Q3 2023 Upbound Group Inc Earnings Call
Good day and thank you for standing by welcome to the quarter three 2023 Uptown Group incorporated earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question.
During that session you will need to press star one one on your telephone.
Here, an automated message advising your hand, just raised to withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would like to now hand, the conference over to your first speaker today Brendon Medtronic.
Good morning, and thank you all for joining us to discuss the company's results for the third quarter of 2023.
We issued our earnings release before the market opened today.
The release and all related materials, including electric to the live webcast.
Are available on our website at Investor <unk> outbound dot com.
On the call today from our Bank group, we have Mitch Fidel our CEO and Fahmi Karam 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.
<unk> 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 in our discussion of comparable performance, we will generally refer to non-GAAP results.
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.
I will turn the call over to Mitch.
Thank you Brendon and welcome everyone for the call. This morning.
We are pleased to report another strong quarter for the company, which January financial results at the high end of our financial outlook.
non-GAAP diluted earnings per share was <unk> 79 cents compared to guidance of 70 to 80 and revenues.
$979 million and adjusted EBITDA of $106 million.
We are encouraged to see our businesses are on track to meet key operating objectives for the year. Despite the continuing challenging external conditions. We again delivered sequential improvement in top line trends lower overall loss rates year over year and strong margins due to stable customer payment behavior in the third quarter.
Considering the third quarter strong financial results the positive trends, we're seeing in the business and the resilient underlying fundamentals of the leased on model our outlook for 2023 has continued to improve accordingly.
We increased the midpoint of our 2023 financial targets, which family ill discuss in more detail in a few minutes.
Before reviewing our third quarter results given ongoing headwinds across consumer credit I think it's worthwhile to offer some perspective on the state of the non prime consumer, but we believe we know well based on rent a center's 50 years of operating history in this market.
The fact that we've been successful for over 50 years speaks to the durability of the lease to own model and its relative stability within disruptive economic environment.
We attribute this counter cyclical aspect to a few factors.
Our lease solutions have a strong value proposition for consumers with credit and liquidity constraints, who otherwise may not be able to access important durable goods like furniture, and appliances and tires and big ticket electronics.
So it's not surprising that they will often re prioritize budgets to stay on lease with us as long as possible, especially given the important role. These products play in their lives and the flexibility of a lease which allows the mirror turning to products free of any obligation.
Second historically, some non traditional LTE, how consumers will trade down from credit solutions.
Lending conditions tighten and they no longer qualify for traditional consumer financing.
This trade down can help sustain our lease portfolio drive incremental lease portfolio value and help manage credit risk with higher credit quality consumers entering the top of the funnel.
We are seeing signs of trade down in our applicants and portfolios over the past three quarters and we believe this dynamic could be a positive tailwind to our results it but if a slowdown in the economy continues.
Regarding the current state of our consumers many households are experiencing financial pressures due to higher prices for non discretionary items growing debt balances and interest rates limited wage growth and decreasing bank account balances.
While these dynamics are causing certain customers to remain on rent for a longer it's important to recognize that many of our customers. There are many of the customers. We serve are accustom to living on tight budgets and are adaptable to changes and financial position.
In addition, the labor market for wage workers remains relatively tight providing ample opportunity to find employment.
And our underserved consumers spent under this inflationary pressure since mid 2022, and although the environment has not improved it has stabilized as consumers have adjusted their cash priorities and we've adjusted our operations to balance meeting their needs and generating appropriate risk adjusted returns.
Our underwriting and account management have continued to evolve over the past year, improving the quality of our lease portfolio. So.
While we've seen some recent softening in the financial profiles of customers in Africa. So we do not expect it to translate to a significant increase in delinquency and loss rates in the foreseeable future in fact.
Given the better than expected yields in the Athima business, we've been able to tactically underwrite leases in certain channels.
<unk> credit Vince the pickup GMB by volume with just a modest uptick in delinquencies and loss rates.
The more challenging aspect actually of consumer behavior for us today at the ongoing impact of demand pulled forward and key durable good categories, especially for a seamless furniture oriented merchant partners.
And a positive note, we have partially offset the soft demand by expanding our presence and less penetrated categories, such as auto and jewelry.
Today, we have a more diverse product portfolio that should be even better positioned for growth when the effects of the demand pull forward dissipate.
So looking at 2024, we will be almost three years out from peak stimulus and we expect furniture demand should begin to normalize.
Putting the pieces together, we believe the non prime consumer has been and will continue to be resilient and is in relatively good shape for this environment, which further increases our confidence that the company can return to growth in 2024.
Now moving to third quarter results the rent a center segment performed in line with our expectations.
Revenues in the same store sales decreased approximately 4% year over year, improving from a four 9% decrease in the second quarter with both rental and fee revenue and merchandize sales revenue down year over year.
However, despite ongoing top line pressures numerous forward looking kpis demonstrated promising sequential improvement relative to the first half of 2023.
The portfolio value finished the quarter, two 7% lower year over year, the best performance year to date and 18, almost 18, 5% above the third quarter of 2019 on a per store basis.
Deliveries for the quarter were down a modest 2% year over year. Despite continued pressure on consumer durable goods spending we see more broadly which reflects the team's strong execution and the resilient underlying demand for rent a center's leasing solutions.
We continued to make progress on strategic initiatives in the third quarter, including <unk>.
Logistics enhancements to improve the omni channel experience or our 50th anniversary campaign that drove a 40% lift in web traffic and a 15% lift in web orders for the quarter.
We've relaunched our presence in tires, and we opened four new stores.
Higher rent a center web traffic led to an increase in e-commerce revenue, which accounted for approximately 25% of the third quarter revenues compared to 23% in the prior year period.
Extended iOS continued to generate strong growth with deliveries up 129% year over year as we continue to add to our product lineup, which by the way. We now offer about 12000 Skus on rent a center dot com, which is over 50% more year over year as far as the Skus online.
The emphasis we placed on risk management over the past year continue to pay off as well in the third quarter with loss rates and delinquency rates in line with our expectations.
<unk> loss rate for the third quarter of four 3% was down 20 basis points sequentially and down 150 basis points year over year with a 30 day past due rate of three 1% decreased 40 basis points year over year and has stabilized during a seasonally tough quarter.
Moving onto Athima topline trends continued to improve there as well in the third quarter as we expected <unk> decreased one 4% year over year, improving 440 basis points relative to the second quarter and we saw modest growth in key metrics like active merchant locations applications funded leases.
Open leases.
The external backdrop remained challenging with traffic and volumes for many merchants and more established categories like furniture and home electronics and appliance is still negatively impacted by the demand pull forward and the ongoing pressure on consumer budgets.
The team has done a great job expanding the platform and less established product categories like I mentioned before things like auto and jewelry and channels like E Commerce and the.
<unk> seem a marketplace have really helped us offset sluggish demand.
In addition, we picked up some good regional account wins and enhanced commercial positions with a few key merchants that also contributed incremental lease volumes in the third quarter.
Based on conversations with current and prospective merchant partners. We believe this is a FEMA is gaining both mindshare and market share in the industry.
Our E comm capabilities, our ability to staff high volume stores and our flexible lease terms are key differentiators for us.
Positive trends in September have carried over into October increasing our confidence that <unk> should grow in the low single digits year over year in the fourth quarter as we've been predicting all year, which visit visions as well to end the year with a strong portfolio and grow revenue and profits in 2024 in fact.
September was the first month of positive year over year GMB growth since December of 2021.
And October was positive as well.
Margins were strong again in the third quarter with adjusted EBITDA margins at the Sema of 15, 3% up 270 basis points year over year benefiting from stable loss rates and a lower mix of customers electing the earliest lease payout option, which increases our yields.
After three quarters of consistent declines in earliest payouts, we feel confident that the mix has stabilized back to pre pandemic levels that are several hundred basis points below 2021 and 2022.
Although we have seen a very modest uptick in delinquencies and loss rates in the third quarter, we do not believe its directly attributable of customers shifting.
From early payouts this thing on lease.
Rather it is related to seasonality a slight shift in mix to E com and isolated to certain pockets of risk in our legacy acceptance now business, which we have addressed by taking further underwriting actions in the quarter.
The effect of slightly higher loss rates, it's been more than offset by the higher yields and margins were any for more customers staying on lease longer.
We continue to advance initiatives that should enhance the companys competitive position and growth opportunities. The product development team launched several improvements that continues to reduce friction for our merchant partners and makes a seamless offerings relatively easier to integrate and transact with versus our competitors.
This dynamic is especially true for ecommerce retailers.
Additionally, our partnership with concur credit, which was formerly known as Genesis financial solutions is progressing nicely and we have gained important insights through early testing.
Looking forward to the final months of the year, we think that our business should be approaching a normalized base from which we can start to progress our three year financial targets, we outlined at our Investor Day earlier, this year, which we believe can sum up to a high teens to low 20% annual total shareholder return.
Now moving to slide five and an overview of our key priorities for the year.
For the rent a center segment, we are focused on enhancing our omnichannel platform and performance by expanding our extended aisle offerings and continuing to improve and grow the e-commerce customer experience.
And additionally of logistics initiatives to improve our last mile capabilities, which are a differentiating factor for us. Additionally.
Additionally, our plans to enhance underwriting at rent a center by leveraging aspects of a seamless decision engine that should help us approved but more of the right rent a center customers.
For FEMA, our top priority is to increase lease applications and manage risk to start 2024 with a strong portfolio.
Key initiatives supporting those objectives include the Athima marketplace.
A robust business development pipeline and further enhancing data analytics and underwriting.
Next we remain focused on enhancing our seamless market position as the most effective <unk> solution for merchants by making it even easier to integrate with continuing to reduce friction points for ecommerce and partnering with financial solution providers to create more holistic offerings.
Top priorities at the <unk> holding company level are implementing our partnership with concur credit realizing synergies between the operating segments and investing in our technology organization to support our growth agenda as we head into 2024.
Looking back over the last 10 months I am really impressed with the company's progress. Despite the external headwinds we've made numerous changes and upgrades and processes people and technology to create what I believe is the best in class platform for non prime financial solutions, serving consumers and merchants.
It's exciting to see the pieces coming together and the potential additional value we can create for our customers our partners and our shareholders and I want to thank the entire team for their tremendous efforts and dedication.
And with that I'll turn the call over to family.
Thank you Mitch and good morning, everyone I will start today with a review of the third quarter results and then discuss our updated fiscal year 2023 guidance after which we will take questions.
Beginning on page six of the presentation.
Holidayed revenue for the third quarter was down four 4% year over year with the Sema down five 8% and rent a center down four 2%.
Rentals and fees revenues were down two 7%, reflecting lower portfolio values for both businesses during the third quarter of this year.
Merchandise sales revenues decreased 13, 6% due to fewer customers electing earlier payout options.
The dollar decrease in revenue was fairly evenly split between rentals and fees revenue and merchandize sales revenue.
Consolidated gross margin was 58% an increase of 140 basis points year over year with improvement in the <unk> segment, partially offset by lower margins in the rent a center segment.
Consolidated operating expenses, excluding skip stolen losses in depreciation and amortization were up low single digits with a low single digit decrease in store labor and other store expenses more than offset by higher general and administrative costs as a result of certain corporate investments and incentive based compensation tied.
The company performance.
Ongoing enhancements enhancements to underwriting and account management drove a 50 basis point year over year reduction in consolidated skip stolen loss rate to 7%.
On a sequential basis consolidated loss rate increased 10 basis points due to seasonality and a modest uptick in the <unk> segment, notably the legacy acceptance now business.
Putting the pieces together consolidated adjusted EBITDA of $106 million decreased seven 8% year over year on lower rent a center segment, EBITDA and higher corporate costs, partially offset by higher our CMS segment EBITDA.
Adjusted EBITDA margin of 10, 8% was down approximately 40 basis points compared to the prior year period with approximately 270 basis points of margin expansion for our FEMA more than offset by approximately 120 basis points of contraction for rent a center and 120 basis point increase in corporate costs as a percent of sales.
I will provide more detail on our segment results in a moment.
Looking below the line the third quarter net interest expense was $27 million compared to $23 million in the prior year due to approximately 300 basis points of year over year increase in variable benchmark rates that affected our variable rate debt, which was approximately $815 million at quarter end.
The effective tax rate on a non-GAAP basis was 25, 5% compared to 26% for the prior year period.
The diluted average share count was $56 9 million in the quarter.
GAAP earnings per share with <unk> in the third quarter compared to a loss per share of <unk> 10 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> 79 in the third quarter of 2023 compared to <unk> 94 in the prior year period.
During the third quarter, we generated $63 million of free cash flow compared to $106 million in the prior year period, and we distributed a quarterly dividend of <unk> 34 per share.
We repurchased approximately 900000 shares in the third quarter and we finished the quarter with a net leverage ratio of approximately two five times unchanged from the second quarter.
Drilling down to the segment results starting on page seven.
Alright.
Great.
Got it.
At this time of year over year.
Thanks, so much.
Great quarter.
And that really drove it.
The decrease in the third quarter results.
Please go ahead.
Decrease.
Okay Alright.
Alright.
Okay.
Period.
Total segment revenues decreased four 2% year over year in line with our expectations and improved from a four 9% decrease in the second quarter.
Same store sales decreased 4% year over year in the third quarter compared to a four 9% decrease in the second quarter.
Skip stolen losses continued to improve driven by ongoing underwriting efforts decreasing 150 basis points year over year to four 3% and 20 basis points sequentially.
Past due rates also decreased year over year with 30 day past due rates, averaging three 1% for the third quarter compared to three 5% for the prior year period.
Adjusted EBITDA margin for the third quarter decreased 120 basis points year over year to 15%, primarily due to deleveraging effect of lower revenues on fixed costs.
This is reflected by a 195 basis point year over year increase in the ratio of operating expenses, excluding skip stolen losses as a percent of revenue, even though expense dollars decreased year over year.
Adjusted EBITDA margin decreased 290 basis points from the second quarter, primarily reflecting normal seasonality and higher marketing expenses.
For Sema as we expected <unk> year over year trends continued to improve sequentially in the third quarter approaching positive territory.
Moreover, we experienced year over year growth in some key underlying drivers with active merchant locations and applications up low single digits.
<unk> were offset by lower average ticket size and lower approval rates as E com and direct to consumer become a bigger portion of the application mix.
Looking at the portfolio opened lease count was up mid single digits, both year over year and sequentially and was the highest level since the first quarter of 2022.
Revenues decreased five 8% year over year, including a three 2% decrease for rentals and fees revenue.
Merchandise sales revenue decreased 14, 5% year over year due to fewer customers electing the earliest payout option with the mix of those transactions for the third quarter dropping down to levels last experienced in 2019.
Skip stolen losses were generally in line with our expectations for the third quarter, the virtual business losses as a percent of sales were seven 8%, a 10 basis points higher sequentially and within our long term target range of 6% to 8%.
While losses at the legacy acceptance now business, we are in the double digits.
During the quarter, we observed softening of performance at <unk> and tightened underwriting we have begun transitioning merchant partners from the a now underwriting decision engine to the <unk> platform and we'll continue with our larger accounts through the fourth quarter and the first part of next year. This will improve our underwriting capabilities and re should reduce loss.
This is at the back book from the legacy system winds down.
On a consolidated basis, the loss rate of nine 4%, which was consistent with our third quarter outlook.
Operating costs, excluding skip stolen losses were down mid single digits in the third quarter with lower labor cost from reduced operational head count largely offset by increased marketing investments.
Operating costs, excluding skip stolen losses as a percent of sales increased 20 basis points year over year due to the deleveraging effect of lower revenues.
Adjusted EBITDA of $72 8 million was up 14, 5% year over year, primarily due to a 10% decrease in cost of goods sold driven by fewer early payout transactions that was partially offset by lower revenues.
Adjusted EBITDA margin of 15, 3% increased approximately 270 basis points year over year, driven by 330 basis points of gross margin expansion.
For the Mexico segment, adjusted EBITDA was higher year over year and in the franchise segment adjusted EBITDA was lower.
Corporate costs were approximately 25% higher compared to the prior year, primarily due to higher projected performance based compensation.
Shifting to the 2023 financial outlook note that references to growth are decreases generally refer to year over year changes unless otherwise stated.
Most of my commentary will be focused on the non-GAAP results, our forecast assumes a macroeconomic backdrop consistent with existing conditions continued discipline and targeted underwriting and a slight increase in unemployment we.
We did not incorporate any material benefit from trade down or the credit card loan partnership.
For the full year, we expect to generate revenue of $3 95 to 4 billion. Adjusted EBITDA is now expected to be $450 million to $460 million, excluding stock based compensation of approximately $25 million.
We are raising the lower end and the midpoint of our target range for fully diluted non-GAAP earnings per share to $3 45 to $3 55.
Which assumes a fully diluted average share count of $56 3 million and no further share repurchases through the remainder of the year.
We expect $215 million to $235 million of free cash flow, which is somewhat lower than our previous outlook due to higher projected <unk> for sema in replenishing our inventory for the rent a center business.
As you may recall, GMB growth and portfolio growth tend to reduce free cash flow conversion as the cash flow cash outflow for product is greater than the associated lease payments collected in the near term.
We expect net interest expense of approximately $110 million and a non-GAAP effective tax rate of approximately 26%.
My discussion on the outlook for operating segments, we'll focus on the fourth quarter.
For the rent a center segment, we expect portfolio value finished the fourth quarter flat to down low single digits. We expect revenues will also be flat to down low single digits and adjusted EBITDA margin to be in the mid teens.
Loss rates should be relatively similar to the third quarter and the four to four 5% range.
For a CMO, we expect fourth quarter <unk> will be up low single digits year over year with revenues up low to mid single digits.
We expect gross margins will be similar to the third quarter and do not anticipate additional decreases in the mix of consumers electing the earliest payout option.
We expect adjusted EBITDA margin will be in the low to mid teens with stable gross margins, partially offset by higher loss rates due to a seasonal uptick in the fourth quarter and higher losses in the legacy <unk> business.
For Mexico in the franchising businesses, we expect Mexico revenue will be up mid teens year over year and franchise revenue down low double digits.
We expect both Mexico and franchise adjusted EBITDA to be up year over year and sequentially.
Corporate costs are expected to increase mid single digits sequentially.
Regarding capital allocation.
We repurchased 900000 shares during the third quarter and another 800000 shares in October totaling $50 million and 3% of basic shares outstanding.
We opportunistically elected to return capital to shareholders given what we believe is a favorable return offered by our shares at recent price levels.
Our strong cash flow generation and liquidity allow us to take a balanced approach to capital allocation, which we have achieved year to date.
The company has paid down approximately $135 million of debt and returned $88 million to shareholders through dividends and share buybacks through the end of the third quarter.
Looking out over the next couple of quarters, our top priorities will likely be more aligned with our long term priorities are reinvesting in the business dividend payments and debt reduction.
We ended the third quarter with $1 3 billion of outstanding debt and net leverage of two five times.
We are still targeting leverage of one five times over the long term, but we will continue to assess market conditions and reasonable reasonable alternative uses of capital that generates favorable risk adjusted returns for shareholders.
To conclude our business fundamentals remain strong we.
We are encouraged by the strong top line trends and our progress in returning to growth in both of our major segments. While there is still a high level of external uncertainty and headwinds on consumer durable goods spending we remain confident in our ability to balance GMB growth supporting our consumers and merchants needs while appropriately managing risk we are.
Our focus on disciplined underwriting and expense management, while also investing in capabilities that will drive sustainable long term growth for our shareholders.
Thank you for your time. This morning, we will now turn the call over to your questions.
Thank you at this time, we will conduct a question and answer session.
As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please standby, while we compile the Q&A roster.
Our first question today comes from the line of Bobby Griffin with Raymond James Your line is now open.
Good morning, everybody. Thanks for taking my questions.
Alright, Bob.
And I guess congrats on on some of the inflection points here on <unk> with the sema in some of the success that it's starting to show up I guess my first question is just a little bit more kind of a multi year or just higher level. We've always been trained to kind of look at the trailing portfolio balances in these businesses to kind of help guide us to next.
Here are the future revenue and things like that and I know, we don't want to give 2024 guidance, but with this earnings season, we've seen some more cautious commentary about 2024. So just when you guys sit here today and help us tune up our models.
Do you think the portfolio balances in both of your key segments that 2024 up.
And my second question I'll, just go ahead and ask now.
Has the dynamic around 90 day buyouts been an over earning aspect this year or is it just been more things normalize and where we don't need to be overly concern that we have to make a counter adjustment next year.
Yes, good questions, maybe I'll start and then Sam family came in and then as far as the portfolio.
Yes, we don't want to get into 2024, right now, but the comments we did make like if you look at the two segments.
We're going to starting with the Sema.
It would be positive <unk> for the first time.
As we said September and October passenger GMB for the first time in a couple of years and as we think about the fourth quarter being positive.
We roll into 2020 forward momentum from a <unk> standpoint.
<unk>, we wouldn't expect that to start going the other way at the beginning of 2024, So and then rent a center. We said the portfolio. It's made progress all year its best level in a couple of years now where it's only down two 7% compared to last year, which was a 200 basis point improvement will be if we're not.
Flat, we're going to be real close to flat at the end of the quarter was it flat to down low single digits in the for the portfolio. So you think about that that momentum in the rent a center business and that being.
A flat portfolio or even if it's a yes.
Whatever low single digit say minus 1% or something very small going into next year with momentum. So I think both segments have the positive momentum that we've had all year in reducing the negative numbers.
That is turning positive in the <unk> in the fourth quarter. We believe it will turn positive in the fourth quarter as evidenced in September and October and then and then rent a center being real close to flat in our portfolio going in going into next year. So some positive momentum in both of them in the second part of your question on the 90 day.
The earliest payout options.
On the <unk> side or even the Renaissance side.
But I think you're particularly talking about the <unk> side, we're back to pre pandemic levels. So we think this is normal it's not a new normal that's actually just back to the normal from the from the elevated levels of it.
Stimulus drove in 2020 in 2021, so I don't think you have to factor in anything different because theyre just back to pre pandemic levels.
Yes Mitch.
I agree with the commentary around 2024, I do think we will end the year on a really strong note from a portfolio standpoint on both of the businesses.
We will have some tough comps on a CMO side going into next year from a margin standpoint.
Reaching 16, 17% EBITDA margins in the second quarter was something we've said, it's probably not sustainable at those levels, but very happy with where we are from a <unk> standpoint, it trended up really throughout the quarter and as we commented showing growth in October as well so from a 2020.
For standpoint, still feel like we will be able to grow both revenue and EBITDA at both segments.
Thank you and then I guess.
Sam is that is that partly a function.
Flattish to maybe even slightly up portfolio you'd have some opex expense that could hurt kind of hinder a little of the growth.
The confidence in the growth is partly a function of you've been able to scale the organization's cost structure to be able to to flow through.
EBITDA growth on a more flattish portfolio to start start the year.
Yes, I think we will definitely be more efficient as we find synergies between the two segments I do think though we are prioritizing putting investment back into the business to make it more consumer and merchant friendly.
So we will spend money, where its appropriate to kind of support the growth, but generally speaking we are very focused on making the operations more efficient and youll see that with the sema as we grow continue to grow revenues youll see some of the operating leverage really play out.
Given the virtual nature of the business and I think the other one to add to that when do you think about margins as the losses on the rent a center side have to come down all year. So early in the year, we'll be we'll have some we'll have some positive.
Loss comparisons on the rent a center side from where they were earlier in the year is <unk>.
All the way down and then on the.
The sema side, even though they have been in line all year.
On the virtual business as we convert the legacy acceptance now business as a family is talking about in his prepared comments as we convert that then those then we have some some.
Tailwind from a comp standpoint on losses on the sema business relative to the legacy business.
Thank you I appreciate the details best of luck here this holiday season.
Great. Thanks, Bobby.
One moment for our next question.
Our next question comes from Brad Thomas with Keybanc Capital markets. Your line is now open.
Hi, good morning, Mitch Fannie and Brendan.
Congrats on the sequential improvement you all are driving here a.
A couple of questions. If I could first wanted to start just with the <unk>.
Outlook on the CMS side and I was wondering if you can just give us a little more color on some of the growth drivers here on the composition.
We think about the trend in the number of doors and partners you have whats going on with the average customer balance.
For new leases on a number of items.
Being granted.
And any color on kind of the product segments or channels, just again, a hallmark color on how things are evolving there.
Maybe just starting.
Sure Brett and good morning.
Primarily the growth the improvement in <unk> and the <unk> side has been.
There's three or four reasons for growing merchants.
That's certainly that's probably number one.
More more come.
Coming out of our marketplace at <unk> Dot Com is another one.
And sometimes it's not just growing merchants, but as we mentioned enhancing our position with merchants. There may be they may have a couple of different lease stones in their store, but if you. If you prove to be their best option and get into number one position versus a number two position.
Yes that helps.
And then.
The diversity of categories as furniture continues to struggle.
Year over year per door.
We're getting we're making nice inroads in the wheel and tire business in the auto space.
Spent a lot of the merchant growth as well and those arent down year over year, those are actually up year over year, where from when you think about door productivity same with jewelry, we're adding merchants plus plus the door productivity per store is not down like it is in furniture, so all of it.
All of those things are making up for retail furniture on a per door basis being down for us but.
Growing merchants.
Diversifying the categories enhanced positions with some merchants in the marketplace to the direct to the consumer stuff is working really well too.
Okay.
Yes.
Alright, thanks to add on to that a little bit as far as the <unk> trajectory really saw inside the quarter growth from July and August into September and I think we've mentioned in our prepared remarks around.
September being the first month of growth year over year growth since December of 2021.
The <unk> side. So so really strong performance for everything that Mitch said applications were up our conversion rates were up slightly year over year average ticket size has come down which was a little bit of a headwind to GMP, but Q1 or Q2 was better than Q1 Q3 was better than.
In Q2, and Q4 should be better than Q3, so a lot of momentum around <unk> and its growth prospects.
I think just adding on one more thing to that Brad as you as you think about the furniture pull forward being probably the biggest headwind that that that we have in household durable goods, a little bit in appliances and electronics, but it's primarily furniture with all of that pull forward from the stimulus money in 2020 in 2021 that adds.
That as things normalize and I don't think theyre going to normalize.
And the next 90 days or anything like that when it comes to that furniture pull forward, but if you think about.
Adding the merchants.
We're adding doing more in our marketplace, we mentioned in our prepared comments.
Some good regional wins, we don't have a national wanted to talk about just yet, but we have.
Some good regional wins take which basically means taking share from our competition.
And when you add all that together and then furniture does improve presuming 2024, maybe it's not normal but 2024 is better than 2023, and when we talk to our furniture partners 2025 will be better than 'twenty, four and probably 26 will be better in 'twenty five and maybe level off then it's going to take another couple of years.
But.
We are already positive for other reasons from a growth standpoint, we're in really great position for when the furniture per door productivity comes back.
We would agree and certainly all the data we have is it furniture is trending below normal.
<unk>.
The United States right now so rich provinces in longer term.
On the on the rent a center side Mitch just as we look at some of your competitors I mean, it does look like.
Our results have been.
Lower year over year significantly better than competitors can you maybe talk about what youre doing.
To maybe take share and maybe how the weekly value proposition Nate maybe more compelling if it is in this current environment and what's more competitors offer.
Yes, I think I think.
Rent a center.
Has performed pretty well improve the.
Negative same store sales each quarter and as we as we mentioned.
Deliveries year over year being only 2% off if.
If you are comparing to traditional retail and you have the rest of our business is furniture too so only being only being 2% up we feel pretty good about especially with.
That improved as the quarter went on as well.
July August September so yes.
Yes, I think we're just sticking with you focusing on execution. The E Commerce as I mentioned has been it has been really strong we continue to grow it when you think about ecommerce, 25% this year roughly versus 23 last year growing win.
'twenty two is better than 'twenty, one and so forth. So even post pandemic continuing to grow the ecommerce with the extended aisle stuff. That's on there is as I mentioned and just really focusing on execution.
Yes, we haven't changed our model we are still in the in the communities with all of our stores.
A steady store count not moving them all over the place and doing things like that we're just steadily focusing on the customer being their form.
In a traditional way expanding the offering swarm, certainly, but really focus on execution and sticking with our core model.
Great. Thanks, so much.
Okay. Thanks, Brett.
One moment for our next question.
Our next question comes from Jason Haas with Bank of America. Your line is now open.
Hey, good morning, and thanks for taking my questions I'm curious as you think.
Youre seeing more trade down now than you were earlier in the year and I know, it's hard to guess, but do you expect to see more trade down going forward.
It is hard it is hard to say we can look at we can look at vantage scores and stuff like that.
See a little bit of it but thats not the only indicator right.
When you think about trade down we definitely think it's part of what's happening I don't know that its yes, I think I'd say, it's been pretty modest every all the data we're looking at we think it could it could.
We can get more in 2024 as credit tightens and.
Yes, it's possible that it goes up from here, we don't have that we don't have that forecasted or or anything it would be a tail a positive tailwind in upside, but it's been pretty modest, but I think it's definitely there I can't say, Jason that theres more today than it was 30 days ago 60 days ago, 90 days ago or even earlier in the year.
It's just really hard to say, but on the other hand, when you think about what I was just mentioning to to Brad when deliver.
Deliveries at rent a center down 2% year over year and half of their businesses is furniture.
When you look at we talked to our big furniture partners that we have on the <unk> side, and even suppliers big names like Ashley furniture, and so forth.
I mean, it's down a lot more than that right furniture, so is that because of the trade down.
Got to be part of it.
The team is executing really well, but they probably need a little help besides execution and I think theres, probably some trade down and there maybe its more than we think it's just really really hard to say, there's definitely some there and it could accelerate as we go forward.
No.
Okay.
I don't know if anybody wants to hear it but if unemployment goes up a little bit probably even accelerates if unemployment gets worse in the in the country in 2024 and may even accelerate as theres, even more tightening above us.
And then how about the impact from student loans I know, we're pretty early into that but I'm curious if you're starting to see any discernible impact from those loss rates or anything in the business that seems to be related to those repayments starting.
No we haven't we've been we've been watching it and looking at it.
Trying to see if theres any differences same thing we get asked the question, sometimes about the snap program and so forth so but nothing discernible that we can tell at this point, yes, one of the things that we have started to notice a little bit again very early on.
But on the front end.
Folks that have student loans have started to convert a little bit less now than.
Were they were kind of before the <unk>.
Turn back on.
So nothing in our lawsuit nothing in our delinquencies, but we have seen some of it come in from the front end on the underwriting side.
Got it that's interesting thank you.
Okay.
Thanks, Jason.
One moment for our next question.
Our next question comes from Vincent Cane kick of Stephens. Your line is now open.
Hey, good morning, Thanks for taking my questions.
First one on.
The components of GMP, so nice to see the sequential improvement.
In that and I'm just wondering if you could talk about the components in terms of.
Underlying demand it sounds like maybe that's stabilized and starting to improve.
But then you talked about tighter underwriting so.
Maybe that dynamic.
So those are down a bit but if you could talk about that and then on a seamless specifically.
Nice to hear the guide for positive <unk> in the fourth quarter.
Just wondering when I compare that to rent a center.
Yes.
That growth in <unk>.
Sure.
Is from same store sales differences or if because youre, adding more merchants that you were able to offset maybe what might be similar or same store sales performance between the CMA.
Rent a center.
Sure Vincent let me let.
Let me start and then family can weigh in and I'll take the last part of that first yes, I think that is that the difference whereas sema.
<unk> growth in merchant growth in the marketplace. The rent a center does two <unk> dot com, but.
More growth in the marketplace.
And just growing the merchants and.
Growth when you think about it from a same store sales standpoint.
It's <unk>.
Probably positive.
Don't really look at it that way, but just knowing the numbers I do look at the verticals like auto.
The wheel and tire verticals, probably on a same store basis, our flat to positive of course furniture sounds like we're talking about.
Clients is probably down a little bit as well.
But I think from a same store sales standpoint from an athima it would depend on the vertical.
Some would be positive and some would be wouldn't be like furniture as I mentioned, but the the.
The growth is really the difference between <unk> and rent a center's we're adding merchants everyday really.
I assume a front I mentioned a few good regional wins.
Where it's adding some <unk> and taking market share I think radnet centers, probably taken a little market share too when you when you compare the numbers, but I think the CMA, adding merchants everyday is probably why they will have positive they're hitting positive first even though you see the improvement in both segments, you'll hit a positive inflect.
<unk> first even with the tighter underwriting and as we mentioned Vincent and as you know when it comes to underwriting when you say tighter overall.
I would agree with that I would say we are tighter today than we were yesterday overall on the other hand, we do look for pockets performing partners and performing risk bins that you can dig deeper in and take more risk in so.
It's not like a carte Blanche just tightened everything if certain people certain scores.
People, what they look like when they come into the decision engine, depending on their scores and other attributes we dig deeper when we can so that helps too.
Yeah, Vincent I think Mitch is the answer for the second part of your question. It really applies to the first part as well just from a standpoint of.
Demand per location is probably down but given.
We're adding more locations Thats why I mentioned the applications we're up.
Year over year, and then as far as the tightening that we mentioned in the prepared remarks, we've really isolated it to our legacy acceptance now business you've heard us talk a lot about synergies between the two major segments and I think one of the.
Biggest components of that is on the underwriting side and making sure that our underwriting capabilities at our CMO, we apply on different parts of the business and the legacy acceptance now business rolls into the <unk> segment, but they are on two different underwriting systems today, we started converting them.
Earlier this quarter, we will continue to do that throughout this year and the first part of next year to get the underwriting platforms kind of consistent on the CMO consolidated business segment and so we are we did have to tighten there and so you've seen that impacted our loss rates this quarter, a little bit 40 basis points up year over year, you'll see that again in the fall.
This quarter as you cut revenue before you start seeing the impact on the last dollars, but as soon as that gets converted over I think youll start seeing it trend much more in line with the CMS segment Sema virtual business.
Okay great.
Super helpful. Thanks, so much.
Thanks, Vincent, Yes, and Thats a real.
That's a real tailwind in the next year or anything about the virtual business being between 6% to eight and we have been more like nine if you look over the last four quarters.
995, because of the legacy business heading into that so once that legacy business runs through there certainly the latter half of next year at least and then youre at six to eight that's a nice tailwind for next year.
Great. Thank you.
Thanks Vincent.
One moment for our next question.
Our next question comes from the line of Kyle Joseph with Jefferies. Your line is now open.
Hey, good morning, guys. Thanks for taking my questions most of them have been answered but on.
Genesis.
Concord.
Just remind us timing in terms of when you anticipate that kind of.
Needing to flow through our model and how exactly that's going to flow through the P&L and in which segment it flows through and how it impacts and when it should start impacting the consolidated P&L.
Hey, good morning, Thanks for the thanks for the question Yeah, we're really excited about the prospects of the partnership.
Still in test mode, and rolling it out in a few stores, but really positive.
Discussions with our <unk>.
Both our small and medium sized businesses as well as our bigger regional players so that the.
The ones that don't have a second look provider are excited about having a second look provider out there at their locations for their for their customers and the ones that do today really liked the benefit of having one vendor that has two products and so really excited about.
The prospects of it we will look to roll out really in scale beginning of the year in 2024 on both the general purpose credit card as well as the second look retail on a private label credit card.
We will give you more guidance into into 2024, probably next quarter, but it will take some time to really ramp up for it to be a material number.
In the P&L. So I would look forward in the second half of next year, but we will give you more of that specific guidance into the numbers as we get into looking into 2024 as far as where it will hit the majority of it will come through the <unk>.
<unk> segment.
Read the rent a center segment will benefit from some of the general purpose credit card, but the all of the private label credit card on the retail side will come through the <unk> segment.
Got it very helpful. Thanks for answering my questions.
Thanks, Scott Thanks, Scott.
One moment for our next question.
Our next question comes from John Rowan with Janney Montgomery Scott. Your line is now open.
Hey, guys.
Just one quick question for me and I apologize if you covered this earlier I hop off for a second but.
No.
I believe you guys said that there was a slight reduction in credit quality of applicants for the quarter and I'm just trying to remember if that.
Blitzer it doesn't <unk> prior comments.
About the quality of applicants coming in at the top of the funnel, indicating whether or not there is a trade down if I'm if I'm remembering correctly.
That was.
Part of the.
Part of the call there that we're seeing better applicants at the top of the funnel and so we do believe we're seeing trade down can you just help me understand the.
The comments today versus prior.
Prior comments thank you.
Sure John Good morning.
The comment around weaker profiles is really related to the acceptance now business and seeing some of that softness that we mentioned.
Previously on it's kind of isolated too.
Those retailers and those merchants really around the furniture side, but generally speaking if you look at our third party scores theyre still elevated year over year Mitch mentioned it.
Earlier in the call but.
We did see a run up in those third party scores at the beginning of the year, it's probably I would say stabilized over the last few months.
But the consumer is very resilient.
They are still under pressure inflation is still very high discretionary spending is is still very limited and tough out there, but generally speaking at the top of the funnel, we're seeing better scores.
And hopefully that continues as people above us continue to tighten it could be a nice tailwind for us in 2024, it's not in any of our guidance that we've given to date, but could be out there for us if if it continues to come in at the top end of our apps and just a little more color on what families just explaining where that's the.
Are you referring to the legacy.
Acceptance now business.
A little weaker coming in and it's mostly because more of the business with those retailers is coming from E com.
And they're doing a lot more furniture, a couple of them are doing a lot more furniture online getting the orders generated online.
And we're seeing some weakness in the customer coming through there in one of the reasons, we're hurrying and by early next year, we'll have everybody converted over the sema platform is because it.
It does a better job.
From an ecommerce standpoint, you haven't heard us talking over the years about the legacy business that we have.
Wanted to get it to a different underwriting level quite as much as you've heard it today, but it's really because the E comm business is growing over there.
We're excited about the benefit by getting it over they seem aside because it can do a better job.
Identifying the risk in those people. So that's really what it was all about just seeing outside of really.
One level down from the legacy business is e-commerce.
Where the weaker the weaker subs coming through and we will have that over on the <unk> side.
And some of our partners by the end of this year, but all of them by early next year.
Okay, great. Thank you.
Thanks, Jeff.
One moment for our next question.
Our next question comes from Alex Fuhrman with Craig Hallum Capital Group. Your line is now open.
Hey, guys just quickly for me there's been a lot of talk about trade down in terms of credit curious if youre seeing your customers trading down just in terms of what theyre buying in your in your stores and with your partners on the Athena side as well are you starting to see.
People, making smaller purchases are gravitating away from name brand at all.
No we really arent Alex good morning, we're not really seeing that.
No.
Youre getting here a little more about that probably at retail than when you. When you think about small weekly payments that are lease offers.
Or monthly payments for that matter, but when you think about a.
<unk>.
55 inch TV Brenda center being <unk>.
$20 a week in the 75 inch TBB and $26 a week and those are closed so those aren't exact numbers.
Yes, $6 difference a week you won't see much trade down now maybe a retailer that one of the Tvs is a $1000 and the other ones 500, Youll see trade down, but when you have the low weekly payments you can return at any time. So if you get in over your head you could in fact, not just return it you could switch to a smaller one if you needed to $20 TV instead of the 26.
One you could you could exchange your for the smaller ones. So there.
Theres not much reason for trade down with a lower weekly payments as compared to traditional retail.
Okay. That's really helpful. Thank you guys very much.
Great. Thanks, Alex.
One moment for our next question.
Our next question comes from Carla Casella with Jpmorgan. Your line is now open.
Hi, Thanks for taking the question.
Give some guidance on free cash flow can you just talk about.
Some of the components of the working capital or specifically more of that merchandise.
Purchases.
Is that driving the Paul difference in your free cash flow and how should we think about that really roll into 'twenty four.
Good morning Carla.
Bit hard to hear you, but I think it was a free cash flow question and yes, we did end up lowering our guidance for the year slightly this quarter compared to last quarter, but very much in line with where we were earlier in the year and I think it's a positive story from a standpoint of DMV has come in higher than what.
We had initially thought and ramping up nicely in the fourth quarter and the.
Same with the rent a center side of the business of replenishing that inventory for the holiday push.
So we expect that to continue to be a draw on free cash flow next year as well as we look into continuing to grow on both of the segments.
Coming off of 2022.
Our heavy free cash flow year coming in with that year with a really big portfolio with comps down.
At Sema at 20%, we were able to generate a lot of free cash flow in 2022.
Still very strong in 2023, but we're starting to see that growth in the second half of the year that we kind of predicted and.
And that should continue into 2024, so we will get to more of a normalized level. This year and then into growth mode into next year. So expectation is that it will continue to be very strong, but probably a little bit less than 24 than we had in 'twenty three.
Okay, Great and then the active merchant locations.
And then can you continue to add additional locations can you just.
You said the percentage growth.
Overall, you see in those in the fourth quarter or next year.
We're up.
Low single digits on the quarter and Thats been pretty consistent over the last couple so I would say outside of us winning a big National account, our enterprise account I would expect that percentage to continue quarter over quarter, yes, low to mid single digit growth in merchants and again I mentioned it earlier Carla not just.
Yeah.
Growth is what we're all about and that's important but also you get merchants are you in now that you can enhance your position back by having the best alternative for the customer and Army best alternative price wise, but the easiest transaction to make and the website things like that so if you have the less friction than maybe one or the other.
The ones that are using and Thats, where you can enhance your position and so forth. So we're focused on continuing to grow that low to mid single digits with the small mid sized players, but also enhance our position within each one we're in as well as obviously, we've got a whole team working on larger national accounts that have such a long sales cycle to them.
Okay, Great and have you said, how many are you exclusive in.
No we don't.
We don't.
Once the big ones were in most of the big ones. We're in.
Our exclusive.
But no we don't.
We don't disclose that number it's not the easiest number to get when you think about having over 30000 small and mid size stores out there where if he has seen her products in there.
But.
We look at it and we know where we're improving it because we are seeing we're seeing our position enhanced and a lot of cases, but we don't disclose the exact number or anything it is a focus of ours I mean, we do the sales team to ask for exclusivity and if we can get exclusivity how do we get first look inside of our existing merchants.
A focus of ours and that's b enhanced position has gone.
That focus has helped a lot exactly.
Okay, great. Thanks for all the help.
Thanks Carol.
Okay.
I am showing no further questions at this time, so I'd like to now turn it back to Mitch Fadel CEO for closing remarks.
Well, thank you and thank you everyone for joining us today.
We appreciate your time.
As you look at look at the quarter and our guidance going forward.
Another good quarter I want to thank thank you for your support.
But also thank all of our employees all the way from our.
Our executives and the people like Anthony and pilots that are running these segments very successfully right now all the way to every employee in the company.
Executing.
Not 100%, because we never do but we're executing at a high level and we'll just keep that going thank you everyone.
Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
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