PLANO, Texas - (BUSINESS WIRE) - May 06, 2019 - Rent-A-Center, Inc. (the "Company" or "Rent-A-Center") (NASDAQ/NGS: RCII) today announced results for the quarter ended March 31, 2019.
"The execution of our plan continues to drive top line growth with a consolidated same store sales increase of 6.8 percent for the quarter. This increase, along with the realization of our cost optimization strategy, is driving a significant improvement in adjusted EBITDA. Our cash position increased due to the strong performance, resulting in net debt of 1.4 times adjusted EBITDA at quarter end," stated Mitch Fadel, Chief Executive Officer of Rent-A-Center.
Mr. Fadel continued, "Our first quarter performance was slightly better than our internal forecast and our Core U.S. rental portfolio ended the quarter ahead of where we planned. Our free cash flow was also better than expected and additional cost savings were implemented. In addition, we will receive proceeds from the previously announced merger termination settlement. As a result, we are increasing our EBITDA, earnings per share and free cash flow guidance for 2019," concluded Mr. Fadel.
Termination of Merger Agreement and Settlement Update
On April 22, 2019, the Company announced it had ended all further litigation with Vintage Capital and B. Riley. In the settlement, the Company will receive a payment of $92.5 million in cash in late May 2019. After payment of all remaining costs, fees and expenses of the Company relating to the terminated merger agreement and arising from the settlement of the litigation, the Company expects to retain pre-tax proceeds of approximately $80 million and after-tax proceeds of approximately $60 million.
Consolidated Overview
Results for the first quarter of 2019 are excluding special items and compared to the first quarter of last year unless otherwise noted. First quarter results do not reflect proceeds from the merger termination settlement or remaining cost, fees and expenses relating to the terminated merger agreement.
On a consolidated basis, total revenues of $696.7 million decreased 0.2 percent primarily driven by refranchising over 100 locations since the first quarter of 2018 combined with closures of certain Core U.S. stores offset by a consolidated same store sales increase of 6.8 percent. Net earnings and diluted earnings per share, on a GAAP basis, were $7.3 million and $0.13 compared to net loss and diluted loss per share of $19.8 million and $0.37 in the first quarter of 2018.
Special items in the first quarter of $33.4 million impacting adjusted EBITDA included charges primarily driven by the Blair class action settlement (see Legal Proceedings, below), legal and professional fees related to the merger agreement termination, cost savings initiatives, and store closure costs.
Excluding special items, the Company’s diluted earnings per share were $0.59 and the Company generated $66.5 million in adjusted EBITDA in the first quarter, compared to a loss per diluted share of $0.08 and adjusted EBITDA of $25.1 million in the first quarter of 2018.
For the three months ended March 31, 2019, the Company generated $75.8 million of cash from operations. The Company ended the first quarter with $237.7 million of cash and cash equivalents compared to $81.4 million as of the end of the first quarter of 2018. The Company's net debt to adjusted EBITDA ratio ended the quarter at 1.4 times.
Segment Operating Performance
CORE U.S. first quarter revenues of $474.1 million decreased 1.7 percent due to the refranchising efforts and rationalization of the Core U.S. store base partially offset by a same store sales increase of 5.8 percent. Gross profit as a percent of total revenue versus the prior year decreased 130 basis points due to changes in the value proposition. Labor and other store expenses decreased by $17.0 million and $20.4 million, respectively, primarily driven by lower store count and our cost savings initiatives. Adjusted EBITDA was $66.6 million and as a percent of total revenue increased 570 basis points versus the prior year.
ACCEPTANCE NOW first quarter revenues of $196.5 million decreased 0.2 percent primarily due to store closures and partially offset by a same store sales increase of 10.1 percent. Gross profit as a percent of total revenue versus prior year decreased 120 basis points due to changes in the value proposition. Labor and other store expenses decreased by $2.7 million and $1.9 million, respectively, primarily driven by our cost savings initiatives. Adjusted EBITDA was $22.1 million and as a percent of total revenue increased 100 basis points versus the prior year.
MEXICO first quarter revenues increased 12.4 percent on a constant currency basis. Gross profit as a percent of total revenue versus prior year increased 30 basis points. Adjusted EBITDA was $1.4 million and as a percent of total revenue increased 70 basis points versus the prior year.
FRANCHISING first quarter revenues of $12.8 million increased 82.8 percent primarily due to the success of our refranchising initiative with over 100 locations refranchised versus the prior year. Adjusted EBITDA was $1.8 million, representing an increase of $0.5 million versus the prior year.
CORPORATE first quarter operating expenses decreased $12.8 million compared to the prior year primarily due to the realization of our cost savings initiatives.
2019 Guidance (1)
The Company is providing the following guidance for its 2019 fiscal year which has been updated to reflect the impact of the settlement payment associated with the termination of the merger agreement with certain affiliates of Vintage Capital and improved performance.
Non-GAAP Reconciliation
To supplement the Company's financial results presented on a GAAP basis, Rent-A-Center uses the non-GAAP measures ("special items”) indicated in Table 2 below, which primarily excludes financial impacts in the first quarter of 2019 related to the Blair class action settlement, incremental legal and professional fees associated with the termination of the merger agreement, cost savings initiatives, and store closures. Gains or charges related to store closures will generally recur with the occurrence of these events in the future. The presentation of these financial measures is not in accordance with, or an alternative for, accounting principles generally accepted in the United States and should be read in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP. Rent-A-Center management believes that excluding special items from the GAAP financial results provides investors a clearer perspective of the Company's ongoing operating performance and a more relevant comparison to prior period results. This press release also refers to the non-GAAP measures adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and Free Cash Flow (net cash provided by operating activities less purchase of property assets). Reconciliation of adjusted EBITDA and Free Cash Flow to the most comparable GAAP measures are provided in Tables 3 and 4, below.
The Company believes that presentation of adjusted EBITDA is useful to investors as, among other things, this information impacts certain financial covenants under the Company's senior credit facilities and the indentures governing its 6.625% senior unsecured notes due November 2020 and its 4.75% senior unsecured notes due May 2021. The Company believes that presentation of Free Cash Flow provides investors with meaningful additional information regarding the Company's liquidity. While management believes these non-GAAP financial measures are useful in evaluating the Company, this information should be considered as supplemental in nature and not as a substitute for or superior to the related financial information prepared in accordance with GAAP. Further, these non-GAAP financial measures may differ from similar measures presented by other companies.
Reconciliation of net earnings (loss) to net earnings (loss) excluding special items:
(1) Other charges for the three months ended March 31, 2019 primarily includes financial impacts, net of tax, related to the Blair class action settlement, incremental legal and professional fees associated with the termination of the merger agreement, cost savings initiatives, and store closures. Other charges for the three months ended March 31, 2018 primarily includes charges, net of tax, related to cost savings initiatives, including reductions in overhead and supply chain, store closures, capitalized software write-downs, incremental legal and advisory fees, and impacts related to the 2017 hurricanes. Charges related to store closures are primarily comprised of losses on rental merchandise, lease obligation costs, employee severance, asset disposals, and miscellaneous costs incurred as a result of the closures.
Reconciliation of net cash provided by operations to free cash flow:
Legal Proceedings
Following a court-ordered mediation in the Blair v. Rent-A-Center, Inc. class action complaint pending in the Federal District Court for the Northern District of California, the Company reached an agreement in principle to settle this matter for a total of $13.0 million, including attorneys’ fees. The complaint alleges various claims, including that the cash sales and total rent-to-own prices exceeded the pricing permitted under the Karnette Rental-Purchase Act. The settlement is in the documentation process and is subject to approval by the court. To account for the prospective settlement, the Company recorded a $13.0 million pre-tax litigation expense during the first quarter of 2019. The Company denied any liability in the settlement and agreed to the settlement in order to avoid additional expensive, time-consuming litigation.
In April 2019, along with other rent to own companies, we received a civil investigative demand from the Federal Trade Commission ("FTC") seeking information regarding certain transactions involving the purchase and sale of customer lease agreements, and whether such transactions violated the FTC Act. Although we believe such transactions were in compliance with the FTC Act, this inquiry could lead to an enforcement action and/or a consent order, and substantial costs. The Company is in the process of responding to this inquiry from the FTC.
Webcast Information
Rent-A-Center, Inc. will host a conference call to discuss the first quarter results, guidance and other operational matters on Tuesday morning, May 7, 2019, at 8:30 a.m. ET. For a live webcast of the call, visit http://investor.rentacenter.com. Certain financial and other statistical information that will be discussed during the conference call will also be provided on the same website. Residents of the United States and Canada can listen to the call by dialing (800) 399-0012. International participants can access the call by dialing (404) 665-9632.
A rent-to-own industry leader, Plano, Texas-based, Rent-A-Center, Inc., is focused on improving the quality of life for its customers by providing them the opportunity to obtain ownership of high-quality, durable products such as consumer electronics, appliances, computers, furniture and accessories, under flexible rental purchase agreements with no long-term obligation. The Company owns and operates approximately 2,200 stores in the United States, Mexico, and Puerto Rico, and approximately 1,100 Acceptance Now kiosk locations in the United States and Puerto Rico. Rent-A-Center Franchising International, Inc., a wholly owned subsidiary of the Company, is a national franchiser of approximately 320 rent-to-own stores operating under the trade names of "Rent-A-Center," "ColorTyme," and "RimTyme." For additional information about the Company, please visit our website at www.rentacenter.com.
Forward Looking Statements
This press release and the guidance above contain forward-looking statements that involve risks and uncertainties. Such forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "could," "estimate," "predict," "continue," "should," "anticipate," "believe," or “confident,” or the negative thereof or variations thereon or similar terminology. The Company believes that the expectations reflected in such forward-looking statements are accurate. However, there can be no assurance that such expectations will occur. The Company's actual future performance could differ materially from such statements. Factors that could cause or contribute to such differences include, but are not limited to: the general strength of the economy and other economic conditions affecting consumer preferences and spending; factors affecting the disposable income available to the Company's current and potential customers; changes in the unemployment rate; capital market conditions, including availability of funding sources for the Company; changes in the Company’s credit ratings; difficulties encountered in continuing to improve the financial and operational performance of the Company's business segments, including its ability to execute its franchise strategy; the Company’s ability to recapitalize its debt, including its revolving credit facility expiring December 31, 2019, and senior notes maturing in November 2020 and May 2021 on favorable terms, if at all; risks associated with pricing changes and strategies being deployed in the Company's businesses; the Company's ability to continue to realize benefits from its initiatives regarding cost-savings and other EBITDA enhancements, efficiencies and working capital improvements; the Company's ability to continue to effectively operate and execute its strategic initiatives; failure to manage the Company's store labor and other store expenses; disruptions caused by the operation of the Company's store information management system; the Company's transition to more-readily scalable, “cloud-based” solutions; the Company's ability to develop and successfully implement digital or E-commerce capabilities, including mobile applications; disruptions in the Company's supply chain; limitations of, or disruptions in, the Company's distribution network; rapid inflation or deflation in the prices of the Company's products; the Company's ability to execute and the effectiveness of a store consolidation, including the Company's ability to retain the revenue from customer accounts merged into another store location as a result of a store consolidation; the Company's available cash flow; the Company's ability to identify and successfully market products and services that appeal to its customer demographic; consumer preferences and perceptions of the Company's brand; the Company's ability to retain the revenue associated with acquired customer accounts and enhance the performance of acquired stores; the Company's ability to enter into new and collect on its rental or lease purchase agreements; the passage of legislation adversely affecting the Rent-to-Own industry; the Company's compliance with applicable statutes or regulations governing its transactions; changes in interest rates; changes in tariff policies; adverse changes in the economic conditions of the industries, countries or markets that the Company serves; information technology and data security costs; the impact of any breaches in data security or other disturbances to the Company's information technology and other networks and the Company's ability to protect the integrity and security of individually identifiable data of its customers and employees; changes in estimates relating to self-insurance liabilities and income tax and litigation reserves; changes in the Company's effective tax rate; fluctuations in foreign currency exchange rates; the Company's ability to maintain an effective system of internal controls; litigation or administrative proceedings to which the Company is or may be a party to from time to time; a failure to receive the settlement amount associated with the Vintage Capital and B. Riley litigation when due; and the other risks detailed from time to time in the Company's SEC reports, including but not limited to, its Annual Report on Form 10-K for the year ended December 31, 2018. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Except as required by law, the Company is not obligated to publicly release any revisions to these forward-looking statements to reflect the events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Maureen Short
Rent-A-Center, Inc.
EVP, Chief Financial Officer
972-801-1899
maureen.short@rentacenter.com
SOURCE Rent-A-Center, Inc.
Rent-A-Center, Inc., headquartered in Plano, Texas, is the largest rent-to-own operator in North America.