Business Context and Reporting Period
The filing is an unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Although the request metadata identifies Upbound Group, Inc., the filing text identifies the registrant as Rent-A-Center, Inc. and its subsidiaries. The company operates rent-to-own and installment-sales businesses through Core U.S., RAC Acceptance, International and ColorTyme segments.
- Locations at June 30, 2012: 2,973 Core U.S. stores, 811 RAC Acceptance kiosks, 99 International stores and 219 ColorTyme franchised stores, for 4,102 total locations.
- Common shares outstanding at July 23, 2012: 59.0 million.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $749.7 million, versus $698.3 million | $1.585 billion, versus $1.440 billion |
| Gross profit | $527.0 million; 70.3% margin | $1.087 billion; 68.6% margin |
| Operating profit | $79.0 million; 10.5% margin | $171.1 million; 10.8% margin |
| Net earnings | $44.2 million, versus $39.9 million | $96.1 million, versus $84.1 million |
| Diluted EPS | $0.74, versus $0.63 | $1.61, versus $1.32 |
| Operating cash flow | Not separately provided | $161.1 million, versus $171.3 million |
- Second-quarter revenue increased 7.4%; six-month revenue increased 10.0%.
- Second-quarter net earnings increased 10.8%; six-month net earnings increased 14.3%.
- Interest expense declined to $8.3 million for the quarter and $17.3 million for the six months, reflecting lower debt and interest rates.
- Cash and cash equivalents were $101.1 million at June 30, 2012, compared with $88.1 million at December 31, 2011.
- Total debt consisted of $367.8 million of senior debt and $300.0 million of 6.625% senior notes. Total reported debt was $667.8 million.
- Capital expenditures were $48.3 million through June 30, 2012; management expected approximately $105.0 million for full-year 2012.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by RAC Acceptance expansion and increased Core U.S. revenue. Same-store revenue increased 2.8% in the second quarter and 4.5% for the six-month period.
- RAC Acceptance locations increased to 811 from 611 at June 30, 2011. The company added 122 RAC Acceptance locations during the first six months of 2012 and expected to add approximately 200 during the full year.
- International locations increased to 99 from 33, primarily reflecting expansion in Mexico. The International segment remained loss-making because losses at newer stores offset profits from older stores.
- Gross margins declined. Second-quarter gross margin fell to 70.3% from 72.5%, while six-month gross margin fell to 68.6% from 71.5%.
- Merchandise sales margins declined to 18.3% from 22.5% in the second quarter and to 21.2% from 28.1% for the six-month period. Management attributed the decline to higher RAC Acceptance merchandise costs and promotional sales strategies in Core U.S.
- Operating profit benefited from the absence of 2011 charges, including a $7.3 million impairment charge, $4.9 million restructuring charge and $2.8 million litigation charge.
- Debt decreased by approximately $72.9 million during the first six months, while share repurchases declined substantially from the prior year. The company repurchased 488,731 shares for approximately $16.5 million in the second quarter.
Guidance, Outlook, Risks and Unusual Items
- Management expected to add approximately 200 RAC Acceptance locations, 10 Canadian stores and 60 Mexican stores during 2012.
- Management believed operating cash flow and available credit facilities would be sufficient to fund operating and liquidity requirements for the following twelve months.
- At June 30, 2012, credit-facility covenant compliance was reported at a 1.45:1 consolidated leverage ratio versus a maximum of 3.25:1, and a 1.62:1 fixed-charge coverage ratio versus a minimum of 1.35:1.
- At July 23, 2012, revolving credit availability was $273.8 million and cash was $78.2 million. The revolving facility and term loan mature July 14, 2016; the senior notes mature in November 2020.
- Variable-rate debt exposed the company to interest-rate risk. Management estimated that a hypothetical 1.0% rate change would affect pretax earnings by approximately $3.5 million annually. No interest-rate swaps were outstanding.
- The company had a pending IRS tax dispute relating to tax years 2003 through 2007, with a Tax Court decision expected in the latter part of 2012. Management did not expect a material impact.
- The company reported no reserves for probable litigation losses at June 30, 2012, but noted historical class-action litigation and potential exposure to regulatory claims and material settlements.
- Other material risks include consumer spending and unemployment, regulation of rent-to-own transactions, dependence on third-party RAC Acceptance partners, international political and operating conditions, foreign exchange, information-system implementation, customer-data security, debt covenants and change-of-control acceleration provisions.
- Goodwill totaled approximately $1.339 billion, and no goodwill impairment was indicated at June 30, 2012.
- The company stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the registrant identity: the supplied filing is for Rent-A-Center, Inc., not Upbound Group, Inc.
- Assess whether RAC Acceptance and International expansion can generate adequate margins as the location base grows.
- Monitor gross-margin pressure from promotional activity, merchandise costs and the changing revenue mix.
- Reconcile cash generation with rental-merchandise investment, capital expenditures, dividends, repurchases and debt repayment.
- Review debt maturities, variable-rate exposure, covenant headroom and the availability of revolving credit.
- Track the IRS tax dispute, litigation exposure, self-insurance reserves and other contingencies.
- Evaluate reliance on the Core U.S. segment, which represented approximately 87% of six-month consolidated revenue and substantially all net earnings.