Market Overview

Rent-A-Center, Inc. Reports Third Quarter 2017 Results

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Sequential Improvements Highlight Progress on Strategic Plan

Rent-A-Center, Inc. (the "Company") (NASDAQ/NGS:RCII) today announced
results for the quarter ended September 30, 2017.

"We continue to make progress in executing on important aspects of our
strategic plan, while recognizing there is still work to be done to
restore growth and improve profitability," said Mark Speese, Chief
Executive Officer of Rent-A-Center. "During the seasonally lower third
quarter, we again delivered sequential improvements in same store sales
in both the Core U.S. and Acceptance Now businesses. In addition, we
continued to improve the fundamentals of our agreement portfolio in the
Core U.S. business by refining and enhancing the operating model and are
in the early phases of repositioning the Acceptance Now business for
profitable growth."

Mr. Speese continued, "During the third quarter, our results were
impacted by unprecedented hurricane activity, which will disrupt
business in the near term. Our immediate concern has been the safety of
our coworkers and customers and we remain committed to caring for those
in need."

Progress on Strategic Plan

During the third quarter of 2017, Rent-A-Center continued to see
improving fundamentals in the Core U.S. segment. Within the Core U.S.
segment, the improved inventory assortment is becoming a larger portion
of the portfolio, driving increases in the monthly rate of new
agreements. The Company continues to empower store level coworkers to
attract and retain talent by modifying pay ranges and encouraging the
shift to full time hours.

In the Acceptance NOW segment, the Company implemented several decision
engine enhancements aimed at improving ownership and decreasing losses.
Additionally, the Company undertook a full assessment of partner
relationships and several actions were taken to improve profitability
and service levels.

  • Core U.S. same store sales for the quarter improved sequentially by
    510 basis points
  • Acceptance Now same store sales for the quarter improved sequentially
    by 120 basis points
  • The year over year change in merchandise on rent improved sequentially
    by 350 basis points, in the Core
  • Average monthly rate of new agreements for September improved by 14.9
    percent versus prior year
  • Higher end product comprised approximately 70 percent of product
    received in stores across major categories for the quarter
  • Annualized co-worker turnover for September improved 22.0 percentage
    points versus prior year
  • Optimized several locations as part of the Acceptance NOW retailer
    partner assessment

Consolidated Overview

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

On a consolidated basis, total revenues were $644.0 million versus
$693.9 million in the third quarter of last year. Consolidated same
store sales improved 430 basis points versus the second quarter of 2017
due to the progress made on executing the Company's initiatives. Net
loss and diluted loss per share, on a GAAP basis, were $12.6 million and
$0.24 compared to net earnings and earnings per share of $6.2 million
and $0.12 in the third quarter of last year.

Excluding special items, the Company's diluted loss per share was $0.15
and the Company generated $17.1 million in adjusted EBITDA in the third
quarter. Adjusted EBITDA as a percent of revenue decreased 170 basis
points versus the second quarter.

For the nine months ended September 30, 2017, the Company generated
$135.4 million of cash from operations and ended the third quarter with
$76.2 million of cash and cash equivalents.

Hurricane Related Expenses

The Company recorded a pre-tax expense of approximately $1.7 million
related to the damage caused by Hurricanes Harvey and Irma. The costs
relate primarily to inventory losses, store remediation efforts and
employee assistance. The Company recorded a $0.2 million expense related
to Hurricane Maria and expects to have a more complete assessment in the
fourth quarter. The costs associated with Hurricane Maria are related to
employee assistance in the Puerto Rico area in the third quarter.

Segment Operating Performance

CORE U.S. third quarter revenues of $442.8 million decreased 8.1 percent
primarily due to lower same store sales, the rationalization of the Core
U.S. store base in the prior year and the hurricane impact. Gross profit
as a percent of total revenue versus prior year decreased 120 basis
points due to targeted pricing actions implemented to right size the
inventory mix and changes from the new value proposition. Gross profit
as a percent of total revenue improved versus the second quarter by 40
basis points. Labor decreased $3.8 million versus prior year driven
primarily by lower store count. Other store expenses decreased $27.4
million driven by lower skip/stolen losses, lower store count and lower
advertising expenses.

ACCEPTANCE NOW third quarter revenues of $184.3 million decreased 5.2
percent primarily due to closures of the Company's Conn's and HHGregg
locations as well as the impact from the recent hurricanes, which was
partially offset by a same store sales increase of 7.9 percent. Gross
profit as a percent of total revenue versus prior year decreased 300
basis points primarily due to lower gross profit on merchandise sales
resulting from a focused effort to encourage ownership and reduce
returned product. Labor, as a percent of store revenue, improved 20
basis points versus prior year due to efforts to improve store level
profitability. Other store expenses, as a percent of store revenue,
increased by 320 basis points primarily driven by higher skip/stolen
losses which increased by 240 basis points and sales deleverage.

MEXICO third quarter revenues decreased 1.7 percent primarily due to
lower same store sales offset by a stronger Mexican peso. Gross profit
as a percent of total revenue versus prior year decreased 220 basis
points driven by lower rental sales gross margin partially offset by
higher merchandise sales gross margin due to pricing initiatives.

FRANCHISING third quarter revenues decreased 10.5 percent due to a lower
amount of merchandise sold to the Company's franchise partners and
operating profit was $1.0 million.

CORPORATE operating expenses increased $2.5 million compared to the
prior year primarily driven by project expenses related to strategic
initiatives, higher depreciation expense due to recent technology
investments and higher legal expenses.

     

SAME STORE SALES

(Unaudited)

 

Table 1  
Period Core U.S.  

Acceptance
Now

  Mexico   Total
Three Months Ended September 30, 2017 (1) (5.1 )% 7.9 % (6.2 )% (3.1 )%
Three Months Ended June 30, 2017 (10.2 )% 6.7 % (6.9 )% (7.4 )%
Three Months Ended September 30, 2016 (11.9 )% (0.3 )% 10.1 % (8.1 )%
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 recent natural disasters,
the Company instituted a change to the same store sales store
selection starting in the month of September, excluding
geographically impacted regions for 18 months.
 
           
KEY OPERATING METRICS
(Unaudited)
 
Table 2

Same Store
Sales

Delinquencies Annualized Co-worker Turnover

Average Monthly
Rate of New
Agreements

Segment

Change vs
2016 (%)

2017  

Sequential
Change (BPS)

2017  

Change vs
2016 (PPT)

Change vs
2016 (%)

Core U.S.
July (5.7 )% 7.5 % 40 86.3 % (19.9 ) 9.0 %
August (5.3 )% 7.2 % (30 ) 87.9 % (21.5 ) 13.0 %
September (4.2 )% 6.9 % (30 ) 86.6 % (22.0 ) 14.9 %
 
Acceptance Now
July 7.1 % 9.0 % 90
August 8.6 % 10.3 % 130
September 8.1 % 11.2 % 90
Note: In the Core U.S. segment delinquencies represent the percent
of customer agreements greater than 7 days past due. In the
Acceptance Now segment delinquencies represent the percent of
customer agreements greater than 32 days past due. In the Core U.S.,
the Company instituted an operational change charging off late-stage
delinquent customers earlier in the month which benefited the
delinquencies numbers in September by approximately 40 basis points.
 

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 3 below, which primarily excludes charges in the third quarter of
2017 for the closure of Acceptance Now locations, reductions at our
field support center, damage caused by Hurricanes Harvey, Irma and
Maria, litigation settlements, and incremental legal and advisory fees.
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.

Please see the Company's earnings press release dated July 26, 2017 for
additional information related to non-GAAP diluted loss per share
excluding special items used to calculate the sequential improvements
contained in this press release.

Reconciliation of net (loss) earnings to net (loss) earnings excluding
special items:

       
Table 3 Three Months Ended Three Months Ended
September 30, 2017 September 30, 2016
(in thousands, except per share data) Amount   Per Share Amount   Per Share
Net (loss) earnings $ (12,599 ) $ (0.24 ) $ 6,181 $ 0.12
Special items, net of taxes:
Other charges (1) 4,456 0.09 820 0.01
Discrete income tax items     (1,092 ) (0.02 )
Net (loss) earnings excluding special items $ (8,143 ) $ (0.15 ) $ 5,909   $ 0.11  

(1)

Other charges for the three months ended September 30, 2017 and
2016 primarily includes charges, net of tax, related to the
closure of Acceptance Now locations, reductions at the field
support center, hurricane damage, and incremental legal and
advisory fees, offset by a litigation settlement. 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
closure.

 

2017 Outlook

The Company is not providing annual guidance as it relates to revenue or
diluted earnings per share for 2017. In an effort to enhance
transparency regarding the Company's results and turnaround efforts, the
Company has shifted to monthly reporting of key operating metrics (Table
2). The Company believes these changes will provide the investment
community meaningful insight into the progress the Company is making on
its turnaround.

Webcast Information

Rent-A-Center, Inc. will host a conference call to discuss the third
quarter results, guidance and other operational matters on Tuesday
morning, October 31, 2017, 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 2,500 stores in the United States, Mexico, Canada and
Puerto Rico, and approximately 1,300 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 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 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," "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; uncertainties concerning the outcome,
impact, effects and results of the Company's exploration of its
strategic and financial alternatives; difficulties encountered in
improving the financial and operational performance of the Company's
business segments; the Company's chief executive officer and chief
financial officer transitions, including the Company's ability to
effectively operate and execute its strategies during the interim period
and difficulties or delays in identifying and/or attracting a permanent
chief financial officer with the required level of experience and
expertise; failure to manage the Company's store labor and other store
expenses; the Company's ability to develop and successfully execute
strategic initiatives; disruptions caused by the operation of the
Company's store information management system, and its 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; 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 the Company's dividend policy and any changes
thereto, 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, 2016, and its Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2017 and June 30, 2017. 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

Please see the Company's earnings press release dated July 26, 2017 for
the non-GAAP reconciliation of consolidated adjusted EBITDA in the prior
quarterly period which was used to calculate the sequential improvements
contained in this press release.

     

STATEMENT OF EARNINGS (LOSS) HIGHLIGHTS - UNAUDITED

 
Table 4 Three Months Ended September 30,
2017   2017   2016   2016
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

$ 643,965 $ 643,965 $ 693,877 $ 693,877
Operating (loss) profit (1,620 ) (1) (8,445 ) 17,656 (2) 16,700
Net (loss) earnings (8,143 ) (1) (12,599 ) 5,909 (2)(3) 6,181
Diluted (loss) earnings per common share $ (0.15 ) (1) $ (0.24 ) $ 0.11 (2)(3) $ 0.12
Adjusted EBITDA $ 17,059 $ 17,059 $ 37,654 $ 37,654
Reconciliation to Adjusted EBITDA:
(Loss) earnings before income taxes $ (12,896 ) (1) $ (19,721 ) $ 6,087 (2) $ 5,131
Add back:
Other charges 6,825 956
Interest expense, net 11,276 11,276 11,569 11,569
Depreciation, amortization and impairment of intangibles 18,679   18,679   19,998   19,998
Adjusted EBITDA $ 17,059   $ 17,059   $ 37,654   $ 37,654

(1)

Excludes the effects of approximately $6.8 million of pre-tax
charges primarily related to the closure of Acceptance Now
locations, reductions at the field support center, hurricane
damages, and incremental legal and advisory fees, offset by
litigation settlements. These charges reduced net earnings and net
earnings per diluted share for the three months ended September
30, 2017, by approximately $4.5 million and $0.09, respectively.

(2)

Excludes the effects of $1.0 million of pre-tax charges primarily
related to the closure of Core U.S. stores and 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.

(3)

Excludes the effects of $1.1 million of discrete income tax
adjustments that increased net earnings per diluted share by $0.02.

 
     

SELECTED BALANCE SHEET HIGHLIGHTS - UNAUDITED

 
Table 5 September 30,
(In thousands) 2017   2016
Cash and cash equivalents $ 76,208 $ 130,305
Receivables, net 62,293 59,200
Prepaid expenses and other assets 54,384 57,624
Rental merchandise, net
On rent 670,417 754,529
Held for rent 199,768 215,901
Goodwill 56,380 206,755
Total assets 1,430,317 1,748,806
 
Senior debt, net $ 98,954 $ 187,761
Senior notes, net 538,440 537,161
Total liabilities 1,193,081 1,329,637 (1)
Stockholders' equity 237,236 419,169 (1)

(1)

Total liabilities and stockholders' equity for the third quarter
of fiscal year 2016 are revised for the correction of a deferred
tax error associated with our goodwill impairment reported in the
fourth quarter of 2015 as discussed in our Annual Report on Form
10-K for the year ended December 31, 2016.

 
     
Rent-A-Center, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) - UNAUDITED
 
Table 6 Three Months Ended September 30,
(In thousands, except per share data) 2017   2016
Revenues
Store
Rentals and fees $ 552,194 $ 595,179
Merchandise sales 67,566 73,219
Installment sales 17,276 17,626
Other 2,257   2,633  
Total store revenues 639,293 688,657
Franchise
Merchandise sales 2,676 3,113
Royalty income and fees 1,996   2,107  
Total revenues 643,965 693,877
Cost of revenues
Store
Cost of rentals and fees 153,202 159,454
Cost of merchandise sold 70,551 68,684
Cost of installment sales 5,207   5,553  
Total cost of store revenues 228,960 233,691
Franchise cost of merchandise sold 2,540   2,960  
Total cost of revenues 231,500   236,651  
Gross profit 412,465 457,226
Operating expenses
Store expenses
Labor 179,643 186,289
Other store expenses 171,995 195,096
General and administrative expenses 43,768 38,187
Depreciation, amortization and impairment of intangibles 18,679 19,998
Other charges 6,825   (1) 956   (2)
Total operating expenses 420,910   440,526  
Operating (loss) profit (8,445 ) 16,700
Interest expense 11,453 11,710
Interest income (177 ) (141 )
(Loss) earnings before income taxes (19,721 ) 5,131
Income tax benefit (7,122 ) (1,050 ) (3)
Net (loss) earnings $ (12,599 ) $ 6,181  
Basic weighted average shares 53,306   53,155  
Basic (loss) earnings per common share $ (0.24 ) $ 0.12  
Diluted weighted average shares 53,306   53,454  
Diluted (loss) earnings per common share $ (0.24 ) $ 0.12  
(1) Includes approximately $6.8 million of pre-tax charges primarily
related to the closure of Acceptance Now locations, reductions at
the field support center, hurricane damages, and incremental legal
and advisory fees.
(2) Includes $1.0 million of pre-tax charges primarily related to the
closure of Core U.S. stores and Acceptance Now locations.
(3) Includes ($1.1) million of discrete income tax adjustments.
 

Rent-A-Center, Inc. and Subsidiaries

SEGMENT INFORMATION HIGHLIGHTS - UNAUDITED

     
Table 7 Three Months Ended September 30,
(In thousands) 2017   2016
Revenues
Core U.S. $ 442,763 $ 481,805
Acceptance Now 184,293 194,398
Mexico 12,237 12,454
Franchising 4,672   5,220  
Total revenues $ 643,965   $ 693,877  
 
Table 8 Three Months Ended September 30,
(In thousands) 2017 2016
Gross profit
Core U.S. $ 309,779 $ 343,071
Acceptance Now 92,088 102,998
Mexico 8,466 8,897
Franchising 2,132   2,260  
Total gross profit $ 412,465   $ 457,226  
 
Table 9 Three Months Ended September 30,
(In thousands) 2017 2016
Operating profit
Core U.S. $ 23,859 (1) $ 26,058 (4)
Acceptance Now 10,379 (2) 29,592 (5)
Mexico (242 ) 235
Franchising 1,032   1,430  
Total segments 35,028 57,315
Corporate (43,473 ) (3) (40,615 )
Total operating (loss) profit $ (8,445 ) $ 16,700  
(1) Includes approximately $1.3 million of pre-tax charges primarily
related to hurricane damages.
(2) Includes approximately $4.6 million of pre-tax charges primarily
related to the closure of Acceptance Now locations and hurricane
damages.
(3) Includes approximately $0.3 million of pre-tax charges related to
reductions at the field support center and incremental legal and
advisory fees, partially offset by a litigation claims settlement.

(4)

Includes $0.8 million of pre-tax charges primarily related to the
closure of Core U.S. stores.
(5) Includes $0.2 million of pre-tax charges related to the closure of
Acceptance Now locations.
 
Table 10       Three Months Ended September 30,
(In thousands) 2017   2016
Depreciation, amortization and impairment of intangibles
Core U.S. $ 7,725 $ 9,495
Acceptance Now 568 815
Mexico 496 746
Franchising 45   44
Total segments 8,834 11,100
Corporate 9,845   8,898
Total depreciation, amortization and impairment of intangibles $ 18,679   $ 19,998
 
Table 11 Three Months Ended September 30,
(In thousands) 2017 2016
Capital expenditures
Core U.S. $ 6,625 $ 3,864
Acceptance Now 430 860
Mexico 56   36
Total segments 7,111 4,760
Corporate 6,258   13,895
Total capital expenditures $ 13,369   $ 18,655
 
Table 12       On Rent at September 30,         Held for Rent at September 30,
(In thousands) 2017   2016 2017   2016
Rental merchandise, net
Core U.S. $ 364,656 $ 413,955 $ 189,029 $ 202,738
Acceptance Now 292,247 326,553 5,897 6,689
Mexico 13,514   14,021   4,842   6,474
Total rental merchandise, net $ 670,417   $ 754,529   $ 199,768   $ 215,901
 
Table 13       September 30,
(In thousands) 2017   2016
Assets
Core U.S. $ 793,036 $ 1,000,572
Acceptance Now 363,212 403,305
Mexico 33,062 32,166
Franchising 3,094   1,732
Total segments 1,192,404 1,437,775
Corporate 237,913   311,031
Total assets $ 1,430,317   $ 1,748,806
 
     
Rent-A-Center, Inc. and Subsidiaries
 
LOCATION ACTIVITY - UNAUDITED
 
Table 14 Three Months Ended September 30, 2017
Core U.S.  

Acceptance Now
Staffed

 

Acceptance Now
Direct

  Mexico   Franchising   Total
Locations at beginning of period 2,437 1,189 106 131 228 4,091
New location openings 63 6 69
Acquired locations remaining open
Conversions (10 ) 10
Closed locations
Merged with existing locations (20 ) (66 ) (46 ) (132 )
Sold or closed with no surviving location (11 ) (1 )     (1 ) (13 )
Locations at end of period 2,406   1,175   76   131   227   4,015  
Acquired locations closed and accounts merged with existing locations 5 5
 
Table 15 Three Months Ended September 30, 2016
Core U.S.

Acceptance Now
Staffed

Acceptance Now
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

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