verify
- Confirm the registrant identity: the supplied metadata says Upbound Group, Inc., while the filing names Rent-A-Center, Inc.
- Assess whether Acceptance Now growth and the 90-day pricing strategy can continue without further erosion of gross and operating margins.
- Track execution and recurring benefits from the flexible labor model, distribution network, new store information system and Acceptance Now Direct rollout.
- Evaluate the sustainability of operating cash flow excluding the $112.5 million tax refund and monitor debt reduction and refinancing needs.
- Monitor Mexico restructuring results, merchandise losses, smartphone performance and the outcome of the unclaimed-property audit.
- Review debt covenants, 2019 revolving-facility maturity, 2020 and 2021 senior notes, franchisee guarantees, lease commitments and change-of-control obligations.