Q3 2021 Rent-A-Center Inc Earnings Call
Good morning, and thank you for holding welcome to rent Disinterest third quarter earnings Conference call. As a reminder, this conference is being recorded Thursday November 20th.
Thursday November 4th 2021, but now like to turn the conference over to Mister Mitrano. Please go ahead Sir.
Thank you all for joining the right to censor team. This morning to discuss Ah results for the third quarter of 2021, we.
We issued our earnings release after the market closed yesterday, and hopefully you've had a chance to review it.
Their beliefs, and all related materials, including a link to the live webcast are available on our web site at Investor Dot Retro Center Dot com.
On a call today from Reno Center, we have Mitch Fidel our CEO, Jason Hoke Executive Vice President Seamer, Anthony <unk> Executive Vice President of the Rec Center business segment, and Maureen short CFO.
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 and adversely from our expectations.
These factors are described in our earnings release as well as in the company's SEC filings.
Rent the centre undertake no obligation to publicly update or revised any forward looking statements, except as required by law.
This call also will include references to non-GAAP financial measures.
Please refer to our third quarter earnings release, which can be found on our website for a description of the non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures.
With that I'll turn the call over to match.
Thank you Brenda and good morning to all of you have joined US today to discuss our third quarter results. We certainly appreciate your interest.
And are pleased to have the opportunity to update you on the developments in our company as we continue to be among the leaders in the advancement of leasing as an alternative solution for consumers in today's rapidly evolving commerce and payments landscape.
Over my career I can't think of another period of such innovation and disruption as we're seeing today with the range of developments things like digital wallets.
Crypto currency and Super apps and buy now pay later and most importantly, new lease stone options, which we often referred to as Elsa Yo.
And with our leadership position and consumer leasing solutions, we are in a great position to benefit from this environment.
Take for example, the current proliferation of buy now pay later, we get asked a lot of it as a threat.
We believe it's actually the opposite.
At least one is very complimentary to buy now pay later, because we see little customer segment overlap and LCL contract incremental sales in the buy now pay later waterfall.
In fact, we're seeing this benefit firsthand in our business today with growing interest in our virtual LTR free from potential merchant partners, who realized we're leaving money on the table customers that don't qualify for buy now pay later.
Similarly consumers are seeking payment services that worked for them rather than for the benefit of an established system is perceived to take advantage of and exclude consumers.
In contrast, <unk> is one of the most inclusive payment option, serving EBIT unbanked consumers and is highly flexible and getting approved doesn't require hard credit inquiry that can impact credit scores.
Because I will feel solutions include returnable consumer durable products like furniture appliances, and electronics transactions typically have a higher average ticket side and longer average payment horizon. Another payment solution for finding now pay later.
So you can understand why we're really optimistic about our future. Following the Athima transaction earlier, this year, which made us a leading outfield player and the only one with our span of omnichannel capabilities across our segments.
The integrations going while we're on pace to achieve our synergy targets.
On top of that.
You can factor in the Athima ecosystem, which is targeted to be up and running and early early next year and we believe can revolutionize else'll potentially doubling our addressable markets around $100 billion.
As LCL continues to gain momentum, we think our scale and omnichannel capabilities to provide us with a competitive advantage.
Because processing more applications and managing more customer relationships will enable us to hone those capabilities even further.
This should translates even more consumers a merchant partners.
This data and technology aspect of our businesses under appreciated and we're investing meaningfully to capitalize on it by mid next year will have migrated the enterprise data warehouse to a cloud based environment will be employing state of the art tools like snowflake and data bricks, which will further enhance our predictive analysis and AI machine learning capabilities.
These initiatives will drive savings from data center costs and productivity gains in processing activities and they can benefit our commercial activities by reducing time for solution launches.
When you put those pieces together strong category momentum.
Ah favorable competitive position and dynamic growth agenda should translate to compelling financial performance.
We continue to believe in in 2023, the company will generate at least $6 billion of revenue in the mid teens adjusted EBITDA margin.
Factoring are strong free cash flow generation already solid financial position and focus on deploying capital to drive shareholder value. We believe that EPS should increase significantly over the next few years.
Now turning to the third quarter the team at continued to execute very well the store base business advanced a number of initiatives focused on ecommerce in the in store experience, which can't be we will update you on.
And it seems we continued adding new merchant partners, including an exclusive strategic account P. C. Richardson one of the largest suppliers retailers in the U S.
That was a competitive wound for us and we think it demonstrates the value proposition other strategic partners will find in our differentiated capabilities.
We also saw positive developments with the Athima ecosystem.
And Jason will elaborate more on that shortly.
Our third quarter revenue of $1.2 billion grew 66% year over year on a reported basis and 13% on a pro forma basis in other words as if we owned a theme in the prior year period, and we had good organic growth across all segments.
The theme it generated pro forma year over year GMB growth of 19% and the redness in her business portfolio was up 14% year over year at the end of September.
Typically the third quarters, the slow season for the lease stone industry, because with the vacations and back to school calendar people tend to be less focused on household durable goods. So.
So we're pleased to see the top line <unk> remained favorable even with stimulus and even with other programs supporting consumers winding down.
We have a strong lease portfolio momentum heading into the last few months of the year. We believe we're very well positioned for the fourth quarter and for early 2022.
Adjusted EBITDA margins for the third quarter of 14.4% was down sequentially from the second quarter, which was consistent with our remarks on the second quarter earnings call in August.
We had expected seasonality and less favorable customer payment activity related to the stimulus winding down would result in some margin contraction.
Non-GAAP earnings per share with the dollars 52 in the quarter compared to pro forma non-GAAP earnings per share of one dollar for in the prior year.
Now looking forward, we have updated our full year 2021 guidance, primarily reflecting changes in the timing of normalization and customer payment activity due to stimulus winding down as well as some impact that merchant partners from global supply chain disruption, primarily impacting the athima business.
We expected customer payment activity to normalize in the back half of the are quite frankly, they normalize faster than we expected we got caught a little short on a collection labor and he had to play catch up.
We have sent stepped up and taken steps have stabilized Steven activity transfer athima. It about we expected them to normalize.
The supply chain headwinds at our retail partners as I mentioned are also affecting a seamless growth in the combined impact of those two things.
Lower fourth quarter revenue in margin for Sema than we had previously forecast.
Even with this timing related issue or 2021 outlook for consolidated revenue non-GAAP EPS is still within the range, we provided with our second quarter results in August.
When we increased our full year 2021 guidance. So we increase in August and we're still within that range now and Maureen provide additional discussion on guidance here in a few minutes. So in closing I want to thank all the members of the rest of your team for the continued effort and dedication it's been quite a journey over the past few years and I'm really thrilled with the progress.
We made in 2021 and the tremendous opportunity I've seen in the future.
That I'll turn the call over to Jason update us on the Athima business.
Thanks Mitch.
Up on your comments about the market opportunity. It really is amazing to see how people are changing the way they think about paying for products and services meeting other financial needs and even the lifestyles, which people aspire consumers today increasingly value services that are flexible personal and inclusive over traditional.
Services that a rigid uniform and exclusionary. This is disrupting the competitive landscape and benefiting innovative business models like buy now pay later and other alternative payment solutions like Athima.
As we are witnessing this play out it validates the Athima acquisition, our strategy and a tremendous opportunity that we have for the company's future.
D seen trends drove us to develop a product sweet over a year ago that we eventually refrained as you've seen the ecosystem, including you seem app seem a browser extension seem a marketplace any team of these pay card.
We discussed the ecosystem at some later on our second quarter call in conjunction with an announced soft launch in early August so before getting into a discussion of broader performance for the quarter I'll share some insights from our preliminary findings keeping.
Keeping in mind that the primary focus for the launch at this stage has been testing and learning we've seen encouraging early results to reinforce our belief in the transformative potential of ecosystem.
You seem app, which is essentially mission control for the ecosystem already has over 220000 active users at the end of three months.
The users are largely comprised of existing customers there were either unconverted or had unused approval amounts looking forward. We believe we are on peace to reach the 1 million use your threshold during the second quarter of 2022.
To put this in perspective, it took Facebook and Twitter 12, and 24 months, respectively to hit that milestone.
So today's leading fintech companies like Clark and Afterpay reached the 1 million download milestone in around six to 12 months right in line with our projection for a schema.
Among these active users we're seeing some compelling conversion rates for instance, mobile App users average 2.07 lease is parr customer significantly higher than the portfolio average while we believe this is reflective of the exuberance of early adopters. We expect this improved.
He's of access to increase the lifetime ratio of leases per customer.
As we are seeing greater customer engagement via the mobile App and ecosystem average ticket size remained similar to the portfolio average.
Since the launch of the ecosystem, we've seen conversion rates grow 20% over the last two months as customers get more acquainted with the expanded choices.
The date the ecosystem is generated transactions with over 2200 different merchant locations, including more than 40 merchants, who aren't even integrated with athima like best buy.
This demonstrates seamless ability to use patent pending technology to allow customers to utilize L. T O payment options with brands or merchants that do not have a relationship with a female without the heavy investment in complicated integrations.
Customer feedback suggest the value proposition is resonating across relevant decision of factors like delivering quote a wonderful experience, providing quote easy access and helpful information and quote working with customers.
Switching to the merchant side. These transactions are illustrating the significant potential value Sima can provide compared to other partners by driving it amount sales from lease to own customers, who otherwise may not have been able to transact with those retailers.
Rather than just offering another form of payment to existing customers athima can bring incremental customers and revenue to the retailer.
The early ecosystem activity is also providing important data and insights that we are incorporating back into our offerings to improve them in preparation for the ramp up to a full rollout planned for early 2022 for example, the Sema App just had its fourth release and we are continuing to.
Iterate and refine the product.
To date enhancements include a streamlined customer application process and.
Embedding the mobile app into our in store text to apply process, expanding the mobile marketplace, adding store location functionality and adding the ability to create and execute a lease in the app. Most importantly, we can now use our presence on the customer's mobile device.
To drive Reengagement and return to shop opportunities for our retailers, we've experienced consistent customer acquisition cost well under $100 per leaves.
And see those tax continuing to decrease at the number of leases per customer grows.
Moreover, our lease volumes increase will apply learnings from transactions to further improve marketing efficiencies and conversions as we ramp our efforts through 2022.
So the preliminary data is really encouraging, but it's premature to confidently project the timing of the material P&L impact, it's probably easier to conceptualize the scale of the opportunity over the next three to five years.
Consider that we have a target consumer database of approximately 50 million consumers, who fit the profile of emphysema customer.
<unk> seem a lease pay card will effectively increase the semen network from 30000 merchants to over 2 million Mastercard merchants were durable goods are sold.
In terms of next steps.
The virtual seem at least a card is already available and we are on track to pilot the physical card by the end of the year.
Shifting the broader performance, we made significant progress on the cement integration getting the right organizational structure in place and enhancing operational capabilities at the same time, we continued to execute well commercially adding over 2700, new retail partners during the quarter. In addition.
And we took back more than 750 retailers from competitors, including PC, Richard Sun, and Sonic electronics by leveraging our enhanced value proposition the ability to acquire our own customers the digital ecosystem and enhanced retailer engagement through the mobile app.
We also signed an exclusive partnership with Whirlpool, which is an e-commerce relationship and demonstrate our ability to win in the E Comm channel.
All of these factors equate the incremental sales for our retail partners, which is we're seeing is preferable to the rebates our competitors are offering.
These seem an integration continues to be a high priority for the third quarter is generally gone. According to plan and we continue to expect to realize $25 million synergies in 2021, and ultimately $40 million to $70 million that run rates synergies.
Another top initiative this quarter was converting staffed and former preferred lease locations to virtual Athima locations. This was a major undertaking and included converting cons and Ashley corporate stores among others.
The conversions often are not only profit enhancing but also should ultimately translate to better experience for merchant partners and consumers because Sima offers a more flexible and seamless experience.
We essentially finalize the organization structure aligning key related activities under one leader to facilities better coordination of support and market facing activities. So our sales and operations organization report to one leader, Ron Schoolcraft digital product development and product management.
Report to Tom able and technology and data services report to Chris <unk>, who.
Who recently joined the company.
I worked with Chris It and handed American express he's a talented technology leader and will be a huge asset for seamer as we continue down the path of becoming a digital oriented fintech business.
I believe we have the right pieces in place to successfully execute on our strategy.
Moving on to third quarter financial results My comments will reflect pro forma performance as if Athima was included the prior year the.
The retail partner business revenues grew 17, 1% led by 19% GMB growth in the face of retail supply chain headwinds and changing consumer behavior as government financial support winded down.
E Commerce continues to gain momentum and accounted for 14% of lease transaction volume, including the Wayfair partnership Ajar.
Adjusted EBITDA margin was 13.9% in the quarter versus 16.5% adjusted skip stolen losses were eight 7% up approximately 30 basis points year over year on a performa basis as Mitch noted in his comments, we had anticipated that during the third call.
Peter customer behavior would start to revert to more normal trends for customer payment activity and losses, which would negatively impact margins on a sequential basis.
Our expectations were Directionally right, though we under anticipated the extent of sequential margin decline due to the factors MC discussed earlier.
Looking forward over the rest of the year are top objective is to ensure the business is well positioned for a strong start to 2022 with that I'll turn it over to Anthony.
Thanks, Jake staying with the topic of the changing environment that consumers and our business are experiencing today. It may be surprising to some people just how well the rest centre business segment has been performing.
But for those of US close to the business. We know just how solid the underlying fundamentals are and how much opportunity there is to generate consistent growth over the long term.
This was illustrated again in the third quarter with revenue growth of five 6%, including 12, 3% same store sales growth and that was comping against eight 6% revenue growth and 13% same store sales growth in the prior year period that makes it 15 consecutive quarters.
That we have generated positive same store growth and five consecutive quarters of double digit same-store growth, which is a testament to the unique value proposition, we offer customers high quality products.
Flexible lease to own solutions to fit everyone integrate experience importantly, we continue to evolve with the consumer and are meeting their preferences with a growing omnichannel platform that has played a key role in our performance over the past year and a half.
In the third quarter R. E Commerce revenue grew 9% as it leaped, 71% growth in the prior year.
E Commerce accounted for 21% of revenue a substantial increase relative to just 13% in the third quarter of 2019.
Importantly, we believe we remain in the early innings of capturing the long term opportunity in the E Commerce channel.
The teams strong execution, including sourcing product marketing merchandising and collections translated to 14% year over year growth in the portfolio for the third quarter. So we feel we're in great position heading into the home stretch this year and for a solid start to 2022.
Profitability also remains solid in the third quarter with adjusted EBITDA margins of 22.9% up 60 basis points year over year. Despite loss rate expansion of 140 basis points due to the normalization of trends following the wind down of government stimulus, we still believe.
<unk> that over the long term or loss rate should be around 3% given the improvements, we're making in collections and decisioning.
Longer term I think the business is well positioned to capitalize on expanding consumer interest in flexible and affordable payment options. We have a relatively large core consumer base to whom we provide a specialized service that makes a difference in people's lives every day, we still have considerable opportunities.
To expand our retail business in our existing footprint through surgical openings, new store concepts and expanding and a new product categories. In addition, we have tremendous e-commerce opportunity that leverages are differentiated omnichannel capabilities, while E Commerce will play a critical role in our future.
We feel the brick and mortar business is just as important because many of our consumers today, especially lease to own customers still prefer an in store experience.
Moreover, brick and mortar allows us to participate in transactions holistically, including sourcing product purchasing it wholesale cost having the ability to establish competitive pricing for customers and to provide the last mile logistics for R. E Commerce channel.
Looking out over the next few months and into 2022, we feel good about the business environment and believe the set of initiatives were focused on such as E com enhancements customer engagement and support and employing continuous improvement tactics should set us up very well for next year.
Now turn the call over to Maureen.
Thanks, Anthony as mix noted earlier, we delivered solid results in the third quarter. Despite some anticipated headwind that we called out on the second quite our call, including some typical third quarter seasonality and a reversion to more normal ranges for customer payment activity.
Last night and early payouts.
Reported revenues of 1.2 billion increased 66% every year and consolidated adjusted EBITDA of 170 million almost doubled.
Let's add that credit is attributable to the Athena acquisition that closed in mid February.
On a pro forma basis consolidated revenues green, 13.3% and adjusted EBITDA Green, 4.1%. This translated Tim margin at 14.4% in the third quarter compared to 15.7% for the prior year period.
A year over year contraction and margins with primarily attributable key normalization and catch her payment activity, but delinquencies.
And last time, the wind down of government stimulus as well as the next shift to the high credit I think that that that.
Margins for the redness and our business segment, Mexico segment in corporate costs for all favorable year over year, while the franchise segment margins are down 135 basis points.
The leather lying net interest expense was $19.7 million, reflecting the debt financing from the Athena acquisition.
The effective tax rate on a non-GAAP basis, with 24% compared to $23, 3% in the prior year period.
And deleted tear count like $68 10 million.
Gap EPS was 31, and the third quarter compared to one dollar and 15 cents in the prior year period and.
And included one time costs related to the Athena transaction and integration.
After adjusting for special items that we believe do not reflect the underlying performance of our business non.
Non-GAAP EPS.
Is one dollar and 52 cents in the third quarter of 2021.
Compared to one dollar and 40 cents in the prior year period.
We generated $55 million, a free cash flow in the third quarter and returned $38 million to shareholders three O 831 quarterly dividend and share repurchases.
Year to date through October the company has repurchased 80 million of common stock at an average price of 56.
Per share at.
At the end of October the company had approximately $170 million remaining in its current share repurchase authorization.
At quarter, and we had a cash balance of 159 million Gregg dead at 1.3 billion net leverage of 1.7 times in available liquidity of over 600 now on.
Regarding our financial outlook for the full year of 2021, we are lowering the high end of our previous guidance ranges or consolidated revenue.
And non-GAAP EPS.
We now expect consolidated revenues at 4552 464 billion.
And non-GAAP EPS at $5.90 to $6.15.
Guidance for adjusted EBITDA is now expected to be between 645 to 675 million.
And free cash flow within the range of 280 to 320 million.
For the Athena segment, we expect revenues at 2322 2.38 billion and adjusted EBITDA as 300 to 320 million.
This outlet reflects the continuing supply chain headwind.
A retail partners are facing in a more rapid setback to prepandemic trends than we had anticipated for customer payment activity and loss reserves data the wind down of government programs that had supported consumer spending during the pandemic.
We had previously incorporated a more gradual reversion to those factors, which.
Like impact the top line and margin over the next couple of quarters in our forecast.
Even with the fighting headwinds and more normalised lease performance metrics.
You still expect Athima to January 20th at 25% annual GMB growth in 2021.
And approximately 14% EBIT margin in queue for.
Looking beyond the fourth quarter the business have largely the past.
Internal and external adjustment.
And his niche mentioned.
We remain confident in our longer term targets for the company.
For the redness in her business segment, we are not adjusting prior guidance.
Revenues are still expected to be between 2.02.
And 2.06 billion.
And same store sales growth in Q4 is expected to again being low double digit.
Adjusted EBITDA is still expected to be between 480 and $500 million in the mid point of our guidance implies an EBIT margin of approximately 23% in queue for.
Higher than last year and flat sequentially, despite recent wage increases and adding head count.
Turning to capital allocation, our priorities are unchanged.
The top priority is appropriately funding, our business and investing in value enhancing Gregg.
Next we will Opportunistically look at M&A that can generate favorable returned.
After satisfying investment means we return capital to shareholders through a combination of dividends in share repurchases.
With share repurchases employed opportunistically.
We remain committed to a solid financial structure that supports our growth strategy and total shareholder return objectives.
To conclude my comments are third quarter efforts were successful piece of the huge undertaking the company has been engaged in over the past 10 months.
We have completed the largest acquisition in the company's history.
Integrated two organizations without letting up on execution.
And we developed and are launching a new fintech payments ecosystem.
Looking forward I think we are well positioned for this next stage in our evolution and the highly compelling opportunities to create shareholder value should become more evident.
I'm also very excited to announce we are planning an investor day for late Q1 next year and of course more details to come.
We will post detailed income statements by segment to our website and file or 10-Q later today. Thank.
Thank you for your time this morning, I'll now turn the call over for your questions.
To ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key.
Please stand by while we compiled the Q&A roster.
Your first question comes from Bobby Griffin with Raymond chain.
More of your Buddy is for taking my questions hope everybody is doing well.
Moaning Bobby.
First I just wanted to talk about maybe just a month by month basis, no that typically you don't get into that type of color, but just now that things are starting to normalize it would be helpful. How did kind of payment activity and you you know skip some stolen trend during the quarter and then did it kind of level out in October and that's what you assume.
<unk> carries forward in the fourth quarter or are you. Assuming you know continues to build back up a little bit in November and December.
Yeah. Good question Bobby.
Deteriorated ask if a quarter went out and as we got farther away from stimulus, but the good news is that as we got it in October, especially as we ramped up from a staffing standpoint got caught up from a staffing standpoint in the collection center. We've seen we've seen really good trends in October so that gives us the confidence going forward.
That that we've.
Certainly normalised faster than we thought but.
October.
Gives us gives us a good feeling going forward in confidence going forward that it was a short term blip.
Okay. That's helpful. In it and secondly, it's more just longer term inside the seam of business. You know obviously, we got our outlook for really good revenue growth, maybe just help US unpack you know where you see some margin opportunities after that business within the piano is no gross margin can move around a lot based on what the cost.
Summers are and stuff. So just maybe as we think two three years out where there could be upside on the margins and what some of those moving parts are.
Yes.
Thanks, Bobby when you when you look at some of the things that I was talking about earlier, we've got some key differentiators that are out there and.
Particularly when you look at the ecosystem, so having declining customer acquisition costs, while simultaneously having increases with regard to the number of pieces per customer when the average ticket is holding enables us to get margin expansion in that regard and so having this ongoing.
Relationship is critical also as we continue to bring on more partners like how I had mentioned PC, Richard and we have whirlpool and cycle electronic you're getting sort of a cotelle effect, that's taking place there as well because we not only have the ability to originate through the traditional.
Locations, but now originate our own customers and drive them towards optimized retail.
Origination experiences.
The other thing.
I'm sorry, Bob.
The other thing I would add to that when we think down the road.
Is in our in our legacy business the staff legacy business, we've got about half those stores converted and would do the other half early next year and with the with the a C months.
Decisioning and so forth and what you've seen in the numbers, we expect in the long term the losses to be lower than our legacy business as we convert over to to assume and as well as its a faster platform and can or cannot reduce labor a little bit in those in those stores are there that we haven't converted yet so.
I think we go forward the staff business.
Have some opportunity that's part of that's part of the long term synergies, we expect anyhow. So I think we've overall in the business you'd see see lower losses as well yeah, and then we're going to continue optimizing by channel using his mistress talk about our machine learning and AI. So that every partnership every channel every product continues to get crisper from an underwriter.
Adding perspective.
Okay. That's very helpful. Michelle's actually my follow up with just the labor opportunity. So I'll go ahead and jump back in the cube cause you answered it but I appreciate I appreciate the time and best of luck here in the fourth quarter.
Thanks, Bobby.
Uh-huh.
Your next question comes from John Rollin with Cheney.
Good morning.
Can you guys remind me what is included or not included out of your current.
You know.
Objectives in the guidance for 2023, just run through because I believe there was a lot that was basically excluded from that number that you are currently undertaking. Thank you.
For the guidance exclude any share repurchases.
And so.
But really that that's the only stipulation when it comes to our guidance.
We're really talking EBITDA margins, when we say 6 billion would expect to be at least 16, a mid teens EBITDA margin from an EPS standpoint, and certainly would not include that if you've tried it back to MIT Beck and the EPS numbers, but it's got 20% to 25% GMB growth.
You know over those over those couple of years to get there.
It's got it's got us achieving the synergies that we're on track to achieve it's got the run the centre business John running mid single digit growth next year, because there's quite a tale coming into the year with that portfolio is Anthony mentioned fill up 14% year over year and then in 2002.
Three you'd look at <unk>.
Load of low to mid single digit growth in that business. So those are those are the base assumptions that we've talked about.
But what about big retail partner wins and or.
Additional growth spurred by the Omnichannel finish.
Fintech platform, Yeah, I think I think.
That's a really good follow up question you know what we don't know if we know it's J was pointing out we know how big the total addressable market is with the ecosystem lease pay card in the marketplace and so forth and we're already seeing some great results as easy as you mentioned doing transactions and storage. So we're not even integrated into this really exciting it's.
<unk>, but we don't have that figured in I mean that that's that's.
You could it's hard to make those assumptions.
And will it be worth.
$200 million in revenue.
Next year or $500 million or in 2023.
At this point, we're we're trying not to build that and I think it certainly that number to the 20% to 25% is gonna take continuing to add on good strategic accounts.
For sure, but as far as the Simo ecosystem.
Yeah.
Certainly upside when you think about it that way.
Okay. Thank you.
Thanks.
Your next question comes from Vincent came take with Steven.
Good morning, Thanks for taking my questions. So first just kind of trying to think about the the run rate maybe going into 2022, and I understand you're giving to ensure you get two guys, yet, but when I when I think about.
The fourth quarter guidance.
Is there any sort of one timers or anything that might change as we.
Run right into next year.
Because it seems like when I look at fourth quarter guidance, you are having EBIT margin expand quarter to quarter and then maybe just.
Credit normalization, the third quarter, maybe to I guess to reserving maybe is taken upfront. So I've just kind of wondering if if there's anything when we think about the fourth quarter that we should be thinking about it for modeling onto next year. Thank you.
Go ahead I was just going to mention there are some reserve adjustments that were made them both in the renison our business as well.
They assume that there's no that is not to predict based on customer of payment activity and lost trend. What we think should be reserved for into the future and so there were some one time adjustments made for that normalization as we mentioned in our prepared comments we expected.
That normalization to happen over a couple of quarters, maybe even slightly into 22.
So there were some adjustments made this year that should set aside better for 22 years since we've taken sometimes inventories are.
We likely would have taken a.
A couple of quarters for now.
Okay. That's that's helpful and I guess was there is there anything else in the fourth quarter, just kind of when we're thinking about it.
Going to 22 was or is the fourth quarter kind of a good good.
Good proxy for how we should be thinking about.
Going forward.
Well I think you know what you're talking about a growing business and.
You know as soon as you go into that go into the future still.
19% GMB growth last quarter.
And as we think about the year.
We're starting to we're starting to camp over a big account like Wayfair added added last year at this time of year, so that that can decelerate the GMB a little bit like the 19%, but we are converting this fast stores to the <unk> to this in the system you got some short term drop when you think about.
When you think about anytime you're doing a conversion and it takes you take one step back take two steps forward, but then you got the new accounts coming in like the day was mentioning and that's what that's what continues to drive it then.
Would you say J 2700, new accounts and in the last quarter. So.
There's a lot there's a lot of ins and out camping over a large addition, obviously you're not going to camp over it unless you have other large editions and it would feel real good about.
The large retailer in the northeast Fichu, Richard that we that we just signed an exclusive with them or kicking off here in November for those who don't know what they are one of the top 10.
Clients retailers in the country and so.
That's it.
You're growing the way we're growing.
Even even though the third quarter of the margins went down because of all the stuff, we've talked about a stimulus and winding down normalization faster.
Caught a little bit light on staffing of as that happened.
Supply chain obviously.
You can guess on one that gets better but when do you have a growing business, even if it might be lumpy a quarter here a quarter there like like we just went through Vincent but overall you got those you got those 20% to 25% growth rates give.
Give or take a quarter of some kind of lumpiness like the like the.
Stimulus ending but overall I mean think about the stores, we added not even talking about the athima ecosystem, but $2700 700, new storage J and so forth to your point advances step function, but what we're seeing is that.
The lead indicators are the competitive wins, the new products that are markedly it's like Mrs. Saying, then there's a ramp that gets associated with them. So you start to see an acceleration once they get to their sort of exit velocity right. When they normalize out. There's also a additional synergy that we're assuming will take place and 22.
That we haven't seen yet we haven't finished the full integration yet.
One of those synergies were math in the back half of this year because of some of the changes that we've seen with the normalization.
The good news is we're seeing strong growth and we're seeing those synergies play out. It's just some of that normalization that occur that made it a little choppy that 22, we shouldn't be adding normalised right yeah, not nothing that has changed our long term outlook exactly.
Okay perfect. That's really helpful. Thank you for that and then a follow up question on the Sema So uhm.
A lot of really exciting data I saw the the ecosystem video on your website that was really interesting as well as the the marketplace and it's really interesting to see that marketplace. What he got best buy home depot Overstock Dot com, you've got a bunch of merchants in there and I was wondering.
I'm wondering if you can maybe talk about.
Kind of your pipeline, how <unk> have you seen that you kind of answered it a little bit, but if you could talk about the pipeline there and even even partnerships such as you kind of touched on these buy now pay later partnerships undertaking interest.
In be stone and and and <unk>. So maybe if you could talk about the pipeline both in terms of the merchant side as well as.
As well as partnership sides and.
What's the I guess the timeframe look like for that thank you.
Yep.
Thank you so I'll sort of take that in reverse order. The when you look at the partnerships interesting thing what we've been sort of saying for a couple of quarters. Now is we see this as a compliment to reset as people become more used to buy now pay later as a solution. It addresses a different segments, then we address and so forth.
<unk>, it's actually having the effective getting people more accustomed to these alternative solutions and so that's been feeling very nicely into our ecosystem like you talked about with regard to the ecosystem itself.
We are a test and learn to have environment reiterating so we rolled out of the mobile app like I talked about with the over 220000 active users now that we've started to get all of our metrics. There in line and we've tested it out we're continuing to add to the marketplace, we're seeing fence.
Have thick volume going through the some of the merchants that you just mentioned despite not having the integration and what you'll start to see is that we're accelerating than our efforts from a consumer standpoint, one very important thing in his Mitch mentioned that with the 2700 wins and other.
Areas, where we're succeeding it gives arab merchants the opportunity to take other bites at the Apple because we are embedding our native mobile app, whereas before customers walk in and have a very friction free experienced in the store, but then they leave and now we have the ability to execute what we're going to be launched.
King is executing on the mobile App and now having Ah Ah stacking effective customers. So that when they do leave we can continue to allow our merchants to continue to market to them and more importantly, transact on their phones now versus having to come back into the store and so the effective that that that will have a.
Sort of a force multiplier effect. So and then the last thing I would say to which mentioned was talking about and I mentioned briefly also the lease pay Mastercard as we build a larger and larger base of consumers on our platform, we have more opportunities to allow them. So in on a direct to consumer.
Plays we not only have the ability for them to make purchases at the merchants that you just described but once we moved the physical piece of plastic into that consumer base their ability to start going to 2.2 million locations makes it a ubiquitous solution that is very Sim.
[noise] blur and why that's important is when we are having discussions with large national retailers. It helps us with integration it helps us with not having to have a heavy integration. It also has completely changed the dynamic on how those retail partners view our solution as just another means like.
A debit card or a credit card or any other means.
Or their customers to spend in the.
Retail location.
Your next question comes from Anthony two combo with loop capital markets.
Good morning, Thanks for taking my question just one quick point of clarification first.
You said you keep using the word accounts and then you also said stores I'm, assuming you've got 2700, that's 2700 doors right. That's just 2700 stores meant like 27 hundred's completely disparate retailers right.
That's correct, it's 2700 doors.
So since given the fact, you've mentioned that 2700 number I guess my question is so what's the total number of doors were seem at this point uhm can you disclose that.
No I mean, we don't we don't talk about the other than we've made previous statements as to the size and like I said in my comments, we say over 30000 right now so and so that's growing at a pretty significant right spill.
Okay, No fair enough and then okay. Just want one less follow up uhm. So I just wanted to get back to the Super normalization. The collection activity. So I just want to make sure I understand so so basically it sounds like you know the the effect on the steamy check started to wear off and maybe you guys.
Hadn't been as aggressive or didn't feel the need to be as aggressive with collections because everyone had just lemme check.
And was making their payments and doing early buyouts and and so it sounds like you hired more people too.
Now the collection customer payment termites normalizing to to to go after that or do you allocate more hours or a combination of those I'm just trying to I'm just trying to understand exactly what that means.
Yeah, I'll I'll start out on these suicide and then pass to Anthony for the rent a center.
So when when Mitch was talking about being caught a little bit short what we're talking about as we were converting over our operations and in doing so that's when we started to see the normalization accelerate so what we've seen now is our staffing ratios come back in line.
With regard to our account loads from a a delinquent account load into the key is that our exit velocity for 22 will be back in line with.
Guidance that we've provided and you are talking call.
And that also and if that's correct and then the other thing is we brought other one of the nice benefits is the is sema platform has a number of other streams, they're automated that enable us to enhance not just having to have collectors and we were able to then bring those online with the general portfolio.
Hey, Anthony Uhm for the rent a center business historically, the third quarter is softer from a payment perspective. So we know that yearly going in the third quarter is going to wind down a bit as people go ahead and get prepared for school and and vacations right before the school year begins.
So you're right that people had stimulus checks in their pocket, but we knew that those were winding down we knew that enhanced unemployment was ultimately going to end as well. So we took a proactive measure throughout the quarter to go ahead and get staff backup actually head count year over year is up 7% so that not only benefited the opportunity when the normalization.
Occurred to go ahead and react it also sets us up for the fourth quarter from a demand perspective, but that one sort of unique situation that occurs is you're right. The customers were more flush with cash in their pocket and it's almost like a wait and see like when is the period that this normalization occurred it occurs quickly we.
In turn go ahead and respond but there's also that balancing act to make sure that we don't over correct. Because we don't want to go ahead and harm the portfolio as well. So we went ahead, we normalized and what we're seeing now in our leading indicators. We feel very confident that is the historical trends for the fourth quarter will continue and the loss rates like I sat around 3% going forward.
We feel confident about that.
Got it very helpful keep up the good work guys. Thanks, Thank you and can I get Ya.
Your next question comes from Brad Thomas with Keybanc.
Yeah. Thank you good morning, just to follow up on that last line of questioning.
So I'm on the rent to censor side as we look at the 2022, you'd think that annual losses can still be in the 3% range and and just any level of.
A detailed into on your confidence and that would be great.
Yeah. Thanks, a lot Brad yes, I do expect that that's going to occur first off the normalization happening and what we're seeing right now from our customer payment perspective, we do feel confident and and when you think about normalization the way that I look at it and the rent a center business is I'm not expecting that we're going to go back to Prepandemic numbers.
And the reason that I can feel confident about that is because now we have centralized decisioning. That's that's available inside of all of our stores. In addition to that as a byproduct of the pandemic customer communication tactics and the initiatives that we employed there and then the ramping up of digital payment. So when you put those things together, that's what makes me confident in the go forward a.
3% around 3% being the range for Iraq.
Almost 60% of the payments are Def yeah are happening outside the store yep yep approaching 60%. So we feel good about that.
Alright.
That's really helpful and maybe a similar question <unk> side I mean.
The the theme of this call and I think others in the sector for this quarter has been normalization happening faster than expected yet you seem aside we're still seeing you know.
The losses down.
Partially from from having a <unk> within the next can you just talk a little bit more junior about your line of sight to 2022, and how you make sure you don't get overly confident in the in the algorithms and Miss <unk>, perhaps would be a more violent move back to normal trying some consumers place.
Yeah. When you when you look at our 2022 loss projections.
We're looking at somewhere around a normalization rate of 6% to 8% within the virtual book.
The key thing is how we don't end up getting.
Kinda over confident too to your point with regard to the underwriting is this ability to break it down by channel byproduct by partner. So there's not just one monolithic decision engine, but our machine learning in our AI is constantly running optimization and looking for.
Exploiting the good portion of the population while minimizing the risk of your portion of the population along that lines and we're able to track that in real time, and then we need on it.
On a regular basis.
Really helpful and Maureen I apologize if I missed it but can you just giving up something on where we stand year to date on synergies how much you think you'll get in the fourth quarter and and your your current plan for 2022.
We believe by the end of the year will the team that 25 million that we talked about.
There were a number of different initiatives.
Part of which we've deployed others still extend within 22, which is why we talked about a longer term run rain at 40 to 70 million.
No that's what we had anticipated rolling out in <unk>.
2021 has already occurred.
We are expecting some of those benefits to send through within that fourth quarter. So like I mentioned earlier, we are on track with the table no sinner teen.
I'm all set with the timing of the normalization that we still feel very confident that integrating apparently business with Athena screen is two companies together will make us a better company will get us to mid teens EBITDA margin.
Over the next year or two.
I think the other thing bread when do you think about the future and a lot of questions.
Obviously this morning about the future as compared to the Lumpiness of of where we are where we are today remember the normalization of.
Of payments will comes with that as a tighter credit environment, you are talking to J 's talking about our own decisioning and and certainly by vertical and even by retailer.
And same and Anthonys business by vertical how do we how do we decision and there's a tightening going on up there without stimulus we just.
That needs to remember that tighter credit environments are beneficial to us in the long run even if in the short term there or not but in the long run the lease owned business benefits from tighter tighter credit out there above us so.
And we're already seeing some of that in the in our vintages in the in our what we call vantage scores as people come into our portfolio, we're seeing a slight uptick in that customer.
The credit worthiness, I guess you'd call it our vantage score.
Cause a lot of different things, but we're seeing a better customer ready and we would expect that to accelerate.
And everybody just needs to remember a tighter credit environment, even though in the short term we get <unk>.
Impacted us in the third quarter and as we go into our fourth quarter and the guidance, we gave but in the long run. This is this is something that benefits else'll.
Absolutely. Thank you all so much.
Thank you and thank you. Thanks.
Your next question comes from Kyle Joseph with Jeffrey.
Hey, good morning.
As for taking my question.
Not to beat a dead horse, but on the credit side.
Obviously, it's normalizing can you just give us a sense for are there any potential offsets and credit normalizing environment, and then kind of.
Remind us how the rest centre business did in in a negative economic scenario like the GSC and then how you engage in.
The seamless and I've seen a business performing in an environment like that.
Yeah, I think that.
They both.
Outperformed in an environment like that as we go and think about 2022 and 2023 is his credit tightens, we've certainly seen that over the years would run the center.
Yeah, you go back to one of the worst recessions in the history of the company in 2000 and the country in 2008, and we had good growth rate certainly outperformed.
Just about everybody when it comes to that.
Not only revenue, but our losses didn't go up and so forth and the seamers should be should be very very similar Kyle I mean, it's the same business it through retail partners.
Of course, the ECB ecosystem stance can stand on its own but it's still the same business is still leasing where they can return the product when we can rewrite those products or rent a center so.
The recession resiliency store I'm sure in 2022, and 2023 and that that's not that we're necessarily be in a recession as a country, but but the impact will be there from a credit tightening standpoint and credit tightening is good good in the long run.
Rented center when you look at at not having to.
Where we where we.
Reduce the guidance and the theme of the annual guidance on the seamer and that rent a center keep in mind I mean renna centers.
A couple of thousand reticent about their have collectors and need sure on the street. If people are paying they can react much faster to it to a technological collections of a centralized call center through virtual payments and so forth. So so the impact is going to be much less on rent. A center. Then then the sema when when this happened and the and the third one.
When the normalization was faster.
But overall in the long term bullshit benefit from the tighter credit environment.
Yeah that makes sense.
And then I could follow up on me, obviously, you talked about the supply chain impacting athima, but just walk us through the rent a center side of the business any impacts from the supply chain, how your inventories position heading into the holiday season there.
Yeah Kyle.
We're in a strong position from from all the major categories.
Good inventory levels actually ended the quarter with held for rent up 24% versus the prior year. So the merchants in the vendor partners have done a good job of sourcing inventory in and we said it before just remembering the rent a center business were able to go ahead and and source for fewer skews, but but.
By deeper in them. So that we have the staple items for the customers that are available.
We're still seeing good expansion in categories, like tools, and and tires and handbags, and he bikes et cetera and.
We're looking for opportunities to expand the the assortment that's available on the website as well strategically, though because we want to make sure that whatever we're showcasing to our customers online that from our customer customer experience perspective, there are things that we can get so we'll ramp those up as time goes on as the supply chain loosens up.
But overall to meet the demand of the fourth quarter, we feel confident especially with that held for rent being up 24% year over year.
Got it thanks very much for answering my questions.
Thanks, So thanks Q.
Your next question comes from Tim Marengo with North Coast Research.
Good morning, and thank you for taking my question.
It seems like most of my actually Christians were already answered, but I do have one a bigger picture question for.
And Mitch it seems like consolidation is happening in most fragmented industries in the U S with all the supply chain issues and kind of really limited capital of the smaller operators I was wondering if we should expect something similar and the legacy brick and mortar business and if you guys had seen.
And it can be using competitive environment recently.
Yeah, Tim this Mitch.
[laughter].
Besides us in.
The obvious one other.
Public competitor errands theirs.
There's there's.
Not not near as much competition.
In the.
<unk> center, either E com or brick and mortar business is there is an <unk>.
Virtual environment so.
It's it's it's not like competition is growing we're growing we're opening some sources here I will open source next year, we're about the only ones growing stores, our competitors shutting down stores.
And the <unk> and the regional side, we're not seeing any any real growth. There. So we're the only ones growing.
I think.
Honestly I think that'd be some opportunities for us to do some acquisitions here and there there'll be there'll be small ones.
Talk to one large competitor anyhow, so there'll be small ones, probably probably not all that material.
You can add a few million dollars of you, but I hear there but.
I think.
Certainly there are probably some of them, but there'll be pretty small in that side of the business I think when you think about M&A.
And using our great balance sheet for M&A or share repurchases in the capital allocation stuff that Maureen was talking about.
I think the opportunities are probably more on the athima side and other other business vehicles like that.
In the payments world than it is on the Renaissance side will do about the rest of your site, but they're going to be pretty small.
Yeah. Thanks, it's not so much the M&A activities and you guys have been outperforming by you know I'm Gonna say high single digits Uhm for almost 24 months now so I was just trying to gauge.
How sustainable that is.
Can you maybe remind us I have.
Number in my head that you're 45% of the store doors in the industry. You are run by independents does that number much smaller now and it might've been give a number that's maybe five years old.
Yeah, I'd say, if you're not that far off.
It's going between 35 and 45.
Okay, Alright, alright. Thank you so much for answering my questions.
Thanks.
Your next question comes from Carla Casella with J P. Morgan.
Hi, just two quick ones here one on the.
Labor costs find it sounds like you pre hired labor in third quarter.
But I'm wondering are you expecting are you still hiring into fourth are you fully staffed and how comfortable are you with the labor cost levels.
Yes, good morning, parallel I'd say, we'd caught up in the third quarter.
And then to October.
They're still they're still hiring going on there always is because unfortunately, we have we have turnover as well so.
I would say we by the end of October where I'm pretty darn good shape.
And it's kind of normal going forward the number number of people, we need to hire but the third leg third quarter and then in October was more of a catch up.
Okay, Great and then just as you mentioned a few times you return to more normal pattern sooner than you expected and as you see that are you seeing any uptick are changing the way you have to compete for either on that seem aside retail partners or our customers there or.
Or on the random centres tied for your traditional customers like are you changing any of the terms or do you see any change in the average length of the contract or anything unusual as he returned to normal.
No the good news.
Our business is that as as credit Titans.
As people get tighter on money it certainly impacts our payments as we've been talking about this morning, but then but from a demand standpoint at actually pushes pushes more demand as credit tightens above us if you will in the funnel. So I think overall for me and.
J mentioned this on the assume aside.
No the proliferation of the buy now pay later space where.
We really don't compete for that same customer, but there's a lot of turndowns in that space with our retail partners and we are hearing from retail partners say what are we we need to talk to you about those the turndowns, we're seeing so as more people add more for.
Crime and near Prime payment options for their customers they start to see more and more customers. They can't do business with.
Those options and that and that's just benefits us.
And actually.
I don't want to call it easy, but it makes it easier to get their attention that they need they need the <unk> option in the store.
Absolutely.
Great. Thank you.
Thanks Carla.
I will now turn the conference over to Mitch Fidel for closing remarks.
Oh, Thank you operator, and thank everyone for your interest this morning I appreciate your time.
It's a it's an interesting time, it's been a heck of a year. So far we got finished strong.
And a heck of a year when you when you start off the year with an acquisition like assuming you know and I just.
We had some lumpiness in the third quarter things Normalised little faster, we've talked about the supply chain overall.
We need to go back to our guidance at the beginning of the year. After we go with the theme, but we'd be delighted to be where we are today at that.
From an EPS standpoint at mid mid point region the $6. So.
There's a lot higher than what we were when we not where we thought we'd be winning out if you've seen the thing so some lumpiness in quarters, but big picture.
Keep keep that in mind and just keep in mind then.
Outlook for a long term has not changed in in fact.
Credit environment is a benefit to lease don't over the next couple of years. So we're really excited and with that well, let's get back to you probably have another call coming anyhow and we'll get back to work. Thank you everyone.
Thank you for participating you may disconnect at this time.
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