Item 1A. Risk Factors
Except for the risk factors set forth below, there have been no changes to the risk factors disclosed in Item 1A of Part 1, "Risk Factors," in our Form 10-K for the year ended December 31, 2015.
Our operations are dependent on effective information management systems. Failure of these systems could negatively impact our business, financial condition and results of operations.
We utilize integrated information management systems. The efficient operation of our business is dependent on these systems to effectively manage our financial and operational data. The failure of our information management systems to perform as designed, loss of data or any interruption of our information management systems for a significant period of time could disrupt our business. If the information management systems sustain repeated failures, we may not be able to manage our store operations, which could have a material adverse effect on our business, financial condition and results of operations.
We are currently investing in new information management technology and systems and implementing modifications and upgrades to existing systems to support our growth plan. These investments include replacing legacy systems, making changes to existing systems, building redundancies, and acquiring new systems and hardware with updated functionality. We are taking appropriate actions to ensure the successful implementation of these initiatives, including the testing of new systems and the transfer of existing data, with minimal disruptions to the business. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, may cause disruptions to our existing systems and our business, and may not provide the anticipated benefits. The disruption in our information management systems, or our inability to improve, upgrade, integrate or expand our systems to meet our evolving business requirements, could impair our ability to achieve critical strategic initiatives and could materially adversely impact our business, financial condition and results of operations.
In the third quarter of 2016, we experienced unexpected capacity-related outages of our new store information management system which negatively impacted our third quarter operating results.
If certain events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying amount, an impairment of goodwill would result.
At September 30, 2016, goodwill totaled $206.8 million. We assess goodwill for impairment annually on October 1, or more frequently if events or circumstances indicate that impairment may have occurred. Overall financial performance such as a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods or a sustained decline in our market capitalization are two of many factors considered in the analyses we conduct to assess the impairment of goodwill. Following our recent third quarter earnings pre-release where we disclosed revenues and earnings for the three months ended September 30, 2016 were below planned revenues and earnings, our market capitalization decreased by approximately 30% to approximately $500 million. If we determine the value of our goodwill is impaired, we would be required to recognize a noncash charge to operating earnings for goodwill impairment. Any material non-cash charges to account for goodwill impairments would negatively affect our financial condition and results of operations. See "Recent Development" and "Critical Accounting Estimates, Uncertainties or Assessments in Our Financial Statements" in Item 2. Management's Discussion and Analysis, below.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Quarterly Report on Form 10-Q and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. Factors that could cause or contribute to these differences include, but are not limited to:
RENT-A-CENTER, INC. AND SUBSIDIARIES
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•
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our ability to successfully implement our new store information management system, including with respect to overcoming system slowness and outages, and effectively integrating this new system into ongoing store operations;
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•
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the general strength of the economy and other economic conditions affecting consumer preferences and spending:
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•
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potential non-cash charges to account for goodwill impairment;
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•
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factors affecting the disposable income available to our current and potential customers;
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•
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changes in the unemployment rate;
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•
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difficulties encountered in improving the financial and operational performance of our business segments;
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•
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failure to manage our store labor (including overtime pay) and other store expenses;
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•
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our ability to identify, develop and successfully execute strategic initiatives;
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•
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our ability to successfully implement our new finance/HR enterprise system;
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•
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our ability to successfully market smartphones and related services to our customers;
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•
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our ability to develop and successfully implement virtual or e-commerce capabilities;
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•
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failure to achieve the anticipated profitability enhancements from the changes to the 90 day option pricing program and the development of dedicated commercial sales capabilities;
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•
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disruptions in our supply chain;
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•
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limitations of, or disruptions in, our distribution network;
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•
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rapid inflation or deflation in prices of our products;
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•
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our ability to execute and the effectiveness of a store consolidation, including our ability to retain the revenue from customer accounts merged into another store location as a result of a store consolidation;
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•
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our available cash flow;
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•
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our ability to identify and successfully market products and services that appeal to our customer demographic;
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•
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consumer preferences and perceptions of our brands;
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•
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uncertainties regarding the ability to open new locations;
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•
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our ability to acquire additional stores or customer accounts on favorable terms;
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•
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our ability to control costs and increase profitability;
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•
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our ability to retain the revenue associated with acquired customer accounts and enhance the performance of acquired stores;
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•
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our ability to enter into new and collect on our rental or lease purchase agreements;
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•
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the passage of legislation adversely affecting the rent-to-own industry;
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•
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our compliance with applicable statutes or regulations governing our transactions;
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•
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changes in interest rates;
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•
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adverse changes in the economic conditions of the industries, countries or markets that we serve;
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•
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information technology and data security costs;
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•
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the impact of any breaches in data security or other disturbances to our information technology and other networks and our ability to protect the integrity and security of individually identifiable data of our customers and employees;
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•
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changes in our stock price, the number of shares of common stock that we may or may not repurchase, and future dividends, if any;
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•
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changes in estimates relating to self-insurance liabilities and income tax and litigation reserves;
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•
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changes in our effective tax rate;
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•
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fluctuations in foreign currency exchange rates;
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RENT-A-CENTER, INC. AND SUBSIDIARIES
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•
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our ability to maintain an effective system of internal controls;
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•
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the resolution of our litigation; and
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•
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the other risks detailed from time to time in our reports to the Securities and Exchange Commission.
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Additional important factors that could cause our actual results to differ materially from our expectations are discussed under the section “
Risk Factors
” in our Annual Report on Form 10-K for the year ended
December 31, 2015
, and elsewhere in this Quarterly Report on Form 10-Q. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
Our Business
We are a rent-to-own industry leader, focused on improving the quality of life for our customers by providing them the opportunity to obtain ownership of high-quality durable products, such as consumer electronics, appliances, computers, tablets, smartphones, furniture and accessories, under flexible rental purchase agreements with no long-term obligation. We were incorporated in Delaware in 1986.
Our Growth Strategy
We are in the midst of a multi-year program designed to transform and modernize our operations in order to improve the profitability of the Core U.S. segment while continuing to grow our Acceptance Now segment. This program is focused on building new competencies and capabilities through a variety of operational and infrastructure initiatives such as introducing a new labor model in our Core U.S. rent-to-own stores, formulating a customer-focused, value-based pricing strategy, developing a new sourcing and distribution model, implementing new technology into our Acceptance Now locations and introducing e-commerce capabilities to our Core U.S. segment. Our multi-year program also includes an emphasis on shifting investment from lower-returning assets, as evidenced by the recent closures of poor performing stores, to higher-return investments including high performing store locations, Acceptance Now national account growth, development of e-commerce and other customer-generating technology, and return of capital to shareholders.
Flexible Labor Model.
Historically, we utilized a fixed labor model in our Core U.S. rent-to-own stores, generally using five employees who perform all tasks including sales, customer verification, collections, merchandise receiving and delivery and setup. Because our stores are open for business six days per week, this fixed labor model included regularly scheduled overtime, and did not allow us to scale our costs to match the revenue cycles. In 2015, we rolled out a flexible labor model utilizing part-time delivery specialists so that in-store personnel can provide better customer service during peak operating hours, gain cost savings during off-peak hours and improve efficiency during seasonal fluctuations in the business. We have introduced the flexible labor model primarily as attrition requires personnel changes, and most of our Core U.S. stores are in a state of transition to full deployment, which has had a positive impact on our Core U.S. store labor expense.
Pricing and Promotions.
We need to price our products to remain competitive in the market, maintain a customer-centric focus and drive traffic while maintaining a focus on profitable growth. We implemented new pricing strategies in our Core U.S. stores in 2015 to meet these challenges. We focused on areas of immediate impact, while building a foundation for improvement, and have incorporated more structured and data-driven decision making to improve our Core U.S. marketing promotions, sales events and brand alignment. In 2016, we made a deliberate decision to be more disciplined, selective and strategic with our pricing and promotional strategies, which has negatively impacted our same store sales growth but benefited gross margins. And, with completion of the implementation of the store information management system in our Core U.S. stores, we will be more prescriptive on pricing so that we can customize pricing elements by region and by product category to ensure our value proposition continues to be relevant to our customers.
Sourcing and Distribution.
From the Company's inception to 2015, the stores in our Core U.S. segment relied on rental merchandise shipped from the manufacturer or distributor directly to the store and did not utilize centralized warehousing and distribution. This operating model allowed us to expand our store base rapidly with lower costs to enter new markets, but also limited our product options, reduced our ability to leverage our expenses, created longer lead times and embedded additional costs. Now that the store base has matured and we have achieved substantial market penetration, in 2015, we created new direct supplier partnerships, implemented a new system to manage distribution operations, implemented a network of distribution centers through a third-party logistics partnership and automated replenishment processes from distribution centers to stores. The use of distribution centers allows us to take greater advantage of discounted bulk purchasing and expand the number of potential manufacturers and suppliers, which allows us to offer our customers a wider selection of products while generating greater margins, better flexibility and improved store service levels. In 2016, these efforts have resulted in lower product costs and a more efficient supply chain.
RENT-A-CENTER, INC. AND SUBSIDIARIES
Virtual Acceptance Now.
In 2014, we developed a virtual solution that decreased the time to process rental purchase agreements, streamlined the sales process and enhanced the customer's experience. This virtual solution is now implemented in all of our manned Acceptance Now locations. This platform is also being used in unmanned Acceptance Now Direct locations, or virtual kiosks, where the retailer does not have enough credit-constrained customers to profitably support creating a manned location.
E-Commerce.
Like many industries, the rent-to-own industry is being transformed by the Internet and virtual marketplace. To meet these evolving demands, we began piloting e-commerce capabilities in our Core U.S. segment in the second quarter of 2016, and we are substantially complete with our nationwide rollout to all Core U.S. stores. We believe offering the rental purchase transaction online will allow us to access new customers who might not otherwise consider rent-to-own, as well as enable our existing customers to interact with Rent-A-Center more easily and conveniently. By pairing e-commerce together with our traditional brick-and mortar stores, we believe we will offer our customers an even more compelling value proposition.
Technology Investments.
Included in our multi-year transformation program are significant investments in new technologies that have enabled or will enable the strategic programs described above, as well as other initiatives, to improve operations and support business growth. In 2015, we developed and implemented applications and systems to support our new distribution network, such as a warehouse management system and enhancements to our automated replenishment system. We developed a virtual solution for the Acceptance Now transaction. We implemented our Enterprise corporate management system which integrates key corporate back-office systems, such as our financial reporting and inventory management systems, as well as collects and consolidates critical business data from all store operations. We are and will continue to leverage this critical business data to better understand and enhance our value proposition and customer experience.
In the second quarter of 2016, we completed implementation of our new store information management system and processes that extend and improve capabilities for store sales and operations in the stores in our Core U.S. segment. In the third quarter of 2016, we experienced unexpected capacity-related outages of such system but we have implemented software releases to improve stability and added hardware to help mitigate over-utilization issues.
In addition, we completed the pilot of our e-commerce capabilities and are substantially complete with its rollout in our Core U.S. segment as described above. We continue to enhance our decision engine functionality for use in our e-commerce platform as well as in our Acceptance Now manned and direct locations; and are working on an integrated financial and human resources enterprise system which will be implemented in the first quarter of 2017.
Results of Operations
The following discussion focuses on our results of operations and issues related to our liquidity and capital resources. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Overview
Through the third quarter of 2016, we have continued our transformational efforts focused on driving profitable sales. While our same store revenues decreased 5.0% year over year, our gross margins increased to
65.5%
as compared to
64.1%
in the comparable period.
The Acceptance Now segment had slightly lower same store revenue for the
nine months ended September 30, 2016
, but had an increase in revenue of $2.9 million over this period.
Revenues in our Core U.S. segment decreased approximately $201.3 million for the
nine months ended September 30, 2016
, due to the continued rationalization of our Core U.S. store base and a 7.2% decrease in our same store revenues. Our gross margins, excluding other charges, as a percentage of revenue increased primarily due to our pricing and supply chain initiatives, revenue mix, and reduction in smart phone loss reserves in 2016. Labor and other store operating expenses were negatively impacted by our sales deleverage and merchandise losses resulting in a decline in operating margins.
The Mexico segment generated positive operating profit during the
nine months ended September 30, 2016
with a continued expectation of break-even results for the year.
Cash flow from operations was
$374.6 million
for the
nine months ended September 30, 2016
. We used our free cash flow to pay down debt by $233.3 million, ending the period with
$130.3 million
of cash and cash equivalents and a leverage ratio of 2.52x.
Recent Developments
During the nine months ended September 30, 2016, we did not identify any events or changes in circumstances that more likely than not would have reduced the fair value of a reporting unit below its carrying amount.
RENT-A-CENTER, INC. AND SUBSIDIARIES
We have initiated the annual goodwill impairment test as of October 1, 2016 as described below in "Critical Accounting Estimates, Uncertainties or Assessments in Our Financial Statements." A decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods or a sustained decline in our market capitalization are two of many factors considered in the analyses we conduct to assess the impairment of goodwill. Following our recent third quarter earnings pre-release where we disclosed revenues and earnings for the three months ended September 30, 2016 were below planned revenues and earnings, our market capitalization decreased by approximately 30% to approximately $500 million. As a result, there is a risk that a non-cash charge could be recorded in the fourth quarter of 2016 to account for goodwill impairment. See "Critical Accounting Estimates, Uncertainties or Assessments in Our Financial Statements" for further discussion on valuation of goodwill.
The following table is a reference for the discussion that follows.
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|
|
|
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|
|
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|
|
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Three Months Ended
|
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|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
September 30,
|
|
Change
|
(Dollar amounts in thousands)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and fees
|
|
$
|
595,179
|
|
|
$
|
683,343
|
|
|
$
|
(88,164
|
)
|
|
(12.9
|
)%
|
|
$
|
1,915,184
|
|
|
$
|
2,098,918
|
|
|
$
|
(183,734
|
)
|
|
(8.8
|
)%
|
Merchandise sales
|
|
73,219
|
|
|
80,932
|
|
|
(7,713
|
)
|
|
(9.5
|
)%
|
|
281,703
|
|
|
300,498
|
|
|
(18,795
|
)
|
|
(6.3
|
)%
|
Installment sales
|
|
17,626
|
|
|
17,786
|
|
|
(160
|
)
|
|
(0.9
|
)%
|
|
53,718
|
|
|
54,200
|
|
|
(482
|
)
|
|
(0.9
|
)%
|
Other
|
|
2,633
|
|
|
4,475
|
|
|
(1,842
|
)
|
|
(41.2
|
)%
|
|
10,001
|
|
|
14,631
|
|
|
(4,630
|
)
|
|
(31.6
|
)%
|
Total store revenue
|
|
688,657
|
|
|
786,536
|
|
|
(97,879
|
)
|
|
(12.4
|
)%
|
|
2,260,606
|
|
|
2,468,247
|
|
|
(207,641
|
)
|
|
(8.4
|
)%
|
Franchise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
3,113
|
|
|
2,456
|
|
|
657
|
|
|
26.8
|
%
|
|
12,083
|
|
|
10,022
|
|
|
2,061
|
|
|
20.6
|
%
|
Royalty income and fees
|
|
2,107
|
|
|
2,613
|
|
|
(506
|
)
|
|
(19.4
|
)%
|
|
6,459
|
|
|
6,318
|
|
|
141
|
|
|
2.2
|
%
|
Total revenues
|
|
693,877
|
|
|
791,605
|
|
|
(97,728
|
)
|
|
(12.3
|
)%
|
|
2,279,148
|
|
|
2,484,587
|
|
|
(205,439
|
)
|
|
(8.3
|
)%
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rentals and fees
|
|
159,454
|
|
|
178,094
|
|
|
(18,640
|
)
|
|
(10.5
|
)%
|
|
504,834
|
|
|
548,618
|
|
|
(43,784
|
)
|
|
(8.0
|
)%
|
Cost of merchandise sold
|
|
68,684
|
|
|
82,043
|
|
|
(13,359
|
)
|
|
(16.3
|
)%
|
|
253,473
|
|
|
282,128
|
|
|
(28,655
|
)
|
|
(10.2
|
)%
|
Cost of installment sales
|
|
5,553
|
|
|
5,854
|
|
|
(301
|
)
|
|
(5.1
|
)%
|
|
17,240
|
|
|
18,125
|
|
|
(885
|
)
|
|
(4.9
|
)%
|
Total cost of store revenues
|
|
233,691
|
|
|
265,991
|
|
|
(32,300
|
)
|
|
(12.1
|
)%
|
|
775,547
|
|
|
848,871
|
|
|
(73,324
|
)
|
|
(8.6
|
)%
|
Other charges and (credits)
|
|
—
|
|
|
34,698
|
|
|
(34,698
|
)
|
|
(100.0
|
)%
|
|
—
|
|
|
34,698
|
|
|
(34,698
|
)
|
|
(100.0
|
)%
|
Franchise cost of merchandise sold
|
|
2,960
|
|
|
2,304
|
|
|
656
|
|
|
28.5
|
%
|
|
11,273
|
|
|
9,284
|
|
|
1,989
|
|
|
21.4
|
%
|
Total cost of revenues
|
|
236,651
|
|
|
302,993
|
|
|
(66,342
|
)
|
|
(21.9
|
)%
|
|
786,820
|
|
|
892,853
|
|
|
(106,033
|
)
|
|
(11.9
|
)%
|
Gross profit
|
|
457,226
|
|
|
488,612
|
|
|
(31,386
|
)
|
|
(6.4
|
)%
|
|
1,492,328
|
|
|
1,591,734
|
|
|
(99,406
|
)
|
|
(6.2
|
)%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
|
|
186,289
|
|
|
209,904
|
|
|
(23,615
|
)
|
|
(11.3
|
)%
|
|
595,668
|
|
|
643,412
|
|
|
(47,744
|
)
|
|
(7.4
|
)%
|
Other store expenses
|
|
195,096
|
|
|
201,638
|
|
|
(6,542
|
)
|
|
(3.2
|
)%
|
|
599,759
|
|
|
631,415
|
|
|
(31,656
|
)
|
|
(5.0
|
)%
|
General and administrative
|
|
38,187
|
|
|
39,590
|
|
|
(1,403
|
)
|
|
(3.5
|
)%
|
|
121,383
|
|
|
127,463
|
|
|
(6,080
|
)
|
|
(4.8
|
)%
|
Depreciation, amortization and write-down of intangibles
|
|
19,998
|
|
|
19,979
|
|
|
19
|
|
|
0.1
|
%
|
|
60,598
|
|
|
60,140
|
|
|
458
|
|
|
0.8
|
%
|
Other charges
|
|
956
|
|
|
10,936
|
|
|
(9,980
|
)
|
|
(91.3
|
)%
|
|
22,240
|
|
|
16,440
|
|
|
5,800
|
|
|
35.3
|
%
|
Total operating expenses
|
|
440,526
|
|
|
482,047
|
|
|
(41,521
|
)
|
|
(8.6
|
)%
|
|
1,399,648
|
|
|
1,478,870
|
|
|
(79,222
|
)
|
|
(5.4
|
)%
|
Operating profit
|
|
16,700
|
|
|
6,565
|
|
|
10,135
|
|
|
154.4
|
%
|
|
92,680
|
|
|
112,864
|
|
|
(20,184
|
)
|
|
(17.9
|
)%
|
Interest, net
|
|
11,569
|
|
|
12,337
|
|
|
(768
|
)
|
|
(6.2
|
)%
|
|
35,078
|
|
|
36,686
|
|
|
(1,608
|
)
|
|
(4.4
|
)%
|
Earnings (loss) before income taxes
|
|
5,131
|
|
|
(5,772
|
)
|
|
10,903
|
|
|
(188.9
|
)%
|
|
57,602
|
|
|
76,178
|
|
|
(18,576
|
)
|
|
(24.4
|
)%
|
Income tax expense (benefit)
|
|
(1,050
|
)
|
|
(1,680
|
)
|
|
630
|
|
|
(37.5
|
)%
|
|
16,414
|
|
|
29,825
|
|
|
(13,411
|
)
|
|
(45.0
|
)%
|
Net earnings (loss)
|
|
$
|
6,181
|
|
|
$
|
(4,092
|
)
|
|
$
|
10,273
|
|
|
(251.1
|
)%
|
|
$
|
41,188
|
|
|
$
|
46,353
|
|
|
$
|
(5,165
|
)
|
|
(11.1
|
)%
|
RENT-A-CENTER, INC. AND SUBSIDIARIES
Three Months Ended September 30, 2016
, compared to
Three Months Ended September 30, 2015
Store Revenue.
Total store revenue
decreased
by
$97.9 million
, or
12.4%
, to
$688.7 million
for the
three months ended September 30, 2016
, from
$786.5 million
for the
three months ended September 30, 2015
. This was primarily due to a decrease of approximately $93.6 million in the Core U.S. segment, as discussed further in the segment performance section below.
Same store revenue generally represents revenue earned in
2,753
locations that were operated by us for 13 months or more. Same store revenues decreased by
$42.5 million
, or
8.4%
, to
$463.0 million
for the
three months ended September 30, 2016
, as compared to
$505.5 million
in
2015
. The decrease in same store revenues was primarily attributable to a decline in the Core U.S. segment, as discussed further in the segment performance section below. Same store revenues are reported on a constant currency basis.
Cost of Rentals and Fees.
Cost of rentals and fees consists of depreciation of rental merchandise. Cost of rentals and fees for the
three months ended September 30, 2016
,
decreased
by
$18.6 million
, or
10.5%
, to
$159.5 million
, as compared to
$178.1 million
in
2015
. This decrease in cost of rentals and fees was primarily attributable to a $18.0 million decrease in the Core U.S. segment as a result of lower rentals and fees revenue, while cost of rentals and fees expressed as a percentage of rentals and fees revenue increased to
26.8%
for the
three months ended September 30, 2016
, as compared to
26.1%
in
2015
, as discussed further in the segment performance section below.
Cost of Merchandise Sold.
Cost of merchandise sold
decreased
by
$13.4 million
, or
16.3%
, to
$68.7 million
for the
three months ended September 30, 2016
, from
$82.0 million
in
2015
, due primarily to a $9.4 million and $3.0 million decrease in the Core U.S. and Acceptance Now segments, respectively. The gross margin percent of merchandise sales
increased
to
6.2%
for the
three months ended September 30, 2016
, from
(1.4)%
in
2015
, primarily due to improvements in the Core U.S. and Acceptance Now segments as discussed further below.
Other Charges.
During the
three months ended September 30, 2015
, a charge of
$34.7 million
was recognized for the write-down of smartphones in the Core U.S. segment.
Gross Profit.
Gross profit
decreased
by
$31.4 million
, or
6.4%
, to
$457.2 million
for the
three months ended September 30, 2016
, from
$488.6 million
in
2015
, due primarily to a decrease of $31.1 million in the Core U.S. segment. Gross profit as a percentage of total revenue increased to
65.9%
for the
three months ended September 30, 2016
, as compared to
61.7%
in
2015
. Excluding the other charges, gross profit was $457.2 million, or 65.9% of revenue for the
three months ended September 30, 2016
compared to $523.3 million, or 66.1% of revenue for the comparable period of 2015. These changes are primarily due to the decrease in Core U.S. store revenue, as discussed further in the segment performance section below.
Store Labor.
Store labor
decreased
by
$23.6 million
, or
11.3%
, to
$186.3 million
, for the
three months ended September 30, 2016
, as compared to
$209.9 million
in 2015. Labor in the Core U.S. segment decreased $20.4 million primarily due to the continued rationalization of the Core U.S. store base. Store labor expressed as a percentage of total store revenue, however, increased to
27.1%
for the
three months ended September 30, 2016
, as compared to
26.7%
in
2015
, as discussed further in the Core U.S. segment performance section below.
Other Store Expenses.
Other store expenses
decreased
by
$6.5 million
, or
3.2%
, to
$195.1 million
for the
three months ended September 30, 2016
, as compared to
$201.6 million
in
2015
. Other store expenses in the Core U.S. segment decreased $8.1 million due to the continued rationalization of the Core U.S. store base. Other store expenses expressed as a percentage of total store revenue were
28.3%
for the
three months ended September 30, 2016
, compared to
25.6%
in
2015
, as discussed further in the Core. U.S. and Acceptance Now segment performance sections below.
General and Administrative Expenses.
General and administrative expenses
decreased
by
$1.4 million
, or
3.5%
, to
$38.2 million
for the
three months ended September 30, 2016
, as compared to
$39.6 million
in
2015
, primarily driven by lower incentive compensation. General and administrative expenses expressed as a percentage of total revenue
increased
to
5.5%
for the
three months ended September 30, 2016
, from
5.0%
in
2015
.
Other Charges.
Other charges decreased by approximately
$10.0 million
, or
91.3%
, to
$1.0 million
for the
three months ended September 30, 2016
, as compared to
$10.9 million
in
2015
. Other charges for the
three months ended September 30, 2016
and
2015
included restructuring charges for the closure of U.S. Core stores and Acceptance Now locations, and losses incurred on the sale of U.S. Core and Canada stores in the prior year.
Operating Profit.
Operating profit
increased
by
$10.1 million
, or
154.4%
, to
$16.7 million
for the
three months ended September 30, 2016
, as compared to
$6.6 million
in
2015
primarily due to an increase of $10.4 million in the Core U.S. segment, as discussed further in the segment performance section below. Operating profit as a percentage of total revenue
increased
to
2.4%
for the
three months ended September 30, 2016
, from
0.8%
in
2015
. Excluding other charges, operating profit was $17.7 million, or 2.5% of revenue for the
three months ended September 30, 2016
, compared to $52.2 million, or 6.6% of revenue for the comparable period of 2015. These changes are primarily due to the decrease in Core U.S. gross profit, as discussed further in the segment performance section below.
RENT-A-CENTER, INC. AND SUBSIDIARIES
Income Tax Benefit.
Income tax benefit
decreased
by
$0.6 million
, or
37.5%
, to
$(1.1) million
for the
three months ended September 30, 2016
, as compared to
$(1.7) million
in
2015
. The effective tax rate was
(20.5)%
for the
three months ended September 30, 2016
, compared to
29.1%
in
2015
, primarily due to discrete income tax items and increase in tax credits. Excluding other charges, the effective tax rate was 2.93% for the
three months ended September 30, 2016
, as compared to 37.75% in 2015, primarily due to an increase in tax credits.
Nine Months Ended September 30, 2016
, compared to
Nine Months Ended September 30, 2015
Store Revenue.
Total store revenue
decreased
by
$207.6 million
, or
8.4%
, to
$2,260.6 million
for the
nine months ended September 30, 2016
, from
$2,468.2 million
for the
three months ended September 30, 2015
. This was primarily due to a decrease of approximately $201.3 million in the Core U.S. segment, as discussed further in the segment performance section below.
Same store revenue generally represents revenue earned in
3,359
locations that were operated by us for 13 months or more. Same store revenues decreased by
$83.6 million
, or
5.0%
, to
$1,574.2 million
for the
nine months ended September 30, 2016
, as compared to
$1,657.8 million
in
2015
. The decrease in same store revenues was primarily attributable to a decline in the Core U.S. segment, as discussed further in the segment performance section below. Same store revenues are reported on a constant currency basis.
Cost of Rentals and Fees.
Cost of rentals and fees consists of depreciation of rental merchandise. Cost of rentals and fees for the
nine months ended September 30, 2016
,
decreased
by
$43.8 million
, or
8.0%
, to
$504.8 million
, as compared to
$548.6 million
in
2015
. This decrease in cost of rentals and fees was primarily attributable to a $44.2 million decrease in the Core U.S. segment primarily as a result of lower rentals and fees revenue. Cost of rentals and fees expressed as a percentage of rentals and fees revenue
increased
to
26.4%
for the
nine months ended September 30, 2016
as compared to
26.1%
in 2015.
Cost of Merchandise Sold.
Cost of merchandise sold
decreased
by
$28.7 million
, or
10.2%
, to
$253.5 million
for the
nine months ended September 30, 2016
, from
$282.1 million
in
2015
, primarily attributable to a decrease of $22.6 million in the Core U.S. segment. The gross margin percent of merchandise sales
increased
to
10.0%
for the
nine months ended September 30, 2016
, from
6.1%
in
2015
.
Other Charges.
During the
three months ended September 30, 2015
, a charge of
$34.7 million
was recognized for the write-down of smartphones in the Core U.S. segment.
Gross Profit.
Gross profit
decreased
by
$99.4 million
, or
6.2%
, to
$1,492.3 million
for the
nine months ended September 30, 2016
, from
$1,591.7 million
in
2015
, due primarily to a decrease of $98.9 million in the Core U.S. segment. Gross profit as a percentage of total revenue increased to
65.5%
for the
nine months ended September 30, 2016
, as compared to
64.1%
in
2015
, primarily due to improvements in the Acceptance Now segment, as discussed further in the segment performance section below. Excluding other charges, gross profit was $1,492.3 million, or 65.5% of revenue for the
nine months ended September 30, 2016
, compared to $1,626.4 million, or 65.5% of revenue for the comparable period of 2015. These changes are primarily due to the decrease in the Core U.S. store revenue, as discussed further in the segment performance section below.
Store Labor.
Store labor
decreased
by
$47.7 million
, or
7.4%
, to
$595.7 million
, for the
nine months ended September 30, 2016
, as compared to
$643.4 million
in 2015. Labor in the Core U.S. segment decreased $42.2 million due to our flexible labor initiative and the continued rationalization of the Core U.S. store base. Store labor expressed as a percentage of total store revenue was
26.3%
for the
nine months ended September 30, 2016
, as compared to
26.1%
in
2015
.
Other Store Expenses.
Other store expenses
decreased
by
$31.7 million
, or
5.0%
, to
$599.8 million
for the
nine months ended September 30, 2016
, as compared to
$631.4 million
in
2015
. Other store expenses in the Core U.S. segment decreased $31.8 million due primarily to the continued rationalization of the Core U.S. store base. Other store expenses expressed as a percentage of total store revenue were
26.5%
for the
nine months ended September 30, 2016
, compared to
25.6%
in
2015
.
General and Administrative Expenses.
General and administrative expenses
decreased
by
$6.1 million
, or
4.8%
, to
$121.4 million
for the
nine months ended September 30, 2016
, as compared to
$127.5 million
in
2015
, primarily driven by lower incentive compensation. General and administrative expenses expressed as a percentage of total revenue
increased
to
5.3%
for the
nine months ended September 30, 2016
, compared to
5.1%
in 2015.
Other Charges.
Other charges increased by
$5.8 million
, or
35.3%
, to
$22.2 million
for the
nine months ended September 30, 2016
, as compared to
$16.4 million
in
2015
. Other charges for the
nine months ended September 30, 2016
included restructuring charges for the closure of Core U.S., Acceptance Now, and Mexico locations.
Operating Profit.
Operating profit
decreased
by
$20.2 million
, or
17.9%
, to
$92.7 million
for the
nine months ended September 30, 2016
, as compared to
$112.9 million
in
2015
due to decreases of $23.0 million and $8.6 million in the Core U.S. and Acceptance Now segments, offset by an increase of $11.2 million in the Mexico segment as discussed in the segment performance sections below. Operating profit expressed as a percentage of total revenue decreased to
4.1%
for the
nine months ended September 30, 2016
, from
4.5%
in
2015
. Excluding other charges, operating profit was $114.9 million, or 5.0% of
RENT-A-CENTER, INC. AND SUBSIDIARIES
revenue for the
nine months ended September 30, 2016
, compared to $164.0 million, or 6.6% of revenue for the comparable period of 2015. These changes are primarily due to the decrease in Core U.S. gross profit, as discussed further in the segment performance section below.
Income Tax Expense.
Income tax expense
decreased
by
$13.4 million
, or
45.0%
, to
$16.4 million
for the
nine months ended September 30, 2016
, as compared to
$29.8 million
in
2015
. The effective tax rate was
28.5%
for the
nine months ended September 30, 2016
, compared to
39.2%
in
2015
, primarily due to discrete income tax items and an increase in tax credits. Excluding other charges, the effective tax rate was 33.2% for the
nine months ended September 30, 2016
, as compared to 38.0% in 2015, primarily due to the increase in tax credits.
Segment Performance
Core U.S. segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
September 30,
|
|
Change
|
(Dollar amounts in thousands)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
481,805
|
|
|
$
|
575,356
|
|
|
$
|
(93,551
|
)
|
|
(16.3
|
)%
|
|
$
|
1,596,782
|
|
|
$
|
1,798,055
|
|
|
$
|
(201,273
|
)
|
|
(11.2
|
)%
|
Gross profit
|
|
343,071
|
|
|
374,214
|
|
|
(31,143
|
)
|
|
(8.3
|
)%
|
|
1,138,089
|
|
|
1,236,964
|
|
|
(98,875
|
)
|
|
(8.0
|
)%
|
Operating profit
|
|
26,058
|
|
|
15,700
|
|
|
10,358
|
|
|
66.0
|
%
|
|
127,009
|
|
|
149,971
|
|
|
(22,962
|
)
|
|
(15.3
|
)%
|
Change in same store revenue
|
|
|
|
|
|
|
|
(12.0
|
)%
|
|
|
|
|
|
|
|
(7.2
|
)%
|
Stores in same store revenue calculation
|
|
|
|
|
|
|
|
1,652
|
|
|
|
|
|
|
|
2,022
|
Revenues.
The decrease in revenues for the three- and nine-month periods ended September 30, 2016, was driven primarily by a decrease in rentals and fees revenue of $85.2 million and $178.9 million, respectively, as compared to
2015
. This decrease is primarily due to the decrease in same store revenue and the continued rationalization of our Core U.S. store base. The decrease in same store revenue was driven primarily by the impact of our store information management system implementation and system outages, and other factors including the recast of the smartphone category, declines in television and computer/tablet categories, deterioration in oil affected markets, and merged stores reentering the comp base. Same store revenue generally represents revenue earned in stores that were operated by us for 13 months or more.
Gross Profit.
Gross profit decreased for the three- and nine-month periods ended
September 30, 2016
, as compared to
2015
, primarily due to the decrease in store revenue as discussed above, partially offset by the $34.7 million write-down of smartphone inventory in the third quarter of 2015. Gross profit as a percentage of segment revenues increased to
71.2%
and
71.3%
for the three- and nine-month periods ended
September 30, 2016
, respectively, as compared to
65.0%
and
68.8%
for the respective periods in
2015
. Excluding other charges, gross profit as a percentage of segment revenue was 71.2% and 71.3% for the three- and nine-months ended September 30, 2016, respectively, as compared to 71.1% and 70.7% for the respective periods in 2015.
Operating Profit.
Operating profit as a percentage of segment revenues was
5.4%
and
8.0%
for the three- and nine-month periods ended
September 30, 2016
, respectively, compared to
2.7%
and
8.3%
for the respective periods in 2015. Excluding other charges, operating profit as a percentage of segment revenues decreased to 5.6% and 9.2% for the three- and nine-months ended September 30, 2016, respectively, compared to 10.7% and 11.0% for the respective periods in 2015. Labor, as a percentage of store revenue, was negatively impacted by sales deleverage and higher health care expenses, partially offset by improved labor productivity and lower incentive compensation. Other store expenses, as a percentage of store revenue, were negatively impacted by sales deleverage, increased customer stolen merchandise losses, and higher advertising costs, partially offset by a lower store count. Charge-offs in our Core U.S. rent-to-own stores due to customer stolen merchandise, expressed as a percentage of Core U.S. rent-to-own revenues, were approximately 4.7% and 3.7% for three and nine-month periods ended
September 30, 2016
, compared to 3.4% and 3.3% for the respective periods in
2015
. Charge-offs in our Core U.S. rent-to-own stores due to other merchandise losses, expressed as a percentage of Core U.S. rent-to-own revenues, were approximately 2.1% and 1.8% for the three- and nine-month periods ended
September 30, 2016
, compared to 2.1% and 1.9% for the same respective periods in
2015
. Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims.
RENT-A-CENTER, INC. AND SUBSIDIARIES
Acceptance Now segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
September 30,
|
|
Change
|
(Dollar amounts in thousands)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
194,398
|
|
|
$
|
196,652
|
|
|
$
|
(2,254
|
)
|
|
(1.1
|
)%
|
|
$
|
624,310
|
|
|
$
|
621,393
|
|
|
$
|
2,917
|
|
|
0.5
|
%
|
Gross profit
|
|
102,998
|
|
|
102,133
|
|
|
865
|
|
|
0.8
|
%
|
|
319,492
|
|
|
315,193
|
|
|
4,299
|
|
|
1.4
|
%
|
Operating profit
|
|
29,592
|
|
|
28,901
|
|
|
691
|
|
|
2.4
|
%
|
|
86,508
|
|
|
95,129
|
|
|
(8,621
|
)
|
|
(9.1
|
)%
|
Change in same store revenue
|
|
|
|
|
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
(0.8
|
)%
|
Stores in same store revenue calculation
|
|
|
|
|
|
|
|
1,016
|
|
|
|
|
|
|
|
1,252
|
Revenues.
The decrease in revenues for the three months ended
September 30, 2016
compared to same period in
2015
was primarily driven by a decrease in same store revenue. The increase in revenues for the nine-months ended
September 30, 2016
over the same year ago period was driven by revenue growth in locations open less than 12 months.
Gross profit.
Gross profit increased for the three- and nine-month periods ended
September 30, 2016
compared to the same respective periods in
2015
. Gross profit as a percentage of segment revenues was
53.0%
and
51.2%
for the three- and nine-month periods ended
September 30, 2016
, as compared to
51.9%
and
50.7%
for the same respective periods in
2015
. Gross profit was favorably impacted by the completed lap of the 90 day option pricing changes and our increased focus on driving profitable sales.
Operating profit.
Operating profit increased for the three-month period ended
September 30, 2016
and decreased for the nine-month period ended
September 30, 2016
as compared to the respective periods in 2015. The increase in operating profit for the three-month period ended
September 30, 2016
was primarily due to continued improvement in gross profit described above. Other store expenses, as a percentage of store revenue, for the three- and nine-month period-ended
September 30, 2016
were negatively impacted by higher customer stolen merchandise. Charge-offs in our Acceptance Now locations due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 8.4% and 9.2% for the three- and nine-month periods ended
September 30, 2016
, compared to 8.2% and 7.9% for the respective periods in
2015
. The ratio of agreement charge-offs to total agreements in this segment is comparable to the Core U.S. segment but the percentage of revenue is higher, primarily due to the higher cost of rental merchandise in this segment. Charge-offs in our Acceptance Now locations due to other merchandise losses, expressed as a percentage of revenues, were approximately 1.3% and 1.1% for the three- and six-month periods ended
September 30, 2016
, as compared to 0.6% and 0.8% for the respective periods in
2015
. Other merchandise losses include unrepairable merchandise and loss/damage waiver claims.
Mexico segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
September 30,
|
|
Change
|
(Dollar amounts in thousands)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,454
|
|
|
$
|
14,528
|
|
|
$
|
(2,074
|
)
|
|
(14.3
|
)%
|
|
$
|
39,514
|
|
|
$
|
48,799
|
|
|
$
|
(9,285
|
)
|
|
(19.0
|
)%
|
Gross profit
|
|
8,897
|
|
|
9,500
|
|
|
(603
|
)
|
|
(6.3
|
)%
|
|
27,478
|
|
|
32,521
|
|
|
(5,043
|
)
|
|
(15.5
|
)%
|
Operating profit (loss)
|
|
235
|
|
|
(2,359
|
)
|
|
2,594
|
|
|
110.0
|
%
|
|
(1,803
|
)
|
|
(12,992
|
)
|
|
11,189
|
|
|
86.1
|
%
|
Change in same store revenue
|
|
|
|
|
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
10.8
|
%
|
Stores in same store revenue calculation
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
85
|
|
Revenues.
Revenues for the three- and nine-month periods ended
September 30, 2016
, were negatively impacted by approximately $1.8 million and $7.0 million, respectively, due to exchange rate fluctuations as compared to the respective periods in
2015
. On a constant currency basis, revenue was positively impacted by the improvement in same store revenue, but negatively impacted by store closures in 2016 and 2015.
Gross Profit.
Gross profit for the three- and nine-month periods ended
September 30, 2016
, was negatively impacted by approximately $1.3 million and $4.9 million, respectively, due to exchange rate fluctuations as compared to the respective periods in 2015. On a constant currency basis, gross profit also decreased as a result of decreased revenues in the segment due to store
RENT-A-CENTER, INC. AND SUBSIDIARIES
closures in
2016
and
2015
. Gross profit as a percentage of segment revenues was
71.4%
and
69.5%
for the three- and nine-month periods ended
September 30, 2016
, as compared to
65.4%
and
66.6%
for the respective periods in
2015
.
Operating Profit (Loss).
Operating results were positively impacted by approximately $0.4 million for the three-month period ended
September 30, 2016
and negatively impacted by approximately $0.5 million for the nine-month period ended
September 30, 2016
due to exchange rate fluctuations compared to respective periods in
2015
. Operating results as a percentage of segment revenues increased to
1.9%
and
(4.6)%
for the three- and nine-month periods ended
September 30, 2016
, respectively, from
(16.2)%
and
(26.6)%
for the same respective periods in
2015
. Operating losses for the nine-month period ended
September 30, 2016
included restructuring charges of $2.3 million, related to store closures in the first quarter of 2016. Excluding these store closure charges, operating results as a percentage of segment revenues would have been 1.3% for the nine-months ended
September 30, 2016
, compared to (20.4)% in 2015, as a result of operating initiatives designed to improve the financial performance of our Mexico operations.
Franchising segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
September 30,
|
|
Change
|
(Dollar amounts in thousands)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,220
|
|
|
$
|
5,069
|
|
|
$
|
151
|
|
|
3.0
|
%
|
|
$
|
18,542
|
|
|
$
|
16,340
|
|
|
$
|
2,202
|
|
|
13.5
|
%
|
Gross profit
|
|
2,260
|
|
|
2,765
|
|
|
(505
|
)
|
|
(18.3
|
)%
|
|
7,269
|
|
|
7,056
|
|
|
213
|
|
|
3.0
|
%
|
Operating profit
|
|
1,430
|
|
|
1,797
|
|
|
(367
|
)
|
|
(20.4
|
)%
|
|
4,268
|
|
|
4,004
|
|
|
264
|
|
|
6.6
|
%
|
Revenues.
Merchandise sales and royalty income and fees increased approximately $0.2 million and $2.2 million for the three- and nine-month periods ended
September 30, 2016
, compared to the respective periods in
2015
.
Gross Profit.
Gross profit as a percentage of segment revenues decreased to
43.3%
and
39.2%
for the three- and nine-month periods ended
September 30, 2016
, from
54.5%
and
43.2%
for the same respective periods in
2015
.
Operating Profit.
Operating profit as a percentage of segment revenues decreased to
27.4%
and
23.0%
for the three- and nine- month periods ended
September 30, 2016
, compared to
35.5%
and
24.5%
for the respective periods in
2015
.
Liquidity and Capital Resources
Overview.
For the
nine months ended September 30, 2016
, we had
$374.6 million
of net cash provided by operating activities. We paid down debt by $233.3 million from cash generated from operations and a $80.0 million income tax refund. We also used cash in the amount of
$46.8 million
for capital expenditures and
$21.3 million
for payment of dividends, ending the nine-month period with
$130.3 million
of cash and cash equivalents.
Analysis of Cash Flow.
Cash provided by operating activities
increased
$125.3 million
to
$374.6 million
for the
nine months ended September 30, 2016
, from
$249.3 million
in
2015
. This was primarily attributable to the receipt in 2016 of income tax refunds of approximately $80.0 million in addition to a decrease in merchandise purchases due to lower sales in the Core U.S. segment and lower 90 days same as cash sales in the Acceptance Now segment.
Cash used in investing activities
decreased
approximately
$22.6 million
to
$45.4 million
for the
nine months ended September 30, 2016
, from
$68.0 million
in
2015
, due primarily to a decrease in capital expenditures and business acquisitions, partially offset by increased property sales.
Net cash used in financing activities was
$254.5 million
for the
nine months ended September 30, 2016
, compared to
$165.2 million
in
2015
, a change of
$89.3 million
, primarily driven by our net reduction in debt of $233.3 million for the
nine months ended September 30, 2016
, as compared to a net decrease in debt of $128.5 million for the comparable period in 2015, and lower dividend payments year over year.
Liquidity Requirements
. Our primary liquidity requirements are for rental merchandise purchases, implementation of our growth strategies, capital expenditures and debt service. Our primary sources of liquidity have been cash provided by operations and borrowings. In the future, to provide any additional funds necessary for the continued operations and expansion of our business, we may incur from time to time additional short-term or long-term bank indebtedness and may issue, in public or private transactions, equity and debt securities. The availability and attractiveness of any outside sources of financing will depend on a number of factors, some of which relate to our financial condition and performance, and some of which are beyond our control, such as prevailing interest rates and general financing and economic conditions. There can be no assurance that additional financing will be available, or if available, that it will be on terms we find acceptable.
RENT-A-CENTER, INC. AND SUBSIDIARIES
We believe the cash flow generated from operations, together with amounts available under our Credit Agreement, will be sufficient to fund our liquidity requirements as discussed above during the next 12 months. Our revolving credit facilities, including our $20.0 million line of credit at INTRUST Bank, provide us with revolving loans in an aggregate principal amount not exceeding $695.0 million, of which
$584.3 million
was available as of
October 26, 2016
, at which date we had $132.1 million in cash. To the extent we have available cash that is not necessary to fund the items listed above, and subject to conditions and covenants within our Credit Agreement, we may declare and pay dividends on our common stock, make additional payments to reduce our existing debt or repurchase additional shares of our common stock. While our operating cash flow has been strong and we expect this strength to continue, our liquidity could be negatively impacted if we do not remain as profitable as we expect.
A change in control would result in an event of default under our senior credit facilities which would allow our lenders to accelerate the indebtedness owed to them. In addition, if a change in control occurs, we may be required to offer to repurchase all of our outstanding senior unsecured notes at 101% of their principal amount, plus accrued interest to the date of repurchase. Our senior credit facilities limit our ability to repurchase the senior unsecured notes, including in the event of a change in control. In the event a change in control occurs, we cannot be sure we would have enough funds to immediately pay our accelerated senior credit facilities and senior note obligations or that we would be able to obtain financing to do so on favorable terms, if at all.
Deferred Taxes.
Certain federal tax legislation enacted during the period 2009 to 2014 permitted bonus first-year depreciation deductions ranging from 50% to 100% of the adjusted basis of qualified property placed in service during such years. The depreciation benefits associated with these tax acts are now reversing. On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 ("PATH") extended the bonus depreciation to 2015 and through December 2019. The PATH act permits first-year bonus depreciation deductions of 50% in 2015-2017, 40% in 2018, and 30% in 2019. The PATH act resulted in an estimated benefit of $100 million for us in 2015. Most, if not all, of the 2015 tax liability had been paid by December 15, 2015, so a refund of approximately $80 million was requested from the IRS and received in early 2016. We estimate the remaining tax deferral associated with these acts is approximately $180 million at September 30, 2016, of which approximately 76.7%, or $138 million will reverse in 2016, and the remainder will reverse between 2017 and 2018. We also estimate a benefit of $100 million resulting from bonus depreciation in 2016 which will offset the $138 million reversal, resulting in a net negative impact to cash taxes of $38 million.
Merchandise Losses
. Merchandise losses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Customer stolen merchandise
|
$
|
41,962
|
|
|
$
|
38,076
|
|
|
$
|
124,070
|
|
|
$
|
116,462
|
|
Other merchandise losses
(1)
|
12,917
|
|
|
13,090
|
|
|
35,420
|
|
|
38,141
|
|
Total merchandise losses
|
$
|
54,879
|
|
|
$
|
51,166
|
|
|
$
|
159,490
|
|
|
$
|
154,603
|
|
__________
|
|
(1)
|
Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims.
|
Capital Expenditures
. We make capital expenditures in order to maintain our existing operations as well as for new capital assets in new and acquired stores, and investment in information technology. We spent
$46.8 million
and
$61.1 million
on capital expenditures during the
nine months ended September 30, 2016
and
2015
, respectively, and expect to spend between $70 million and $80 million in 2016.
RENT-A-CENTER, INC. AND SUBSIDIARIES
Acquisitions and New Location Openings.
During the first
nine
months of
2016
, we acquired locations and accounts for an aggregate purchase price of approximately
$2.3 million
in three different transactions.
The table below summarizes the location activity for the
nine-month
period ended
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Core U.S.
|
|
Acceptance Now Staffed
|
|
Acceptance Now Direct
|
|
Mexico
|
|
Franchising
|
|
Total
|
Locations at beginning of period
|
2,672
|
|
|
1,444
|
|
|
532
|
|
|
143
|
|
|
227
|
|
|
5,018
|
|
New location openings
|
—
|
|
|
101
|
|
|
50
|
|
|
1
|
|
|
1
|
|
|
153
|
|
Acquired locations remaining open
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Conversions
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Closed locations
|
|
|
|
|
|
|
|
|
|
|
|
Merged with existing locations
|
(183
|
)
|
|
(171
|
)
|
|
—
|
|
|
(4
|
)
|
|
(1
|
)
|
|
(359
|
)
|
Sold or closed with no surviving location
|
(20
|
)
|
|
—
|
|
|
(87
|
)
|
|
(10
|
)
|
|
(1
|
)
|
|
(118
|
)
|
Locations at end of period
|
2,469
|
|
|
1,373
|
|
|
495
|
|
|
130
|
|
|
231
|
|
|
4,698
|
|
Acquired locations closed and accounts merged with existing locations
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Total approximate purchase price of acquired stores (in thousands)
|
$
|
2,302
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,302
|
|
Senior Debt.
As discussed in Note 2 to the consolidated financial statements, the $900.0 million Credit Agreement consists of $225.0 million, seven-year Term Loans and a $675.0 million, five-year Revolving Facility.
The full amount of the Revolving Facility may be used for the issuance of letters of credit, of which $90.7 million had been so utilized as of
October 26, 2016
, at which date $584.3 million was available. The Term Loans are scheduled to mature on March 19, 2021, and the Revolving Facility has a scheduled maturity of March 19, 2019. The weighted average Eurodollar rate on our outstanding debt was 0.75% at
October 26, 2016
.
Senior Notes
. See descriptions of our senior notes in Note 3 to the consolidated financial statements.
Store Leases
. We lease space for substantially all of our Core U.S. and Mexico stores and certain support facilities under operating leases expiring at various times through 2026. 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-upon formulas.
Franchising Guarantees.
Our subsidiary, ColorTyme Finance, Inc. ("ColorTyme Finance"), is a party to an agreement with Citibank, N.A., pursuant to which Citibank provides up to $27.0 million in aggregate financing to qualifying franchisees of Franchising. Under the Citibank agreement, upon an event of default by the franchisee under agreements governing this financing and upon the occurrence of certain other events, Citibank can assign the loans and the collateral securing such loans to ColorTyme Finance, with ColorTyme Finance paying or causing to be paid the outstanding debt to Citibank and then succeeding to the rights of Citibank under the debt agreements, including the right to foreclose on the collateral. Rent-A-Center and ColorTyme Finance guarantee the obligations of the franchise borrowers under the Citibank facility. An additional $20.0 million of financing is provided by Texas Capital Bank, National Association under an agreement similar to the Citibank financing, which is guaranteed by Rent-A-Center East, Inc., a subsidiary of Rent-A-Center. The maximum guarantee obligations under these agreements, excluding the effects of any amounts that could be recovered under collateralization provisions, is $47.0 million, of which
$4.4 million
was outstanding as of
September 30, 2016
.
RENT-A-CENTER, INC. AND SUBSIDIARIES
Contractual Cash Commitments
. The table below summarizes debt, lease and other minimum cash obligations outstanding as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
Contractual Cash Obligations
|
Total
|
|
|
2016
|
|
2017-2018
|
|
2019-2020
|
|
Thereafter
|
|
(In thousands)
|
Senior Term Debt
|
$
|
192,376
|
|
(1)
|
|
$
|
563
|
|
|
$
|
4,500
|
|
|
$
|
4,500
|
|
|
$
|
182,813
|
|
Revolving Facility
|
—
|
|
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
6.625% Senior Notes
(3)
|
380,013
|
|
|
|
9,697
|
|
|
38,788
|
|
|
331,528
|
|
|
—
|
|
4.75% Senior Notes
(4)
|
309,375
|
|
|
|
5,938
|
|
|
23,750
|
|
|
23,750
|
|
|
255,937
|
|
Operating Leases
|
496,431
|
|
|
|
43,872
|
|
|
284,109
|
|
|
143,974
|
|
|
24,476
|
|
Total
(5)
|
$
|
1,378,195
|
|
|
|
$
|
60,070
|
|
|
$
|
351,147
|
|
|
$
|
503,752
|
|
|
$
|
463,226
|
|
__________
|
|
(1)
|
Amount referenced does not include interest payments. Our senior term debt bears interest at varying rates equal to the Eurodollar rate (not less than 0.75%) plus 3.00% or the prime rate plus 2.00% at our election. The Eurodollar rate on our senior term debt at
September 30, 2016
, was 0.84%.
|
|
|
(2)
|
Amount referenced does not include interest payments. Our Revolving Facility bears interest at varying rates equal to the Eurodollar rate plus 1.50% to 2.75% or the prime rate plus 0.50% to 1.75% at our election.
|
|
|
(3)
|
Includes interest payments of $9.7 million on each of May 15 and November 15 of each year.
|
|
|
(4)
|
Includes interest payments of $5.9 million on each of May 1 and November 1 of each year.
|
|
|
(5)
|
As of
September 30, 2016
, we have $24.8 million in uncertain tax positions. Because of the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, uncertain tax positions are not reflected in the contractual obligations table.
|
Seasonality.
Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year, primarily related to federal income tax refunds. Generally, our customers will more frequently exercise the early purchase option on their existing rental purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year. Furthermore, we tend to experience slower growth in the number of rental purchase agreements in the third quarter of each fiscal year when compared to other quarters throughout the year. We expect these trends to continue in the future.
Critical Accounting Estimates, Uncertainties or Assessments in Our Financial Statements
Valuation of Goodwill.
We perform an assessment of goodwill for impairment at the reporting unit level annually on October 1, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors which could necessitate an interim impairment assessment include a sustained decline in our market capitalization, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results.
Our reporting units are generally our reportable operating segments identified in Note 7 to the consolidated financial statements. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions that we believe are reasonable but inherently uncertain, and actual results may differ from those estimates. These estimates and assumptions include, but are not limited to, future cash flows based on revenue growth rates and operating margins, and future economic and market conditions approximated by a discount rate derived from our weighted average cost of capital. Factors that could affect our ability to achieve the expected growth rates or operating margins include the general strength of the economy and other economic conditions that affect consumer preferences and spending, factors that affect the disposable income of our current and potential customers, our ability to execute on our multi-year program designed to transform and modernize our operations, including the flexible labor and sourcing and distribution initiatives, and our ability to successfully implement our new store information management system, including with respect to overcoming system slowness and outages, and effectively integrating this new system into ongoing store operations. Factors that could affect our weighted average cost of capital include changes in interest rates and changes in our effective tax rate.
We use a two-step approach to assess goodwill impairment. If the fair value of the reporting unit exceeds its carrying value, then the goodwill is not deemed impaired. If the carrying value of the reporting unit exceeds fair value, we perform a second analysis to measure the fair value of all assets and liabilities within the reporting unit, and if the carrying value of goodwill exceeds its implied fair value, goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of goodwill and the implied fair value, which is calculated as if the reporting unit had just been acquired and accounted for as a business combination.
RENT-A-CENTER, INC. AND SUBSIDIARIES
Based on the results of our 2015 annual goodwill impairment test, we concluded that an impairment of goodwill for the Core U.S. segment existed and we recorded a goodwill impairment charge of $1,170 million in the fourth quarter of 2015. As of the date of our annual impairment test, October 1, 2015, the amount of goodwill allocated to the Core U.S. and Acceptance Now segments was $150.0 million and $54.4 million, respectively. In addition, the fair value of the Core U.S. and the Acceptance Now segments significantly exceeded their carrying value (by over 85% and 100%, respectively). During the nine months ended September 30, 2016, we did not identify any events or changes in circumstances that more likely than not would have reduced the fair value of a reporting unit below its carrying amount. If we fail to achieve the estimated revenue growth rates or operating margins, the fair value of a reporting unit could decrease below its carrying value, resulting in an impairment of goodwill that could have a material impact on our financial statements.
Effect of New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB approved a one-year deferral of the effective date. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, which amends ASU 2014-09 relating to how and when a company recognizes revenue when another party is involved in providing a good or service to a customer. Under Topic 606, a company will recognize revenue on a gross basis when it provides a good or service to a customer (acts as the principal in a transaction), and on a net basis when it arranges for the good or service to be provided to the customer by another party (acts as an agent in a transaction). ASU 2016-08 provides additional guidance for determining whether a company acts as a principal or agent, depending primarily on whether a company controls goods or services before delivery to the customer. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, which provides additional guidance related to the identification of performance obligations within the contract, and licensing. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which provides additional guidance related to certain technical areas within ASU 2014-09. The adoption of these additional ASUs must be concurrent with the adoption of ASU 2014-09, which will be required for Rent-A-Center beginning January 1, 2018, with early adoption permitted as of the original effective date. These ASUs allow adoption with either retrospective application to each prior period presented, or retrospective application with the cumulative effect recognized as of the date of initial application. We are currently in the process of determining what impact the adoption of these ASUs will have on our financial position, results of operations and cash flows, and we are evaluating the adoption date and transition alternatives.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which replaces existing accounting literature relating to the classification of, and accounting for, leases. Under ASU 2016-02, a company must recognize for all leases (with the exception of leases with terms less than 12 months) a liability representing a lessee's obligation to make lease payments arising from a lease, and a right-of-use asset representing the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged, with certain improvements to align lessor accounting with the lessee accounting model and Topic 606,
Revenue from Contracts with Customers.
The adoption of ASU 2016-02 will be required for Rent-A-Center beginning January 1, 2019, with early adoption permitted. The ASU must be adopted using a modified retrospective transition, applying the new criteria to all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. We are currently in the process of determining the what impact the adoption of this ASU will have on our financial position, results of operations and cash flows, and we are evaluating the adoption date and transition alternatives.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The adoption of ASU 2016-09 will be required for Rent-A-Center beginning January 1, 2017. ASU 2016-09 requires that certain provisions be adopted using a modified retrospective transition and other provisions retrospectively. We are currently in the process of determining what impact the adoption of this ASU will have on our financial position, results of operations and cash flows, and we are evaluating the adoption date and transition alternatives.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which provides guidance on the treatment of cash receipts and cash payments for certain types of cash transactions, to eliminate diversity in practice in the presentation of the cash flow statement. The adoption of ASU 2016-15 will be required for Rent-A-Center on a retrospective basis beginning January 1, 2018, with early adoption permitted. We are currently in the process of determining the adoption date and what impact the adoption of this ASU will have on our presentation of cash flows.
RENT-A-CENTER, INC. AND SUBSIDIARIES
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Sensitivity
As of
September 30, 2016
, we had
$292.7 million
in senior notes outstanding at a fixed interest rate of 6.625%, and
$250.0 million
in senior notes outstanding at a fixed interest rate of 4.750%. We also had
$192.4 million
outstanding in Term Loans, and no outstanding borrowings under our Revolving Facility or our INTRUST line of credit, each at interest rates indexed to the Eurodollar rate or the prime rate. The fair value of the 6.625% senior notes, based on the closing price at
September 30, 2016
, was
$282.5 million
. The fair value of the 4.750% senior notes, based on the closing price at
September 30, 2016
, was
$211.3 million
. Carrying value approximates fair value for all other indebtedness.
Market Risk
Market risk is the potential change in an instrument’s value caused by fluctuations in interest rates. Our primary market risk exposure is fluctuations in interest rates. Monitoring and managing this risk is a continual process carried out by our senior management. We manage our market risk based on an ongoing assessment of trends in interest rates and economic developments, giving consideration to possible effects on both total return and reported earnings. As a result of such assessment, we may enter into swap contracts or other interest rate protection agreements from time to time to mitigate this risk.
Interest Rate Risk
We have outstanding debt with variable interest rates indexed to prime or Eurodollar rates that exposes us to the risk of increased interest costs if interest rates rise. As of
September 30, 2016
, we have not entered into any interest rate swap agreements. Based on our overall interest rate exposure at
September 30, 2016
, a hypothetical 1.0% increase or decrease in market interest rates would have the effect of causing a $2.0 million additional pre-tax charge or credit to our statement of earnings.
Foreign Currency Translation
We are exposed to market risk from foreign exchange rate fluctuations of the Mexican peso and Canadian dollar to the U.S. dollar as the financial position and operating results of our stores in those countries are translated into U.S. dollars for consolidation. Resulting translation adjustments are recorded as a separate component of stockholders’ equity.
Item 4.
Controls and Procedures.
Evaluation of disclosure controls and procedures
. In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is (1) recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of
September 30, 2016
, our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934) were effective.
Changes in internal controls
. We completed implementation of a new Store Information Management System in all of our Core U.S. rent-to-own stores in 2016. The Store Information Management System manages key business processes in the store such as sales, customer account management, cash management and inventory management and has resulted in changes to these business processes and related internal controls over financial reporting.
Other than as described above, for the quarter ended
September 30, 2016
, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that, in the aggregate, have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – Other Information