Upbound Group, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Upbound Group is a lease-to-own provider operating in the United States, Puerto Rico, Mexico and through franchised locations. Its reportable segments are Acima, Rent-A-Center, Mexico and Franchising. The filing covers the unaudited three months ended March 31, 2024, compared with the three months ended March 31, 2023.
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $1,096.0 million | $1,016.1 million | 7.9% increase |
| Gross profit | $529.1 million | $506.3 million | 4.5% increase |
| Gross margin | 48.3% | 49.8% | Down 150 basis points |
| Operating profit | $61.8 million | $(35.1) million | Improved $96.9 million |
| Operating margin | 5.6% | (3.5)% | Improved 910 basis points |
| Net earnings | $27.7 million | $47.3 million | 41.5% decrease |
| Diluted EPS | $0.50 | $0.84 | Decrease |
| Operating cash flow | $45.4 million | $105.4 million | Decrease of $60.0 million |
- Revenue growth was led by Acima, where revenue increased 16.0% to $561.3 million and gross merchandise volume increased 19.9% to $417.6 million. Rent-A-Center revenue was essentially flat at $485.8 million; Mexico revenue increased 18.0% to $20.6 million; and Franchising revenue declined 5.0% to $28.3 million.
- Cost of revenues increased 11.2%, faster than revenue, including a 10.1% increase in rental costs and a 15.9% increase in merchandise costs.
- Net earnings benefited from the operating recovery but were below the prior year because Q1 2023 included a $110.1 million income tax benefit, while Q1 2024 recorded $4.9 million of tax expense. The effective tax rate was 15.0% versus 175.4% in Q1 2023.
- Cash flow from operations was reduced by a $269.0 million investment in rental merchandise and a $57.4 million decrease in trade accounts payable. Capital expenditures were $11.8 million.
- Cash used in financing activities was $42.8 million, including $79.2 million of debt repayments and $21.5 million of dividends, partially offset by $60.0 million of new borrowings.
- At March 31, 2024, cash and cash equivalents were $84.8 million, total reported debt was approximately $1.29 billion, and stockholders’ equity was $578.3 million.
Material changes versus the prior comparable period
- Operating profit turned positive primarily because other gains and charges fell to $26.8 million from $127.6 million. Q1 2023 included $109.5 million of stock compensation related to Acima acquisition consideration, including accelerated vesting; Q1 2024 included $4.9 million of that expense.
- Q1 2024 included $4.6 million of accelerated depreciation related to the planned retirement of legacy Rent-A-Center point-of-sale software. The company expects approximately $1.5 million of additional related depreciation after March 31, 2024.
- Acima operating profit declined 3.6% to $51.9 million despite revenue growth, as non-labor operating expenses increased approximately $17.7 million. Acima operating margin fell to 9.2% from 11.1%.
- Acima merchandise losses increased to approximately 9.6% of segment revenue for lease charge-offs, compared with 8.9% in the prior year.
- Rent-A-Center operating profit increased 8.4% to $74.8 million, with a 0.8% increase in same-store sales and operating margin improvement to 15.4% from 14.2%. E-commerce represented approximately 26% of Rent-A-Center lease-to-own revenue, compared with 25% in the prior year.
- Mexico operating profit increased 70.5% to $1.7 million, while Franchising operating profit declined 29.3% to $3.4 million.
Debt, liquidity and outlook
- The ABL facility had $53.0 million outstanding and approximately $446.6 million of borrowing capacity, net of letters of credit, at March 31, 2024. The ABL matures February 17, 2026, and carried a 7.44% interest rate at quarter-end.
- The senior secured term loan had $808.9 million outstanding, matures February 17, 2028 and carried a 9.12% interest rate at quarter-end. The $450.0 million senior notes mature February 15, 2029 and bear fixed interest at 6.375%; their carrying value was $440.4 million.
- Management stated that operating cash flow and ABL availability are expected to fund operations for the next twelve months. At April 24, 2024, cash on hand was approximately $39.8 million and ABL availability was approximately $409.6 million.
- The company declared a quarterly dividend of $0.37 per share for the second quarter of 2024, paid April 22, 2024. Approximately $235.0 million remained available under the share repurchase authorization, although no repurchases occurred during the quarter.
- No specific full-year revenue, earnings or cash-flow guidance is provided in the filing text. Management continues to emphasize Acima merchant and direct-to-consumer growth, Rent-A-Center e-commerce and omnichannel initiatives, technology upgrades, analytics and complementary products.
Risks, contingencies and unusual items
- Key operating risks include inflation, consumer payment behavior, unemployment, recession risk, interest rates, merchandise losses, availability of funding, competition, technology and cybersecurity disruptions, supply-chain constraints and regulatory changes affecting lease-to-own transactions.
- A 1.0% change in market interest rates would change annualized pretax expense or income by approximately $8.6 million. The company had no interest-rate swaps at March 31, 2024.
- Acima remains subject to a CFPB investigation, a multi-state attorneys general investigation and a New York Attorney General investigation involving alleged consumer-protection and related compliance issues. Potential remedies could include restitution, disgorgement, damages, penalties, injunctive relief or changes to business practices; timing and outcome are not predictable.
- The company is defending the McBurnie putative class action concerning processing and expedited fees charged in California. The Ninth Circuit affirmed the denial of arbitration in March 2024 and remanded the case for consideration of standing issues.
- Management states that no legal proceeding is currently determined to be materially impacting the consolidated financial statements, but adverse developments could materially affect results, liquidity, reputation or operations. No material changes were reported to the risk factors in the 2023 Form 10-K.
- Results are moderately seasonal, with the first quarter generally having higher merchandise sales and the latter part of the third and fourth quarters generally requiring higher merchandise purchases.
Important facts for investors to verify
- Whether Acima revenue growth can translate into improved profitability as merchandise losses, lease charge-offs and non-labor expenses remain elevated.
- The sustainability of operating cash flow after significant rental-merchandise purchases and the company’s ability to fund dividends and debt repayments.
- Refinancing and interest-rate exposure associated with the $808.9 million term loan maturity in 2028 and the $53.0 million ABL maturity in 2026.
- The timing, financial impact and business-practice implications of the CFPB, multi-state attorneys general and New York Attorney General matters.
- Whether the Rent-A-Center e-commerce and technology initiatives produce incremental revenue and acceptable merchandise-loss rates.
- The effect of the lower gross margin, higher Acima merchandise losses and the planned additional depreciation of legacy point-of-sale software on future earnings.