Business Overview and Detailed History: Upbound Group, Inc. (UPBD) is a leading provider of lease-to-own solutions, offering consumers who may not qualify for traditional financing the opportunity to access high-quality, name-brand durable goods. Through its Acima and Rent-A-Center segments, the company has established a strong presence in the United States, Puerto Rico, and Mexico, catering to the needs of underserved communities and delivering inclusive shopping experiences.
Upbound Group, formerly known as Rent-A-Center, Inc., was incorporated in the state of Delaware in 1986 and has been publicly traded on the Nasdaq Global Select Market under the ticker symbol UPBD since its inception. The company's origins can be traced back to the 1970s when its founders recognized the growing demand for accessible financing options for consumers who lacked access to traditional credit. Over the decades, Upbound Group has evolved from a regional rent-to-own operator to a nationwide leader in the lease-to-own industry.
In 2021, the company underwent a transformative acquisition, bringing Acima Holdings, a leading provider of virtual lease-to-own solutions, into the fold. This strategic move allowed Upbound Group to expand its reach and enhance its digital capabilities, positioning it to better serve the evolving needs of its customer base. The integration of Acima's virtual capabilities with Upbound Group's traditional brick-and-mortar lease-to-own stores has created a differentiated omnichannel lease-to-own offering.
Today, Upbound Group operates through four primary segments: Acima, Rent-A-Center, Mexico, and Franchising. The Acima segment, which primarily operates in the United States and Puerto Rico, offers consumers who do not qualify for traditional financing the opportunity to lease-to-own a wide range of durable goods through staffed or unstaffed kiosks located within third-party retailer locations, as well as through virtual options. The Rent-A-Center segment consists of company-owned lease-to-own stores in the United States and Puerto Rico, providing customers with the ability to lease household goods and have the option to purchase them over time. The Mexico segment operates company-owned stores in Mexico that lease household durable goods to customers on a lease-to-own basis. The Franchising segment primarily generates revenue from the sale of rental merchandise to its franchisees and royalties based on franchisees' monthly gross revenues.
Throughout its history, Upbound Group has faced various challenges. In 2020, the company encountered regulatory scrutiny related to its Acima subsidiary's lease-to-own transactions, leading to lawsuits filed by the Consumer Financial Protection Bureau and the New York Attorney General, as well as a multi-state regulatory investigation. These matters remained ongoing as of the most recent 10-Q filing. Additionally, the company has had to navigate macroeconomic headwinds, such as significant changes in the U.S. consumer price index, shifts in consumer spending and payment behaviors, a tight labor market, rising interest rates, and global supply chain disruptions.
To address these challenges and improve its operations, Upbound Group has taken strategic actions, such as refranchising certain Rent-A-Center stores and consolidating its store footprint to enhance the efficiency and profitability of its brick-and-mortar operations. The company has also worked to strengthen its operational and technological capabilities to optimize performance across its business segments and enhance the overall customer experience.
Financial Performance and Ratios: Upbound Group has demonstrated consistent financial performance in recent years, despite the challenges posed by the macroeconomic environment. As of the latest fiscal year end (December 31, 2023), the company reported annual revenue of $3.99 billion and a net loss of $5.18 million. The company's operating cash flow for the fiscal year 2023 was $200.29 million, with free cash flow of $146.89 million.
In the most recent quarter (Q3 2024), Upbound Group reported impressive financial results, with revenue increasing by 9.2% year-over-year to $1.07 billion. The company's net income for the quarter was $30.86 million, with operating cash flow of $106.21 million and free cash flow of $88.26 million.
The company's financial position remains strong, with a current ratio of 3.51 and a quick ratio of 3.49, indicating a healthy liquidity position. As of September 30, 2024, Upbound Group had cash and cash equivalents of $85.05 million and an available credit line of $494.40 million under its $550 million ABL Credit Facility, net of $55.60 million in issued letters of credit.
The company's debt levels are also manageable, with a debt-to-equity ratio of 2.02 as of September 30, 2024, suggesting a relatively conservative capital structure. Upbound Group's return on assets and return on equity stand at 3.15% and 13.85%, respectively, reflecting the company's ability to generate solid returns on its invested capital.
Segment Performance: For the nine months ended September 30, 2024, the Acima segment reported revenues of $1.68 billion, an increase of 18% compared to the prior year period. Gross profit for the Acima segment increased 10.3% to $522.9 million, while operating profit increased 6.2% to $185.9 million. The growth in the Acima segment was driven by increases in rentals and fees revenues and merchandise sales, resulting from higher gross merchandise volume (GMV).
The Rent-A-Center segment reported revenues of $1.42 billion, an increase of 1% compared to the prior year period. Gross profit for the segment increased 1% to $984.9 million, while operating profit decreased 0.4% to $210.7 million. The increase in revenues was primarily due to a 1.9% increase in same store sales, driven by an increase in rentals and fees revenues.
The Mexico segment reported revenues of $60.5 million, an increase of 8.9% compared to the prior year period. Gross profit for the segment increased 10.2% to $43.4 million, and operating profit increased 21.1% to $4.1 million. The increases were primarily due to a 7.6% increase in same store sales.
The Franchising segment reported revenues of $81.2 million, a decrease of 10.4% compared to the prior year period. This decrease was primarily due to a decrease in merchandise sales to franchisees of $9.6 million. Gross profit for the segment remained relatively flat at $20.9 million, and operating profit decreased 7.9% to $12.2 million.
Quarterly Performance and Outlook: In Q3 2024, Upbound Group's non-GAAP earnings per share was $0.95, exceeding the consensus estimate of $0.89 and representing a 20% growth compared to the prior year period. The strong performance was driven by robust growth in the Acima segment, where revenue increased by 19.1% year-over-year, as well as continued momentum in the Rent-A-Center segment, which saw a 1.1% revenue increase. The company's adjusted EBITDA margin for the quarter was 10.9%, up approximately 10 basis points compared to the prior year period.
Looking ahead, Upbound Group has provided guidance for the full year 2024, expecting revenue to be in the range of $4.2 billion to $4.3 billion, adjusted EBITDA in the range of $470 million to $480 million, and non-GAAP earnings per share to be between $3.75 and $3.90. For Q4 2024, the company expects adjusted EBITDA in the range of $120 million to $130 million and non-GAAP EPS in the range of $0.97 to $1.12 per share.
The company noted that Q4 GMV growth at Acima is expected to be in the low double-digit range, higher than their previous expectation. However, this year's free cash flow is now expected to finish towards the lower end of their previous guidance range due to the higher-than-expected GMV growth at Acima.
Liquidity: Upbound Group maintains a strong liquidity position, as evidenced by its healthy current and quick ratios. The company's ability to meet its short-term obligations is robust, providing a solid foundation for its operations and future growth initiatives. This liquidity strength allows Upbound Group to navigate potential market fluctuations and capitalize on strategic opportunities as they arise.
Risks and Challenges: Despite Upbound Group's strong performance, the company faces several risks and challenges that investors should be aware of. The lease-to-own industry is highly competitive, with the company vying for market share against traditional retailers, online competitors, and other fintech companies offering alternative financing solutions.
Additionally, the company's operations are subject to various regulatory environments, and any changes or enforcement actions could have a significant impact on its business model and financial results. The company is currently engaged in ongoing legal proceedings and governmental inquiries, which could result in monetary damages, fines, or changes to its business practices. For the nine months ended September 30, 2024, Upbound Group recorded expenses of $8.2 million related to estimated legal settlement reserves for certain regulatory matters and incurred litigation and defense expenses of $3.5 million related to these regulatory matters.
Furthermore, Upbound Group's performance is closely tied to the financial health of its target consumer base, and any deterioration in the macroeconomic conditions or a prolonged economic downturn could adversely affect the company's revenue and profitability.
Conclusion: Upbound Group's differentiated business model, focused on providing inclusive retail solutions for underserved consumers, has positioned the company as a leader in the lease-to-own industry. The company's recent acquisition of Acima Holdings and its ongoing efforts to enhance its digital capabilities have further strengthened its competitive positioning and ability to meet the evolving needs of its customer base.
Despite the challenges posed by the macroeconomic environment and regulatory risks, Upbound Group has demonstrated its resilience and ability to deliver consistent financial performance. The company has experienced consistent growth in its Acima segment, with four consecutive quarters of double-digit year-over-year growth in Gross Merchandise Volume (GMV), and expects continued low double-digit GMV growth at Acima going forward.
As Upbound Group continues to execute on its strategic initiatives, investors will closely monitor its ability to navigate the competitive landscape, manage legal and regulatory risks, and capitalize on the growing demand for accessible financing options among underserved consumers. The company's strong liquidity position, strategic focus on digital capabilities, and continued growth in key segments position it well to address future challenges and opportunities in the evolving lease-to-own market.