Rent-A-Center, Inc. Reports First Quarter 2019 Results

Rent-A-Center Reports Solid Earnings and Cash Flow in the First
Quarter

Increases 2019 Guidance

PLANO, Texas–(BUSINESS WIRE)–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.

 
SAME STORE SALES
(Unaudited)
 
Table 1  
Period Core U.S.  

Acceptance
Now

  Mexico   Total
Three Months Ended March 31, 2019 (1) 5.8 % 10.1 % 13.1 % 6.8 %
Three Months Ended December 31, 2018 (1) 8.8 % 9.6 % 13.8 % 9.1 %
Three Months Ended March 31, 2018 (1) 0.3 % 3.3 % 0.7 % 0.8 %
 
Note: Same store sale methodology – Same store sales generally
represents revenue earned in stores that were operated by us for 13
months or more and are reported on a constant currency basis. The
Company excludes from the same store sales base any store that
receives a certain level of customer accounts from closed stores or
acquisitions. The receiving store will be eligible for inclusion in
the same store sales base in the 24th full month
following account transfer.
(1) Given the severity of the 2017 hurricanes, the
Company instituted a change to the same store sales store selection
starting in the month of September 2017, excluding geographically
impacted regions for 18 months.
 

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.

  • Consolidated revenues of $2.585 billion to $2.630 billion

    • Core U.S. revenues of $1.790 billion to $1.815 billion
    • Acceptance NOW revenues of $700 million to $715 million
  • Consolidated Same Store Sales increases in the low to mid-single digits
  • Adjusted EBITDA of $230 million to $260 million
  • Non-GAAP diluted earnings per share of $1.85 to $2.25
  • Free cash flow of $195 million to $225 million (2)
  • Net debt of $190 million to $155 million
  • Net debt to EBITDA ratio of 0.85x to 0.50x (3)
(1)  

Guidance does not include the impact of new franchising
transactions beyond the transaction completed in the first quarter
of 2019 or the anticipated refinancing of our debt.

(2) Free cash flow defined as net cash provided by operating activities
less purchase of property assets (reference table 3). Free cash flow
range includes approximately $80 million in pre-tax proceeds, or
approximately $60 million in after-tax proceeds, relating to the
terminated merger agreement.
(3) Net debt to EBITDA ratio defined as outstanding debt less cash
divided by trailing twelve months EBITDA.
 

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:

Table 2   Three Months Ended March 31,
2019   2018  
(in thousands, except per share data) Amount  

Per
Share

Amount  

Per
Share

Net earnings (loss) $ 7,323 $ 0.13 $ (19,843 ) $ (0.37 )
Special items, net of taxes:
Other charges (1) 25,226 0.46 15,633 0.29
Discrete income tax items       62      
Net earnings (loss) excluding special items $ 32,549 $ 0.59 $ (4,148 ) $ (0.08 )
 

(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:

Table 3   Three Months Ended March 31,
(In thousands)   2019       2018  
Net cash provided by operating activities $ 75,775 $ 84,477
Purchase of property assets   (2,508 )   (8,649 )
Free cash flow $ 73,267 $ 75,828
 
Proceeds from sale of stores $ 8,475 $ 9,463
Acquisitions of businesses       (440 )
Free cash flow including acquisitions and divestitures $ 81,742   $ 84,851  
 

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.

About Rent-A-Center, Inc.

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.

 
Rent-A-Center, Inc. and Subsidiaries
 
STATEMENT OF EARNINGS (LOSS) HIGHLIGHTS – UNAUDITED
 
Table 4 Three Months Ended March 31,
  2019     2019     2018       2018  
Before After Before After
Special Items Special Items Special Items Special Items
(Non-GAAP (GAAP (Non-GAAP (GAAP
(In thousands, except per share data) Earnings) Earnings) Earnings) Earnings)
Total revenues $ 696,694 $ 696,694 $ 698,043 $ 698,043
Operating profit (loss) 50,719

(1)

17,349 7,185

(2)

(10,270 )
Net earnings (loss) 32,549

(1)

7,323 (4,148 )

(2)(3)

(19,843 )
Diluted earnings (loss) per common share $ 0.59

(1)

$ 0.13 $ (0.08 )

(2)(3)

$ (0.37 )
Adjusted EBITDA $ 66,492 $ 66,492 $ 25,085 $ 25,085
Reconciliation to Adjusted EBITDA:
Earnings (loss) before income taxes $ 42,204

(1)

$ 8,834 $ (3,966 )

(2)

$ (21,421 )
Add back:
Other charges 33,370 17,455
Interest expense, net 8,515 8,515 11,151 11,151
Depreciation, amortization and impairment of intangibles   15,773   15,773   17,900     17,900  
Adjusted EBITDA $ 66,492 $ 66,492 $ 25,085   $ 25,085  
 
 
(1) Excludes the effects of approximately $33.4 million of pre-tax
charges including $13.0 million related to the Blair class action
settlement, $10.4 million in incremental legal and professional fees
associated with the termination of the merger agreement, $8.7
million related to cost savings initiatives, and $1.3 million
related to store closure costs. These charges decreased net earnings
and net earnings per diluted share for the three months ended March
31, 2019, by approximately $25.2 million and $0.46, respectively.
(2) Excludes the effects of approximately $17.5 million of pre-tax
charges including $10.3 million related to cost savings initiatives,
$4.4 million related to store closure costs, $1.9 million for
capitalized software write-downs, $1.7 million in incremental legal
and advisory fees, and $(0.8) million related to the 2017
hurricanes. These charges increased net losses and net losses per
diluted share for the three months ended March 31, 2018, by
approximately $15.6 million and $0.29, respectively.
(3) Excludes the effects of $0.1 million of discrete income tax
adjustments.
 

SELECTED BALANCE SHEET HIGHLIGHTS – UNAUDITED

 
Table 5 March 31,
(In thousands)   2019     2018
Cash and cash equivalents $ 237,744 $ 81,393
Receivables, net 63,761 64,823
Prepaid expenses and other assets 39,885 67,517
Rental merchandise, net
On rent 647,536 649,891
Held for rent 120,385 162,625
Operating lease right-of-use assets 273,833
Goodwill 56,815 56,784
Total assets 1,681,416 1,386,438
 
Operating lease liabilities $ 284,488 $
Senior debt, net 57,426
Senior notes, net 540,357 539,078
Total liabilities 1,387,164 1,131,457
Stockholders’ equity 294,252 254,981
 
Rent-A-Center, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) – UNAUDITED
 
Table 6 Three Months Ended March 31,
(In thousands, except per share data)   2019     2018  
Revenues
Store
Rentals and fees $ 563,354 $ 564,714
Merchandise sales 104,470 107,356

Installment sales

15,436 16,404
Other   664     2,584  

Total store revenues

683,924 691,058
Franchise
Merchandise sales 8,456 3,634
Royalty income and fees   4,314     3,351  
Total revenues 696,694 698,043
Cost of revenues
Store
Cost of rentals and fees 155,372 156,095
Cost of merchandise sold 103,391 96,353
Cost of installment sales   4,924     5,242  
Total cost of store revenues 263,687 257,690
Franchise cost of merchandise sold   8,141     3,375  
Total cost of revenues   271,828     261,065  
Gross profit 424,866 436,978
Operating expenses
Store expenses
Labor 161,656 181,074
Other store expenses 163,794 185,949
General and administrative expenses 32,924 44,870
Depreciation, amortization and impairment of intangibles 15,773 17,900
Other charges   33,370  

(1)

  17,455  

(2)

Total operating expenses 407,517 447,248
Operating profit (loss) 17,349 (10,270 )
Interest expense 9,389 11,360
Interest income   (874 )   (209 )
Earnings (loss) before income taxes 8,834 (21,421 )
Income tax (benefit) expense   1,511     (1,578 )

(3)

Net earnings $ 7,323   $ (19,843 )
Basic weighted average shares   53,930     53,406  
Basic earnings per common share $ 0.14   $ (0.37 )
Diluted weighted average shares   55,496     53,406  
Diluted earnings per common share $ 0.13   $ (0.37 )

Contacts

Rent-A-Center, Inc.
Maureen Short
EVP, Chief Financial Officer
972-801-1899
maureen.short@rentacenter.com

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