Upbound Group, Inc.: Form 10-Q for the period ended Mar 31, 2024

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, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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.” These forward-looking statements, include, without limitation, those relating to the impact of ongoing challenging macroeconomic conditions on our business, operations, financial performance and prospects, the future business prospects and financial performance of our Company as a whole and of our segments, our growth strategies, our expectations, plans and strategy relating to our capital structure and capital allocation, including any share repurchases under our share repurchase program, and other statements that are not historical facts.

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 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 and adversely depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. 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. Except as required by law, 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:

• the general strength of the economy and other economic conditions affecting consumer preferences and spending, including the availability of credit to our target consumers and to other consumers, impacts from continued inflation, central bank monetary policy initiatives to address inflation concerns, and a possible recession or slowdown in economic growth;
• factors affecting the disposable income available to our current and potential customers;
• changes in the unemployment rate;
• capital market conditions, including changes in interest rates and availability of funding sources for us;
• changes in our credit ratings;
• difficulties encountered in improving the financial and operational performance of our business segments;
• risks associated with pricing, value proposition and other changes and strategies being deployed in our businesses;
• our ability to continue to effectively execute our strategic initiatives, including mitigating risks associated with any potential mergers and acquisitions, or refranchising opportunities;
• our ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies;
• failure to manage our operating labor and non-labor operating expenses, including merchandise losses;
• disruptions caused by the operation of our information management systems or disruptions in the systems of our host retailers;
• risks related to our virtual lease-to-own business, including our ability to continue to develop and successfully implement the necessary technologies;
• our ability to achieve the benefits expected from our integrated virtual and staffed retail partner offering and to successfully grow this business segment;
• exposure to potential operating margin degradation due to the higher cost of merchandise and higher merchandise losses in our Acima segment compared to our Rent-A-Center segment;
• our transition to more-readily scalable “cloud-based” solutions;
• our ability to develop and successfully implement digital or E-commerce capabilities, including mobile applications;
• our ability to protect our proprietary intellectual property;
• our ability or that of our host retailers to protect the integrity and security of customer, employee, supplier and host retailer information, which may be adversely affected by hacking, computer viruses, or similar disruptions;
• impairment of our goodwill or other intangible assets;
• disruptions in our supply chain;
• limitations of, or disruptions in, our distribution network;
• rapid inflation or deflation in the prices of our products and other related costs;
• allegations of product safety and quality control issues, including recalls;
• our ability to execute, as well as the effectiveness of, store consolidations, including our ability to retain the revenue from customer accounts merged into another store location as a result of a store consolidation;
• our available cash flow and our ability to generate sufficient cash flow to continue paying dividends;
• increased competition from traditional competitors, virtual lease-to-own competitors, online retailers, Buy-Now-Pay-Later and other fintech companies and other competitors, including subprime lenders;
• our ability to identify and successfully market products and services that appeal to our current and future targeted customer segments and to accurately estimate the size of the total addressable market;
• consumer preferences and perceptions of our brands;
• our ability to effectively provide consumers with additional products and services beyond lease-to-own, including through third-party partnerships;
• our ability to retain the revenue associated with acquired customer accounts and enhance the performance of acquired stores;
• our ability to enter into new rental or lease purchase agreements and collect on our existing rental or lease purchase agreements;
• impacts from the enforcement of existing laws and regulations and the enactment of new laws and regulations adversely affecting our business, including in connection with the regulatory matters described in Note 11 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, and any legislative or other regulatory enforcement efforts that seek to re-characterize store-based or virtual lease-to-own transactions as credit sales and to apply consumer credit laws and regulations to our business;
• our compliance with applicable statutes or regulations governing our businesses;
• changes in tariff policies;
• adverse changes in the economic conditions of the industries, countries or markets that we serve;
• information technology and data security costs;
• the impact of any breaches in data security or other disturbances to our information technology and other networks;
• changes in estimates relating to self-insurance liabilities and income tax and litigation reserves, including in connection with the regulatory and litigation matters described in Note 11 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q;
• changes in our effective tax rate;
• fluctuations in foreign currency exchange rates;
• our ability to maintain an effective system of internal controls;
• litigation or administrative proceedings to which we are or may be a party to from time to time; and
• the other risks detailed from time to time in our reports furnished or filed with the United States Securities and Exchange Commission (the “SEC”).

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, 2023 and elsewhere in this Quarterly Report on Form 10-Q.

Our Business

We are a leading lease-to-own provider with operations in the United States, Puerto Rico and Mexico. We provide a critical service for underserved consumers by providing them with access to, and the opportunity to obtain ownership of, high-quality, name brand durable products under a flexible lease-purchase agreement with no long-term debt obligation. Our Acima segment offers lease-to-own solutions through retailers in stores and online enabling such retailers to grow sales by expanding their customer base utilizing our differentiated offering and allowing customers to access our flexible lease-to-own solutions at thousands of retailers and to lease a wide range of durable products. Through our Rent-A-Center segment, we provide a fully integrated customer experience through our e-commerce platform and brick and mortar presence in local communities around the country. We were incorporated in the State of Delaware in 1986, and our common stock is traded on the Nasdaq Global Select Market under the ticker symbol “UPBD.”

Executive Summary

Our Strategy

Our strategy is focused on achieving our mission to elevate financial opportunity for all and growing our business through emphasis on the following key initiatives:

• Grow penetration with current Acima merchants and build on our strength with small to medium size businesses while also adding new national and regional merchants to our platform and expanding our direct-to-consumer channels;
• At Rent-A-Center, accelerate the shift to e-commerce, improve the fully integrated omni-channel customer experience and expand product categories, which we expect will increase brand awareness and customer loyalty;
• Leverage data analytics capabilities to attract new customers, approve more customers and mitigate risk across business segments;
• Upgrade and integrate technology platforms to allow for a more simplified and seamless consumer experience, merchant and third-party waterfall integration and consumer transaction process and coworker efficiency;
• Execute on market opportunities and enhance our competitive position across both traditional and virtual lease-to-own solutions, and implement complementary products and services that supplement our current offerings and provide our customers more financial alternatives; and
• Develop centers of excellence that will be leveraged across the organization to support our various business segments, utilizing best practices to drive efficiency and growth.

As we pursue our strategy, we have taken, and may in the future take, advantage of joint venture, partnership, or merger and acquisition opportunities from time to time that advance our key initiatives and elevate the financial mobility of underserved consumers.

Recent Developments

Dividend. On March 22, 2024, we announced that our board of directors approved a quarterly cash dividend of $0.37 per share for the second quarter of 2024. The dividend was paid on April 22, 2024 to our common stockholders of record as of the close of business on April 3, 2024.

Business and Operational Trends

Macroeconomic Conditions. In recent years, we have experienced significant change in our business and operational trends driven by macroeconomic conditions, which have directly impacted our customers as well as our operations, including significant changes in the U.S. consumer price index, changes in demand for certain consumer retail categories, changes in consumer payment behaviors, a condensed labor market, which has also contributed to wage inflation, rapid increases in interest rates, and global supply chain disruptions resulting in reduced product availability and rising product costs.

While the lease-to-own industry has historically remained a resilient business model throughout various economic cycles, the full extent to which our risk management strategy and these macroeconomic trends (including consumer spending and payment behavior) may impact our business in future periods is uncertain. The continuation of negative and volatile macroeconomic trends may have a material adverse impact on our financial statements, including our results of operations, operating cash flows, liquidity and capital resources.

See “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2023, for additional discussion of impacts to our business and additional risks associated with macroeconomic conditions.

Rent-A-Center E-commerce revenue. In recent years, e-commerce revenues have continued to increase as a percentage of total rentals and fees revenue in our Rent-A-Center segment. For the three months ended March 31, 2024, e-commerce revenues represented approximately 26% of total lease-to-own revenues compared to approximately 25% for the three months ended March 31, 2023. Due to recent trends in consumer shopping behaviors and expectations, we believe e-commerce solutions are an important part of our lease-to-own offering. However, we are unable to quantify the extent to which e-commerce revenues are incremental compared to what our overall revenues would have been in the absence of those e- commerce transactions. In addition, the profitability of e-commerce transactions can be impacted by different merchandise loss factors compared to traditional store-based transactions in the Rent-A-Center segment. Therefore, we are unable to determine with certainty whether the continuation of this trend toward increased e-commerce transactions will have a significant impact to our financial statements in future periods or be favorable or unfavorable to our financial results.

Results of Operations

The following discussion focuses on our results of operations and our liquidity and capital resources. You should read this discussion in conjunction with the condensed consolidated financial statements and notes thereto for the three months ended March 31, 2024 included in Part I, Item I of this Quarterly Report on Form 10-Q.

Key Metrics

Gross Merchandise Volume (“GMV”): The Company defines Gross Merchandise Volume as the retail value in U.S. dollars of merchandise acquired by the Company that is leased to customers through a transaction that occurs within a defined period, net of estimated cancellations as of the measurement date.

Lease Portfolio Value: Represents the aggregate dollar value of the expected monthly rental income associated with current active lease agreements from our Rent-A-Center stores and e-commerce platform at the end of any given period.

Same Store Sales: 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 as a percentage of total revenue earned in stores of the segment during the indicated period. 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 30th full month following account transfer.

Lease Charge-Offs (“LCOs”) (previously referred to as "skip / stolen losses"): Represents charge-offs of the net book value of unrecoverable on-rent merchandise with lease-to-own customers who are past due. This is typically expressed as a percentage of revenues for the applicable period. For the Rent-A-Center segment, LCOs exclude Get It Now and Home Choice locations.

Overview

The following briefly summarizes certain of our financial information for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023.

During the first three months of 2024, consolidated revenues and gross profit increased by approximately $79.9 million and $22.8 million, respectively, primarily due to an increase in the Acima segment revenues described below. Operating profit increased by approximately $96.9 million, primarily due to a decrease in Other gains and charges of $100.8 million in addition to the increase in gross profit noted above, partially offset by an increase in non-labor operating expenses of $17.1 million, and general and administrative expenses of $7.4 million.

The Acima segment revenues increased approximately $77.5 million for the three months ended March 31, 2024, due to increases in rentals and fees revenues and merchandise sales of $59.4 million and $18.2 million, respectively, resulting from higher GMV. Growth in GMV was primarily due to an increase in merchant locations, merchant productivity which resulted in more leases per merchant, expanding direct-to-consumer offerings, and improved conversion rates. Operating profit decreased approximately $2.0 million for the three months ended March 31, 2024, primarily due to an increase non-labor operating expenses of approximately $17.7 million, partially offset by an increase in gross profit of $14.2 million. See "Segment Performance" below for further discussion of Acima segment operating results for the three months ended March 31, 2024.

Revenues in our Rent-A-Center segment increased approximately $0.7 million for the three months ended March 31, 2024 due to an increase in same store sales of 0.8% driven by an increase in rentals and fees revenues of $3.5 million partially offset by a decrease in merchandise sales of $1.5 million. Operating profit increased approximately $5.8 million for the three months ended March 31, 2024, primarily due to an increase in gross profit of approximately $5.9 million resulting primarily from a decrease in cost of revenues of $5.2 million. See "Segment Performance" below for further discussion of Rent-A-Center segment operating results for the three months ended March 31, 2024.

The Mexico segment revenues increased by 18.0% for the three months ended March 31, 2024, contributing to an increase in gross profit of 18.8%, or $2.3 million, primarily due to a 5.6% increase in same store sales driven by an increase in rentals and fees revenues of $2.9 million. Operating profit increased $0.7 million for the three months ended March 31, 2024, primarily due to an increase in gross profit described above, partially offset by an increase in operating labor costs of approximately $1.0 million. See "Segment Performance" below for further discussion of Mexico segment operating results for the three months ended March 31, 2024.

Revenues for the Franchising segment decreased $1.5 million for the three months ended March 31, 2024, primarily due to a decrease in merchandise sales of $2.0 million, partially offset by an increase in royalty income and fees of $0.3 million. See "Segment Performance" below for further discussion of Mexico segment operating results for the three months ended March 31, 2024.

Cash flow from operations was $45.4 million for the three months ended March 31, 2024. As of March 31, 2024, we held $84.8 million of cash and cash equivalents and had outstanding indebtedness of $1.3 billion.

The following table is a reference for the discussion that follows.

(dollar amounts in thousands)

Three Months Ended March 31, 2024, compared to Three Months Ended March 31, 2023

Revenue. Total revenues increased by $79.9 million, or 7.9%, to $1,096.0 million for the three months ended March 31, 2024, from $1,016.1 million for the three months ended March 31, 2023. This increase was primarily due to an increase of approximately $77.5 million in the Acima segment, as discussed further in the section “Segment Performance” below.

Cost of Rentals and Fees. Cost of rentals and fees consists primarily of depreciation of rental merchandise. Cost of rentals and fees for the three months ended March 31, 2024 increased by $30.0 million, or 10.1%, to $327.1 million as compared to $297.1 million for the three months ended March 31, 2023. The increase was primarily attributable to an increase of approximately $33.5 million in the Acima segment driven by an increase in rentals and fees revenues, partially offset by a decrease of $4.2 million in the Rent-A-Center segment. Cost of rentals and fees expressed as a percentage of rentals and fees revenue was 37.5% for the three months ended March 31, 2024, as compared to 36.8% for the three months ended March 31, 2023.

Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold increased by $29.3 million, or 15.9%, to $213.6 million for the three months ended March 31, 2024, from $184.3 million for the three months ended March 31, 2023, primarily attributable to an increase of $29.8 million in the Acima segment, driven primarily by higher merchandise sales. The gross margin percent of merchandise sales decreased to (18.8)% for the three months ended March 31, 2024, from (13.1)% for the three months ended March 31, 2023.

Gross Profit. Gross profit increased by $22.8 million, or 4.5%, to $529.1 million for the three months ended March 31, 2024, from $506.3 million for the three months ended March 31, 2023, primarily due to increases of $14.2 million and $5.9 million in the Acima and Rent-A-Center segments, respectively, as discussed further in the section “Segment Performance” below. Gross profit as a percentage of total revenue decreased to 48.3% for the three months ended March 31, 2024, as compared to 49.8% for the three months ended March 31, 2023.

Operating Labor. Operating labor includes all salaries and wages paid to operational employees and district managers, together with payroll taxes and benefits. Operating labor increased by $1.6 million, or 1.1%, to $158.1 million for the three months ended March 31, 2024, as compared to $156.5 million for the three months ended March 31, 2023, primarily due to an increase of $1.0 million in the Mexico segment. Operating labor expressed as a percentage of total revenue excluding franchise merchandise sales and royalty income and fees was 14.8% for the three months ended March 31, 2024, as compared to 15.9% for the three months ended March 31, 2023.

Non-Labor Operating Expenses. Non-labor operating expenses include LCO's, occupancy, delivery, advertising, selling, insurance, travel and other operating expenses. Non-labor operating expenses increased by $17.1 million, or 8.7%, to $213.8 million for the three months ended March 31, 2024, as compared to $196.7 million for the three months ended March 31, 2023, due to an increase of $17.7 million in the Acima Segment primarily attributable to an increase of $11.3 million in merchandise losses. Non-labor operating expenses expressed as a percentage of total revenue excluding franchise merchandise sales and royalty income and fees was 20.0% for the three months ended March 31, 2024, compared to 19.9% for the three months ended March 31, 2023.

General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, payroll taxes and benefits, stock-based compensation, occupancy, administrative and other expenses, as well as salaries and labor costs for our regional directors, divisional vice presidents and executive vice presidents. General and administrative expenses increased by $7.4 million, or 15.4%, to $55.1 million for the three months ended March 31, 2024, as compared to $47.7 million for the three months ended March 31, 2023, primarily due to increases in overhead labor. General and administrative expenses expressed as a percentage of total revenue were 5.0% and 4.7% for the three months ended March 31, 2024 and 2023, respectively.

Other Gains and Charges. Other gains and charges decreased by $100.8 million, or 79.0%, to $26.8 million for the three months ended March 31, 2024, as compared to $127.6 million for the three months ended March 31, 2023. The decrease in other gains and charges was driven primarily by stock compensation expense recognized for the three months ended March 31, 2023, related to restricted stock issued in connection with the Acima Holdings acquisition, including $74.8 million attributable to the acceleration of vesting provisions for former employee and Acima founder, Aaron Allred, upon his transition from Executive Vice President of Acima to an advisory role in early 2023, resulting in a decrease in stock compensation expense of $104.6 million for the three months ended March 31, 2024, as compared to the prior year period. This decrease was partially offset by $4.6 million in accelerated software depreciation for the three months ended March 31, 2024.

Operating Profit (Loss). Operating profit increased by $96.9 million, or 275.9%, to $61.8 million for the three months ended March 31, 2024, as compared to $(35.1) million for the three months ended March 31, 2023, primarily due to the decrease in other gains and charges and increase in gross profit, partially offset by increases in non-labor operating expenses and general and administrative expenses as described above. Operating profit expressed as a percentage of total revenue was 5.6% for the three months ended March 31, 2024, compared to (3.5)% for the three months ended March 31, 2023.

Income Tax Expense (Benefit). Income tax expense increased by $115.0 million to $4.9 million for the three months ended March 31, 2024, as compared to $(110.1) million for the three months ended March 31, 2023, primarily due to the increase in earnings before income taxes for the three months ended March 31, 2024 compared to the same period in 2023, and a lower effective tax rate for the three months ended March 31, 2024, primarily attributable to a lower tax impact of stock compensation expense related to stock consideration issued to the former owners of Acima Holdings compared to the prior year period, as well as a favorable adjustment related to foreign deferred tax assets.

Segment Performance

Acima segment

(dollar amounts in thousands)

(1) See Key Metrics described above for additional information.

Revenues. The increase in revenues for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, included increases in rentals and fees revenues and merchandise sales revenue of $59.4 million and $18.2 million, respectively, resulting from higher GMV. Growth in GMV was primarily due to an increase in merchant locations, merchant productivity which resulted in more leases per merchant, expanding direct-to-consumer offerings, and improved conversion rates.

Gross Profit. Gross profit increased for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, driven primarily by the increase in revenues described above. Gross profit as a percentage of segment revenues decreased to 30.2% for the three months ended March 31, 2024, compared to 32.1% for the three months ended March 31, 2023, partly due to an increase in merchandise sales resulting from a larger portfolio at the beginning of 2024 compared to 2023, in addition to the conversion of Acceptance Now locations to the Acima Holdings Lease Management platform.

Operating Profit. Operating profit as a percentage of segment revenues decreased to 9.2% for the three months ended March 31, 2024 compared to 11.1% for the three months ended March 31, 2023. The decrease in operating profit for the three months ended March 31, 2024 is primarily due to an increase in non-labor operating expenses of approximately $17.7 million, partially offset by the increase in gross profit. Merchandise losses in our Acima locations due to LCOs, expressed as a percentage of segment revenues, were approximately 9.6% for the three months ended March 31, 2024, compared to 8.9% for the three months ended March 31, 2023. Merchandise losses in our Acima locations due to other merchandise losses, expressed as a percentage of segment revenues, were approximately 0.3% for the three months ended March 31, 2024, compared to approximately 0.2% for the three months ended March 31, 2023.

Rent-A-Center segment

(dollar amounts in thousands)

(1) See Key Metrics described above for additional information.

Revenues. The increase in revenue for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, was primarily due to an increase in same store sales of 0.8%, driven by an increase in rentals and fees revenues of $3.5 million, partially offset by decreases in merchandise sales and installment sales of $1.5 million primarily attributable to fewer customers electing early purchase options.

Gross Profit. Gross profit increased for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, driven primarily by the increase in revenues described above. Gross profit as a percentage of segment revenues was 69.5% for the three months ended March 31, 2024, as compared to 68.4% for the three months ended March 31, 2023, primarily due to mix-shift changes between lease merchandise product categories.

Operating Profit. Operating profit as a percentage of segment revenues was 15.4% for the three months ended March 31, 2024, compared to 14.2% for the three months ended March 31, 2023. The increase in operating margin for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, was primarily driven by the increase in gross profit described above. Merchandise losses in our Rent-A-Center lease-to-own stores due to LCOs, expressed as a percentage of Rent-A-Center lease-to-own revenues, were approximately 4.7% for the three months ended March 31, 2024, compared to 4.8% for the three months ended March 31, 2023. Other merchandise losses in our Rent-A-Center lease-to-own stores, expressed as a percentage of Rent-A-Center lease-to-own revenues, were approximately 1.1% for the three months ended March 31, 2024, compared to approximately 1.4% for the three months ended March 31, 2023. Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims.

Mexico segment

(dollar amounts in thousands)

(1) See Key Metrics described above for additional information.

Revenues. Revenues were positively impacted by exchange rate fluctuations of approximately $1.9 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. On a constant currency basis, revenues for the three months ended March 31, 2024 increased approximately $1.2 million, compared to the three months ended March 31, 2023.

Gross Profit. Gross profit was positively impacted by exchange rate fluctuations of approximately $1.3 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. On a constant currency basis, gross profit for the three months ended March 31, 2024 increased by approximately $1.0 million as compared to the three months ended March 31, 2023. Gross profit as a percentage of segment revenues was 71.6% for the three months ended March 31, 2024, compared to 71.1% for the three months ended March 31, 2023.

Operating Profit. Operating profit was positively impacted by exchange rate fluctuations of approximately $0.2 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. On a constant currency basis, operating profit for the three months ended March 31, 2024 increased by approximately $0.5 million as compared to the three months ended March 31, 2023. Operating profit as a percentage of segment revenues increased to 8.2% for the three months ended March 31, 2024, compared to 5.7% for the three months ended March 31, 2023, primarily due to lower LCOs.

Franchising segment

(dollar amounts in thousands)

Revenues. Revenues decreased for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to a decrease in merchandise purchases by franchisees of $2.0 million, partially offset by increases in royalty income and fees revenue of $0.3 million.

Gross Profit. Gross profit as a percentage of segment revenues increased to 26.2% for the three months ended March 31, 2024, compared to 23.5% for the three months ended March 31, 2023, primarily due to the change in allocation of merchandise sales compared to royalty and fee revenue.

Operating Profit. Operating profit as a percentage of segment revenues decreased to 11.9% for the three months ended March 31, 2024 compared to 16.0% for the three months ended March 31, 2023, primarily due to an increase in segment operating expenses of $1.8 million.

Liquidity and Capital Resources

Overview. For the three months ended March 31, 2024, we generated $45.4 million in operating cash flow and used cash in the amount of $79.2 million for debt repayments, $21.5 million for dividends and $11.8 million for capital expenditures, partially offset by cash proceeds from indebtedness of $60.0 million. We ended the first quarter of 2024 with $84.8 million of cash and cash equivalents and outstanding indebtedness of $1.3 billion.

Analysis of Cash Flow. Cash provided by operating activities decreased by $60.0 million to $45.4 million for the three months ended March 31, 2024, from $105.4 million for the three months ended March 31, 2023, primarily due to a decrease in net earnings and an increase in our inventory purchases driven by increased consumer demand.

Cash used in investing activities increased to $11.7 million for the three months ended March 31, 2024, compared to $9.6 million for the three months ended March 31, 2023, primarily due to higher investment in store-related assets in our Rent-A-Center segment for the three months ended March 31, 2024.

Cash used in financing activities decreased to $42.8 million for the three months ended March 31, 2024, compared to $69.4 million for the three months ended March 31, 2023, primarily due to an increase in borrowings under the ABL Credit Facility of $60.0 million, partially offset by an increase in debt repayments of $37.1 million for the three months ended March 31, 2024.

Liquidity Requirements. Our primary liquidity requirements are for rental merchandise purchases, which are impacted by consumer demand for our lease-to-own solutions. Other capital requirements include expenditures for technology and property assets, and debt service. Our primary source of liquidity has been cash provided by operations.

We utilize our ABL Credit Facility for the issuance of letters of credit, as well as to manage normal fluctuations in operational cash flow caused by the timing of cash receipts. In that regard, we may from time to time draw funds under the ABL Credit Facility for general corporate purposes. Amounts are drawn as needed due to the timing of cash flows and are generally paid down as cash is generated by our operating activities. We believe cash flow generated from operations and availability under our ABL Credit Facility will be sufficient to fund our operations during the next twelve months. At April 24, 2024, we had approximately $39.8 million in cash on hand, and $409.6 million available under our ABL Credit Facility.

Merchandise Losses. Merchandise losses consist of the following:

(in thousands)

(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, acquire new capital assets in new and acquired stores and invest in information technology. We spent $11.8 million and $9.5 million on capital expenditures during the three months ended March 31, 2024 and 2023, respectively. The increase of $2.3 million is primarily due to higher investment in store-related assets in our Rent-A-Center segment.

Acquisitions and New Location Openings. The table below summarizes the store location activity for the three-month period ended March 31, 2024 for our Rent-A-Center, Mexico and Franchising operating segments.

Senior Debt. On February 17, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and lenders party thereto, that provides for a five-year asset-based revolving credit facility with commitments of $550 million and a letter of credit sublimit of $150 million, which commitments may be increased, at our option and under certain conditions, by up to an additional $125 million in the aggregate (as amended on August 10, 2022, the “ABL Credit Facility”). Under the ABL Credit Facility, we may borrow only up to the lesser of the level of the then-current borrowing base and the aggregate amount of commitments under the ABL Credit Facility. The borrowing base is tied to the amount of eligible installment sales accounts, inventory and eligible lease contracts, reduced by certain reserves. The ABL Credit Facility bears interest at a fluctuating rate determined by reference to an adjusted Term SOFR rate plus an applicable margin of 1.50% to 2.00%, which, as of April 24, 2024, was 7.41%. A commitment fee equal to 0.250% to 0.375% of the unused portion of the ABL Credit Facility fluctuates dependent upon average utilization for the prior month as defined by a pricing grid included in the documentation governing the ABL Credit Facility. Loans under the ABL Credit Facility may be borrowed, repaid and re-borrowed until February 17, 2026, at which time all amounts borrowed must be repaid.

The obligations under the ABL Credit Facility are guaranteed by us and certain of our material wholly owned domestic restricted subsidiaries, subject to certain exceptions. The obligations under the ABL Credit Facility and such guarantees are secured on a first-priority basis by all of our and our subsidiary guarantors’ accounts, inventory, deposit accounts, securities accounts, cash and cash equivalents, rental agreements, general intangibles (other than equity interests in our subsidiaries), chattel paper, instruments, documents, letter of credit rights, commercial tort claims related to the foregoing and other related assets and all proceeds thereof related to the foregoing, subject to permitted liens and certain exceptions (such assets, collectively, the “ABL Priority Collateral”) and a second-priority basis in substantially all other present and future tangible and intangible personal property of ours and the subsidiary guarantors, subject to certain exceptions.

On February 17, 2021, we also entered into a term loan credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and lenders party thereto, that provides for a seven-year $875 million senior secured term loan facility (as amended on September 21, 2021 and June 15, 2023, the “Term Loan Facility”). Subject in each case to certain restrictions and conditions, we may add up to $500 million of incremental term loan facilities to the Term Loan Facility or utilize incremental capacity under the Term Loan Facility at any time by issuing or incurring incremental equivalent term debt. Interest on borrowings under the Term Loan Facility is payable at a fluctuating rate of interest determined by reference to an adjusted Term SOFR rate plus an applicable margin of 3.25%, subject to a 0.50% Term SOFR floor, which, as of April 24, 2024 was 9.12%.

Borrowings under the Term Loan Facility amortize in equal quarterly installments in an amount equal to 1.000% per annum of the original aggregate principal amount thereof, with the remaining balance due at final maturity. The Term Loan Facility is secured by a first-priority security interest in substantially all of present and future tangible and intangible personal property of us and our subsidiary guarantors, other than the ABL Priority Collateral, and by a second-priority security interest in the ABL Priority Collateral, subject to certain exceptions. The obligations under the Term Loan Facility are guaranteed by us and our material wholly-owned domestic restricted subsidiaries that also guarantee the ABL Credit Facility.

At April 24, 2024, we had outstanding borrowings of $808.9 million under the Term Loan Facility and available commitments of $409.6 million under our ABL Credit Facility, net of letters of credit.

See Note 5 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding our senior debt.

Senior Notes. On February 17, 2021, we issued $450 million in senior unsecured notes due February 15, 2029, at par value, bearing interest at 6.375% (the “Notes”). Interest on the Notes is payable in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. We may redeem some or all of the Notes at any time for cash at the redemption prices set forth in the indenture governing the Notes, plus accrued and unpaid interest to, but not including, the redemption date. If we experience specific kinds of change in control, we will be required to offer to purchase the Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest. See Note 6 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding our senior notes.

Operating Leases. We lease space for all of our Rent-A-Center and Mexico stores under operating leases expiring at various times through 2034. In addition, we lease space for certain support facilities under operating leases expiring at various times through 2032. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed-upon formulas. As of March 31, 2024, our total remaining obligation for existing store lease contracts was approximately $342.1 million.

We lease vehicles for all of our Rent-A-Center stores under operating leases with lease terms expiring twelve months after the start date of the lease. We classify these leases as short-term and have elected the short-term lease exemption for our vehicle leases, and have therefore excluded them from our operating lease right-of-use assets within our Condensed Consolidated Balance Sheets. As of March 31, 2024, our total remaining minimum obligation for existing Rent-A-Center vehicle lease contracts was approximately $0.9 million.

We also lease vehicles for all of our Mexico stores which have terms expiring at various times through 2027 with rental rates adjusted periodically for inflation. As of March 31, 2024, our total remaining obligation for existing Mexico vehicle lease contracts was approximately $4.3 million.

Uncertain Tax Position. As of March 31, 2024, we have recorded $1.2 million in uncertain tax positions. Although these positions represent a potential future cash liability to us, the amounts and timing of such payments are uncertain.

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. Generally, our customers will more frequently exercise the early purchase option on their existing lease purchase agreements in our Acima and Rent-A-Center segments or purchase pre-leased merchandise off the showroom floor in our Rent-A-Center segment during the first quarter of each fiscal year, primarily due to the receipt of federal income tax refunds. In contrast, our cash expenditures for our merchandise purchases for the fiscal year are generally the highest beginning in the latter part of the third quarter through the fourth quarter, primarily as a result of holiday promotions that lead to increased demand for our lease-to-own offerings.

Recently Issued Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is intended to improve the transparency of the annual income tax disclosures by requiring specific categories in the income tax rate reconciliation and disaggregation of income taxes paid by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The adoption of ASU 2023-09 will be required for us for fiscal years beginning after December 15, 2024. We do not believe the adoption of this ASU will have a material impact on our financial statements.

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. As of March 31, 2024, unless otherwise discussed (including with respect to ASU 2023-07), 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.

Interest Rate Risk

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.

As of March 31, 2024, we had $450 million in Notes outstanding at a fixed interest rate of 6.375%. We also had $808.9 million outstanding under the Term Loan Facility and $53.0 million outstanding under our ABL Credit Facility, each at interest rates indexed to the Term SOFR rate. Carrying value approximates fair value for such indebtedness. Based on our overall interest rate exposure at March 31, 2024, a hypothetical 1.0% increase or decrease in market interest rates would have the effect of causing an additional $8.6 million additional annualized pre-tax charge or credit to our Condensed Consolidated Statements of Operations. We have not entered into any interest rate swap agreements as of March 31, 2024.

Foreign Currency Translation

We are also exposed to market risk from foreign exchange rate fluctuations of the Mexican peso to the U.S. dollar as the financial position and operating results of our stores in Mexico are translated into U.S. dollars for consolidation. Resulting translation adjustments are recorded as a separate component of stockholders’ equity.

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. Based on this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of March 31, 2024, 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 over Financial Reporting. For the quarter ended March 31, 2024, 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.

There have been no material changes to the risk factors disclosed in Item 1A of Part 1, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023.