Q4 2022 Rent-A-Center Inc Earnings Call
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Good day, and thank you for standing by.
Welcome to the outbound group, formerly rent a center's fourth quarter 2022 earnings conference call.
At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session.
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Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your speaker today, Brendon Medtronic, Vice President of Investor Relations.
Good morning, and thank you all for joining us to discuss the company's performance for the fourth quarter and full year of 2022.
Outlook for 2023, and our new parent company name and Enterprise brand abound grew back.
We issued two press releases this morning before the market opened.
First regarding up out.
And the second our fourth quarter earnings release, both press releases and all related materials, including a link to the live webcast.
Available on our website at Investor data centric dot com.
On the call today from up our group, formerly ran a center, we have Mitch Fidel our CEO and feminine care.
Our CFO as a reminder, some of the statements provided on this call are forward looking and are subject to factors that could cause actual results to differ materially from our expectations. These factors are described in our earnings release as well as in the company's SEC filings.
Bond group undertakes no obligation to publicly update or revise any forward looking statements, except as required by law.
This call will also include references to non-GAAP financial measures. Please refer to our fourth quarter and full year earnings release, which can be found on our website for a description of the non-GAAP financial measures and the reconciliations to the most comparable GAAP financial measures.
With that I will turn the call over to Mitch.
Thank you Brendan and good morning to everyone on the call today we.
We will start with a discussion of our corporate name change to outbound Group, Inc, which we announced in our press release. This morning then.
I'll review some full year 2022 highlights and plans for 2023 before handing off to our Chief Financial Officer family Karam for a more detailed review of financial results and our financial outlook at the conclusion of course, we'll take some questions.
As I just mentioned.
Today, the company announced the corporate name change to outbound Group Inc.
This is an important milestone for us essentially marking the next stage in the company's journey.
Since acquiring as Sema holdings in February of 2021, which almost doubled the company's size and expanded its presence in point of sale financial solutions, we made a lot of progress on integration and strategy development today.
Today, the two organizations have really come together to become a new and exciting company positioned to continue to evolve and grow our reach.
We now think it is important to define who we are under unifying identity and mission then.
Identity is upbound.
And its mission is to elevate financial opportunity for all.
As outbound we will achieve this mission with anomaly channel platform that offers a range of inclusive and flexible financial solutions that can address the changing needs and aspirations of consumers.
Upbound as an enterprise brand that will help to define strategies and unify resources and capabilities across the company. So that we can more effectively achieve our objectives are customer.
Or facing businesses will continue to operate under the same well established brands that have built a loyal following over many years.
Upbound represents our transition to a different enterprise operating structure that will enhance strategic planning and other functions within the organization that can be leveraged better as shared services.
Upbound should also provide the company with a greater ability to focus on innovating and applying technology to enhance existing solutions and develop new solutions that.
They will benefit customers and merchants, such as targeted credit and point of sale loan products.
On slide four we provide a high level example of the outbound operating structure, our bonds and umbrella holding company that is responsible for optimizing functions that can be shared across the organization to drive better performance and efficiency for the operating business units.
Note that we show just a few types of shared services as an illustration, but there are certainly other opportunities for us to realize efficiencies.
Another noteworthy aspect about bound illustrated in this chart is the potential opportunity to apply our data and analytics capabilities to the vast amount of payment history, we have in millions of relationships with our own customers to offer them a broader set of financial solutions and we hope to have more to share on this front over the course of the year.
Looking at slide five we feel confident that we have the right leadership team to successfully execute our balanced growth strategy and overall mission.
Business unit leaders have deep industry experience with several years of both rent a center and at the Sema the.
Shared service leaders are all accomplished in their functional roles with a range of relevant industry experience that includes specialty finance technology enterprise sales and account management.
We have a good mix of 10 year roughly half of our leaders have been with us for more than a decade and have deep company and industry knowledge. The other half have joined us in the last couple of years and bring fresh ideas and insights from outside the company.
Additionally, we have several updates within the company and leadership.
I'm really excited to announce that Tyler Montrone has been appointed executive Vice President at the Sema and Tyler will oversee the business segment reporting directly to me.
Tyler has played a significant role in this seamless development over the years, including senior legal compliance and development roles and most recently he's been responsible for a seamless product engineering and underwriting functions.
I'm also pleased to say as seamless founder Aron already we'll continue to work with the company in an advisory role.
I'm also pleased to announce that so deep Watson has joined the company as Chief Technology and digital officer.
<unk> has an impressive track record of leading digital transformation to a company like Pratt and Whitney and Hewlett Packard and we believe so deep technology expertise and leadership will be an important factor in our digital evolution.
Also as we've previously announced our CFO <unk> <unk> and our head of business development, Mike <unk> joined the company within the past six months.
And we'll have more to say on outbound and our plans for the future in the coming months, including an Investor day on May 24th in New York City.
In the interim to learn more about our vision and mission as Upbound visit our updated corporate and Investor relations websites.
So moving on to our fourth quarter results were encouraged by the progress we saw in our business executing well on topline and customer payment objectives, delivering financial results that were better than our fourth quarter outlook, including revenue of $990 million adjusted EBITDA of $110 million and adjusted EPS of <unk> 86.
Looking at full year 2022 performance. It is important to consider how disproportionately macro conditions impacted less affluent households.
Many of them effectively went through their own recession faced with declining cash balances and rampant inflation.
This combined with the effect of demand pull forward in the previous two years.
A significant headwind for our business portfolio values for both rent a center in a C. Moore under pressure throughout the year translating into an 11% pro forma year over year decrease in consolidated revenues to work in a quarter billion with rent a center down 4% and the sema down about 16% on a pro forma basis.
Customer payment behavior was also under pressure, which resulted in higher loss rates and lower lease renewal rates compared to the prior year.
So on loss rates.
<unk> increased to 100 basis points year over year to 10, 6% and for rent a center increased to 180 basis points to four 9% both above our long term expectations.
Although we took steps to control costs and improve efficiency, the combined effect of lower revenues and higher losses drove over 300 basis points of adjusted EBITDA margin contraction and led to a full year 2022 adjusted earnings per share of $3 70.
Compared to $5 57 for 2021 and despite those headwinds.
Free cash flow of $407 million was still quite strong benefiting from running off higher portfolio balances from the beginning of the year now on a positive note the pressure on our businesses revealed insights and prompted actions that positioned us well moving forward.
We gained a better understanding of sustainable fundamentals when fiscal and monetary excess of the past few years started getting pulled out of the economy.
It reinforces the importance of data analytics risk management automation and appropriately balancing underwriting discipline with growth.
The company has also become a nimbler organization after adapting to the dynamic conditions from last year.
Lastly, it reconfirms the importance of embracing and investing in technology and adapting a technology centric operating philosophy to improve the customer experience and to differentiate ourselves with our merchant partners.
Digging into our key operating segments on page seven credits in our revenues and lease demand held up relatively well considering the external backdrop, which speaks to its stability and value proposition to customers.
Revenues were down four 3% for the full year in line with our original expectations, but that was down compared to peak stimulus levels from 2021.
On a more normal historical basis 2022 revenues remained healthy with two year stacked growth of five 7% in first store revenue is still 20% above 2019 levels.
Similarly, same store sales were down four 5% year over year, but two year stacked growth was 10, 8%.
We continue to make progress good progress with direct digital platform E. Commerce revenues increased mid single digits for the year, representing approximately 25% of total lease some store revenues compared to approximately 24% for 2021 and just 13% in 2019.
Overall, the pressure on revenues was primarily attributable to a year over year decrease in the portfolio with the portfolio, finishing 2022 down about 5%.
On a more normalized basis the portfolio was up approximately 15% from the end of 2019 after adjusting for franchise stores, which translates to around a 5% CAGR.
Looking at lease portfolio components deliveries were down low single digits compared to peak levels. In 2021, we launched an advanced several initiatives that helped to attract and retain customers, including reducing friction and online checkout launching our retention engine to better match payments with budgets and expanding access to new <unk>.
And brands for our extended out of service.
Returns and charge offs are where the macro environment, most negatively impacted the portfolio with renewal rates down year over year and loss rates up 180 basis points to four 9% for 2022.
Now the 2022 loss rate increased to five 8% for the second half of the year above our expectations.
We reacted swiftly in the third quarter with enhancements to account management and adjustments to underwriting to mitigate any further increases in passenger rates, which are an early indicator of loss rates stabilized in the third quarter and started a decrease in the fourth quarter.
Based on changes we've implemented we expect to see rates improved gradually throughout 2023.
Now moving on to a steamer you may recall that the business experienced high delinquencies and loss rates in late 2021 after the pandemic stimulus programs wind down.
In early 2022, we made changes in leadership and re prioritize strategic initiatives to focus on more conservative underwriting marketplace execution and profitability.
During the first half of the year, we made numerous underwriting adjustments that reduce loss rates by 370 basis points from the first to the fourth quarter contributing to a 10 two percentage point increase in adjusted EBITDA margin.
Importantly, this process has enhanced our underwriting and risk management capabilities, which should benefit the business moving forward.
<unk> decreased.
23% for the full year 2022 on a pro forma basis due to a combination of lower customer traffic and merchant partner retail locations and are on charter underwriting.
We believe we are holding share volume in stores across our merchant portfolio based on merchant feedback and retail industry data.
Average active merchant locations for the full year increased 13, 8% compared to 2021, and we made progress with strategic accounts, adding several strong regional merchants, including city furniture and sleep outfitters.
Our newly formed enterprise account team has elevated our capabilities and I'm increasingly confident that we should have additional positive developments in 2023.
Moving on to our outlook 2023, it looks like another year of macro uncertainty with the consensus view of economists' projecting that a recession will begin sometime this year.
Historically, the rent sooner businesses outperformed during recessions, while athima has yet to really be tested in a down cycle.
We believe a big part of that outperformance is non traditional LCL customers dropping into the <unk> market when unfavorable circumstances arise like job loss or consumer credit tightens.
We did not see significant indications of trade down in 2022 as employment strong and credit was ample based.
Based on recent trends there is a better chance, we'll see at least some trade down in 2023.
Included in our base case forecast given how different this economic cycle spend compared to previous cycles.
Given the macro backdrop high level operating priorities for 2023 are similar to 2022.
Maintain underwriting discipline and look for good risk adjusted opportunities to add revenues and continue to control costs to support margins and cash flow.
With underwriting now well aligned with external conditions strategic initiatives should give more focus in 2023, including Upbound related initiatives that we believe will return us to growth in 2024 and beyond.
We're also in the early stages of exploring opportunities to leverage our expertise in the underserved consumer market and specifically our existing customer database to offer additional financial solutions that can broaden customer options and eventually expand our market reach and as I mentioned earlier it would be more to come on this as we progress into the year.
Top priorities for the rent a center business or to grow and retain the customer base will do this by expanding our products and brands through our extended aisle offering improving customer experience and engagement among numerous fronts. We plan to invest in technology to enhance the digital and Omnichannel journey for consumers and <unk>.
Top of those priority is getting loss rates back towards 4% is also a high priority.
Top priorities for Siemens, who is growing the merchant base, both the SMB channel and enterprise continuing to optimize underwriting and enhancing our technology capabilities. This includes recovery and account management improvements leveraging the expertise of our rent a center business.
We'll also continue to assess ramping up our direct to consumer solutions and other solutions as market conditions are supportive.
As we start this next stage of the Companys journey as Upbound I believe we're very well positioned to play an important role in the evolving market for more inclusive and flexible consumer financial solutions.
In doing so I believe we can we can achieve compelling growth and deliver significant value for our customers merchant partners employees and shareholders and I want to thank the entire team for their continued effort and dedication that bin bin.
Impressed with the progress we made over the last year and I see tremendous opportunity in our future and with that I'll turn the call over to Jamie.
Thank you Mitch and good morning, everyone I will start today with a review of the fourth quarter and full year financial performance.
Quarterly guidance after which we will take questions.
I'll start my commentary on page nine of the presentation and would like to note that we added a new key metrics table in our press release this quarter to help investors more efficiently assess the company's performance.
We've also disclosed a couple of new metrics at the segment level that we've highlighted in the past, but we will disclose more prominently going forward.
For rent a center thats, our portfolio of value and for Sema, It's DMD.
Moving on to the results.
<unk> revenue for the fourth quarter was down 15, 4% led by a 22, 2% decrease for Sema and a seven 7% decrease for the rent a center business.
Looking at revenue categories rental and fee revenues were 13, 3% lower and accounted for most of the decrease in consolidated revenues, reflecting lower portfolio values for both businesses during the current year.
Merchandise sales revenues decreased 26, 8% as a result of fewer customers electing early payout options.
Consolidated gross margin was 50% in the fourth quarter up 190 basis points year over year due to a higher mix of rental on fees revenues compared to merchandise sales in the current year period.
We continued to execute well on expense management in the fourth quarter with consolidated cost, excluding skip stolen losses down 8% year over year led by a 10, 4% decrease in labor costs.
As Mitch noted our efforts in account management and underwriting are paying off evidenced by our fourth quarter loss rate of eight 9% for a schema, which was down 290 basis points year over year and is the lowest since eight 7% in the third quarter of 2021.
The rent a center loss rate was five 8% in line with our expectations, but above our long term target levels.
We have seen continued improvement in past due rates, which suggest loss rates should continue to trend lower as portfolio turns with newly created leases.
Fourth quarter consolidated adjusted EBITDA of $110 million was down 15, 2% year over year with a 31% decrease in rent a center offsetting 22, 4% growth for a CMO.
Adjusted EBITA margin of 11, 1% was flat compared to the prior year period with 470 basis points of margin contraction for rent a center offsetting 540 basis points of expansion for FEMA.
I'll provide more detail on the segment results on the next few slides.
Looking below the line fourth quarter net interest expense was $26 4 million compared to $18 6 million in the prior year due to an approximately 400 basis points year over year increase in variable benchmark rates at affected $950 million or 70% of our total debt.
Higher interest expense alone was a 10 fact, EPS headwind compared to the prior year period.
The effective tax rate on a non-GAAP basis was 25, 8% compared to 23, 4% in the prior year.
non-GAAP diluted average share count was $56 $5 million in the quarter compared to $65 million in the prior year period.
GAAP earnings per share was <unk> <unk> in the fourth quarter compared to <unk> 15 in the prior year period.
After adjusting for special items that we believe do not reflect the underlying performance of our business non-GAAP diluted EPS was <unk> 86 in the fourth quarter of 2022 compared to $1 eight in the prior year period.
During the fourth quarter, we generated $44 4 million of free cash flow compared to $49 5 million in the prior year period we.
We paid a quarterly dividend of <unk> 34 cents per share and during October which we previously disclosed in the third quarter call. We repurchased two 3 million shares at approximately $19 50 per share.
No additional share repurchases were executed in November and December .
Drilling down to segment results on page 10.
The rent a center business lease portfolio value was down four 7% year over year, which drove a six 8% decrease in the fourth quarter rental and fee revenue and contributed to a 25% decrease in merchandise sales revenue.
Merchandise sales were impacted by fewer customers electing early payout options compared to the prior year period.
Total segment revenue decreased seven 7% year over year with same store sales down eight 1%.
Considering the strong prior year growth, it's worth noting that both total revenues and same store sales were up low single digits on a two year stacked basis.
The trend of lower same store sales and revenue in the mid single digits has continued in the first part of 2023 as tax season has not begun in full effect and consumers remain cautious.
Skip stolen losses increased 180 basis points year over year to five 8%, which was in line with our quarterly expectations.
We believe that higher loss rate was primarily due to greater pressure on customers' budgets as inflation accelerated and remained elevated throughout the year.
We made changes to tighten underwriting standards in certain segments and account management, starting in the third quarter Pat.
Past due rates have moved lower in a downward trend suggests that loss rates should improve over the next few quarters as newer monthly vintages become a larger percentage of the overall portfolio polio.
We've continued to see this positive trend in the first few weeks of 2023 and are encouraged by our ability to manage losses, while maintaining the portfolio.
Adjusted EBITDA margin for the fourth quarter decreased 470 basis points year over year to 14, 6%, primarily due to lower revenues and higher loss rates compared to the prior year period.
These headwinds were partially offset by lower labor advertising and other operating expenses, resulting in a 140 basis points year over year reduction in the ratio of operating expenses, excluding losses as a percent of revenue.
Moving to a FEMA during.
During the fourth quarter <unk> decreased 23, 4% year over year, primarily due to macroeconomic pressure on consumers and the pull forward effect of stimulus that caused the drop in application volumes for our merchant partners.
This trend has also continued in the first few weeks of 2023.
Offsetting lower traffic merchant locations in the fourth quarter were up mid single digits compared to the prior year period.
With <unk> running down over 20% in the past few quarters, our open lease count was down in the high teens compared to the prior year period.
This drove a 22, 2% year over year decrease in revenues with rental revenues down, 22% and merchandize sales revenues down 28, 6%.
Skip stolen losses decreased 290 basis points year over year to eight 9%, which was slightly better than our outlook.
Underwriting changes made in the first half of the year and our continuous monitoring of higher risk segments has continued to benefit losses since the high seen earlier in 2022.
Also worth noting that our virtual business, excluding legacy stack business loss rates for the quarter were 8% at the high end, but within our 6% to 8% expectation for that part of the business.
Adjusted EBITDA of $71 7 million was up 22, 4% year over year, driven by lower losses in operating costs offset by lower revenue.
Adjusted EBITDA margin of 15% increased 540 basis points year over year, and 240 basis points sequentially.
On a full year basis consolidated revenue decreased seven 4% on a reported basis and 11, 2% on a pro forma basis, reflecting that February 2021 acquisition of Sema.
The decrease in reported revenue was evenly split between rental and fee revenue and merchandize sales revenue as both were down approximately $115 million from 2021.
Consolidated gross margin was 48, 9% up 40 basis points year over year due to a higher mix of rental and fees revenue compared to merchandise sales in the current year period.
Adjusted EBITDA $453 5 million decreased 28, 2% year over year on a reported basis and 32% on a pro forma basis.
The rent a center business accounted for approximately two thirds of the decrease in our CMO accounted for approximately one third.
The primary factors that drove EBITDA lower with a decrease in revenues and higher loss rates.
Operating costs, excluding losses decreased 1% year over year on a pro forma basis with labor cost down almost 2% and G&A down 4%, reflecting our cost management efforts.
Full year net interest expense was $87 1 million compared to $70 7 million in the prior year due to higher variable benchmark rates.
The higher interest expense was a 'twenty, one EPS headwind compared to the prior year period.
The effective tax rate on a non-GAAP basis was 25, 8% compared to 23, 3% in the prior year.
And non-GAAP diluted average share count was $59 million for the year compared to $66 8 million for 2021.
For the year ended December 31, 2022, we generated $468 5 million of cash flow from operations and $407 1 million of free cash flow up from $392 3 million of cash flow from operations and $329 9 million of free cash flow in 2021.
We paid an annual dividend of $1 36 per share and repurchased three 5 million shares at approximately $21 per share.
The company has approximately $285 million remaining on its current share repurchase authorization in.
In addition at year end, we had a cash balance of $144 million gross debt of $1 4 billion net leverage of two eight times and available liquidity of approximately $540 million.
Shifting to the 2023 financial outlook note that references to growth or decreases generally refer to year over year changes unless otherwise stated.
For the full year, we expect to generate revenue of $3 8 billion to 4 billion adjusted.
Adjusted EBITDA of $380 million to $415 million.
Which excludes stock based compensation of approximately $24 million.
We are projecting modest margin contraction as lower revenues will largely be offset by lower losses and operating expenses.
Fully diluted adjusted earnings per share is expected to be $2 50 to $3, which assumes a fully diluted average share count of $56 7 million with no share repurchases throughout the year.
For the year, we expect $180 million to $215 million of free cash flow net interest expense of $105 million to $110 million and an effective tax rate of 25, 5% to 26, 5%.
Our forecast assumes a macroeconomic backdrop consistent with existing conditions persistent inflation and a slight increase in unemployment.
For Sema full year 2023, <unk> is expected to be down low to mid single digits year over year as we expect merchant partner volumes will remain under pressure from the prevailing macroeconomic conditions and the remaining impact of the pull forward.
<unk> will start off the year with similar year over year trends that we experienced in the fourth quarter, but we do expect that to improve throughout 2023 and get back to year over year growth by the third and fourth quarter as some of the headwinds for merchant volume applications improve and targeted sales initiatives take effect.
We expect our Cmos full year revenues will be down low double digits with the first half of the year down in the high teens in the second half down mid single digits.
Adjusted EBITDA margin is expected to be in the low double digit range and remained relatively consistent throughout the year as loss rates should stay around nine to nine 5% range.
For the rent a center business segment, we expect 2023 revenues and same store sales to be down in the low to mid single digit range, mainly driven by a lower lease portfolio due to lower demand and higher return rates.
Adjusted EBITDA margin is expected to be in the mid teens range throughout the year with loss rates improving throughout 2023 with continued elevated losses in the first quarter and ending the year in the four 5% range.
We expect the Mexico and franchising businesses will generate similar results to 2022.
Corporate costs are expected to increase mid to high single digits, reflecting several new executive leadership additions in late 2022 in early 2023, as well as lower than normal performance based compensation in 2022, and higher technology investments across the organization.
For the first quarter total consolidated revenue will be down in the mid teens year over year with adjusted EBITDA margins in the nine 5% to 10% range.
Interest expense tax rate and share count should be similar to the fourth quarter of 2022.
Regarding capital allocation, the top priorities continue to be dividend payments and debt reduction.
Given the pressure on the portfolio side and revenues paying down debt to maintain a relatively flat leverage ratio is a top priority.
Over the long term, we continue to target a one five times debt to EBITDA ratio.
Touching quickly on the corporate name change as Mitch mentioned earlier, the change to outbound group became effective yesterday.
Starting on Monday February 27th our shares will be listed on NASDAQ under our new ticker <unk>.
In summary, 2022 was a challenging year for our customers as well as our financial results. We have demonstrated our ability to identify risks in our portfolio in both segments adjusting our underwriting and account management practices and we've seen the impact of those adjustments with lower delinquencies and losses throughout the year.
We have a strong balance sheet and generate strong cash flows we have an opportunity to further support our core businesses with a unified strategic direction, leveraging best practices, and realizing operational and cross brand synergies.
The macro environment will remain uncertain in 2023, especially for our consumers. However, we believe we have a resilient business with a disciplined approach that can deliver long term sustainable growth.
Thank you for your time. This morning, we will now turn the call over for your questions.
As a reminder to ask a question. Please press star one one on your telephone and wait.
Aimed to be announced.
To withdraw your question Press Star one one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Bobby Griffin with Raymond James.
Yeah.
Good morning, everybody. Thank you for taking my questions.
I guess first wondering Bob.
I wanted to follow up first on the Athima comments around <unk> I think I heard you correctly, it's GMB down similar to the four key strengths so call. It I guess low twenties.
Parison start to get easier, though in <unk>. So just curious why we shouldn't see some type of maybe sequential recovery immediately still down but less down given that we're starting to lap minus 20 GMB growth throughout 2022.
Yeah, Hey, Bob Good morning. Thanks for the question this is Jamie.
Yes, the comment was really what was going to be similar trends to the fourth quarter, we don't expect it to be in the low.
But our mid twenties.
So it will be down year over year, but you are right. We started making some changes in underwriting in the first part of the first quarter of 2022 Didnt take full effect.
The beginning of the quarter, but it will be down call it mid teens.
In the first quarter year over year. Despite some of the changes that we made.
Last year, yes, we have some good morning, Bobby mid share that you have some of those.
So the comps start to change so it'll be down less but still be down I think what's the point of the comment and then Thats fine. We mentioned also in his prepared comments as we go through the year third and fourth quarters, when we would see it being back into positive territory. So it's kind of like it gets better a little bit each quarter, along the along the way that negative mid <unk>.
<unk> said in the first quarter, and then by third and fourth quarter were in the positive territory.
Okay.
Helpful and I guess secondly, Mitch.
On the sourcing of products have you start to see some break and the cost because I kind of have a view that inflation basically priced out this consumer youre target consumer base, even if they needed. Some of these durable products just given that you had to pass through the massive level of inflation, we've seen across all kind of durable products are you starting to see break.
In sourcing where you can lower the rental prices to customers and is that starting to move demand in certain categories where that.
Actually happen.
Yes, I think absolutely it has.
<unk>.
We're back to.
Of course, they went up a lot of our back to deflationary times when it comes to electronics electronics have been deflationary for so many years.
Yes, so as they come out with some new assess deflating from day, one of course that change for a couple of years during the pandemic, but we're back to things dropping down now in electronics really all categories have had a drop some more severe than others.
We've even seen some furniture pricing reductions.
Quite honestly not so much in appliances, yet but.
But electronics and furniture for sure. So yes, I think we're seeing some of that deflation will have.
Our business in 2023.
Okay, and then I guess lastly for me just on the leverage side of things understand kind of what the game plan is for 2023, but on a multiyear basis should we think about share repurchases turned off until we get closer to the target or or would you still look at it even if youre above target.
If there is excess cash or just any kind of decision like that.
Yes.
Wouldn't say they are turned off theyre going to be opportunistic in nature.
We're very focused on as I mentioned, maintaining our leverage ratio to kind of flat to slightly up this year given the pressure on EBITDA, we paid over $200 million of debt in 2022, and I don't think we'll be able to get to that level. In 2023, just given the drop in free cash flow year over year, but our.
Focus is to maintain that leverage ratio around where we where we ended the year. So paying down that debt is still a top priority.
Thank you I appreciate all the details best of luck here this year.
Thanks, Bob.
Our next question comes from the line of Jason Haas with Bank of America.
Hey, good morning, and thanks for taking my questions.
Just wanted to follow up on that.
On the CMA GMB, what gives you the confidence that you will see.
And acceleration and get back to positive.
By the second half of the year, because I don't think the comparison based on a one year basis that will make it that.
That much through the year I'm not sure if youre looking on like a multi year basis.
That's the case or if there's anything else that we should just be aware of to get some confidence that we will see acceleration.
Okay.
Yes, I think I think because of the because of the comps were going over and even though you're right 2022 was was pretty flat, but when you look at multiple years.
Of course, 2022 had different times of the year, we're tightening the underwriting so that kind of flatten things out but more in other years youll see that.
The fourth quarter certainly trend up.
From a seasonality standpoint, so when we put multiple years in there Jason we see we trend it conservatively still trend our GMP, but we could do it based on multiple years the way the comps come out you end up with some positive and I'm not going to be huge positive numbers in the third and fourth quarter will be low low to mid single digits is what we built.
Leaf.
Got it that's great that makes sense.
And then.
Paul I was curious.
Michelle if you could talk about it sounds like youre, not really seeing much benefit from credit tightening yet I'm curious.
When do you expect that might happen and when we do see that do you think it will benefit the <unk> segment more ore or the rent a center segment more.
Yes, good question, where we've seen a little of it and I think we said in our comments that we.
In recent trends.
It just hasn't been significant yet certainly not like past cycles.
Downturns, where it was almost immediate but because of the unemployment rate.
And remaining so strong we haven't seen much we've seen a little bit depends on the depends on the retail partner when we look at some of our larger ones who have it depends on how the retail partner.
Willing or not willing to pay fees to the lenders above us.
To.
Because we still have to pay more merchant fees as interest rates go up it goes up and things like that so, but we are seeing a little.
Certainly not not nothing large yet our vantage scores coming in.
Especially the top 10% of our scores are showing a bit of an increase I get a CE mark we haven't loosened underwriting at all on our approval rates are upper pointed to point or two which means a little different customers come in and we're seeing a little.
Have any of it in our in our forecast for this year. So that's all upside for us in 2023, and the second part of your question.
Yes, I think.
I think as CMO will see it more noticeably presuming it does get to a significant level in 2023.
Just because I mean rent a center's pretty consistent anyhow. They just don't have the volatility in there in their portfolio that assume a dozen and.
Not a direct it's not directly aligned with lenders above us it's not like a waterfall business. When people go to go into rent a center. So yes, I think as seamless C. It would see more than rent a center.
Great. Thank you and if I could squeeze one more question I was curious if you look by category, if theres anything performing noticeably better or worse than others.
Like furniture, and mattresses versus consumer electronics, and other categories I guess, both in rent a center and casino business.
Yes, I think the items.
I think Jason it comes down to the items.
The big pull forward in 2020, one was really in the furniture and the furniture space.
Other things not as much certainly laptop computers were pull forward as people start working from home, but but.
Other things there wasn't really a pull forward in appliances people then just replace their appliances, because they're at home more.
That's more of a replace when they break at least for at least for our customer so that the real pull forward was in furniture, you look at some other categories, where seamless bigger like will entire where there wasn't a pull forward.
And we're not seeing weakness in that compared to furniture. So it's really furniture stands by itself. When it comes in our business when it comes to a pull forward comment.
Furniture really stands alone.
And our mix at our CMO has also shifted.
Back to the earlier comment on what gives us confidence that we can grow throughout the years is our ability to us to kind of shift.
Product categories that we do so we talked about <unk> being down from a <unk> standpoint, 23%, but if you look at jewelry and electronics and auto as Mitch mentioned those are only down 5% year over year. So the mix shift also helps.
Got it that makes sense. Thank you.
Thanks, Jason.
Our next question comes from the line of Vincent <unk> with Stephens.
Good morning, Thanks for taking my questions.
So nice.
Brand name change.
And.
Look forward to the Investor day.
Maybe want to touch on that if there is any.
In addition to that Brendan take any strategic changes or.
Or shifts that you might be seeing as part of that thank you.
Sure Good morning Vincent.
It's a few things we've mentioned.
The new products.
<unk>.
That did this.
Kind of paves, a way from a strategic standpoint, when we say new products. We're talking about loan products. You know some of our competition already has a loan product out there to go to go along with the lease some product to move ups up a little bit. So we're looking at those kind of products as we move up in the in our credit and loan products.
Point of sale.
That's certainly part of the strategy. We're in the early stages of looking at that but again thats certainly part of the strategy the way sharing best practices and and.
Shared service model, we're not like we're adding a whole bunch of people in the shared service model just moving some moving some deck chairs around it and where we can where we can.
Sure create shared services for for both most of the big segments add a third segment here down the road in the in the lending products that I mentioned so.
But it's really those products the shared services.
The sharing of data that can really can really make an impact from a underwriting and our marketing.
<unk>.
Standpoint.
Collections as well right in the center helping.
Collect and pick up a lot more on the siem upfront. So its a matter of there's been some quite a bit of integration in the last year anyhow and the companies are really starting to work well together and we just thought it was very time for.
US to do the go the holding company route where it's like I said shared services best practices and those kinds of things and really feed off each other.
And be able to set the strategy of the outbound level, which would be taking.
Taking advantage of those best practices synergies certainly some synergies to be gotten as as we do this along the way nothing in our model and our financial forecast, but we think there are some synergies down the road as we look at this and we're really excited about getting into some new products.
Yes, maybe I'll add to that a little bit of who we are as part of the strategy. We are still in the early stages of evaluating and assessing goods, especially around our approach and timing and we will be able to update you more on investor day, but we know it's an opportunity for us we have millions of customers that we've dealt with that we have payment history with so.
The ability to kind of monetize our customer database and help them kind of move upward in their financial journey. If you think about who our core customers are they typically either have bad credit or no credit and are not able to get some of those typical lending products.
For us we actually have history with them, we have payment history, and we have the data behind it to be able to potentially offer them.
Those types of products and then the second piece as Mitch said the point of sale, we think our merchant partners, especially on the small medium sized businesses will really get a lot of traction with that it drives incremental sales and honestly it makes us stickier.
With them on the on the <unk> side as well so so definitely feel like it's an opportunity for US we'll have more for you as we progress through the year.
Okay, Great that's very helpful.
Thank you for that and the second following up on the GMB discussion.
Just wondering if there is.
Other changes that need to happen for the GMB improvement or is it just comps for example.
Thinking about your approval rates or on the seamless side, it's more merchant litigation what needs to happen just sort of what what are you assuming is.
GMB improves throughout the year. Thank you.
Yes.
Good question, we're not assuming any large enterprise accounts, although that's certainly always an opportunity as we've built that team out.
Yes.
As a direct answer to your question I'll get back to that but Mike bagel.
Joined us about six months ago is building out that team, we're starting to see much better conversations at that highest level from an enterprise standpoint. So we're excited about where we're where we're going with that but in our.
In the way of Sema is always growing the core business I mean, we did we do have more active merchants now than we had a year ago. So we're growing from that standpoint, we think we can target from a strategic standpoint, I mentioned Tyler Montrone now now in charge of the Sema believes we can target better to get more <unk> out of the out of the.
That are the ones that are given us <unk> now.
More of a targeted approach than mayonnaise approach not that we won't be adding a lot of merchants, but just the ones. We already have how do we target more at a certain ones and so forth.
And those kind of things so it's more more of a targeted strategy on the SMB of course, the enterprise strategy I mentioned.
But I think thats it.
It's a targeted strategy from a sales standpoint, and we've got momentum from that standpoint, and also it's not like we've lost merchants. So our merchant base, even though we're sitting at minus 20.
<unk> in 2022, our merchant base grew.
Of course with all of that pull forward in furniture, it's under a lot of pressure to actually grow GMP, but the merchant base is still growing so that's probably the biggest part of the answer Vincent is the merchant base is still growing.
Okay that makes sense.
Is there kind of any.
Change to the approval rates are any assumptions there. Thank you.
Just more I mean more of the same as far as the customer we're not assuming that things get better where we will be able to approve a higher percentage or so point that I mentioned approval rates have ticked up slightly the last couple of months, but thats without changing the underwriting that's really where we're starting to see probably at least a little bit of trade down.
But no we're not we're not assuming that we'll be able to loosen that would be that would be a tailwind obviously a headwind if we had to tighten more but we're not assuming the customer behavior changes in 2023.
We've done a lot Vincent over the year to really dig into our decision engine understand our data better as we kind of had really high losses in the first part of the year, we had to look at it at a very granular level, whether it's by product category or by channel or even at the merchant level to really try to optimize our approval.
Rates in our conversion rates and so we're going to continuously look to tweak those and try to get as much <unk> and penetrate those good merchant is as we can.
So it's.
It's hard to look at just the approval rates because of strategy changes across 25000 30000 merchants, yes. When you look at when you look at those past dues and loss charges that are in the presentation I don't know if you've looked at the presentation. Vincent if it's in front of you or not but in the on the <unk> side as bad associate gotten in late 2021.
In early 2022.
Really impressive how how fast the team Aaron Aaron I'll read obviously, we had him come back and work on that Aaron and Tyler basically in a gentleman by name of Stuart Salt Lake.
Those three guys the way they brought down the way they brought down those losses in past due numbers as quickly as they did and now we've got last numbers as well as the third lowest since mid 2021. So.
Certainly proved proved we can we can do it and learned a lot as famous our same thing on the rent a center side with that underwriting team.
As soon as you look at those past due numbers in our presentation that jumped in July and now we're back down already I already back down below July of course, we've got tax season coming so.
We proved we learned a lot we learned a lot we're better today than before that happened to us in both segments. So.
That's the brightness of the future.
Very helpful. Thanks, very much.
Thanks Vincent.
Our next question comes from the line of Brad Thomas with Keybanc capital markets.
Hi, good morning.
Wanted to follow up on I think the last topic.
Losses, the skip stolen.
Can you talk a little bit more about about.
Expectations here for the full year in the ranges that you are targeting.
The two larger segments.
Sure. So obviously.
We just talked about a seamless coming down almost 300 basis points year over year. So it's kind of back into our range.
Virtual side of the business at 8% for the for the quarter. That's at the high end, but within our range for that business. So guiding on a combined sema segment in that nine to nine five range very similar to where we ended.
The fourth quarter is where we expect it to be and then on the rent a center side, obviously, the five 8% in the fourth quarter was higher than what wed like to see it is much higher than our target levels, but consistent with with our forecast.
Throughout the year, we expect that to trend down so first quarter will still be a little bit elevated and will be better sequentially, but it will still be elevated compared to historical trends and end the year kind of in that four 5% range and and if things go well and the macro gets a little bit better maybe we can drive it a little bit further than four and a half but.
The guidance, we gave you two to four 5% on the rent a center side.
Really helpful. Thanks, Thanks Sami.
And then maybe.
Mitch I just wanted to ask a question about the rent a center store.
Business.
The segments coming off of.
Really good years for revenues.
Running it at.
Profitability.
Most retailers would kill to have.
But.
As you face, perhaps a tougher revenue outlook going forward can you talk a little bit about the store.
Polio and what you think the right number of stores is.
How you might want to.
That's been kind of all of that portfolio going forward.
Yes, good question, Brad I think.
We're very comfortable with the store count is today.
Think theres some opportunity down the road, we've mentioned that in past calls we're testing some smaller.
Footprint, we think we can we can cover the country.
And cover a lot of our business as we mentioned coming from E com.
And the 25% range, but the stores are still a fulfillment center for that so.
We're comfortable with the account we have now probably could do it in less square footage on average so we're testing some of that using technology in the stores.
To search categories versus having to have as much showroom space and so forth. So we're we're going to be able to over the next five years bring down the cost of real estate I believe but the store count itself will stay about the same we're still running 15% higher than in 2019 portfolio levels on a per store basis or even on an.
Overall basis, when you when you back out some of the stores we sold the two.
Basically so, California in 2020 to a large franchisee so.
But 15% growth, we think we think.
We're we can finish this year at or above where we are now so it doesn't go lower from here to go lower in the course of the year, but we see we really see 2023 is a trough year for rent a center.
And for and for Sema for that matter, although seamless EBITDA won't be much of 2020 two's, but.
The trough year overall, and especially at rent a center so the.
Store count won't change a whole lot. We don't believe going forward, we have some opportunities from a overall square footage standpoint, but I think we're we're getting as low as we believe it is going to get again, when you think about year end numbers, so it'll get lower.
Coming next few weeks and months with income tax refunds, we lose some portfolio and then build it back, especially as we go into the fourth quarter, but we expect to finish this year from a portfolio standpoint at least flat with where we started the year and therefore maintain that 15% growth over 2019 levels pre pandemic levels.
Great great.
We've talked about kind of tax refund season.
A couple of questions.
I think the early data would suggest that the average refunds are down kind of double digit from a year ago.
Any particular view on.
No tax season will play out and implications perhaps for your business.
Yeah.
I don't I think.
<unk> done this a long time I don't get too wrapped up in some of those some of those numbers that come out because theyre not necessarily related to our consumer so I don't know that the consumer.
35% to $40000 income ranges as having 10% to 12% lower refunds or not I know those are the overall numbers. We'll know soon enough. We'll know in the next couple of weeks.
When it comes to.
We're seeing in the business so yes.
The good news there Brad is if theres less money.
There'll be less less payouts portfolio actually maintained might maintain better than we anticipate.
On the other hand, when Theres a good income tax season, I mean, we've put a lot of new business on the books too so.
They tend to well the portfolio is still goes down they don't balance up we don't do enough new business for the portfolio not to go down at all it does go down during tax season, but the money is good.
And the payouts, especially in our rent a center side, we still make good margins on those so.
There's a few less payouts.
It'll be good for the portfolio. So we're not really worried about it whether it's if they are a little lower or not.
I don't know that they will be lower but I don't I don't see how thats going to be much of a negative for us. So it could end up a positive for us if they are a little lower especially on the Athima side, where we're less payouts are really.
A good thing it as sema, because we don't make a heck of a lot.
And those early payouts is unlike rent a center, where we got the difference between wholesale and retail built in there where were okay. When there's those early payout so.
We're not.
Whether there's a few less payouts or not I don't think its going to matter a whole lot at the end of the day.
Fair point, Thanks, Thanks mentioned.
Okay, great. Thanks, Brett.
Our next question comes from the line of Anthony <unk> with loop capital.
Good morning.
Hey, good morning. Thank you so much for taking my question. So I know, there's probably a bit difficult to parse out but as you think about the 23% GMB decline sema last year, how much of that was.
<unk>.
Proactively tightening credit as opposed to some of the pullback.
In demand at your retail partners, because it sounds like at least from our doors perspective.
You guys had a pretty good year. So how do you sort of think about that.
Yes ill start and then family family can chime in.
Did have a pretty good year from a door count standpoint, but each each location was less productive, especially the furniture locations.
Yeah.
Even even where there wasn't a pullback like.
Like family was talking about again on the auto space or even the jewelry space, where there wasn't much of a pull forward in 'twenty or 'twenty one.
We're still down in the mid to high single digits, just based on so that if you say that's underwriting.
Youre somewhere in that half and half range as far as traffic at the retail partner versus underwriting maybe it's a little more on the traffic side than it is underwriting but.
Theres somewhere 50, 50 as far as the reasons for it yes, and I would add to that it's also average ticket size in our product mix also as part of the <unk> calculation. So average ticket sizes have trended down.
Throughout the year, especially year over year because of the mix and the <unk>.
Mix also.
Trended down it so so it's Anthony it's tough to kind of parse out as you said, it's a combination of all those three things, but if we had to rank them I do think its foot traffic is probably at the top of the list. Okay got.
Got it and then just one quick follow up from a credit underwriting perspective I mean.
Have you.
Any sort of stabilize that like are you.
Are you tightening at all it loosening at all I'm thinking more kind of sequentially.
I would say, yes, all of the above Anthony.
We're continuously kind of trying to optimize and drive higher yield better performance and ultimately get to a better <unk>.
EBITDA number.
So it kind of depends Youre question is have we bottomed out it depends on your view of the recession and Theres a lot of conflicting signals on where we're going.
Feel good that if we if we see early indications of risk in certain segments. We have the ability now to adjust pretty quickly at a very granular level. Some good around lawsuit question will become how much <unk> did we lose if we have to tighten so it's more around demand poor.
Folio size and it is the overall loss rate just given the fact that we've been able to decrease in such a short period of time.
And I had mentioned Anthony that the.
Not seeing a significant trade down yet, but we think we're starting to see a little of it our approval rates are actually have actually gone up a hair on the seamless side without loosening underwriting, which means there's a little bit different customer at least coming into the mix. When we look at our vantage scores and they are now.
I mentioned earlier at least the top 10%, we're seeing we're seeing differences in the scores. So so I think if you see some trade down.
That naturally moves the approval rates up a little bit without.
Because of better customer for us coming into the into the funnel.
<unk>.
A more creditworthy customer I should say coming into the into the into the funnel and that can.
That helps that can help the approval rate, even with us not changing underwriting.
Got it. Thank you that's helpful.
Thanks Anthony.
Our next question comes from the line of Alex Fuhrman with Craig Hallum.
Hey, guys. Thanks, very much for taking my question.
Yes, it sounds like furniture and to some extent.
Laptop computers were really the big driver of demand in 2021 and is now creating the pumpkin Paris Ed.
You look at this being the trough year, what do you think is going to really be the category that that helped to drive demand to lead you out of that frothy or do you think furniture is likely to reaccelerate or or do you think it's going to be more weighted towards appliances or other category that you resumed growth.
Firstly, I think it'll be it'll be across all the categories. I think that every every quarter, we get farther away from the pull forward on furniture. It's helpful same with the same with the laptops that I mentioned.
Yes.
We have game systems on the rent a center side now that are helping with some of the new games that came out last year that there wasn't great availability on but now there is so electronics will help us.
I think it'll be pretty widespread I mean, thats seamless doing.
Doing really well in the auto business will entire specifically.
Jewelry, depending on the timing.
It's spotty obviously.
Valentine's day, and Christmas and so forth, but.
I think I think it will be across all of them just because I think the furniture category as it.
<unk> hit bottom hit bottom in 2022, so I think that the growth coming out of especially our exit growth velocity at the end of 2023, you'll be on all categories.
Okay. That's really helpful. Thank you mentioned.
Okay. Thanks.
That concludes today's question and answer session I would like to turn the call back to Mitch Fadel CEO for closing remarks.
Thank you Liz and thank you all for joining US today. We appreciate your interest in our company and we look forward to talk with you more in the future about the exciting developments the opportunities of course, we mentioned the Investor Day May 24th in New York City, and we will be talking to you before that on an earnings call, but put that on your calendar and we look forward to updating you on our.
The exciting developments and opportunities we see here at Upbound, formerly known as rent a center so have a great day everyone.
This concludes today's conference call. Thank you for participating you may now disconnect.
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