Rent-A-Center, Inc. Reports Third Quarter 2016 Results

PLANO, Texas - October 26, 2016 - (BUSINESS WIRE) - Rent-A-Center, Inc. (the "Company") (NASDAQ/NGS: RCII) today announced results for the quarter ended September 30, 2016.

Notable Items for the Quarter

Explanations of performance are compared to the prior year unless otherwise noted

GAAP Basis

  • Diluted earnings per share was $0.12 compared to $(0.08) for the third quarter of 2015

Excluding Special Items (see "Non-GAAP Reconciliation" and related tables below)

  • Diluted earnings per share was $0.11 compared to $0.47 for the third quarter of 2015
  • Consolidated total revenues decreased 12.3 percent to $693.9 million and same store sales decreased 8.4 percent
  • Acceptance Now revenue decreased by 1.1 percent primarily due to the same store sales decrease of 0.9 percent
  • Core U.S. revenue decreased by 16.3 percent primarily due to the same store sales decrease and the continued rationalization of our store base. Core U.S. same store sales decreased by 12.0 percent driven by the impact of the store information management system implementation and system outages, and other factors including the recast of the smartphone category, and declines in televisions, computers and tablets
  • The Company's EBITDA as a percent of total revenues was 5.4 percent, down 370 basis points to prior year and operating profit as a percent of total revenues was 2.5 percent, down 400 basis points
  • For the nine months ended September 30, 2016 the Company generated $374.6 million of cash from operations, capital expenditures totaled $46.8 million, and the Company ended the third quarter with $130.3 million of cash and cash equivalents
  • The Consolidated Leverage Ratio was at 2.52x and the Fixed Charge Coverage Ratio was at 1.72x as of September 30, 2016
  • The Company paid on July 21, 2016 a quarterly dividend for the third quarter of 2016 in the amount of $0.08 per share

“As previously announced, our third quarter operating results were negatively impacted by unexpected capacity-related system outages following the full implementation of our new store information management system within our Core U.S. stores. Consequently, I am terribly disappointed in the results for the quarter, both top and bottom line. Toward the end of the third quarter we had seen significant improvement in system availability and a reduction in the frequency of system outages. However, over the past two weeks on a couple of instances we have experienced system slowness and outages similar to but less impactful than what we saw earlier in the third quarter. Despite these recent challenges, over the past 6 weeks, past due percentages have been lower than they were a year ago,” said Robert D. Davis, the Chief Executive Officer of Rent-A-Center, Inc.

Mr. Davis continued, “While certainly the third quarter results were very disappointing and the macro environment continues to provide challenges and headwinds, we successfully rolled out eCommerce in October, and we have made significant progress in readying our organization for piloting with several large national retailers in Acceptance Now. We are enthusiastic about these opportunities and I continue to believe our business model provides a superior customer experience to both the retailer and the end consumer,” Mr. Davis concluded.

             
SAME STORE SALES
(Unaudited)
             
Table 1     2016     2015
      Core     Acceptance                 Core     Acceptance            
Period     U.S.     Now     Mexico     Total     U.S.     Now     Mexico     Total
Three Months Ended September 30,     (12.0 )%     (0.9 )%     10.1 %     (8.4 )%     (0.2 )%     24.5 %     5.0 %     5.2 %
                                                                 

Note: Same store sales are reported on a constant currency basis.

                                                                 

Quarterly Operating Performance

Explanations of performance are excluding special items and compared to the prior year unless otherwise noted.

ACCEPTANCE NOW third quarter revenues of $194.4 million decreased 1.1 percent primarily due to the same store sales decrease of 0.9 percent. Gross profit as a percent of total revenue versus prior year improved 110 basis points driven by completing the lap of 90 day option pricing changes, and the Company's increased focus on driving profitable sales. Labor, as a percent of store revenue, improved versus prior year by 130 basis points. Other store expenses, as a percent of store revenue, were up 170 basis points.

CORE U.S. third quarter revenues of $481.8 million decreased 16.3 percent primarily due to lower same store sales and the continued rationalization of our store base. Gross profit as a percent of total revenue increased 10 basis points and was positively impacted by our supply chain initiative, revenue mix, and a reduction in smartphone loss reserves, partially offset by a clearance event focused on previously-rented product. Labor, as a percent of store revenue, was negatively impacted by sales deleverage, partially offset by improved labor productivity, and lower incentive compensation. Other store expenses, as a percent of store revenue, were negatively impacted by sales deleverage, higher skip/stolen losses, and higher advertising, partially offset by a lower store count.

MEXICO third quarter revenues decreased 14.3 percent driven by currency fluctuations and store closures. Same store sales were up 10.1 percent. Gross profit as a percent of total revenue versus prior year improved 600 basis points driven by revenue mix and higher merchandise sales gross margin due to pricing initiatives. Operating profit improved by $2.6 million and EBITDA was $1.0 million.

FRANCHISING third quarter revenues increased 3.0 percent and operating profit was $1.4 million.

Other

General and administrative expenses decreased by $1.4 million primarily driven by lower incentive compensation.

The effective tax rate on a GAAP basis decreased primarily due to the resolution of certain tax positions pertaining to prior years and an increase in tax credits. The decrease in the effective tax rate excluding special items was primarily related to an increase in tax credits.

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 Tables 2 and 3 below, which exclude restructuring charges in 2016 for the closure of certain U.S. Core stores and Acceptance Now locations, and discrete income tax items. Gains or charges related to sales of stores, store closures, and discrete adjustments to tax reserves 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.

Reconciliation of net earnings to net earnings excluding special items (in thousands, except per share data):

Table 2     Three Months Ended     Three Months Ended
      September 30, 2016     September 30, 2015
      Amount   Per Share     Amount   Per Share
Net earnings     $ 6,181     $ 0.12       $ (4,092 )   $ (0.08 )
Special items, net of taxes:                    
Write-down of smartphones                     21,114       0.40  
Other charges (1)       820       0.01         6,615       0.13  
Discrete income tax items     $ (1,092 )   $ (0.02 )     $ 1,178     $ 0.02  
Net earnings excluding special items     $ 5,909     $ 0.11       $ 24,815     $ 0.47  

1) Other charges for the three months ended September 30, 2016 and 2015 primarily includes restructuring charges, net of tax, related to the closure of U.S. Core and Acceptance Now locations, and loss incurred on the sale of U.S. Core and Canada stores in the prior year. Restructuring charges are primarily comprised of lease obligation costs, employee severance, asset disposals, and miscellaneous costs incurred as a result of the closure.

2016 Outlook

The Company now projects the following for the full year assuming a continued reduction in the impact of system related incidents.

  • Core revenue of $2,065 to $2,100 million
  • Acceptance Now revenue of $805 to $835 million
  • Consolidated non-GAAP diluted earnings per share of $1.05 to $1.15

Guidance Policy

Rent-A-Center, Inc. provides annual guidance as it relates to diluted earnings per share and will only provide updates if there is a material change versus the original guidance. The Company believes providing diluted earnings per share guidance provides investors the appropriate insight into the Company’s ongoing operating performance. Management will not discuss intra-period sales or other key operating results not yet reported as the limited data may not accurately reflect the final results of the period or quarter referenced.

Webcast Information

Rent-A-Center, Inc. will host a conference call to discuss the third quarter results, guidance and other operational matters on Thursday morning, October 27, 2016, 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.

About Rent-A-Center, Inc.

A rent-to-own industry leader, Plano, TX-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, and smartphones, under flexible rental purchase agreements with no long-term obligation. The Company owns and operates approximately 2,600 stores in the United States, Mexico, Canada and Puerto Rico, and approximately 1,870 Acceptance Now 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 230 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 Statement

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," "should," "anticipate," or "believe," 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; difficulties encountered in improving the financial and operational performance of the Company's business segments; failure to manage the Company's store labor (including overtime pay) and other store expenses; the Company’s ability to develop and successfully execute strategic initiatives; the Company's ability to successfully implement its new store information management system and a new finance/HR enterprise system; the Company’s ability to successfully market smartphones and related services to its customers; the Company's ability to develop and successfully implement virtual or e-commerce capabilities; failure to achieve the anticipated profitability enhancements from the changes to the 90 day option pricing program and the development of dedicated commercial sales capabilities; 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; uncertainties regarding the ability to open new locations; the Company's ability to acquire additional stores or customer accounts on favorable terms; the Company's ability to control costs and increase profitability; 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; 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 the Company's stock price, the number of shares of common stock that it may or may not repurchase, and future dividends, if any; 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; the resolution of the Company's litigation; 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, 2015, and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016, and June 30, 2016. 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 of this press release or to reflect the occurrence of unanticipated events.

     
       
Rent-A-Center, Inc. and Subsidiaries
STATEMENT OF EARNINGS HIGHLIGHTS - UNAUDITED
       
Table 3     Three Months Ended September 30,
      2016       2016     2015       2015
(In thousands, except per share data)     Before       After     Before       After
      Special Items       Special Items     Special Items       Special Items
      (Non-GAAP       (GAAP     (Non-GAAP       (GAAP
      Earnings)       Earnings)     Earnings)       Earnings)
Total revenues     $ 693,877       $ 693,877     $ 791,605       $ 791,605  
Operating profit       17,656  

(1)

    16,700       52,199  

(3)

    6,565  
Net earnings       5,909  

(1)(2)

    6,181       24,815  

(3)

    (4,092 )
Diluted earnings per common share     $ 0.11  

(1)(2)

  $ 0.12     $ 0.47  

(3)

  $

(0.08

)

Adjusted EBITDA     $ 37,654       $ 37,654     $ 72,178       $

72,178

 
Reconciliation to Adjusted EBITDA:                            
Earnings before income taxes     $ 6,087  

(1)

  $ 5,131     $ 39,862  

(3)

  $ (5,772 )
Add back:                            
Other charges and (credits)              

              34,698  
Other charges               956               10,936  
Interest expense, net       11,569         11,569       12,337         12,337  
Depreciation, amortization and write-down of intangibles       19,998         19,998       19,979         19,979  
Adjusted EBITDA     $ 37,654       $ 37,654     $ 72,178       $ 72,178  

 

(1)

  Excludes the effects of approximately $1.0 million of pre-tax restructuring charges primarily related to the closure of 167 Core U.S. stores and 96 Acceptance Now locations. These charges reduced net earnings and net earnings per diluted share for the three months ended September 30, 2016, by approximately $0.8 million and $0.01, respectively.
(2)  

Excludes the effects of ($1.1) million of discrete income tax adjustments that increased diluted net earnings per share by $0.20.

(3)   Excludes the effects of a $34.7 million pre-tax write-down of smartphones, $4.9 million pre-tax loss on the sale of 22 Core U.S. stores to a franchisee, a $4.3 million pre-tax charge related to the closure of 65 Core U.S. stores, a $1.2 million pre-tax charge for start-up and warehouse closure expenses related to our sourcing and distribution initiative, and a $0.3 million pre-tax loss on the sale of 14 stores in Canada. These charges reduced net loss and net loss per diluted share for the three months ended September 30, 2015, by approximately $27.7 million and $0.53, respectively. Net loss also excludes the effect of $1.2 million of discrete income tax adjustments to reserves that reduced earnings per diluted share by $0.02.

 

           
           

SELECTED BALANCE SHEET HIGHLIGHTS - UNAUDITED

           
Table 4     September 30,
      2016   2015
(In thousands)             Revised
Cash and Cash Equivalents     $ 130,305       $ 60,072    
Receivables, net       59,200         63,252    
Prepaid Expenses and Other Assets       57,624         62,212    
Rental Merchandise, net                  
On Rent       754,529         849,234    
Held for Rent       215,901         272,225    
Total Assets       1,748,806         3,025,630    
                   
Senior Debt, net       187,761  

(1)

    365,181  

(1)

Senior Notes, net       537,161  

(1)

    535,858  

(1)

Total Liabilities       1,242,745         1,623,332    
Stockholders' Equity       506,061         1,402,298    

 

(1)   In accordance with a newly adopted accounting standard, debt balances are now presented net of unamortized debt issuance costs and the 2015 amounts have been revised to conform to the current period presentation. Unamortized debt issuance costs related to Senior Debt were $4.6 million and $6.4 million at September 30, 2016 and 2015, respectively. Unamortized debt issuance costs related to Senior Notes were $5.6 million and $6.9 million at September 30, 2016 and 2015, respectively. These unamortized debt issuance costs were previously presented in Prepaid Expenses and Other Assets.

 

       
       
Rent-A-Center, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
       
Table 5     Three Months Ended September 30,
      2016   2015
(In thousands, except per share data)                  
Revenues          
Store                  
Rentals and fees     $ 595,179         $ 683,343      
Merchandise sales       73,219           80,932      
Installment sales       17,626           17,786      
Other       2,633           4,475      
Total store revenues       688,657           786,536      
Franchise                  
Merchandise sales       3,113           2,456      
Royalty income and fees       2,107           2,613      
Total revenues       693,877           791,605      
Cost of revenues                  
Store                  
Cost of rentals and fees       159,454           178,094      
Cost of merchandise sold       68,684           82,043      
Cost of installment sales       5,553           5,854      
Total cost of store revenues       233,691           265,991      
Other charges                 34,698    

(3)

Franchise cost of merchandise sold       2,960           2,304      
Total cost of revenues       236,651           302,993      
Gross profit       457,226           488,612      
Operating expenses                  
Store expenses                  
Labor       186,289           209,904      
Other store expenses       195,096           201,638      
General and administrative expenses       38,187           39,590      
Depreciation, amortization and write-down of intangibles       19,998           19,979      
Other charges       956    

(1)

    10,936    

(4)

Total operating expenses       440,526           482,047      
Operating profit       16,700           6,565      
Interest expense       11,710           12,490      
Interest income       (141 )         (153 )    
Earnings (loss) before income taxes       5,131           (5,772 )    
Income tax benefit       (1,050 )  

(2)

    (1,680 )  

(5)

NET EARNINGS (LOSS)     $ 6,181         $ (4,092 )    
Basic weighted average shares       53,155           53,060      
Basic earnings per common share     $ 0.12         $ (0.08 )    
Diluted weighted average shares       53,454           53,333      
Diluted earnings per common share     $ 0.12         $ (0.08 )    

 

(1)   Includes approximately $1.0 million of pre-tax restructuring charges related to the closure of 167 Core U.S. stores and 96 Acceptance Now locations.
(2)   Includes ($1.1) million of discrete income tax adjustments.
(3)   Includes a $34.7 million write-down of smartphone inventory.
(4)   Includes a $4.9 million loss on the sale of 22 Core U.S. stores to a franchisee, a $4.3 million charge related to the closures of 65 Core U.S. stores, a $1.2 million charge for start-up and warehouse closure expenses related to our sourcing and distribution initiative, and a $0.3 million loss on the sale of 14 stores in Canada.
(5)   Includes $1.2 million of discrete adjustments to income tax reserves.

 

       
       
Rent-A-Center, Inc. and Subsidiaries
 
SEGMENT INFORMATION HIGHLIGHTS - UNAUDITED
       
Table 6     Three Months Ended September 30,
      2016   2015
Revenues          
Core U.S.     $ 481,805   $ 575,356
Acceptance Now       194,398     196,652
Mexico       12,454     14,528
Franchising       5,220     5,069
Total revenues     $ 693,877   $ 791,605

 

       
       
Table 7     Three Months Ended September 30,
      2016   2015
Gross profit              
Core U.S.     $ 343,071   $ 374,214  

(1)

Acceptance Now       102,998     102,133    
Mexico       8,897     9,500    
Franchising       2,260     2,765    
Total gross profit     $ 457,226   $ 488,612    

 

(1)   Includes a $34.7 million write-down of smartphone inventory.

 

           
           
Table 8     Three Months Ended September 30,
      2016   2015
Operating profit (loss)                  
Core U.S.     $ 26,058    

(1)

  $ 15,700    

(2)

Acceptance Now       29,592           28,901      
Mexico       235           (2,359 )    
Franchising       1,430           1,797      
Total segment operating profit       57,315           44,039      
Corporate       (40,615 )         (37,474 )    
Total operating profit     $ 16,700         $ 6,565      

 

(1)   Includes approximately $1.0 million of restructuring charges related to the closure of 167 Core U.S. stores and 96 Acceptance Now locations.
(2)   Includes a $34.7 million write-down of smartphone inventory, a $4.9 million loss on the sale of 22 Core U.S. stores to a franchisee, a $4.3 million charge related to the closure of 65 Core U.S. stores, a $1.2 million charge for start-up and warehouse closure expenses related to our sourcing and distribution initiative, and a $0.3 million loss on the sale of 14 stores in Canada.

 

       
       
Table 9     Three Months Ended September 30,
      2016   2015
Depreciation, amortization and write-down of intangibles          
Core U.S.     $ 9,495   $ 11,818
Acceptance Now       815     836
Mexico       746     1,165
Franchising       44     45
Total segments       11,100     13,864
Corporate       8,898     6,115
Total depreciation, amortization and write-down of intangibles     $ 19,998   $ 19,979

 

       
       
Table 10     Three Months Ended September 30,
      2016   2015
Capital expenditures          
Core U.S.     $ 3,864   $ 6,148
Acceptance Now       860     921
Mexico       36     16
Total segments       4,760     7,085
Corporate       13,895     11,171
Total capital expenditures     $ 18,655   $ 18,256

 

             
             
Table 11     On Rent at September 30,     Held for Rent at September 30,
      2016   2015     2016   2015
Rental merchandise, net                    
Core U.S.     $ 413,955   $ 496,524     $ 202,738   $ 260,563
Acceptance Now       326,553     334,167       6,689     6,354
Mexico       14,021     18,543       6,474     5,308
Total rental merchandise, net     $ 754,529   $ 849,234     $ 215,901   $ 272,225

 

           
           
Table 12     September 30,
      2016   2015
Assets             Revised    
Core U.S.     $ 1,000,572       $ 2,404,391    
Acceptance Now       403,305         410,892    
Mexico       32,166         39,923    
Franchising       1,732         1,840    
Total segments       1,437,775         2,857,046    
Corporate       311,031  

(1)

    168,584  

(1)

Total assets     $ 1,748,806       $ 3,025,630    

 

(1)   In accordance with a newly adopted accounting standard, debt balances are now presented net of unamortized debt issuance costs and the 2015 amounts have been revised to conform to the current period presentation. Unamortized debt issuance costs related to Senior Debt were $4.6 million and $6.4 million at September 30, 2016 and 2015, respectively. Unamortized debt issuance costs related to Senior Notes were $5.6 million and $6.9 million at September 30, 2016 and 2015, respectively. These unamortized debt issuance costs were previously presented in Prepaid Expenses and Other Assets.

 

       
       
Rent-A-Center, Inc. and Subsidiaries
 
LOCATION ACTIVITY - UNAUDITED
       
Table 13     Three Months Ended September 30, 2016
         

Acceptance Now

 

Acceptance Now

 

 

 

 

   
     

Core U.S.

 

Staffed

 

Direct

  Mexico   Franchising   Total
Locations at beginning of period     2,478     1,374     545     129   228     4,754  
New location openings         35     3     1       39  
Acquired locations remaining open                   5     5  
Conversions         2     (3 )         (1 )
Closed locations                          
Merged with existing locations     (3 )   (38 )         (1 )   (42 )
Sold or closed with no surviving location     (6 )       (50 )     (1 )   (57 )
Locations at end of period     2,469     1,373     495     130   231     4,698  
Acquired locations closed and accounts merged with existing locations                        

 

       
       
Table 14     Three Months Ended September 30, 2015
         

Acceptance Now

  Acceptance Now            
      Core U.S.   Staffed   Direct   Mexico   Franchising   Total
Locations at beginning of period     2,803     1,459     12   143   187     4,604  
New location openings         30     208     1     239  
Acquired locations remaining open                      
Conversions     (22 )   (3 )   3       22      
Closed locations                          
Merged with existing locations     (68 )   (18 )           (86 )
Sold or closed with no surviving location     (16 )           (3 )   (19 )
Locations at end of period     2,697     1,468     223   143   207     4,738  
Acquired locations closed and accounts merged with existing locations     7                 7  

SOURCE Rent-A-Center, Inc.

Contact:

Maureen Short
Rent-A-Center, Inc.
Senior Vice President - Finance
Investor Relations and Treasury
972-801-1899
maureen.short@rentacenter.com

###

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