rcii-20200930
RENT A CENTER INC 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 001-38047
Rent-A-Center, Inc.
(Exact name of registrant as specified in its charter)
Delaware45-0491516
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
5501 Headquarters Drive
Plano, Texas 75024
(Address, including zip code of registrant’s principal executive offices)
Registrant’s telephone number, including area code: 972-801-1100
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, $.01 par valueRCIIThe Nasdaq Stock Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 22, 2020:
ClassOutstanding
Common stock, $.01 par value54,170,466




TABLE OF CONTENTS
 
  Page No.
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
 


i


Item 1. Condensed Consolidated Financial Statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(In thousands, except per share data)
Revenues
Store
Rentals and fees$579,573 $550,795 $1,682,310 $1,665,829 
Merchandise sales91,233 65,552 300,693 240,864 
Installment sales16,580 16,952 48,970 49,658 
Other844 1,054 2,341 2,962 
Total store revenues688,230 634,353 2,034,314 1,959,313 
Franchise
Merchandise sales19,069 11,178 49,553 30,307 
Royalty income and fees4,716 3,840 13,833 12,370 
Total revenues712,015 649,371 2,097,700 2,001,990 
Cost of revenues
Store
Cost of rentals and fees167,027 161,971 489,606 473,001 
Cost of merchandise sold95,177 70,575 296,894 250,000 
Cost of installment sales5,713 5,527 16,830 16,133 
Total cost of store revenues267,917 238,073 803,330 739,134 
Franchise cost of merchandise sold19,070 11,302 49,632 29,923 
Total cost of revenues286,987 249,375 852,962 769,057 
Gross profit425,028 399,996 1,244,738 1,232,933 
Operating expenses
Store expenses
Labor150,493 158,666 434,216 473,221 
Other store expenses140,818 150,366 463,292 463,385 
General and administrative expenses41,576 34,364 113,694 105,822 
Depreciation and amortization
13,810 14,894 43,071 45,788 
Other (gains) and charges(1,856)2,859 7,768 (41,308)
Total operating expenses344,841 361,149 1,062,041 1,046,908 
Operating profit80,187 38,847 182,697 186,025 
Debt refinancing charges 2,168  2,168 
Interest expense3,350 6,733 11,958 26,214 
Interest income(152)(85)(561)(2,956)
Earnings before income taxes76,989 30,031 171,300 160,599 
Income tax expense (benefit)12,959 (1,246)19,485 27,544 
Net earnings$64,030 $31,277 $151,815 $133,055 
Basic earnings per common share$1.19 $0.57 $2.80 $2.46 
Diluted earnings per common share$1.15 $0.56 $2.73 $2.39 
See accompanying notes to condensed consolidated financial statements.

1


RENT-A-CENTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(In thousands)
Net earnings$64,030 $31,277 $151,815 $133,055 
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax of $162 and $(91), $(872) and $(11) for the three and nine months ended September 30, 2020 and 2019, respectively
609 (344)(3,280)(40)
Total other comprehensive income (loss)609 (344)(3,280)(40)
Comprehensive income$64,639 $30,933 $148,535 $133,015 
See accompanying notes to condensed consolidated financial statements.

2


RENT-A-CENTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 
September 30, 2020December 31, 2019
(In thousands, except share and par value data)Unaudited
ASSETS
Cash and cash equivalents$227,398 $70,494 
Receivables, net of allowance for doubtful accounts of $7,916 and $5,601 in 2020 and 2019, respectively
75,471 84,123 
Prepaid expenses and other assets40,172 46,043 
Rental merchandise, net
On rent680,955 697,270 
Held for rent119,903 138,418 
Merchandise held for installment sale4,287 4,878 
Property assets, net of accumulated depreciation of $550,958 and $522,826 in 2020 and 2019, respectively
145,298 166,138 
Operating lease right-of-use assets280,845 281,566 
Deferred tax asset14,889 14,889 
Goodwill70,217 70,217 
Other intangible assets, net8,130 8,762 
Total assets$1,667,565 $1,582,798 
LIABILITIES
Accounts payable – trade$176,304 $168,120 
Accrued liabilities305,919 275,777 
Operating lease liabilities283,784 285,041 
Deferred tax liability168,622 163,984 
Senior debt, net
190,599 230,913 
Total liabilities1,125,228 1,123,835 
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value; 250,000,000 shares authorized; 112,023,559 and 111,166,229 shares issued in September 30, 2020 and December 31, 2019, respectively
1,103 1,110 
Additional paid-in capital878,965 869,617 
Retained earnings1,051,760 947,875 
Treasury stock at cost, 57,889,659 and 56,428,482 shares in September 30, 2020 and December 31, 2019, respectively
(1,375,541)(1,348,969)
Accumulated other comprehensive loss(13,950)(10,670)
Total stockholders' equity542,337 458,963 
Total liabilities and stockholders' equity$1,667,565 $1,582,798 
See accompanying notes to condensed consolidated financial statements.

3


RENT-A-CENTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 Common StockAdditional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated Other Comprehensive (Loss) IncomeTotal
SharesAmount
 (In thousands)
Balance at December 31, 2019111,166 $1,110 $869,617 $947,875 $(1,348,969)$(10,670)$458,963 
Adoption of ASU 2016-13— — — (769)— — (769)
Net earnings— — — 49,292 — — 49,292 
Other comprehensive loss— — — — — (3,906)(3,906)
Purchase of treasury stock— (14)— — (26,511)— (26,525)
Exercise of stock options69 1 1,194 — — — 1,195 
Vesting of restricted share units434 4 (4)— — —  
Tax effect of stock awards vested and options exercised— — (5,270)— — — (5,270)
Stock-based compensation— — 3,043 — — — 3,043 
Balance at March 31, 2020111,669 $1,101 $868,580 $996,398 $(1,375,480)$(14,576)$476,023 
Net earnings— — — 38,493 — — 38,493 
Other comprehensive income— — — — — 17 17 
Exercise of stock options42 — 486 — — — 486 
Stock-based compensation— — 2,849 — — — 2,849 
Dividends declared— — — (31,292)— — (31,292)
Balance at June 30, 2020111,711 $1,101 $871,915 $1,003,599 $(1,375,480)$(14,559)$486,576 
Net earnings— — — 64,030 — — 64,030 
Other comprehensive income— — — — — 609 609 
Purchase of treasury stock—  — — (61)— (61)
Exercise of stock options226 2 4,053 — — — 4,055 
MP Acquisition Share Release
87   — — —  
Stock-based compensation— — 2,997 — — — 2,997 
Dividends declared— — — (15,869)— — (15,869)
Balance at September 30, 2020112,024 $1,103 $878,965 $1,051,760 $(1,375,541)$(13,950)$542,337 
See accompanying notes to consolidated financial statements.


4


RENT-A-CENTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)
(Unaudited)
 Common StockAdditional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated Other Comprehensive Income (Loss)Total
SharesAmount
 (In thousands)
Balance at December 31, 2018109,910 $1,099 $838,436 $805,924 $(1,347,677)$(11,265)$286,517 
ASC 842 adoption— — — (1,976)— — (1,976)
Net earnings— — — 7,323 — — 7,323 
Other comprehensive income— — — — — 521 521 
Exercise of stock options284 3 2,889 — — — 2,892 
Vesting of restricted share units218 2 (2)— — —  
Tax effect of stock awards vested and options exercised— — (1,734)— — — (1,734)
Stock-based compensation— — 709 — — — 709 
Balance at March 31, 2019110,412 $1,104 $840,298 $811,271 $(1,347,677)$(10,744)$294,252 
Net earnings— — — 94,455 — — 94,455 
Other comprehensive loss— — — — — (217)(217)
Exercise of stock options101 1 1,417 — — — 1,418 
Vesting of restricted share units49 — — — — —  
Stock-based compensation— — 1,982 — — — 1,982 
Balance at June 30, 2019110,562 $1,105 $843,697 $905,726 $(1,347,677)$(10,961)$391,890 
Net loss— — — 31,277 — — 31,277 
Other comprehensive loss— — — — — (344)(344)
Exercise of stock options105 1 1,502 — — — 1,503 
Stock-based compensation— — 1,952 — — — 1,952 
Dividends Declared— — — (13,707)— — (13,707)
MP Acquisition439 4 19,165 — — — 19,169 
September 30, 2019111,106 $1,110 $866,316 $923,296 $(1,347,677)$(11,305)$431,740 
See accompanying notes to consolidated financial statements.


5


RENT-A-CENTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 Nine Months Ended September 30,
 20202019
(In thousands)
Cash flows from operating activities
Net earnings$151,815 $133,055 
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation of rental merchandise471,530 455,143 
Bad debt expense10,959 11,591 
Stock-based compensation expense8,889 4,644 
Depreciation of property assets42,268 45,551 
Loss on sale or disposal of property assets1,067 278 
Amortization of intangibles810 237 
Amortization of financing fees1,186 2,574 
Write-off of debt financing fees 2,168 
Deferred income taxes4,383 16,629 
Changes in operating assets and liabilities, net of acquired assets
Rental merchandise(435,722)(387,098)
Receivables(2,465)(11,891)
Prepaid expenses and other assets5,871 10,080 
Operating lease right-of-use assets and lease liabilities(536)5,305 
Accounts payable – trade8,184 (8,796)
Accrued liabilities27,987 (51,341)
Net cash provided by operating activities296,226 228,129 
Cash flows from investing activities
Purchase of property assets(22,557)(12,010)
Proceeds from sale of property assets196 16,922 
Hurricane insurance recovery proceeds158 995 
Acquisitions of businesses(700)(28,722)
Net cash used in investing activities(22,903)(22,815)
Cash flows from financing activities
Share repurchases(26,572) 
Exercise of stock options5,737 5,813 
Shares withheld for payment of employee tax withholdings(5,270)(1,733)
Debt issuance costs (8,454)
Proceeds from debt198,000 285,400 
Repayments of debt(239,500)(568,140)
Dividends paid(47,329) 
Net cash used in financing activities(114,934)(287,114)
Effect of exchange rate changes on cash(1,485)91 
Net increase (decrease) in cash and cash equivalents156,904 (81,709)
Cash and cash equivalents at beginning of period70,494 155,391 
Cash and cash equivalents at end of period$227,398 $73,682 
See accompanying notes to condensed consolidated financial statements.

6

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation
The interim condensed consolidated financial statements of Rent-A-Center, Inc. included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to the SEC’s rules and regulations, although we believe the disclosures are adequate to make the information presented not misleading. We suggest these financial statements be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2019. In our opinion, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly our results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
COVID-19
During the first quarter of 2020, the respiratory disease caused by a novel coronavirus (“COVID-19”) began to spread worldwide causing the World Health Organization to declare the outbreak a pandemic, and resulting in significant disruptions to the U.S. and world economies. In response to the issuance of U.S. federal guidelines to contain the spread of the COVID-19 virus, state and local jurisdictions implemented various containment measures, including temporary shelter-in-place orders and closure of non-essential businesses. The effects of these containment measures negatively impacted our operations resulting in the temporary or partial closure of certain locations in all of our U.S. operating segments during the first half of 2020. In addition, certain of our Mexico locations were also temporarily closed in accordance with jurisdictional ordinances issued in Mexico. In response to these restrictions and negative impacts to our operations, we implemented certain measures to reduce operating expenses and cash flow uses in order to mitigate these effects. In addition, we implemented additional electronic payment methods for our Rent-A-Center Business and Preferred Lease customers.
While the pandemic is ongoing and uncertainties remain that may not allow us to accurately predict the full impact that COVID-19 will ultimately have on our business, all locations in our Rent-A-Center Business, Franchising and Mexico operating segments, and staffed Preferred Lease locations temporarily or partially closed at the onset of the pandemic, were reopened in the second quarter of 2020 and continue to remain fully operational.
Use of Estimates
In preparing financial statements in conformity with U.S. generally accepted accounting principles, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent losses and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. However, uncertainties, including future unknown impacts of the COVID-19 pandemic, may affect certain estimates and assumptions inherent in the financial reporting process, which may impact reported amounts of assets and liabilities in future periods and cause actual results to differ from those estimates.
Principles of Consolidation and Nature of Operations
These financial statements included herein include the accounts of Rent-A-Center, Inc. and its direct and indirect subsidiaries. All intercompany accounts and transactions have been eliminated. Unless the context indicates otherwise, references to “Rent-A-Center” refer only to Rent-A-Center, Inc., the parent, and references to the "Company", “we,” “us” and “our” refer to the consolidated business operations of Rent-A-Center and any or all of its direct and indirect subsidiaries. We report four operating segments: Rent-A-Center Business, Preferred Lease, Mexico and Franchising.
Our Rent-A-Center Business segment consists of company-owned lease-to-own stores in the United States and Puerto Rico that lease household durable goods to customers on a lease-to-own basis. We also offer merchandise on an installment sales basis in certain of our stores under the names “Get It Now” and “Home Choice.” Our Rent-A-Center Business segment operates through our company-owned stores and e-commerce platform through rentacenter.com.
Our Preferred Lease segment, which operates in the United States and Puerto Rico, and includes the operations of Merchants Preferred (as defined in Note 2 below) acquired in August 2019, generally offers the lease-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks located within such retailer's locations, including staffed options, unstaffed or virtual options, or a combination of the two (the hybrid model). The hybrid model can be staffed by a Preferred Lease employee (staffed locations) or employ a virtual solution where customers, either directly or with the

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RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
assistance of a representative of the third-party retailer, initiate the lease-to-own transaction online in the retailers' locations using our virtual solutions (virtual locations).
Our Mexico segment consists of our company-owned lease-to-own stores in Mexico that lease household durable goods to customers on a lease-to-own basis.
Rent-A-Center Franchising International, Inc., an indirect, wholly owned subsidiary of Rent-A-Center, is a franchisor of lease-to-own stores. Our Franchising segment’s primary source of revenue is the sale of rental merchandise to its franchisees, who in turn offer the merchandise to the general public for rent or purchase under a lease-to-own transaction. The balance of our Franchising segment’s revenue is generated primarily from royalties based on franchisees’ monthly gross revenues.
Newly Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires immediate recognition of estimated current expected credit losses, rather than recognition when incurred. We adopted ASU 2016-13 and all related amendments, including ASU 2020-02 and ASU 2020-03, beginning January 1, 2020, using a modified retrospective approach. Under such approach, we recognized a cumulative-effect of the guidance as an adjustment to the opening balance of retained earnings for the quarter ended March 31, 2020. The application of this new methodology is limited to our installment notes receivables and trade receivables with our franchisees, primarily related to merchandise sales. The comparative information has not been restated and continues to be reported under the accounting standards in effect for periods ending prior to January 1, 2020.
The cumulative effect as of January 1, 2020 resulting from the adoption of ASU 2016-13 and related amendments was a net decrease to opening retained earnings in our condensed consolidated balance sheet of $0.8 million. See Note 4 for additional information regarding our trade and note receivables and related allowances for doubtful accounts.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the hypothetical purchase price allocation and instead using the difference between the carrying amount and the fair value of the reporting unit. We adopted ASU 2017-04 beginning January 1, 2020, using a prospective approach. There was no impact on our financial statements for the nine months ended September 30, 2020 resulting from the adoption of this ASU.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies, and adds certain disclosure requirements in ASC 820, to improve the effectiveness of the fair value measurement disclosures. We adopted ASU 2018-13 beginning January 1, 2020, using a prospective approach. There was no impact on our financial statements for the nine months ended September 30, 2020 resulting from the adoption of this ASU.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40); Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement, which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing agreement under the internal-use software guidance in ASC 350-40. We adopted ASU 2018-15 beginning January 1, 2020, using a prospective approach. Following our adoption of this ASU, deferred implementation costs related to cloud computing arrangements are recorded to prepaid expenses and other assets in our condensed consolidated balance sheet and subsequently amortized to other store expenses in our condensed consolidated statement of operations. Impacts to our financial statements resulting from the adoption of this ASU were immaterial to our financial statements for the nine months ended September 30, 2020.
Note 2 - Acquisitions and Store Sales
On August 13, 2019, we completed the acquisition of substantially all of the assets of C/C Financial Corp. dba Merchants Preferred ("Merchants Preferred"), a nationwide provider of virtual lease-to-own services. The aggregate purchase price was approximately $46.4 million, including net cash consideration of approximately $28.0 million, and 701,918 shares of our common stock valued at $27.31 per share, as of the date of closing, less working capital adjustments of approximately $0.9 million.

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RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. The following table provides the final estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date:
(in thousands)August 13, 2019
Receivables$1,813 
Prepaid expenses and other assets154 
Rental merchandise17,904 
Software4,300 
Right of use operating leases404 
Other intangible assets8,900 
Goodwill13,403 
Lease liabilities(487)
Net identifiable assets acquired$46,391 
The fair value measurements were primarily based on significant unobservable inputs (level 3) developed using company-specific information. Certain fair value estimates were determined based on an independent valuation of the net assets acquired, including identifiable intangible assets, relating to dealer relationships of $8.9 million, and software of $4.3 million. The fair value for dealer relationships and software were estimated using common industry valuation methods for similar asset types, based primarily on cost inputs and projected cash flows. The dealer relationships and software assets were both assigned remaining lives of 10 years.
In addition, we recorded goodwill of $13.4 million, which consists of the excess of the net purchase price over the fair value of the net assets acquired. The goodwill is not deductible for tax purposes.
California Refranchise Sale
On July 22, 2020, we entered into an asset purchase agreement to sell all 99 Rent-A-Center Business corporate stores in the state of California to an experienced franchisee. The sale was consummated on October 5, 2020 for cash consideration of approximately $16 million, including approximately $1 million paid for related franchise fees. In accordance with the criteria included in US GAAP, assets sold in connection with the sale were classified as assets held for sale and reported at their net book value as of September 30, 2020, including idle and on-rent inventory of approximately $31.1 million and property assets of approximately $0.8 million.
Note 3 - Revenues
The following table disaggregates our revenue for the periods ended September 30, 2020 and 2019:
 Three Months Ended September 30, 2020
 
Rent-A-Center Business
Preferred LeaseMexicoFranchisingConsolidated
(In thousands)
Store
Rentals and fees$414,798 $153,306 $11,469 $ $579,573 
Merchandise sales42,459 48,096 678  91,233 
Installment sales16,580    16,580 
Other386 257 12 189 844 
Total store revenues474,223 201,659 12,159 189 688,230 
Franchise
Merchandise sales   19,069 19,069 
Royalty income and fees   4,716 4,716 
Total revenues$474,223 $201,659 $12,159 $23,974 $712,015 


9

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
 Nine Months Ended September 30, 2020
 
Rent-A-Center Business
Preferred LeaseMexicoFranchisingConsolidated
(In thousands)
Store
Rentals and fees$1,193,301 $454,744 $34,265 $ $1,682,310 
Merchandise sales144,887 153,774 2,032  300,693 
Installment sales48,970    48,970 
Other1,222 511 19 589 2,341 
Total store revenues1,388,380 609,029 36,316 589 2,034,314 
Franchise
Merchandise sales   49,553 49,553 
Royalty income and fees   13,833 13,833 
Total revenues$1,388,380 $609,029 $36,316 $63,975 $2,097,700 

 Three Months Ended September 30, 2019
 
Rent-A-Center Business
Preferred LeaseMexicoFranchisingConsolidated
(In thousands)
Store
Rentals and fees$389,421 $148,711 $12,663 $ $550,795 
Merchandise sales29,185 35,667 700  65,552 
Installment sales16,952    16,952 
Other939 108 7  1,054 
Total store revenues436,497 184,486 13,370  634,353 
Franchise
Merchandise sales   11,178 11,178 
Royalty income and fees   3,840 3,840 
Total revenues$436,497 $184,486 $13,370 $15,018 $649,371 

 Nine Months Ended September 30, 2019
 
Rent-A-Center Business
Preferred LeaseMexicoFranchisingConsolidated
(In thousands)
Store
Rentals and fees$1,196,800 $431,008 $38,021 $ $1,665,829 
Merchandise sales112,678 125,963 2,223  240,864 
Installment sales49,658    49,658 
Other2,514 426 22  2,962 
Total store revenues1,361,650 557,397 40,266  1,959,313 
Franchise
Merchandise sales   30,307 30,307 
Royalty income and fees   12,370 12,370 
Total revenues$1,361,650 $557,397 $40,266 $42,677 $2,001,990 
Rental-Purchase Agreements
Rent-A-Center Business, Preferred Lease, and Mexico
Rentals and Fees. Rental merchandise is leased to customers pursuant to rental purchase agreements, which provide for weekly, semi-monthly or monthly rental terms with non-refundable rental payments. At the expiration of each rental term, customers

10

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
may renew the rental agreement for the next rental term. Generally, the customer has the right to acquire title of the merchandise either through a purchase option or through payment of all required rental terms. Customers can terminate the rental agreement at the end of any rental term without penalty. Therefore, rental transactions are accounted for as operating leases.
Rental payments received at our Rent-A-Center Business, Preferred Lease (excluding virtual) and Mexico locations must be prepaid in advance of the next rental term. Under the virtual business model, revenues are earned prior to the rental payment due date. Therefore, virtual business revenue is accrued prior to receipt of the rental payment, net of estimated returns and uncollectible renewal payments. Under both models, rental revenue is recognized over the rental term. See Note 4 for additional information regarding accrued rental revenue and the related allowances for returns and uncollectible payments.
Cash received for rental payments, including fees, prior to the period in which it should be recognized, is deferred and recognized according to the rental term. At September 30, 2020 and December 31, 2019, we had $41.9 million and $39.9 million, respectively, in deferred revenue included in accrued liabilities related to our rental purchase agreements. Revenue related to various payment, reinstatement or late fees is recognized when paid by the customer at the point service is provided. Rental merchandise is depreciated using the income forecasting method and is recognized in cost of sales over the rental term.
We also offer additional product plans along with our rental agreements which provide customers with liability protection against significant damage or loss of a product, and club membership benefits, including various discount programs, product service and replacement benefits in the event merchandise is damaged or lost, and payment insurance in the event eligible customers become unemployed. Customers renew product plans in conjunction with their rental term renewals, and can cancel the plans at any time. Revenue for product plans is recognized over the term of the plan. Costs incurred related to product plans are primarily recognized in cost of sales.
Revenue from contracts with customers
Rent-A-Center Business, Preferred Lease, and Mexico
Merchandise Sales. Merchandise sales include payments received for the exercise of the early purchase option offered through our rental purchase agreements or merchandise sold through point of sale transactions. Revenue for merchandise sales is recognized when payment is received and ownership of the merchandise passes to the customer. The remaining net value of merchandise sold is recorded to cost of sales at the time of the transaction.
Installment Sales. Revenue from the sale of merchandise in our retail installment stores is recognized when the installment note is signed and control of the merchandise has passed to the customer. The cost of merchandise sold through installment agreements is recognized in cost of sales at the time of the transaction. We offer extended service plans with our installment agreements which are administered by third parties and provide customers with product service maintenance beyond the term of the installment agreement. Payments received for extended service plans are deferred and recognized, net of related costs, when the installment payment plan is complete and the service plan goes into effect. Customers can cancel extended service plans at any time during the installment agreement period and receive a refund for payments previously made towards the plan. At September 30, 2020 and December 31, 2019, we had $3.0 million and $2.9 million in deferred revenue included in accrued liabilities related to extended service plans.
Other. Other revenue primarily consists of other miscellaneous product plans offered to our rental and installment customers. Revenue for other product plans is recognized in accordance with the terms of the applicable plan agreement.
Franchising
Merchandise Sales. Revenue from the sale of rental merchandise is recognized upon shipment of the merchandise to the franchisee.
Royalty Income and Fees. Franchise royalties, including franchisee contributions to corporate advertising funds, represent sales-based royalties calculated as a percentage of gross rental payments and sales. Royalty revenue is accrued and recognized as rental payments and merchandise sales occur. Franchise fees are initial fees charged to franchisees for new or converted franchise stores. Franchise fee revenue is recognized on a straight-line basis over the term of the franchise agreement. At September 30, 2020 and December 31, 2019, we had $4.2 million and $4.5 million, respectively, in deferred revenue included in accrued liabilities related to franchise fees.

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RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 4 - Receivables and Allowance for Doubtful Accounts
Installment sales receivables consist primarily of receivables due from customers for the sale of merchandise in our retail installment stores. Installment sales receivable associated with the sale of merchandise at our Get It Now and Home Choice stores generally consist of the sales price of the merchandise purchased and any additional fees for services the customer has chosen, less the customer’s down payment. No interest is accrued and interest income is recognized each time a customer makes a payment, generally on a monthly basis. Interest paid on installment agreements for the nine months ended September 30, 2020 was $8.5 million.
Trade and notes receivables consist primarily of amounts owed from our franchisees for inventory purchases, earned royalties and other obligations; and other corporate related receivables. Credit is extended based on an evaluation of a franchisee’s financial condition and collateral is generally not required. Trade receivables are generally due within 30 days.
Receivables consist of the following:
(In thousands)September 30, 2020December 31, 2019
Installment sales receivables$57,939 $56,370 
Trade and notes receivables25,448 33,354 
Total receivables83,387 89,724 
Less allowance for doubtful accounts(7,916)(5,601)
Total receivables, net of allowance for doubtful accounts$75,471 $84,123 
We have established an allowance for doubtful accounts for our installment notes receivable. Our policy for determining the allowance is primarily based on historical loss experience, as well as the results of management’s review and analysis of the payment and collection of the installment notes receivable within the previous year. We believe our allowance is adequate to absorb all expected losses. Our policy is to charge off installment notes receivable that are 120 days or more past due. Charge-offs are applied as a reduction to the allowance for doubtful accounts and any recoveries of previously charged off balances are applied as an increase to the allowance for doubtful accounts.
The allowance for our Franchising trade and note receivables is determined by considering a number of factors, including the length of time receivables are past due, previous loss history, the franchisee’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. Trade receivables that are more than 90 days past due are either written-off or fully reserved in our allowance for doubtful accounts. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
The allowance for doubtful accounts related to trade and notes receivable was $0.9 million and $1.5 million at September 30, 2020 and December 31, 2019, respectively. The allowance for doubtful accounts related to installment sales receivable was $7.0 million and $4.1 million at September 30, 2020 and December 31, 2019, respectively.
Changes in our allowance for doubtful accounts are as follows: 
(In thousands)September 30, 2020
Beginning allowance for doubtful accounts$5,601 
Bad debt expense (1)
10,959 
Accounts written off(9,141)
Recoveries497 
 Ending allowance for doubtful accounts$7,916 
(1) Uncollectible installment payments, franchisee obligations, and other corporate receivables are recognized in other store operating expenses in our condensed consolidated financial statements.
Note 5 - Leases
We lease space for all of our Rent-A-Center Business and Mexico stores under operating leases expiring at various times through 2027. In addition, we lease space for certain support facilities under operating leases expiring at various times through 2032. Most of our store leases are five-year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed formulas. We evaluate all leases to determine if it is likely that we will exercise future renewal options and in most cases we are not reasonably certain of exercise due to competing market rental rates and lack of significant penalty or business disruption incurred by not exercising the renewal options. We include month-to-month leases in operating lease right-of-use assets and operating lease liabilities in our condensed consolidated balance sheet. In

12

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
certain situations involving the sale of a Rent-A-Center Business corporate store to a franchisee, we enter into a lease assignment agreement with the buyer, but we remain the primary obligor under the original lease for the remaining active term. These assignments are therefore classified as subleases and the original lease is included in our operating lease right-of-use assets and operating lease liabilities in our condensed consolidated balance sheet.
We lease vehicles for all of our Rent-A-Center Business stores under operating leases with lease terms expiring twelve months after the start date of the lease. We classify these leases as short-term and have elected the short-term lease exemption for our vehicle leases, and have therefore excluded them from our operating lease right-of-use assets within our condensed consolidated balance sheet. We also lease vehicles for all of our Mexico stores which have terms expiring at various times through 2022 with rental rates adjusted periodically for inflation. Finally, we have a minimal number of equipment leases, primarily related to temporary storage containers and certain back office technology hardware assets.
For all of the leases described above, we have elected not to separate the lease and non-lease components and account for these as a single component. We have also elected to use the practical expedients that remove the requirement to reassess whether expired or existing contracts contain leases and the requirement to reassess the lease classification for any existing leases prior to our adoptio