Rent-A-Center, Inc. Reports Third Quarter 2014 Results

October 20, 2014 at 4:23 PM EDT
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Total Revenues Increased 2.0%

Consolidated Same Store Sales Increased 1.9%

Diluted Earnings per Share of $0.48

PLANO, Texas--(BUSINESS WIRE)--Oct. 20, 2014-- Rent-A-Center, Inc. (the "Company") (NASDAQ/NGS: RCII), the nation's largest rent-to-own operator, today announced results for the quarter ended September 30, 2014.

Third Quarter 2014 Results

Total revenues were $769.5 million, an increase of $14.7 million from total revenues of $754.8 million for the same period in the prior year. This 2.0% increase in total revenues was primarily due to increases of approximately $36.6 million in the Acceptance Now segment and approximately $6.9 million in the Mexico segment, partially offset by a decrease of approximately $29.5 million in the Core U.S. segment.

Same store sales increased 1.9% as compared to the same period in the prior year, primarily attributable to increases of 25.7% and 25.9% in the Acceptance Now and Mexico segments, respectively, partially offset by a 3.6% decrease in the Core U.S. segment.

Net earnings and net earnings per diluted share were $25.3 million and $0.48, respectively, as compared to $27.2 million and $0.50, respectively, for the same period in the prior year. After adjusting for significant items (see Non-GAAP Reconciliation below), net earnings and net earnings per diluted share were $26.0 million and $0.49, respectively.

"As we expected, same store sales improved again versus the previous quarter in our Core U.S. business, aided by the roll-out of smartphones in July. In addition, Acceptance Now continued to deliver consistently strong same store sales growth. As a result of the performance of these two businesses, our earnings for the third quarter 2014 met our expectations," said Robert D. Davis, the Chief Executive Officer of Rent-A-Center, Inc.

"At the same time, these results confirm our urgency to execute on the transformation we outlined in February, with a focus on operational and infrastructure initiatives such as introducing a new labor model for our Core U.S. stores, developing a new supply chain, formulating a customer-focused value-based pricing strategy and implementing new technology into our Acceptance Now locations," Mr. Davis concluded.

Nine Months Ended September 30, 2014 Results

Total revenues were $2,376.5 million, an increase of $41.9 million from total revenues of $2,334.6 million in the same period in the prior year. This 1.8% increase in total revenues was primarily due to increases of approximately $121.9 million in the Acceptance Now segment and approximately $19.7 million in the Mexico segment, partially offset by a decrease of approximately $97.6 million in the Core U.S. segment.

Same store sales increased 0.5% as compared to the same period in the prior year, primarily attributable to increases of 25.6% and 21.2% in the Acceptance Now and Mexico segments, respectively, partially offset by a 4.9% decrease in the Core U.S. segment.

Net earnings and net earnings per diluted share were $71.7 million and $1.35, respectively, as compared to $115.2 million and $2.06, respectively, for the same period in the prior year.

For the nine months ended September 30, 2014, the Company generated cash flow from operations of approximately $63.3 million, while ending the quarter with approximately $62.0 million of cash on hand. The Company will pay its 18th consecutive quarterly cash dividend on October 23, 2014.

Non-GAAP Reconciliation

Management believes that excluding special items from the financial results provides investors a clearer perspective of the Company's ongoing operating performance and a more relevant comparison to prior period results. During the third quarter of 2014, the Company recorded a pre-tax credit of approximately $7.1 million due to the settlement of a lawsuit against the manufacturers of LCD screen displays, pre-tax restructuring charges of approximately $2.8 million related to a corporate reorganization, pre-tax restructuring charges of approximately $0.4 million related to the previously announced consolidation of 150 stores, and a pre-tax impairment charge of $4.6 million related to internally-developed computer software. During the nine months ended September 30, 2014, the Company also recorded $1.9 million of financing charges due to refinancing in the first quarter and pre-tax restructuring charges of approximately $4.4 million related to the previously announced consolidation of 150 stores in the second quarter.

While management believes this non-GAAP financial measure is 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, the non-GAAP financial measure may differ from similar measures presented by other companies.

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

  Three Months Ended September 30, 2014   Three Months Ended September 30, 2013
Amount   Per Share Amount   Per Share
Net income $ 25,306 $ 0.48 $ 27,165 $ 0.50
Special items, net of taxes:
Vendor settlement credit (4,682 ) (0.09 ) — —
Other (gains) and charges   5,414     0.10     —   —
Net income excluding special items $ 26,038   $ 0.49   $ 27,165 $ 0.50
 
 
Nine Months Ended September 30, 2014 Nine Months Ended September 30, 2013
Amount Per Share Amount Per Share
Net income $ 71,696 $ 1.35 $ 115,174 $ 2.06
Special items, net of taxes:
Vendor settlement credit (4,682 ) (0.09 ) — —
Other (gains) and charges 8,023 0.15 — —
Finance charges from refinancing   1,288     0.03     —   —
Net income excluding special items $ 76,325   $ 1.44   $ 115,174 $ 2.06

2014 Guidance

The Company's expectations for the balance of the year are consistent with the guidance provided in the second quarter 2014 press release.

Rent-A-Center, Inc. will host a conference call to discuss the third quarter results, guidance and other operational matters on Tuesday morning, October 21, 2014, at 10:45 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.

Rent-A-Center, Inc., headquartered in Plano, Texas, is the largest rent-to-own operator in North America, 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 3,020 stores in the United States, Mexico, Canada and Puerto Rico, and approximately 1,360 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 190 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.

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; economic pressures, such as high fuel costs, affecting the disposable income available to the Company's current and potential customers; changes in the unemployment rate; difficulties encountered in improving the financial performance of the Core U.S. segment; the Company’s ability to develop and successfully execute the competencies and capabilities which are the focus of the Company’s multi-year program designed to transform and modernize the Company’s operations; costs associated with the Company's multi-year program designed to transform and modernize the Company’s operations; the Company’s ability to successfully market smartphones and related services to its customers; the Company's ability to develop and successfully implement digital electronic commerce capabilities; the Company's ability to retain the revenue from customer accounts merged into another store location as a result of the store consolidation plan; the Company's ability to execute and the effectiveness of the store consolidation; rapid inflation or deflation in prices of the Company's products; 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 enhance the performance of acquired stores; the Company's ability to retain the revenue associated with acquired customer accounts; 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 Company's ability to protect the integrity and security of individually identifiable data of its customers and employees; the impact of any breaches in data security or other disturbances to the Company's information technology and other networks; 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, 2013, and its quarterly reports on Form 10-Q for the quarters ended March 31, 2014, and June 30, 2014. 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)
 
(In thousands, except per share data) Three Months Ended September 30,
2014   2014    

2013 (2)
Before After After
Significant Items Significant Items Significant Items
(Non-GAAP (GAAP (GAAP
Earnings) Earnings) Earnings)
Total Revenues $ 769,525 $ 769,525 $ 754,780
Operating Profit 45,494 44,823 55,773
Net Earnings 26,038

(1)

 25,306 27,165
Diluted Earnings per Common Share $ 0.49

(1)

 $ 0.48 $ 0.50
Adjusted EBITDA $ 65,412 $ 65,412 $ 75,833
 
Reconciliation to Adjusted EBITDA:
 
Earnings Before Income Taxes $ 33,713

(1)

 $ 33,042 $ 45,040
Add back (subtract):
Vendor settlement credit — (7,072 ) —
Restructuring charge — 3,185 —
Impairment charge — 4,558 —
Interest Expense, net 11,781 11,781 10,733
Depreciation of Property Assets 18,536 18,536 19,421
Amortization and Write-down of Intangibles   1,382   1,382     639  
 
Adjusted EBITDA $ 65,412 $ 65,412 $ 75,833
 

(1) Excludes the effects of a $7.1 million pre-tax vendor settlement credit, a $4.6 million pre-tax impairment charge and a $3.2 million pre-tax restructuring charge. These charges reduced net earnings and net earnings per diluted share for the quarter ended September 30, 2014, by approximately $0.7 million and $0.01, respectively.

(2) As discussed in our Annual Report on Form 10-K for the year ended December 31, 2013, we identified errors in accounting for our estimates for rental merchandise reserves and for the allowance for doubtful accounts, resulting in an immaterial overstatement of on rent merchandise and understatements of held for rent merchandise and receivables which affected periods through December 31, 2013. We increased (decreased) previously reported salaries and other expenses, operating profit, income tax expense and net earnings by $0.8 million, $(0.8) million, $(0.3) million and $(0.5) million in our historical financial statement highlights and financial statements for the three-month period ended September 30, 2013, reported herein.

(In thousands, except per share data)   Nine Months Ended September 30,
2014   2014  

2013 (4)
Before After After
Significant Items Significant Items Significant Items
(Non-GAAP (GAAP (GAAP
Earnings) Earnings) Earnings)
Total Revenues $ 2,376,488 $ 2,376,488 $ 2,334,572
Operating Profit 151,739 144,745 211,787
Net Earnings 76,325

(3)

 71,696 115,174
Diluted Earnings per Common Share $ 1.44

(3)

 $ 1.35 $ 2.06
Adjusted EBITDA $ 210,225 $ 210,225 $ 271,135
 
Reconciliation to Adjusted EBITDA:
 
Earnings Before Income Taxes $ 115,296

(3)

 $ 108,302 $ 183,673
Add back (subtract):
Vendor settlement credit — (7,072 ) —
Restructuring charge — 7,562 —
Impairment charge — 4,558 —
Finance charges from refinancing — 1,946 —
Interest Expense, net 34,497 34,497 28,114
Depreciation of Property Assets 56,258 56,258 56,654
Amortization and Write-down of Intangibles   4,174   4,174     2,694  
 
Adjusted EBITDA $ 210,225 $ 210,225 $ 271,135

(3) Excludes the effects of a $7.1 million pre-tax vendor settlement credit, a $7.6 million pre-tax restructuring charge, a $4.6 million pre-tax impairment charge and a $1.9 million pre-tax refinancing charge. These charges reduced net earnings and net earnings per diluted share for the nine months ended September 30, 2014, by approximately $4.6 million and $0.09, respectively.

(4) As discussed in our Annual Report on Form 10-K for the year ended December 31, 2013, we identified errors in accounting for our estimates for rental merchandise reserves and for the allowance for doubtful accounts, resulting in an immaterial overstatement of on rent merchandise and understatements of held for rent merchandise and receivables which affected periods through December 31, 2013. We increased (decreased) previously reported salaries and other expenses, operating profit, income tax expense and net earnings by $1.5 million, $(1.5) million, $(0.6) million and $(0.9) million in our historical financial statement highlights and financial statements for the nine-month period ended September 30, 2013, reported herein. We also increased (decreased) previously reported accounts receivable, on rent rental merchandise inventory, held for rent rental merchandise, total assets, total liabilities and stockholders' equity by $4.5 million, $(16.4) million, $1.2 million, $(10.7) million, $(4.0) million and $(6.7) million, respectively, at September 30, 2013.

 
(In thousands of dollars) September 30,
  2014    

2013 (4)

 

Cash and Cash Equivalents $ 61,958 $ 52,857
Receivables, net 68,229 52,979
Prepaid Expenses and Other Assets 85,565 73,910
Rental Merchandise, net
On Rent 867,184 838,132
Held for Rent 266,574 218,633
Total Assets $ 3,059,191 $ 2,926,559
 
Senior Debt $ 425,135 $ 284,575
Senior Notes 550,000 550,000
Total Liabilities 1,674,167 1,585,556
Stockholders' Equity $ 1,385,024 $ 1,341,003
 
   
Rent-A-Center, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
(In thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30,
  2014      

2013 (2)

 

  2014      

2013 (4)

 

Revenues
Store
Rentals and fees $ 678,190 $ 671,334 $ 2,056,492 $ 2,013,885
Merchandise sales 58,477 53,808 226,148 227,171
Installment sales 18,089 17,474 54,499 52,138
Other 6,384 4,483 14,376 14,244
Franchise
Merchandise sales 6,524 6,396 19,811 23,072
Royalty income and fees   1,861     1,285     5,162     4,062  
769,525 754,780 2,376,488 2,334,572
Cost of revenues
Store
Cost of rentals and fees 177,208 170,979 532,590 507,826
Cost of merchandise sold 47,569 42,344 174,299 175,903
Cost of installment sales 6,134 5,983 18,874 18,141
Vendor settlement credit (7,072 ) — (7,072 ) —
Franchise cost of merchandise sold   6,247     6,142     18,984     22,072  
230,086 225,448 737,675 723,942
Gross profit 539,439 529,332 1,638,813 1,610,630
Operating expenses
Salaries and other expenses 443,874 435,866 1,345,303 1,281,922
General and administrative expenses 41,617 37,054 132,471 114,227
Amortization and write-down of intangibles 1,382 639 4,174 2,694
Other (gains) and charges   7,743     —     12,120     —  
494,616 473,559 1,494,068 1,398,843
 
Operating profit 44,823 55,773 144,745 211,787
Finance charges from refinancing — — 1,946 —
Interest expense 11,981 10,916 35,178 28,773
Interest income   (200 )   (183 )   (681 )   (659 )
Earnings before income taxes 33,042 45,040 108,302 183,673
Income tax expense   7,736     17,875     36,606     68,499  
NET EARNINGS $ 25,306   $ 27,165   $ 71,696   $ 115,174  
 
Basic weighted average shares   52,864     53,438     52,828     55,423  
 
Basic earnings per common share $ 0.48   $ 0.51   $ 1.36   $ 2.08  
 
Diluted weighted average shares   53,114     53,812     53,069     55,800  
 
Diluted earnings per common share $ 0.48   $ 0.50   $ 1.35   $ 2.06  
 

Rent-A-Center, Inc. and Subsidiaries

SEGMENT INFORMATION HIGHLIGHTS
(Unaudited)

On January 1, 2014, the Company realigned its reporting structure to include its Canadian stores in the Core U.S. segment, which were previously reported in the International segment. The accompanying prior-year amounts and store counts have been revised to reflect this change, and we now refer to the segment formerly reported as "International" as "Mexico" since only that country's results are reported therein.

 
(In thousands of dollars) Three Months Ended September 30, 2014
Core U.S.   Acceptance Now   Mexico   Franchising   Total
Revenue $ 581,600 $ 160,388 $ 19,152 $ 8,385 $ 769,525
Gross profit 430,816 92,911 13,574 2,138 539,439
Operating profit (loss) 27,297 21,242 (4,884 ) 1,168 44,823
Depreciation of property assets 15,208 1,506 1,773 49 18,536
Amortization and write-down of intangibles 1,240 142 — — 1,382
Capital expenditures 16,177 3,336 770 — 20,283
 
(In thousands of dollars) Three Months Ended September 30, 2013
Core U.S. Acceptance Now Mexico Franchising Total (2)
Revenue $ 611,091 $ 123,798 $ 12,210 $ 7,681 $ 754,780
Gross profit 444,898 74,083 8,812 1,539 529,332
Operating profit (loss) 44,073 18,789 (7,488 ) 399 55,773
Depreciation of property assets 16,610 1,323 1,468 20 19,421
Amortization and write-down of intangibles 497 142 — — 639
Capital expenditures 22,399 2,819 3,722 — 28,940
 
(In thousands of dollars) Nine Months Ended September 30, 2014
Core U.S. Acceptance Now Mexico Franchising Total
Revenue $ 1,808,403 $ 490,392 $ 52,720 $ 24,973 $ 2,376,488
Gross profit 1,319,325 275,694 37,805 5,989 1,638,813
Operating profit (loss) 99,315 61,218 (17,979 ) 2,191 144,745
Depreciation of property assets 49,129 4,356 5,204 135 58,824
Amortization and write-down of intangibles 3,748 426 — — 4,174
Capital expenditures 47,898 9,193 4,642 — 61,733
Rental merchandise, net
On rent 532,743 313,533 20,908 — 867,184
Held for rent 253,017 5,779 7,778 — 266,574
Total assets 2,576,022 410,296 70,350 2,523 3,059,191
 
(In thousands of dollars) Nine Months Ended September 30, 2013
Core U.S. Acceptance Now Mexico Franchising Total (4)
Revenue $ 1,905,968 $ 368,454 $ 33,016 $ 27,134 $ 2,334,572
Gross profit 1,371,890 209,960 23,718 5,062 1,610,630
Operating profit (loss) 176,807 51,833 (18,497 ) 1,644 211,787
Depreciation of property assets 48,987 3,574 4,033 60 56,654
Amortization and write-down of intangibles 2,267 427 — — 2,694
Capital expenditures 57,642 7,021 9,098 — 73,761
Rental merchandise, net
On rent 568,413 255,997 13,722 — 838,132
Held for rent 207,628 3,681 7,324 — 218,633
Total assets 2,518,194 345,539 61,617 1,209 2,926,559
   
SAME STORE SALES
(Unaudited)
 
2014   2013  
Period Core U.S.   Acceptance Now   Mexico   Total Core U.S.   Acceptance Now   Mexico   Total
Three months ended March 31, (6.1 )% 26.1 % 20.3 % (0.8 )% (8.7 )% 33.8 % 80.0 % (4.3 )%
Three months ended June 30, (4.7 )% 25.1 % 17.0 % 0.6 % (5.8 )% 32.0 % 61.3 % (1.6 )%
Three months ended September 30, (3.6 )% 25.7 % 25.9 % 1.9 % (5.0 )% 29.3 % 36.2 % (0.8 )%
Nine months ended September 30, (4.9 )% 25.6 % 21.2 % 0.5 % (6.6 )% 31.6 % 55.2 % (2.3 )%
 
Rent-A-Center, Inc. and Subsidiaries
 
LOCATION ACTIVITY
(Unaudited)
 
Location Activity - Three Months Ended September 30, 2014
Core U.S.   Acceptance Now   Mexico   Franchising   Total
Locations at beginning of period 2,847 1,359 176 180 4,562
New location openings 2 55 — 14 71
Acquired locations remaining open 1 — — — 1
Closed locations
Merged with existing locations — 55 — — 55
Sold or closed with no surviving location 9 — — 6 15
Locations at end of period 2,841 1,359 176 188 4,564
Acquired locations closed and accounts merged with existing locations 1 — — — 1
 
Location Activity - Three Months Ended September 30, 2013
Core U.S. Acceptance Now Mexico Franchising Total
Locations at beginning of period 2,990 1,153 130 221 4,494
New location openings 6 112 22 4 144
Acquired locations remaining open 6 — — — 6
Closed locations
Merged with existing locations 10 10 2 — 22
Sold or closed with no surviving location — 1 — 12 13
Locations at end of period 2,992 1,254 150 213 4,609
Acquired locations closed and accounts merged with existing locations 5 — — — 5
 
Location Activity - Nine Months Ended September 30, 2014
Core U.S. Acceptance Now Mexico Franchising Total
Locations at beginning of period 3,010 1,325 151 179 4,665
New location openings 10 140 30 23 203
Acquired locations remaining open 2 — — — 2
Closed locations
Merged with existing locations 163 105 5 — 273
Sold or closed with no surviving location 18 1 — 14 33
Locations at end of period 2,841 1,359 176 188 4,564
Acquired locations closed and accounts merged with existing locations 7 — — — 7
 
Location Activity - Nine Months Ended September 30, 2013
Core U.S. Acceptance Now Mexico Franchising Total
Locations at beginning of period 3,008 966 90 224 4,288
New location openings 15 320 62 9 406
Acquired locations remaining open 12 — — — 12
Closed locations
Merged with existing locations 40 31 2 — 73
Sold or closed with no surviving location 3 1 — 20 24
Locations at end of period 2,992 1,254 150 213 4,609
Acquired locations closed and accounts merged with existing locations 18 — — — 18

Source: Rent-A-Center, Inc.

Rent-A-Center, Inc.:
David E. Carpenter, 972-801-1214
Vice President - Investor Relations
david.carpenter@rentacenter.com
or
Maureen B. Short, 972-801-1899
Senior Vice President - Finance, Investor Relations and Treasury
maureen.short@rentacenter.com