Q3 2020 Rent-A-Center Inc Earnings Call

[music].

Good morning, and thank you for holding welcome to rent a center's third quarter earnings Conference call. As a reminder, this conference is being recorded Thursday October 29, 2020 were speakers today are mr. much Verdult Chief Executive Officer, Bret Just center worried short Chief Financial Officer Anthony.

Josh was executive Vice President of rent a center business, Jason Hogan Executive Vice President of preferred Leach and Daniel Rohr, Senior Vice President of Finance and real estate.

I'd now like to turn the conference over to Mr. Robert Please go ahead Sir.

Adjusted EBITDA growth and profitability, we're the strongest we've seen in years.

And Marina hotline or increased guidance in a moment, but the key takeaways from my perspective.

It reflects increases to consolidated adjusted EBITDA.

Non-GAAP EPS and free cash flow and importantly is not contingent on additional government stimulus.

I think about the journey, we've been on since I came back to the company in 2018, we first had to right the ship.

Attract new customers and dramatically reduce our expenses.

Once we're on the right track, we established our digital growth strategy.

The pandemic is confirmed an accelerated the digital strategies to write appropriately added significant talent to take it all that in the next level.

We brought in an exceptional talent and Jason hold to lead our preferred the excitement Jason has over 20 years of high level Fintech expertise and success.

We mentioned with Anthony Blackfoot, who now leads to run the center segment with his over 20 years experience in Reno Center, and combining such a high level fintech person with arguably the best rental store operating in the industry has this extremely excited about taking the success over the last couple of years to another level.

So today to provide some additional perspective on our strategy, Jason Logan preferred to these segment leader and Anthony Black with so as I mentioned, Lisa reminiscent of business are joining marine and I am today's call. We trust your walk with a better understanding of a roadmap in the sense of the excitement we're all sure about the future.

If you can see on fire for the economic environment remains highly favorable for these stone and we expect tighter credit to remain a tailwind for the business.

That credit dynamics supports our business in times of economic uncertainty and we're seeing the benefits of that dynamic in our financial results.

As we start the fourth quarter, we're continuing to experienced strong demand solid customer payment activity.

Customer to obtaining ownership of a product that higher rates, resulting in strong customer satisfaction across the business.

It's also important to note that we continue to see positive terms without the benefit of further government stimulus.

Preferred lease is adding more retail partners than ever before we make investments in the national sales team expand new merchants and improve activation rates.

Rather than a continuous experienced strong trends with notable strengthened home related products.

We believe the central readily serve for customers coupled with our focused on improving operating performance can continue to support EBITDA growth.

We're particularly excited about our digital strategy as you know it's been a watershed year for digital and social distancing accelerated strategic investments are are already in progress to interact with shoppers in the preferred settings and given our experienced in 2020, we have confidence in our ability to harness digital increase both the overall market and our share of at least one.

To that end is Jason will discuss we're launching a broad digital offer behind our preferred brand.

The overall umbrella is preferred dynamics, which will support a suite of new technology and products around for for these preferred digital and ultimately preferred marketplace.

Or committing significant resources I believe we can expand the preferred partner based broaden the age demographic and introduce more aspirational branch tomorrow customers.

We continue to believe virtual least on this is significantly undisturbed opportunity and we're more than confident in our near term goal of 1.2 billion and prefer these revenue by the end of 2022.

We're also making investments in digital and run the center to drive revenue through customer retention or answer had an outstanding quarter with our strongest adjusted EBITDA margin in years and loan loss rates, even with significant E Commerce Grove.

We believe ecommerce penetration can reach 30% to 40% in the next couple of years and we expect our digital investments to support elevated same store sales and sustainable margins.

Now before I turn it over to Jason I'd like to thank our coworkers our franchisees in retail partners for your dedication to serve customers. During this challenging time.

Thanks, Dr value proposition, our customers has never been stronger in our mission to invest in digital strategies that can support long term growth has never been more relevant.

Jason.

Thanks, Mitch amount.

Ah monitor each year with you today and look forward to sharing our plans for the preferred these business as we move forward.

As many of you know have a long history of bringing disruptive innovation and financial services via technology.

I think we have a fantastic opportunities to grow prefer at least and I'm truly excited about the course of our center.

Turning to slide five.

The third quarter speak to our strong foundation invoice volume grew 34% 16 points over the second quarter as we Onboarding new partners across hundreds of locations and achieved broader diversification across product categories. As many mentioned, we're also becoming more efficient and activating.

Retail partners.

No invoice volume drives revenue growth total revenue increased 93% in the quarter and we expect the invoice volume trend to continue to support accelerated revenue growth.

Adjusted EBITDA was $16 $6 million.

Skip stalling losses improved sequentially as we continue to ramp up our centralized collections initiatives.

The lead portfolio features higher credit quality customers that should allow us to drive revenue and yield as we increase market share.

The investments we need in sales this year are supporting more efficient activation of our growing pipeline of retail partners.

We're excited about partner growth across the spectrum from regional accounts to National Cats.

While the latter takes time to advance we're in the final stages on some truly exciting national opportunities.

At the same time, the stripes were making an digital are benefiting performance across the business with improvements in collections and more of our customers using digital payments.

Turning to slide six our goal is to take that strong foundation accelerate growth by driving innovation that physicians are preferred brand as the leading fintech platform, one that spans modal and E commerce with extended proprietary and differentiated products and services.

As Mitch outlined we've organized the team under preferred dynamics to accomplish that.

As you can see from the slide preferred dynamics as an operating structure to accelerate the pace of innovation and provide a more effective way to onboard new talent and digital expertise as we fast track R virtual strategy.

Preferred dynamics will support preferred leads are foundational lease to own program and we'll also house or work for preferred digital which Leverages mobile web and in store technology to create a seamless lts offering.

Are multi fees two year strategic plan supports a broad set of digital initiatives included in our initial provisional patents week, which is already filed too.

To improve the customer interface reduce friction and support better functionality for retail partners for example are.

Our mobile offering will feature in a more streamlined origination process with better scalability more efficient decisioning and the potential for increased adoption from millennials and <unk> customers.

We've been able to lower the approval process to less than a minute from over 20 minutes, which is truly.

We're also using technology to enable frictionless retail partner Onboarding with seamless integration to retail partner E Commerce platforms.

We're also implementing new marketing strategies to generate more business from existing customers and an expanded potential customer base.

We've created an innovation partner program and are launching pilots with four of our large Nash.

National retail partners in the fourth quarter with our new mobile application and.

And we will have other tangible example share SB turn on functionality.

The average will support our partner growth and should benefit productivity as we add new merchant partners.

Over time, we think our strategy can extend beyond its existing focus to support preferred marketplace and expanded set of strategic partnerships with consumer brands that could greatly increase the total addressable market.

That would increase the existing total addressable market, we see from executing on retail and national partner growth.

Ultimately, we see the preferred brand as a platform where our customers can move fluidly between retail mall and online transactions through a seamless interface to a curated network that expands choices for lease to own customers and create new opportunities for our partners.

<unk> strategy will reinvent the least transaction and I look forward to updating you on our progress in the coming quarters now I'll turn it over to Anthony.

Thanks, Jason let me start by saying I am a proud of veteran rented center with a deep understanding of our culture customers and operations.

Been a pleasure working with Jason and I look forward to continuing to share best practices.

There is a lot we can do to revolutionize the customer experience and many of the things Jason outlined can be applied to rent a center and our franchisees.

As Mitch pointed out sustainability is the hallmark of the rented center story for 2020. It played out in the third quarter as we saw positive trends in customer retention.

Payment activity, even as stimulus and we.

We expect growth to continue as we advanced plans to improve our digital capabilities.

Looking at the quarter on slammed Senate.

Total revenues were up eight 6% and we saw 78% growth in adjusted EBITDA.

Revenue growth in the quarter was driven by a strong portfolio entering continuing throughout the quarter with their collections.

E Commerce transactions increased 71% and it's 21% penetration rate helps contribute to a 12.9% increase in same store sales are 11 consecutive quarterly increase to.

To support growth, we're adding functionality to improve the customer experience at the point of sale that includes a multi store E Commerce test using the preferred lease decision in June.

We're expanding electronic payments, which is driving fewer merchandise returns and better customer payment activity.

And we're incorporating digital features to improve the communication process. Our customers have clearly shown a preference for texting for example, and next improving net promoter scores and improving labor efficiency.

Turning to slide eight as you can see ecommerce sure. The overall revenues continue to improve during 2020, and we're driving more revenue from the chain.

As we look forward using digital to profitably evolved or at least the old model remains our top priority.

Unlike many retailers ecommerce as a profitable and largely incremental transaction for rent center. The digital transaction is attracting new customers say the least.

Which tend to have a younger demographic hybrid.

Higher adoption of digital payments is resolved better collection performance and as a result, skip storms or below historical levels as in past recessions tighter credit reduced options for customers and we feel we're taking it out by sure of that.

Sure in the coming quarters, and I look forward to updating you on our progress I will now turn it over to Morris.

Thanks, Anthony and you can see on slide nine total revenue Green nine 6% in the third quarter versus last year and.

Jested EBITDA increased 63%.

We're ahead of our original and updated guidance.

And dusted EBITDA margin increased 420 basis points for instance, last year driven by elaborate on strong revenue and lower expenses.

Not gap deleted EPS threads, 121%.

Digging deeper into the segment performance on slide 10 preferred lease revenue trends strengthened to nine 3% grandisonant quarter and the Android volume greet sequentially.

Driven by noon virtual retail partner edition, and organic grants and both virtual and stacked location.

As an extension preferred lease made investments to build a sales staff, we'd still hi, Frank grant and more efficient on bringing in new retail partner.

That preferably portfolio is expected to end the year at approximately 90% versus 2019, and we expect full year 2020, England volume to be approximately 25% higher year over year.

<unk> volume grant into outpacing portfolio of greater and we are accelerating the number of virtual location.

Ensing increased early <unk> activity the last couple of quarters.

And you know <unk> find the leading indicators for revenue growth.

We expect the quality of our portfolio to continue to benefit from higher credit tightening across the competitive environment and three enhancement through making trying decision engine.

To get stolen losses, or 11.3% of revenue down 710 basis points sequentially and 240 higher than last year.

Scottsdale and lots of benefited from and cramped customer payment activity and increased efficiency from our centralized collections team.

And just did EBIT margin for preferred lease was lower than last year, primarily due to a higher mix of merchandise down.

Driven by an increase in early peon activity.

In addition, we continue to make investments to support Greg.

Preferred Lisa even in margins are expected to grow as we scale that virtual business and.

And streamline collection calm.

Turning to the rented center business total revenue increased eight 6% versus last year at.

71% increase in E. Commerce sales helped dragged an outstanding same store sales performance for the third quarter.

Two years same store sales trend and create to 16.6% with double digit positive constantly each month of the quarter.

The Rec center portfolio ended the quarter at approximately 9% over last year, which is a leading indicator for same store sales.

Scottsdale advances for their interest in our business for 2% down 210 basis points versus last year and in sequential improvement over the second quarter of 2020.

As Anthony pointed out increased adoption of digital payment is driving improved payment activity and collection.

We're very pleased with performance on this and that checks, which is more than offsetting slightly higher losses from the E Commerce.

For the full year, we now expect skips Don losses for the rent a center business to be approximately 3% of revenue 70 basis points lower versus last year. Despite credits in E Commerce.

Adjusted EBITDA for the Reynolds Center business was extremely thrown in the quarter benefiting from favorable revenue Trent and COVID-19 related expenses reduction.

Free cash flow with $34 million, which benefited from favorable financial performance and.

And included working capital investments to find Pizza Greg.

This brings us to $274 million in free cash flow and the year to date and we ended the quarter with zero net debt.

Turning to our full year guidance for 2020 on site 11, we've increased our guidance can't count for better than expected performance in the third quarter and favorable trends as we enter the fourth quarter.

On a consolidated basis, we expect revenues in the range of 27952 825 billion.

It's important to note that our guidance reflect the Refranchising of all 99, California rented center location.

Which we closed on October set.

Well it will lower top line revenue, we expect the transaction to be essentially flat to earnings going forward as the forgone profit from the California location will be offset by franchise royalty payments and infrastructure efficiency.

We expect adjusted EBITDA.

In the range of $308 to $323 million and non-GAAP deleted earnings per share.

At $3.35 to $3.50.

Free cash flow is expected to be between 202 hundred $15 million for 2020.

Looking at the segments, we expect preferred lease revenue in the range of $812 million to $822 million with adjusted EBITDA has $66 million to $71 million.

Credit Center revenues are expected to be in the range of 185 to 184 billion with adjusted EBITDA and $352 million to $362 million.

Our overall portfolio balances for both businesses are expected to end the year well positioned for growth in 2021.

Now supplied 12, a revenue performance and disciplined cost philosophy continues to generate robust cash flow. We expect to end 2020 with over 360 million and liquidity and we're prioritising investment in high return projects to support profitable Greg.

We are expecting strong cash run in the coming year as we benefit from improvements we've made across the organization and the continued implementation of our digital strategy.

We have re-present $26 $6 million in shares this year, leaving 58 $8 million of remaining share repurchase authorization.

On October 26, we paid in cash dividend at 29 cents per share for the fourth quarter of 2020.

As always detail income statements by segment are posted to your Investor Relations website can we anticipate filing the 10-Q tomorrow.

Thank you for your time and I'll now turn the call over for question.

The song if you would like to ask a question. Please press star does number one on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Vinson can inject from Stevens you line is open.

Hey, Thanks, Good morning, guys and congratulations on a good quarter.

First question on.

On the preferred lease so a lot of exciting things going on here.

Excel.

To hear about your adding incremental partners just wondering.

Maybe if you could talk about the retail partner pipeline, what sort of conversations are you, having and what's the the typical sales cycle before we can expect.

Pier you point to some final stages National partners.

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If its Vincent heard Vincent did you yeah, no I pod College I didn't hear any of it prologis.

That's no worries so I got a nice warm up this will be been Ah Ah.

More polished [laughter] too [laughter]. So we are we're pursuing a two pronged approach. So on the national side, we have developed a robust pipeline, where we are in late stage discussions with a number of national retailers across verticals both in.

In the retail side as well as the E com side and our goal. There is to then launched pilot programs in specific regions. So that we can support them develop metrics. So that we optimize the go to market strategy and then to scale those programs. The second prong that we're pursuing is on our virtual merge.

In partnership so.

Side and there we are actually doing a number of things first as we've mentioned.

In the past we are growing our direct sales force. We are on target right now with all of our objectives from a hiring perspective on boarding perspective, there and we're seeing the results with regard to.

Being on target with acquiring new merchant partners and like I mentioned earlier seeing the invoice volume increasing in a direct correlation in addition to that in order to optimize those returns we've implemented it inside sales approach, which also enables us to utilize targeting in March.

Modeling in order to generate the most optimized leads from both the propensity to convert as well as from a yield perspective. So we're going to continue to implement both of these strategies over the coming quarters, maybe a comment about national partners Jay Yes.

So on the National partner front, we're actually.

Very far along with regard to the with regard to the.

Both negotiations.

Negotiation side as well as lining up pilot programs in order to get that implemented and then be able to prove out our metrics.

Okay, great on a pilot program I guess typically speaking from going from the negotiations to pilot to Nash.

National rollout, how long does that would that typically take just to frame that together.

Yeah, you know the way the way in my experience that we do it is it's turning up the volume type approach. So what we end up doing is we do a rolling Thunder approach and can take place, we don't try and be like one or two months smart it's not quarters, it's more months when we get into into that type of a rollout.

Okay very helpful and.

Next question on the rent a center business side I thought the the franchising of the California stores Whats really interesting.

And just kind of wondering sort of what drove that is the are those stores kind of similar to the the national footprint and it's sort of the economics.

That you laid out in the press release similar to to national sort of what we can expect if you were to franchise more stores. Thank you.

Yeah, Thanks, Vincent that I'll take that one this mitch the yeah, there's only a couple of markets that we serve.

Felt like as well as Weve performed the last couple of years, there's only a couple of markets that we feel would be in better hands, a franchisee in California is one of them.

Yeah for the you know you're not going to see a whole bunch of franchising I think we've said before we use it opportunistically and like I. Just said, there's only a couple of markets, where we think the better off in the hands of a franchisee in it and again, California being one of them.

You know the deal we made it will be essentially flat to earnings.

Plus the revenue plus the cash from selling the stores so flat to earnings based on the.

Well, we're making out there it is.

Got it is that new agreement the agreement with the franchisee has a 10 store growth agreement over the next five years. So we're actually going to have growth, which would actually be accretive to earnings. So there's only if there's only a few markets that being one of them. So it's not like you're going to see much more on the franchising side, but.

It'll be pretty limited but.

But then when we felt really good about the franchisee can handle California better than us and like I said, it's it's essentially flat earnings going forward with.

But you know not that mentioned the proceeds coming in and the growth there.

Payment that comes with it.

Okay, great. Thanks very much.

Thanks Vincent.

Your next question comes from the line.

Bobby Griffin from Raymond James Your line is open.

Good morning, I also understand it on somebody thank you for taking my question.

First I'm going to refer to me side of it in the press release, you mentioned the broader diversification across product category did you enter any new product categories during the quarter.

Yeah, where we're actually moving into a number of them ranging from.

Jewelry to tires to further diversification into electronics and as I referenced a moment ago My last answer.

The ability to actually generate proactive leads through an inside sales approach using targeted modeling on who we call enables us to be very thoughtful with regard to how we enter into those markets. In addition to that our decision engine enables us to very much understand the initial performance by now.

Amex as we get into the new verticals and that enables us to make sure that we're kind of a monitoring performance as we continue to turn up and then make adjustments to the.

Both vertical as well as the region.

And the size of the merchant that we bring onboard.

Okay. That's helpful and then understanding higher early buyout aspect, but is there anything else driving the large delta between different lease merchandise sales and the rental and fee revenue.

Yes, good morning, I can speak to that and merchandise return.

Higher year over year, because as I'm, just that the macro environment and consumers, having more money in their pocket and similar to your tax refund season anytime there's more money in our country and that generate more.

You know more merchandise sales early payout higher ownership rate plan customers, which is a great thing.

And so that contributed over the last couple of quarters to to merchandise sales being higher relative to rental sales than previous partners.

Okay. That's helpful. And then do you expect that to further this happen.

Good health intersect sorry, this Mitch I just wanted to add two more he said you know one of the.

The.

Really positive things you see when you think about the extra extra payouts based on you know probably primarily because the stimulus earlier in the year earlier in the quarter not so much anymore, but.

That that drove that drove a lot of that but the interesting thing is with all those extra payouts, bringing all that extra revenue that the portfolios in both businesses are still well well ahead of last year, where on the rent a center side you are there both actually by 9% ahead of last year Coincidentally so.

The portfolios have held off great, which means as we're getting this income in on the early early buyout them. Both both segments. There's an awful lot of replacement of rental agreements second half second the.

Portfolios backup so the rent a center side of the business stays in high single digits, you know close.

Close to the double digit same store sales going forward. When you when you end the portfolio at the end of the third quarter at about 9%. That's a that's a leading indicator of what the next quarter same store sales are going to be at least that number so and the same thing. We don't do same store sales necessarily on the preferred lease side, but the portfolios are our IR.

Really outperforming even with all those payouts.

That's very helpful. And then last for me have you noticed any changes in trends during October getting the spike in the number of cases.

And do you want to talk then the rest there sorry, I meant both Yasmin Yeah, No I would just comment that that's you know Mitch Mitch stated at the end of the third quarter. The portfolio was up almost 9% October is trending favorably for us both from a demand as well as a payment perspective.

So we feel strong link.

So we haven't seen anything and we operated as an essential business and safely served our customers and we will continue to do that so I mean that health enter the tailwinds on on household or what products are really pretty strong so.

As far as people spend more money in their home on the on site and within their own right. So it's been strong on both the preferred the site and the and the incentive side.

Okay perfect. Thank you and best of luck on about the event.

Thanks.

As we've centralized our collections into the call Center.

So you know we haven't changed our belief that EBITDA margins in that business could be you know, 10% to 13% even in the near term.

You got it.

Oh, just after that you know.

Mortgage broker about the increase for my gave me half to 13.

And the.

12 to 13 in the fourth quarter based on our guidance I'd also remind me of the third quarter is up about 500 basis points from the second quarter. So sequential roll on the margins has already started.

Got it no. That's very helpful color and then just <unk> when quick follow up somewhat related you know you you mentioned in one of your slides how credit. It seems like it's tightening are are you seeing that sort of trade down uhm from a credit perspective and in the run a center visits to prefer at least business I would I would guess that as.

[noise] subprime credit got tighter than that that would be a benefit to you and you can maybe start to see some higher credit score customers in your in your sort of entering your funnel.

We absolutely are we can tell we can tell we have our own.

Proprietary scoring system, so it's not like a.

Credit score or something like that wouldn't put it in our own scoring model, yes, the the quality the numbers.

Better than they were before so yeah, we're seeing a higher quality customer coming in getting pushed down into the least zone transaction versus.

Brian.

Slider, so I'd say like 19%.

Was reported is 19% drop in subprime lending.

Back on slide four.

So minutes and near Prime 11%. So that's those are pretty big drops according to the.

Federal Reserve Bank so.

That's.

And we're definitely seeing it on our end as well.

That's helpful. Thank you.

Thanks, and then.

Your next question comes from the line of Kyle Joseph from Jeffries. Your line is open.

Hey, good morning, everyone. Congratulations on a good quarter and thanks for taking my questions.

Oh no no obviously the third quarter was very strong both in terms of volumes in payment activity and credit performance the.

The question I get is is on the sustainability of the of the positive results here and so can you kind of walk us through how you see your business performing going forward, if there's less stimulus no stimulus or Nicholson, an equivalent amount of stimulus.

Hey, good morning to all this is Anthony I'll I'll take this first so obviously to start the number one thing is as Mitch commented and I Echo the sentiment portfolio being ahead, 9% going into the fourth quarter October's trending favorably so far and we've really been taking a multifaceted up.

Approach to convert and retain more business across both web and in the store and a couple of things that I would comment on that we believe is gonna be.

Really beneficial towards our sustainability is we.

We've made a lot of enhancements to a digital payments, it's almost doubling the.

The number of customers that are paying digitally they're staying on rent longer and it's allowing really our team to focus their efforts on more conversions and then as I commented in my prepared remarks. Another thing that we're seeing as we've got our decision mentioned that were testing it's live in about 10% of our stores and initial read on that it's allowing for a fat.

Stir in frictionless approval process. So if you think about the increase in demand coming from the web.

Those stores that are implemented it we're starting to see that they're converse rates are going up so that and I would just just finished with.

Introducing some new product vertical so we feel pretty good about the go forward plan.

And I would just add to that child. The if you look at our looking at our guidance.

For the year and obviously that allows you to back into the fourth quarter, we're pretty confident in our in our guidance it doesn't rely on stimulus.

And it's still pretty good fourthquarter courts portfolios are in great shape on in and we have the benefit of seeing what October Sun already so the majority of October. So we're confident that though I wouldn't want to speculate on the on the stimulus program. Another package, but that would only be upside to a dark wood wood or what our guidance going forward is.

Got it very helpful and just from a high level I know, we don't have 21 guidance, yet and there's so much uncertainty right now.

But just in terms of the seasonality of the business obviously in the post Covid World in 2020 that seasonality has been.

Turned upside down but.

Going forward.

Would you anticipate kind of normal seasonal trends in in 2021 or is that largely going to be determined by if one there is more stimulus.

Hey, Kyle Yeah, <unk>, Yeah, we'll give more guidance I'm sorry, 2021 on the next earnings call that as we look forward.

There will be some differences within the seasonality I mean, we've always got the the tax refund season that causing.

Uhm higher performance going into 21, we're obviously.

9% ahead in our portfolio, which is a great leading indicator until same store sales and the rent is center business and the invoice volume growth is significant at 34%. It's this past quarter uhm. The inside sales team is doing a great job and signing on new retail partner.

We've accelerated the growth in that area.

And so within both businesses, where in a great position to start out of the gates in 2021 in a great position and then we'll provide more details on the next earnings call as far as the 21 guidance.

Very helpful. Thanks, Oh, sorry go ahead.

Well I would just add to that when you think about the when you back into the guidance for the fourth quarter by using the annual it's not.

The fact is not.

There's no stimulus package contemplated and that that'll be the closest thing to a to a run rate that you're gonna have going forward. It's it's because it's not stimulus driven in the fourth quarter ended the portfolio business. So you you can start to look at that as as there'll be some seasonality within 2021 and then.

The normal here, but but yeah, that's gonna be Kosta run rate is you're gonna see as we weren't able to see over the last few chords rapidly nothing's been run right over the last few quarters, but when you're back in your fourth quarter number choose their annual guidance, they're gonna be pretty close to run right numbers.

Very helpful. Good point Uhm last one for me.

Terms of the nine.

Buyout activity I know, we talked about margins on a year over year basis being down but can you talk about 90 or the buyout activity between the second quarter in the in the third quarter. Obviously, you saw gross profit margins recover sequentially is is that a function of of less violent activity or what's driving that.

It is we did the lower buyout activity in the third quarter relative to the second quarter, and we think as as we get further and further out from the stimulus.

That that will continue so for example in our fourth quarter guidance within those businesses.

We're expecting the merchandise sales as a percentage of total revenue to be lower sequentially than the third quarter, but it is contributing to the lower margins, particularly in the prefer at least sign at the business because it is a lower gross margin transaction.

We do get more customers to ownership, which is great, but it does impact gross margins, but with the initiatives that we have.

Uhm and the growth that we have planned in both businesses EBITDA margins are still expected to grow because of you know the lower costs year over year with centralizing collection. Some of the initiatives. The Anthony talked about that will help them sustain and even grow grow smart.

<unk> and EBITDA margins overtime.

Got it very helpful. Thank you guys very much for answering all my questions.

Thanks Kyle.

Your next question comes from the line of Bradley Thomas from Quebec Capital markets. Your line is open.

Hey, Good morning. This is Andrew on for Brad you know over the last few months, we've heard of various supply chain disruptions across the industry, particularly in furniture and electronics.

Could you comment on any supply chain our capacity disruptions you are seeing in your business or with your partners and how that's impacting the business so far.

Hey, Andrew. This is this is Anthony so I can speak on the on the renison or business. So if you recall I believe last quarter Mitch commented on on our help for rent numbers and expectations that it was going to improve and I can say sequentially. It has and as a matter of fact, we feel like we're in good pet.

<unk> to go ahead and meet the demand for this quarter, if we just compare year over year, we're pretty close.

That being said, obviously, we all have the wish list of.

Limitless supplies of certain things, but generally speaking.

We're pretty well positioned and really it's a testament to our merchants and our suppliers and they've been doing a nice job to to get a stuffed up to the busy holiday season.

Got on this Friday on the <unk> on the preferred Lee side, we've actually gone and we've made the rounds with our largest partners over the past few weeks and in a very similar sense. They have proactive game plans to work through backlog over the course of the next several months and get back onto their normal delivery.

Time in their normal resolved inventories. So there's there's really sort of a digging out that's actively taking place and now.

As compared to maybe several months ago, we have more clear line of sight with very specific game plans coming off of our of our key large partnerships.

Understood that that's very helpful. My last question is on.

On our customer payment activity I was wondering if you could talk a little bit more about the drivers of that strong customer payment activity that you saw during the quarter and how you expect us to evolve in and <unk> and perhaps even in 2021.

Yeah. This is this is Anthony again, so [noise] customer payments have been strong our customers have migrated towards more digital payments, which obviously is enabling some lower delinquencies and as I stated earlier on taste, the double versus last year, and we're very very into.

Tension on our approach to pricing and the value proposition. So it's resulting in more ownership and then the other thing that I would say is is we've really invested in communication with our customers and making it much more efficient, especially through texting, we survey them a bunch and they've obviously told us your preference for communications, so that's improving the customer payments.

And then Directionally, we looked at leading indicators every single day and considering the health of the portfolio, we feel very confident going forward as well.

Okay. Thank you.

[noise] Thanks, Andrew.

Again, if you would like to ask questions. Please press star, but my number one on your telephone keypad. Your next question comes from Milan Overdrawn Rohan from Jenny you Lightens open.

Good morning, guys.

Alright, so first of all the the decision to actually California is that I mean, I I I understand you know there were certain franchisees that you were targeting to your to pan stores off too, but does that driven in any way by the new D. F. P. I N. You know looking decided steps you know a new regulator and the state.

It's a combination of things certainly you know.

B.

The least stonewall out there from a margin standpoints different than the rest of the country you know there's a lot of.

One of the reasons, we think it's better for franchisee to operate a market like California's all the laws that are specific to California.

Don't deal with nationally so <unk>, it's a multitude of reasons is that the sidestepping any particular regulation multiple reasons that we felt like there was a better better situation for a franchisee.

Okay did you guys address the increase in the for at least skipped stolen losses you over here.

No.

Sequentially its way down it is a little higher year over year.

Yeah.

Answer yeah, [laughter] the year over year change is mainly driven by the mix <unk>, increasing that virtual business, we do have.

Slightly higher loss rate than that virtual business and N. As we grow the business then.

It's gonna put some pressure on last night and the preferred means business, we do like that mono a lot, though because the EBITDA margins are actually fairly similar though there's higher last right but.

Lower expenses of course, because we don't have to have labor in the stores to help generate sales it and so the EBITDA margin their favorite ball, but year over year. It does put some pressure on margins, but if you look sequentially. It's it's at significant air sorry down significantly 11% versus about 18.

Per cent in the second quarter.

And we're expecting that's favorable lost trend to continue into the fourth quarter and then as we grow the virtual business like I sat there there'll be pressure that we will overall grade the EBITDA per cent because it's a more efficient model if you will.

Okay.

Staying on preferred lease for a moment you talk a lot about you know new national partners.

Is there any difference in the products that you're offering you know are we looking at just in your conversations with them or were you looking at anything that would be a second look opportunity.

Or are these all sorts of luck or are we thinking about products that would potentially be outside of the typical you know right scale that you have at other retailers.

Yeah, there's a number of different opportunities that were enacted discussion with obviously the third luck is still a critical component of what we do and how we participate when we're in a waterfall situation, but one of the other advantages that we have by launching the preferred digital platform and having now version one point.

Over a mobile app in the marketplace is the ability to increase our addressable markets and to also kind of get a first look at customers and be able to drive those customers into our retail partner locations proactively so that enables us to target into kind of optimal optimal consumer segments is.

As well as be able to drive them into optimal verticals for us so taking this platform approach.

He is going to be transformative over the course of the next several quarters as we begin to roll it out at scale.

When you talk about some waterfall would you be a third look possibly behind a second look program for another least one operator or would you be the only least shown operator in a waterfall.

Yeah, no we yeah.

<unk>.

There are a number of different scenarios that unfold and so the answer to your question directly is yes in some situations, yes in other situations.

Third and in other situations, where actually first depending on whether or not we're originating in where the customers coming from so it's a blend.

When we when we look at it to the point that we were talking about earlier with regard to credit tightening and some of the benefit that we have when we are in that second look or that third look scenario. What we are seeing as as people have tightened up we're actually getting segment expansion, which is enabling us to be more selective with regard to our decision.

<unk> and we actually ended up seeing to the point that Mitch made earlier and increase in the average risk score is the way that we look at it.

Okay and then just last question for Maureen Uhm is there any tax rate guidance. So we should use going forward.

And the tax rate going forward will still be around that 24%, we benefited quite a bit this year from the cares Act and and N O L. Carry back favorite ability that we were able to take advantage of that to go for a great will be around 24%.

Alright, Thank you very much.

Thanks.

There are no further questions at this time I turn the call back to Chief Executive Officer of furniture center much for though for closing remarks.

Thank you J and thank you everyone for your support and for taking the time this morning to listen or update.

Things are very positive here and we're really excited about our future only getting better.

And.

Obviously any follow up questions, we're certainly more than prepared to spend time answering them hopefully the audio was better on your end then it was on our end we if it was a little choppy. We apologize we have some audio problems on our end in the middle of the call, but hopefully it was only on our end and we apologize who was chopping on your end and if there was anything you couldn't hear certain.

Really.

More than happy to get on the line with each and every one of you to answer your question. So thanks, again and have a great day everyone.

That concludes today's conference call you may not.

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