Upbound Group - Earnings Call - Q1 2020

Transcript

Speaker 0

Good morning and thank you for holding. Welcome to Rent A Center's First Quarter Earnings Conference Call. As a reminder, this conference is being recorded Thursday, 05/07/2020. Your speakers today are Mitch Fadel, Chief Executive Officer of Rent A Center Maureen Short, Chief Financial Officer and Daniel O'Rourke, Senior Vice President of Finance and Real Estate. I would now like to turn the conference over to Mr.

O'Rourke. Please go ahead, sir.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us. Our earnings release was distributed after market closed yesterday, and it outlines our operational and financial results for the 2020. All related materials, including a link to the live webcast, are available on our website at investor.rentacenter.com. As a reminder, some of the statements provided on this call are forward looking statements, which are subject to many factors that could cause actual results to differ materially from our expectations.

These factors are described in our earnings release issued yesterday as well as in the company's SEC filings. Rent A Center undertakes no obligation to publicly update or revise any forward looking statements. This call will also include references to non GAAP financial measures. Please refer to our first quarter earnings release, which can be found on our website, for a reconciliation of non GAAP financial measures to the most comparable GAAP financial measures. I'd now like to turn the call over to Mitch.

Speaker 2

Thank you, Daniel, and good morning, everyone. Thank you for joining us. We will be providing a voiceover to the presentation shown on the webcast or can also be found at investor.rennacenter.com. So starting on Slide three, the coronavirus has put significant stress on our economy. And on our organizations, we all adjust to social distancing and other governmental measures to combat the pandemic.

We've worked extremely hard to ensure the health and safety of our employees, customers, and suppliers, which is our number one priority, while making sure we're addressing our customers' needs. Many are affected by this crisis. We are sensitive to their condition and focused on reinforcing the attributes that have made Rent A Center a trusted partner for over three decades. The responses highlighted the strength of our organization. Our people have gone above and beyond in so many ways, from providing masks to keeping everyone safe, to implementing curbside pickup, and keeping the increased volume of e commerce deliveries moving smoothly.

Their hard work and dedication, especially of our frontline coworkers, inspire each of us every day, I'm incredibly proud of their efforts. Their response has also underscored the relative strength of our lease to own model versus traditional retail. It was the case in the Great Recession when lease to own sales outpaced general retail, and it's proving to be the case in the current economic environment. While this situation continues to play out, our metrics thus far are performing better than we initially expected when this pandemic started. April was a solid month, helped by government stimulus and e commerce increases.

Financial stress is not new to our customers, and the slowdown appears to be having a more substantial impact for retailers outside the lease to own channel we serve. Our model is unique in that it features a revenue stream from lease payments. It also has low loss rates as customers generally return product if they can no longer make payments, which we then re rent. As a result, even though revenue has been impacted slightly by a small portion of showroom closures, we continue to generate recurring revenue and demand for essential products such as appliances and computers that's been strong. Turning to Slide four, digging in a little deeper into revenue performance and what's happening in our stores, the first quarter marked the ninth consecutive quarter of positive same store sales in the Rent Center business.

And our growth is still in the high single digits at over 7% from a two year perspective. And since the beginning of the pandemic, almost all of our Renaissance stores have remained open to address needs based activity from our credit constrained customers. While most remain fully open, at the peak, about 25% of our locations were operating with a closed showroom. That's come down to about 19% as state and local governments move to reopen their economies. We have strived to operate in compliance with applicable local, state, and CDC guidelines, and we're well prepared to move forward with further showroom openings as areas allow.

We also operate in retail partners through our preferred lease segment, where we continue to see strong invoice volume versus last year of 17%. While many of those stores were closed during the March, we benefited from the recurring revenue nature of our lease agreements. About 65% of our staff locations are now up and running in retail partners with open stores, and that compares to only about 25% at the March. Our virtual channel saw a dip in applications in March and April, but the demand is trending back towards normal levels. Preferred lease is an important strategic business for us, but it's not yet a substantial portion of our business, so the impact to our overall operating results has been muted and we've been really pleased by payment activity in the segment.

And as those retail stores reopen, we're seeing strong demand for our lease to own program. Sales for the quarter increased modestly, driven by same store sales increase of 1.7% in the Rent A Center business and the addition of the Merchants Preferred Virtual solution. We're encouraged by trends we're seeing in e commerce, which experienced growth of over 100% in April versus last year. First quarter adjusted EBITDA remained consistent with the 2019, while non GAAP earnings per share grew by almost 15%. There will be an impact from the pandemic in the second quarter as it compares to last year, but we believe it will not be near as severe as traditional retail as we expect our revenue decline to be 10% or less with the potential for a lower impact on EBITDA.

Turning on Slide five. We're committed to investing in strategic priorities that we believe have the potential to steepen our long term demand curve by improving the customer experience. E commerce is clearly one of those. We responded to widespread social distancing by accelerating initiatives to enhance customer service, add new payment options for our unbanked customers, and implement additional e commerce functionality. These initiatives are improving traction with both new and existing customers.

In addition to our digital strategies, overall demand is being helped by the government stimulus and our own internal programs. The majority of our customers qualify for The U. S. CARES Act and many have used stimulus funds to make rental payments. In fact, the day that direct deposit government stimulus payments were sent out, we saw a material increase in demand and revenue.

And we expect further benefits from stimulus as the mail checks go out in waves all summer. We also offer an internal program called Benefits Plus, which includes an unemployment benefit underwritten by Aon that enables eligible customers to become unemployed to keep their merchandise during this difficult time, which is providing nice additional support. Skip selling losses in each of the segments performed in line with expectations for the quarter. Most of our products are necessities that our customers want to keep, and we're working to help them do just that, even providing payment extensions in some cases. In addition to adding digital capabilities to support demand, we're making continued progress to streamline operations, and I want to stress that these initiatives are really paying off.

We've been able to react faster and work smarter, and that's helped offset some of the near term headwinds from the response to the virus. Importantly, the focus on optimizing costs will have long term benefits as well. To use just one example, we made enhancements to our centralized contact center as we reduced labor hours in the staffed preferred lease stores. We believe there's a long term opportunity to become more efficient at collections as we free up store hours to support additional sales. Our financial condition is strong with substantial liquidity as we move forward on our strategic plans.

We ended the quarter with $183,000,000 in cash and no debt maturities until 2024, and we've prioritized our cash for operations. We are expecting sequential improvement in cash flow in the second quarter and are continuing to invest in our strategic priorities. We've also declared our second quarter dividend consistent with historical amounts. Based on our experience during the Great Recession, we expect demand for our products and services to continue to increase as prime and subprime lenders move back up the credit scale. The demand increases we've historically seen at the top of our funnel typically more than make up for any short term impact we see during recessions.

We put a lot of time and effort in improving the customer experience, and we're confident in our ability to execute on our strategic initiatives to capture white space opportunity via digital and virtual. We see numerous opportunities to gain market share in the Rent A Center segment. And we also believe the stress on traditional retailers is enhancing our growth prospects for preferred lease. Our conversations with potential retail partners show that they are looking for ways to improve their sales as the virus accelerates change. We have a strong balance sheet and a flexible partner model versus competitors that are not as well capitalized, particularly at the regional level.

Really some great opportunities for us there. And with that, I'll turn it over to Maureen to discuss the first quarter financials in more detail.

Speaker 3

Thanks, Mitch. As you can see on slide six, consolidated earnings were favorable to last year with an increase in the top line and a slight decline in the adjusted EBITDA margin. Consolidated total revenues were approximately $7.00 $2,000,000 in the first quarter, an increase of 0.8% versus the same period last year. The gain was driven by addition of the Merchants Preferred virtual solution and a same store sales increase of 1.7% in the Rent A Center business, partially offset by refranchising and rationalizing our store base. Adjusted EBITDA was $65,500,000 in the quarter, and adjusted EBITDA margin was 9.3% versus 9.5% in the same period last year.

Non GAAP diluted EPS was $0.67 up 14.6% over last year. Other benefits to non GAAP diluted EPS included lower interest expense versus last year and a lower tax rate of 18.4%, down from 22.9 in the 2019. Turning to segment results, starting with our largest segment. Revenues for the Rent A Center business, which includes corporate owned U. S.

Stores and rentacenter.com, were $455,000,000 in the first quarter and benefited from a 1.7% increase in same store sales. To provide some context for the coronavirus impact, same store sales in our Rent A Center business increased 2.8% in January, 4.8% in February, and were down 2.5% in March as the initial impact of the pandemic took effect across The U. S. In April, trends improved sequentially driven by government stimulus payments. Adjusted EBITDA for the Rent A Center business was $74,500,000 up two forty basis points as a percentage of segment revenue versus the same quarter last year.

The performance was driven by better gross margins and lower operating expenses as we continue to streamline the business. As a percentage of revenues, skipstolen losses for the Rent A Center business were 3.9%, a 20 basis point decline from the 2019 and up 20 basis points versus the year ago period. Preferred lease total revenues increased 10% in the first quarter versus the same quarter last year. The performance reflects a 17% increase in invoice volume, driven by the addition of the Merchants Preferred virtual solution. Adjusted EBITDA for preferred lease was $18,800,000 or 8.7% of revenue.

The year over year change in EBITDA as a percentage of sales was driven by investments to support future growth, the mix shift to virtual locations and the impact from the coronavirus from closed retail partner locations during the March. Skipstolen losses were 12.2% of sales for the Preferred Lease segment in the first quarter, up versus last year before we increased our mix of virtual locations, but down 200 basis points sequentially. Profitability in this segment is expected to improve as we scale the virtual offering. Finally, in the corporate segment, first quarter expenses increased $5,500,000 driven by the addition of the Merchants Preferred virtual solution, rent expenses resulting from the sale and partial leaseback of the corporate headquarters and timing of our annual stock award grant. Moving on to the balance sheet and cash flow highlights.

Cash generated from operating activities was $47,400,000 for the first quarter. The company ended the first quarter with $182,900,000 of cash and cash equivalents and outstanding indebtedness of $362,000,000 Now turning to Slide seven. As we outlined in our March update, we are not providing guidance for the year given the fluid nature of the coronavirus and the varied efforts by the states to contain the spread and reopen their economies. That said, we do want to provide additional color on our near term outlook and the adjustments we're making to address these challenges. There will be an impact overall in the second quarter as it compares to last year, but not as severe as many traditional retailers are experiencing.

Based on what we know today, we expect second quarter revenue to be down 10% or less versus last year, driven by lower demand from closed locations and lower collections. As Mitch noted, we have transformed the organization to incorporate a more variable expense structure, And we expect that, coupled with our ongoing focus on reducing costs, to result in an EBITDA decline for the second quarter in the same range to slightly better than the impact in revenue. Additionally, given the improved capital structure and lower interest expense versus last year, earnings per share is expected to be essentially flat to last year during the second quarter. We do not expect to see material pressure on skipsdolen losses for the year. As you know, our contracts are leases and unlike a traditional subprime lender, returning the merchandise is always an option for our customers.

Additionally, any pressure reduced beyond skipstolen losses is reflected as a noncash write off of inventory when customers stop paying and do not return the merchandise. Turning to expenses. We've made a number of additional adjustments to reduce operating expenses, including executive pay reductions, temporarily furloughing employees in stores and at our corporate office, reducing store hours in some cases, and where possible renegotiating real estate leases. We plan to build back in some expenses as we move into the second half of the year, which has the potential to impact our seasonally low third quarter. That said, we believe our actions will further streamline costs and improve efficiencies benefiting future years.

Regarding cash flow, inventory purchases and capital expenditures have been reduced in order to partially mitigate the impact of the coronavirus. In addition, we were able to take advantage of the net operating loss carryback and deferred payroll taxes available as a result of the CARES Act. We are tracking to a sequential improvement in free cash flow as compared to the first quarter twenty nineteen. Our near term outlook of down 10% or less in revenue and EBITDA for the second quarter reflects the resiliency of our lease to own model and our swift actions to reduce costs. Turning to Slide eight.

Our financial position is strong with total liquidity of over $230,000,000 and net debt to adjusted EBITDA at 0.7x at the end of the first quarter compared to 1.4x in the year ago quarter. Our liquidity at the April is actually up to $280,000,000 an increase of approximately $50,000,000 since the end of the quarter, driven by strong performance in April. Our capital allocation priorities are to continue to invest in the business and return value to shareholders. In the first quarter, we increased our quarterly dividend from $0.25 to $0.29 and repurchased 1,460,000.00 shares for $26,500,000 returning approximately $42,000,000 in capital to shareholders. As Mitch mentioned earlier and given our healthy financial position, we intend to pay our second quarter dividend on June 1.

As always, detailed income statements by segment are posted to our Investor Relations website, and we anticipate filing the 10 Q on May 11. Thank you for your time. I'll now turn the call over for questions.

Speaker 0

Thank you. And at this time I would like to remind everyone if you do have a question, please press star one on your telephone keypad. Okay. And your first question will be from the line of Bobby Griffin with Raymond James.

Speaker 4

Good morning, everybody. Thank you for taking my questions. I hope everybody's doing well and staying healthy. I guess the first question I want to ask Mitch and Maureen is around the portfolio nature of the business. Given that trends are starting to improve here in April and more states are opening, will February largely be the low watermark for revenue, or does the portfolio side of the business mean that, you know, the impact could actually be worse in March from a revenue decline perspective?

Just trying to understand how this business will kinda trend going forward if we stay on the same path of of more openings and slightly, sequentially improving trends by month.

Speaker 2

Yes. Good morning, Bobby. I think at this point, it's too hard to say what's going to happen to the portfolio between now and the end of the quarter, which is what will drive the third quarter revenue. So I don't know if it's the low watermark or not. It's really too much it's too hard to forecast.

All we can tell you is demand is really strong right now, You know, as you can see, April was April was good. Demand was strong. But where the portfolio ends, I I don't know. We we can't predict the third quarter yet to say that the second quarter is the the low watermark or not.

Speaker 4

Like, let me I guess, let me maybe ask it a different way. If based on the guidance of down 10% for February revenue, are you assuming that contracts written into the portfolio modestly improve in in May and June versus what they're doing today in April?

Speaker 2

Well, we expect the demand to stay strong for a couple of reasons. The, you know, the stimulus is still going. There's paper checks getting mailed out all summer long, So we expect that to continue to help. Tightening credit, as we've talked about, that we're already seeing in the marketplace as credit tightens up, it pushes more demand in the lease to own transactions. So we expect demand to be to continue to be strong, not just in April not just in April thing.

Speaker 4

Okay. And then I guess, lastly for me, you mentioned it briefly there in your response. But when when you talk to kinda your your third party retail partners, and and you look at kind of the pipeline there for preferred leasing, are they starting to mention already that the first tier and second tier offerings that they usually use for credit are changing, and you're seeing more people, either new customers or current customers having to rely on that rent to own offering? Or is that typically three, six months that happens three, six months after we get a, economic shock like we're getting now? How quick does that credit conditions typically change?

Speaker 2

We think it's happening already, and it's not just from anecdotal feedback from retail partners. It's I mean, we see and we have a decision engine in the preferred lease business. So we see the customer that gets that comes into the engine from a credit standpoint, not necessarily a FICO score standpoint, but our own credit decisioning, both in staff locations and in virtual locations. And we're seeing a higher quality credit customer coming into the decision engine already.

Speaker 4

Okay. I appreciate that. That was both very helpful. I'll jump back in the queue. Thank you for answering my questions.

Speaker 2

Thanks, Bobby.

Speaker 0

Hey. And your next question will be from John Baugh with Stifel.

Speaker 5

Good morning, and congratulations on a great first quarter in a tough environment. I'll jump right in. Any comment, Mitch, on what's happening with pickups? Obviously, skips, lost and stolons are in good shape. But I'm curious, are you having to pick up and then re rent much more frequently today?

Speaker 2

No. We haven't seen that yet, John. You know, we're working with customers. They want to keep our products like we always talk about. The majority of our products are essential products.

The customers want to keep them, you know, the customer is not necessarily under any more pressure than they normally are. I mean, think as you know, this customer is under pressure all the time. This obviously is a tough time for a lot of people, but I don't know that it's necessarily more specific to our customer than maybe others. You know, keep in mind the majority of the essential workforce probably fits in our customer demo. So we're not seeing, you know, anything dramatic there.

And the people that need help, we're working with them to keep it on rent. You know, we haven't been in the field a whole lot the last six weeks either. Will there be a few more pickups, you know, in May and June than normal? We haven't seen it yet. I think there'll probably be a few more, which on one hand is okay because it you know, we buy less product that way to re rent to others because the demand I'm comfortable saying the demand will outrun any return in the pickups as more and more people get pushed into the lease owned transaction, as credit tightens, as people are looking for more flexible options and so forth.

Speaker 5

And then you mentioned the Aon benefits. Could you just sort of review for for MyBenefit and others, you know, how many customers have that? Assume that's on the store side. And and how that's kinda working, what you're seeing, how many people are utilizing, that benefit now, and kinda kinda how the pluses and minuses of that are are working so far.

Speaker 2

Well, it's all pluses. About 70% of our customers have agreements that have the benefits plus attached to their agreement, which includes the unemployment benefit, like I said, underwritten by Ann, which allows eligible customers who become unemployed to keep their merchandise. I would tell you that we've it's certainly gone up from normal circumstances, but it's not an avalanche of claims for that. I really think we're seeing it's not like I'm not seeing an unemployment rate at our demographic higher than, you know, what maybe is impacting middle income or higher incomes. Again, I think the majority of our majority of the essential workforce out there is in our demo.

So it's helpful. We're glad we have it. We make money when we sell the product, and now it comes in handy. And Ann's processing the claims. More claims than normal, of course.

But it's not it's nice support. I mean, it'll help us, you know, a million or 2 a month in money coming in from someone like Aon and helps the customers keep the product because they make the payments for them. But it's not like it's going to be 20% of our revenue or anything like that, John. We're just not seeing those kind of unemployment rates with our with our customer. It's up.

I can't tell you the exact number. I don't know what the exact number is, but it's not. Okay. And I think that's just that there's an impression out there that that it's the the lowest income's got to be heard the worst. And and I don't know that that's the case.

Obviously, time will tell. But I like I said, I think, you know, the majority of the essential workforce that's working in this country right now is our is our our customer. So it's it's certainly helpful, we're glad we have it.

Speaker 5

And staying on this theme, You mentioned payment extensions in some cases. Correct me if I'm wrong, but you do that to some degree all the time. So the question is, are you doing it meaningfully more? Or to the comments you just made, no. It's not that bad, slight slightly more.

What what what are you seeing there?

Speaker 2

Yeah. More the latter. I'd say a little more than slightly, but it's not, again, it's not an avalanche of having to do that. We'll do it to help the customer keep the product, but it's a circumstance by circumstance decision that the stores make and that for a preferred lease our contact center makes. You know, it's up, but it's not easy.

You see what we're forecasting the revenue to be in the second quarter, you know, less than 10% drop from last year. So it's obviously not a huge number. Because if we do the extension, it's not like that would count towards the revenue. If we do the extension, you know, if if it was that big, that our revenue forecast for the second quarter would be, you know, worse than what we're what we're telling you.

Speaker 5

Correct. Okay. And then you mentioned on the preferred lease side that I think that 25% of your customers or your retail partners were were closed at the March, and 65%, I think, were open now, and you're, quote, trending toward normal. I guess kind of two part question. Most of those retail partners are furniture, if I recall correctly.

And you I would assume even if they're open now, their business is still off substantially versus previrus being open. So I'm I'm wondering, you know, trending back towards normal, sounds like you're close to getting it all back. And I just find that a little hard, I believe. But what are your expectations on that business revenue tracking? And I assume we'll get most of the stores open within the next sixty days, if not sooner.

Speaker 2

Yeah. And the numbers we that that I said in the prepared comments, John, only 25 at the March, only 25% were open, and now it's 65. So we had, you know, 70 the inverse of that, obviously, 75% closed and only 25% open at the March. Now 65% are open. So and I agree with you.

I think by the end of the quarter, if not sooner, they'll all be open. I think we've been pleasantly surprised even in the furniture categories that the demand has been strong. I think furniture retailers will tell you, because I talk to a lot of them, will tell you they've been surprised. Back in the March, the rush was essential products like computers and appliances and so forth. And the longer people are in their homes, I think what we're seeing, and as I said in talking to some furniture executives, CEOs of some of the bigger furniture companies, they're you know, the belief is now based on what they're seeing is that anything for the home gonna do well.

Anything you know, as people are inside more and staying home more and, you know, not only through the pandemic, but even afterwards, you know, there's a belief people will be home more and out heat less and those kind of things as as you know. But it seems like anything for the home, the demand is high. And I'm not saying that, you know, furniture executives will tell you they're at a you know, they're doing better than last year. But what they thought they would do when they reopen compared to what they're doing, they're doing a lot better than they thought. There's a lot of pent up demand there.

And a lot of the stores are opening and getting and we're getting back to normal levels ourselves. So keep in mind, John, they could be 20% off last year and we could still be doing more as credit above us tightens up. So I think in a furniture store, because of social distancing and so forth, they are still going to be down some, not as bad as people thought when they started. When they reopened, they're not down as much as they thought they were. And we may not be down at all based on credit being tighter above us.

Speaker 0

Okay. Your next question is from the line of Brad Thomas with KeyBanc Capital. Please go ahead.

Speaker 6

Hi. Good morning, Mitch. Good morning, Maureen. And let me add my congratulations on some nice execution here of late. Let's see here.

I wanted to just follow-up on on some of John's questions on the direct side of the business. I apologize if I if I missed it. I'm having trouble getting the slide deck up. But can you talk a little bit more about what the invoice volume growth rates, what those trends have looked like as you went through March and April and how it's tracking here in early May?

Speaker 2

Well, the 17% increase in the invoice volume on preferred lease in the first quarter, and we pretty much lost the last two weeks of March. It was very, very low those last two weeks of March. 75% of those stores closed. So if you factor in a you know, those two weeks were about 15% of the quarter, I mean, that 17% gets back to where we were like in the fourth quarter in that 30% range if we hadn't lost those last two weeks. So and as I said, as they reopen, the demand is strong.

I don't have a forecast for you on what we think the invoice volume will be in this quarter. But as you see, we expect it to be pretty strong based on the kind of revenue that we're forecasting for the quarter.

Speaker 6

Got you. Okay. And can you remind us how much Merchants Preferred would have contributed to revenue and invoice volume here for the quarter as being an acquisition?

Speaker 3

Yeah. Revenue in the quarter for preferred lease was 23,000,000, and it generated invoice volume pretty similar to what what they contributed last quarter, around the same range as the revenue number for the quarter.

Speaker 6

Okay. Great. And then I guess, Mitch, in terms of a bigger picture question here, you know, as you think about the Rent A Center side of the business and the preferred lease side of the business, how how does the new world that we're in, how does it change strategically? How do you like to position these businesses as you think about the strategy and some of the investments you're going to be making over the next couple of years?

Speaker 2

I think it's so much more of the business is going towards the web, ecom. We're as we said, we're double in April where we were a year ago as far as orders coming in on the web. And we wouldn't expect it to stay at double, but we would expect it to stay high. And we think more this isn't going to be a one and done thing as far as more people shopping online. It's going to continue.

We're making investments in it. You know, one of the maybe one of the most telling stats I can give you, Brad, is when we say April was double, about two thirds of the customers that come through our website and e comm site and put their put an order in through our e comm site, about two thirds of them are new customers that we haven't seen do business with us before, or at least not in a very long time. And that two thirds new customers is holding as the numbers doubled from last year. So not only has the website, the ecom business doubled, the two thirds being brand new customers has held. So that new customers has doubled too.

And I think that's a real telling stat. And we'll continue to invest there. And I think, you know, that's partially because of our value proposition, it's partially because of credit tightening up above us, flexibility, the fact that this is a lease and not a sale, all those kind of things. And so we'll continue to invest there. We've added additional payment options for the customer, both banked and unbanked customers, so they can pay in multiple places.

We've made it easier to sign up for auto pay. We've added texting capabilities, both on the sales and the collection side. So a lot of investment on the ecom side. And that's why we say, well, we're going to come out of this stronger. And so from a strategic standpoint, you're talking about preferred lease or rent a center, ecom is probably the biggest change from a not that that wasn't part of the strategy, but it just got a lot more important and a lot more of our investments going there.

And we just couldn't be more thrilled with the fact that it's doubling in April and through the first few days of May, and that the two thirds of new customers have held. So that it's not like our customers are just sitting home.

Speaker 6

Great. That's very helpful. Thank you, Mitch.

Speaker 2

Thanks, Brett. Thank

Speaker 0

you. And your next question will come from the line of John Rowan with Janney. Please go ahead with your question. John Rowan, please press star one again.

Speaker 2

Maybe on mute, John.

Speaker 0

Okay. His line is open now.

Speaker 7

Hi. Can you hear me now?

Speaker 2

Yes. Hi, John.

Speaker 7

Hi, guys. Good morning. So as you look into 2Q and you've made the comments about having a big increase in cash flow, What are your plans? Are you going to maintain a high level of liquidity and a lot of cash? Or would you look to actually reduce debt in 2Q?

Speaker 3

Yes. So we're evaluating that. We initially drew down an additional 118,000,000 when the pandemic first started because of the uncertainty and and just to make sure that we had access to our cash flow and adequate liquidity. Given the increases in cash flow that we're expecting in the second quarter, we'll be evaluating that. We'll know a lot more about the state governments opening up their economies and what impact that's gonna have on our business and and may feel comfortable at some point within the quarter or soon after to reduce that debt.

Speaker 7

Okay. And then can you remind me, is there any online only business in Merchants Preferred, meaning that you don't actually that the merchandise you shop for online and then lease to own transaction is created fully online? Or is it primarily the virtual lease to own in store?

Speaker 2

Well, it's a combination. We don't yet have any retailers that only do business online. But, you know, in our generally speaking, in preferred lease, about 30% of the location starts online with that retailer. So it's about 30% of that business, like I said, but it's not 100% anywhere where they don't or not do business with anybody yet that doesn't have any stores. Okay.

Thank you. Thank you. Thanks, John.

Speaker 0

Your next question will come from the line of Kyle Joseph with Jefferies.

Speaker 8

Apologies I hopped on late if I do ask something that was stated earlier. I just wanted to get a a sense. You know, you guys have given us a lot of color on on merchant's preferred or sorry, preferred lease. But I kinda wanna wanna cover, you know, retail demand for the virtual rent to own product? Have you have you seen an an increase in inbound calls from retailers looking to add the virtual rent to own to their to their product suite?

Speaker 2

Yeah. We it's it's pretty active there, you know, as as, you know, retail goes through the the the such a, I don't know what you want to call it, such a huge change so fast and accelerated change, if you will, we think there's going be great opportunity for us to add accounts, large accounts and small accounts for that matter. But we think there's going to be a huge opportunity as they look for ways to replace tightening credit primarily. And so we think it's going to be a better environment coming out of here for the preferred lease business than than even before.

Speaker 8

Got it. And then just it'd be helpful to get get a sense for for your thoughts on the on the health of the underlying consumer. You know, obviously, we've had unemployment claims go up a lot, but we've had stimulus and federal unemployment to offset that. You know, obviously, that's scheduled to end at some point, but can you just walk us through where your customer is right now at in general and where you see that heading over the next, call it, months and quarters?

Speaker 2

Well, I think the customer is in pretty good shape right now. You know, with the stimulus, they've got more disposable income. We're seeing demand at really strong levels. As I've said a couple of times this morning, Kyle, that our customer is under pressure all the time. You know, what we've seen in past recessions is, you know, more customers get pushed, you know, come into the top of our funnel as credit tightens.

And to the extent there's any that we lose out of the other side of the funnel that we can't keep on rent that struggle too hard, what we've seen in the past is more customers get pushed into our transaction than get pushed out of the transaction during a recession. And when you think about our e comm business being double what it was a year ago and our new customers coming as part of that number also doubling, I'd say there's a lot of customers getting pushed into the transaction, and, you know, it's kind of under the belief it's gonna be like past recessions where we do pretty darn darn well.

Speaker 8

Got it. And then, you know, given this this environment and the shift to ecommerce, can you give us a sense for how how sales have have the mix shift has shifted and and impacts on margins? Just, you know, your the margins at the rental center business was, was much better than I had modeled for, and and I believe up year over year. So can you give us a sense for your outlook there?

Speaker 2

Yeah. The the margin's probably they are pretty good in the run center business, probably just because of the changes we made to the value proposition, not necessarily because of shift in product mix. Certainly when this started, you know, there was more push on the essential products. You know, laptops were hot, appliances, you know, refrigerators and freezers and the like. You know, even game consoles as people were home more, I guess trying to give the kids something to do.

Or maybe it's more adults these days. I don't know. I'm not a gamer. But we ran an awful lot of game consoles. And but as we you know, six weeks into it now, the mix is getting pretty even.

You know, the furniture is starting to move again and moving well with good demand. And TVs are going again. And I think right now it's spread out over the all of our products as the as people stay at home more. It's not just the things they had to have real quick, like a a laptop to work from home or for the kids, you know, because they're they're homeschooling and so forth. It's pretty well spread out through all of our product categories now.

Speaker 3

And the mix of e commerce sales as a percentage of revenue was 16.5% in the quarter, which was up from 14.7% in the '19. So we continue to see that increase. And then, of course, with some of the closed showrooms and some of the shift in customer behavior to shop online, we saw an even more dramatic increase this past quarter.

Speaker 8

Got it. That's really helpful. One last one for me. Just highlight your your outlook for the second quarter is is very impressive in this environment. Obviously, you guys had revs coming down to a certain extent.

But in terms of modeling, you know, what what line items in terms of expenses should we ex expect to be the big offsets there?

Speaker 3

Yeah. A lot of the the savings on the operating expense side come from temporarily furloughing store employees. Where there's cases of closed showrooms or with preferred lease, the retail partner is closed. We've temporarily furloughed our employees. There's also decreases that we're seeing in real estate costs.

We've renegotiated leases with a pretty significant number of our landlords, taken either rent deferrals or even rent reductions. And then there's we didn't evaluate any nonessential type of spend to to try to counteract some of the negative impacts that we're seeing from the top line. We will see a modest increase in skipstolen losses in the second quarter. However, we're doing everything we can to try to to offset those losses by being smarter about our costs and and reducing costs where we can.

Speaker 2

But the and the biggest line to summarize what you just said, Maria, would be the labor line.

Speaker 3

Right.

Speaker 2

You know, if you're the the reason that the revenue is down less than 10% and EBITDA is is down less than 10% as well or will be down less than 10% as we forecasted today, labor is the biggest line you would be adjusting in a model. Right?

Speaker 3

Right. There's others that are more variable expenses. Like, for example, you know, we're doing less deliveries, less pickups, and so there's a delivery cost lower.

Speaker 2

And gas prices are down significantly,

Speaker 3

so that helps drive it, and any other variable type of expenses will be lower in that quarter.

Speaker 2

Yeah. Kyle, you know, we've for a lot of years, people thought of us and we even said, you know, we we had a real more of a fixed cost model. And we really, over the last couple of years, in having to turn around the company a few years ago, you know, we really turned our labor model into something we could call a variable model now. And we don't have any of the minimums. Like, you got to have a minimum of this number of people I'm sorry, got a minimum of this number of trucks, and it's very much variable now.

And as some showrooms were closed or as demand was soft before the stimulus checks came out, then we, you know, we were able to reduce the labor. So the labor is a variable line for us now as compared to what it has been in the past.

Speaker 8

Really appreciate that. Very helpful. Mitch, Maureen, thanks so much, And echo others on congrats on a great quarter despite the rough operating environment.

Speaker 2

Thanks, Kyle.

Speaker 0

Your next question will come from the line of Vincent Kentick with Stephens. Please go ahead.

Speaker 9

Hey, thanks guys. Good morning. Appreciate the guidance you gave for the second quarter and that it's very strong guidance. I appreciate that. Could you possibly help break it out by segment levels of how you're thinking about the Rent A Center stores versus preferred lease for revenues and earnings?

Speaker 3

Yes. So we do expect to see a a top line impact that's fairly similar between the two segments. But from an operating expense standpoint, as we just walked through, there's a number of more items that we can address on the Rent A Center side to to help loss offset some of the impacts versus the preferred lease side where we've seen more of the closures and and more of that impact without as many opportunities to address the expense side. We have looked at reducing the labor lines within the preferred lease segment as well and have done temporary furloughing of employees. We've also shifted some of the collections activities to our centralized call center to try to improve the efficiency and and help improve the the margin.

But we will see more of a a pressure on the skipstolen losses in the preferred lease segment versus the Rent A Center business where we're able to, you know, pick up the product. We have more of a relationship with the customer and should see very modest impact on skipstolen losses within the Rent A Center business.

Speaker 9

Okay. That's very helpful detail. Thank you. And I guess on that, when I think about the skips, solans and bad debt and also how you think about maybe depreciation of the items, Any thoughts or incremental, say, reserves that you have to take there? And I guess maybe one related question, but does the new CECL accounting methodology affect your accounting at all?

Speaker 3

The the CECL impact was only experienced in our installment sales, Get It Now Home Choice business. It was less than a million dollars and and did not affect our

Speaker 2

Rent

Speaker 3

A Center or Preferred Lease businesses. And the the skip to loan losses that we talked about in the first quarter, it we did look at the reserves and did take some adjustments where needed, but not a significant adjustment made for COVID-nineteen. We'll see reserve adjustments likely in the second quarter to address potential pressure in skipstolen losses.

Speaker 2

But anything we think we might need to take there in the second quarter is built into the fact that we still think EBITDA will be within 10% of last year and total EPS. So when you factor in the interest savings, it will be pretty flat with last year. So it's not gonna be a huge number. There's other there's other offsets. You know, we're and just to remind everybody, it's it's this is still a lease and not a sale.

I mean, when when things get tight, people can just return it. We can rent it to re rent to somebody else. And we work with our customers to keep them on rent. But this isn't a, you know, a subprime loan where if they don't have the money, there's nothing much to do but write it off write off balance. So it's a much more flexible business model in lease to own.

And we've seen that. You can go back and look at 2,008 and 02/09 losses, and they're just not there.

Speaker 3

Right. And if they are write offs, they're inventory write downs. They're not, you know, cash impacting items. And then one other thing to point out, you know, we have seen some pressure on collections, but that's already reflected in our revenue numbers since we don't record the revenue until we collect payments from our customers. So that's already impacting our business and is reflected in our color about the second quarter with revenue and EBITDA being down 10% or less.

Those are reflected with the lower collections, our estimates for what the skipstolen losses and reserves will look like, and we still believe that we can perform with pretty decent margins given this environment.

Speaker 2

And I think, Vincent, all that that all of that reflects on the operations team in both Rent A Center and the preferred lease side that what a great job they're doing, not just management, but even more specifically our frontline store coworkers of of what a great job they're doing during these trying times to help the customer get new products as well as help keep people on rent. We additional ways for customers to pay than we had just six weeks ago, you know, as far as payments online and so forth. So there's been a really great team effort on making it easier for the customer to pay in a great effort by our store employees.

Speaker 9

Yes, it definitely shows in your results. Appreciate that. I guess last question. So on the topic of the tightening, maybe competitors or I should say lenders who are more in the prime or near prime space. In the last recession, you took a lot of share and grew a ton of profitable business from people who aren't typically shopping at your stores, but because of the tightening that came down.

I guess what you just curious what you're seeing today in terms of who's coming into the stores physically and virtually for your e com business. Are the same type of customers who you'd interact with? Or are you actually seeing different customers, maybe higher tier customers? And then for those customers that you might not normally be seeing but are seeing now, are there any specific types of products you're buying or any like differentiators there? Thank you.

Speaker 2

Yeah. Good question. What we know is that the customer we're seeing has a higher when we put them through our decision engine, is a higher comes out with a higher quality score than before this, which to us means the the lenders above us, subprime or prime lenders, are pushing more down because we're getting a better credit coming into our transaction. As far as the and then and then on the on the website, the fact that our new customer traffic is double what it was a year ago, it tells us that there's a lot of new customers coming, and they're a higher quality customer. And I mean higher quality from a credit decisioning, not necessarily the person.

Don't want to catch any aspersions there. But just that from a credit quality standpoint, they're a higher quality customer. And the fact that it's doubled. From a product mix standpoint, know, doubled as far as the e comm traffic with new customers. As far as the product mix, no, we're not seeing any shift there.

Again, early on it was more towards things you'd consider a little more essential, but now it's spread out. I mean furniture, televisions, and things you'd consider more essential these days like laptops and appliances, refrigerators and so forth. But early on it was more just the essential products and now it's a pretty even spread of what we normally see.

Speaker 4

Okay. Perfect. Well, thank you for the detail. Thanks. Thank you.

Speaker 2

Thanks, Vincent.

Speaker 0

All right. And there are no other questions at this time. I'll turn the call back over to Mitch Fadel, CEO, for final closing remarks.

Speaker 2

Well, thank you, operator. As I was just mentioning, I'd like to take one more opportunity to thank our SOAR coworkers who have done such a great job safely taking care of themselves and our customers, all while dealing with an increase in demand for our products and services. And I'll tell you, our frontline SOAR coworkers deserve a tremendous amount of credit, and I want to point that out again. And I want all of you to know how much we appreciate you out there in the stores. I was out visiting some stores the other day and I just can't be more thankful of the effort we're getting out of our store coworkers.

They're doing a great job. And I wanted to take one more opportunity to say thank you. And thank you to everyone else who joined us on this call and for your continued support. So go out and have a really good day, everyone, and stay safe.

Speaker 0

Thank you. Thank you everyone again for joining today's call. This concludes the conference. You may now disconnect.