Rent-A-Center, Inc. Reports Fourth Quarter and Year End 2018 Results

Rent-A-Center posts positive consolidated same store sales of 9.1
percent and strong earnings and cash flow in the fourth quarter

PLANO, Texas–(BUSINESS WIRE)–Rent-A-Center, Inc. (the “Company” or “Rent-A-Center”) (NASDAQ/NGS:
RCII) today announced results for the quarter ended December 31, 2018.

“When I returned to Rent-A-Center last January as CEO, we focused the
Company’s strategy on optimizing the cost structure, increasing store
traffic through an enhanced value proposition and growing our
franchising business. I am extremely pleased with our 2018 results as we
made substantial progress in each of those areas and exceeded our
financial and operational expectations,” stated Mitch Fadel, Chief
Executive Officer of Rent-A-Center.

Mr. Fadel continued, “Consolidated same store sales increased by 9.1
percent in the fourth quarter and extended our streak of quarterly same
store sales improvement to eight consecutive quarters. The cost savings
initiatives and improved operational performance led to an increase of
over $100 million in adjusted EBITDA versus 2017. The operational
results coupled with working capital improvements and franchise sales
helped reduce our net debt by over $220 million in 2018 and we ended the
year with over $155 million of cash on the balance sheet. In 2019, we
expect to further benefit from the full year impact of the cost savings
initiatives implemented in 2018, which are expected to reduce costs
year-over-year by approximately $50 million. Customer demand is also on
a positive trajectory and we will continue to refine our value
proposition with a strong focus on execution in 2019.”

Termination of Merger Agreement

On December 18, 2018, after the Company did not receive an extension
notice from Vintage Rodeo Parent, LLC (“Vintage”) that was required by
December 17, 2018 to extend the Merger Agreement’s stated End Date, we
terminated the Merger Agreement. Our Board of Directors determined that
terminating the Merger Agreement was in the best interests of our
stockholders, and instructed Rent-A-Center’s management to exercise the
Company’s right to terminate the Merger Agreement and make a demand on
Vintage for the $126.5 million reverse breakup fee owed to us following
the termination of the Merger Agreement. On December 21, 2018, Vintage
and its affiliates filed a lawsuit in Delaware Court of Chancery against
Rent-A-Center, asserting that the Merger Agreement remained in effect,
and that Vintage did not owe Rent-A-Center the $126.5 million reverse
breakup fee. B. Riley, a guarantor of the payment of the reverse breakup
fee, later joined the lawsuit brought by Vintage in Delaware Court of
Chancery. In addition, Rent-A-Center brought a counterclaim against
Vintage and B. Riley asserting its right to payment of the reverse
breakup fee.

On February 11th and 12th of this year, a trial was held in Delaware
Court of Chancery in the lawsuit arising from Rent-A-Center’s
termination of the Merger Agreement. While it is difficult to predict
the outcome of litigation, we believe Rent-A-Center, under the express
and unambiguous language of that agreement, had a clear right to
terminate the Merger Agreement and that it is entitled to the $126.5
million reverse breakup fee. Oral argument on the parties’ post-trial
briefs is scheduled for Monday, March 11th.

Consolidated Overview

Explanations of performance for the fourth quarter of 2018 are excluding
special items and compared to the fourth quarter of last year unless
otherwise noted.

On a consolidated basis, total revenues were $661.8 million representing
an increase of 3.6 percent primarily driven by a consolidated same store
sales increase of 9.1 percent partially offset by closures of certain
Core U.S. stores. Net earnings and diluted earnings per share, on a GAAP
basis, were $1.7 million and $0.03 compared to net earnings and diluted
earnings per share of $34.8 million and $0.65 in the fourth quarter of
last year. We note that in 2017 GAAP diluted earnings per share were
benefited by $1.45 related to the Tax Cuts and Jobs Act (the “Tax Act”)
passed in December of 2017, which resulted in the revaluation of net
deferred tax liabilities to a 21 percent federal tax rate.

Excluding special items, the Company’s diluted earnings per share were
$0.35 and the Company generated $49.0 million in adjusted EBITDA in the
fourth quarter, compared to a loss per diluted share of $0.41 and
adjusted EBITDA loss of $8.5 million in the fourth quarter of last year.

Special items impacting adjusted EBITDA of $18.7 million included
charges primarily driven by cost savings initiatives, incremental legal
and advisory fees, and store closure costs.

For the twelve months ended December 31, 2018, the Company generated
$227.5 million of cash from operations and reduced its outstanding debt
balance by $139.3 million. The Company ended the fourth quarter with
$155.4 million of cash and cash equivalents compared to $73.0 million as
of the end of 2017. The Company’s net debt to adjusted EBITDA ratio
ended the year at 2.1 times, reflecting a substantial reduction compared
to the ratio of 8.6 times as of the end of 2017.

Segment Operating Performance

CORE U.S. fourth quarter revenues of $466.6 million increased 4.9
percent due to a same store sales increase of 8.8 percent offset by the
rationalization of the Core U.S. store base. Gross profit as a percent
of total revenue versus the prior year decreased 30 basis points. Labor
and other store expenses decreased by $6.7 million and $13.7 million,
respectively, primarily driven by lower store count and the cost savings
initiatives. Adjusted EBITDA was $52.4 million and as a percent of total
revenue increased 700 basis points versus the prior year.

ACCEPTANCE NOW fourth quarter revenues of $173.1 million decreased 1.5
percent primarily due to closures in 2017 partially offset by a same
store sales increase of 9.6 percent. Gross profit as a percent of total
revenue versus prior year decreased 290 basis points primarily due to
the intercompany book value adjustment on returned Acceptance NOW
products and certain value proposition enhancements. Labor and other
store expenses decreased by $24.4 million primarily driven by the cost
savings initiatives and lower skip/stolen losses. Adjusted EBITDA was
$23.8 million and as a percent of total revenue increased 10.9
percentage points versus the prior year.

MEXICO fourth quarter revenues increased 12.1 percent on a constant
currency basis. Gross profit as a percent of total revenue versus prior
year increased 90 basis points driven by higher rental and fees gross
margin. Other store expense improved 70 basis points versus prior year
driven by lower skip/stolen losses. Adjusted EBITDA was $0.5 million and
as a percent of total revenue increased 110 basis points versus prior
year.

FRANCHISING fourth quarter revenues of $9.5 million increased primarily
due an increase in merchandise sales driven by higher store count and a
2018 accounting standard change for franchise advertising fees. Adjusted
EBITDA was $0.7 million.

CORPORATE fourth quarter operating expenses decreased $6.4 million
compared to the prior year primarily due to the realization of cost
savings partially offset by higher incentive compensation.

     
SAME STORE SALES
(Unaudited)
Table 1  
Period Core U.S.    

Acceptance
Now

    Mexico     Total
Three Months Ended December 31, 2018 (1) 8.8 % 9.6 % 13.8 % 9.1 %
Three Months Ended September 30, 2018 (1) 5.2 % 6.7 % 12.8 % 5.7 %
Three Months Ended December 31, 2017 (1) (3.6 )% 6.7 % (2.3 )% (2.0 )%
 

Note: Same store sale methodology – Same store sales generally
represents revenue earned in stores that were operated by us for 13
months or more and are reported on a constant currency basis. The
Company excludes from the same store sales base any store that receives
a certain level of customer accounts from closed stores or acquisitions.
The receiving store will be eligible for inclusion in the same store
sales base in the 24th full month following account transfer.

(1) Given the severity of the 2017 hurricanes, the Company
instituted a change to the same store sales store selection starting in
the month of September 2017, excluding geographically impacted regions
for 18 months.

2019 Guidance (1)

The Company is providing the following guidance for its 2019 fiscal year
which has been updated to reflect the impact of a franchise transaction
completed in January of 2019.

  • Consolidated revenues of $2.585 billion to $2.630 billion

    • Core U.S. revenues of $1.765 billion to $1.790 billion
    • Acceptance NOW revenues of $725 million to $740 million
  • Consolidated Same Store Sales increases in the low to mid-single digits
  • Adjusted EBITDA of $220 million to $250 million
  • Non-GAAP diluted earnings per share of $1.75 to $2.15
  • Free cash flow of $115 million to $145 million (2)
  • Net debt of $270 million to $235 million
  • Leverage ratio of 1.25x to 0.90x

(1) Guidance does not include the impact of new franchising
transactions beyond the transaction completed in January of 2019,
refinancing the balance sheet or the reverse breakup fee associated with
the termination of the Merger Agreement.

(2) Free cash flow defined as Net cash provided by operating
activities less purchase of property assets (reference table 3).

Non-GAAP Reconciliation

To supplement the Company’s financial results presented on a GAAP basis,
Rent-A-Center uses the non-GAAP measures (“special items”) indicated in
Table 2 below, which primarily excludes financial impacts in the fourth
quarter of 2018 related to cost savings initiatives, incremental legal
and advisory fees, capitalized software write downs, store closures, and
hurricane impacts. Gains or charges related to store closures will
generally recur with the occurrence of these events in the future. The
presentation of these financial measures is not in accordance with, or
an alternative for, accounting principles generally accepted in the
United States and should be read in conjunction with the Company’s
consolidated financial statements prepared in accordance with GAAP.
Rent-A-Center management believes that excluding special items from the
GAAP financial results provides investors a clearer perspective of the
Company’s ongoing operating performance and a more relevant comparison
to prior period results. This press release also refers to the non-GAAP
measures adjusted EBITDA (earnings before interest, taxes, depreciation
and amortization) and Free Cash Flow (net cash provided by operating
activities less purchase of property assets). Reconciliation of adjusted
EBITDA and Free Cash Flow to the most comparable GAAP measures are
provided in Tables 3 and 4, below.

The Company believes that presentation of adjusted EBITDA is useful to
investors as, among other things, this information impacts certain
financial covenants under the Company’s senior credit facilities and the
indentures governing its 6.625% senior unsecured notes due November 2020
and its 4.75% senior unsecured notes due May 2021. The Company believes
that presentation of free cash flow provides investors with meaningful
additional information regarding the Company’s liquidity. While
management believes these non-GAAP financial measures are useful in
evaluating the Company, this information should be considered as
supplemental in nature and not as a substitute for or superior to the
related financial information prepared in accordance with GAAP. Further,
these non-GAAP financial measures may differ from similar measures
presented by other companies.

Reconciliation of net earnings to net earnings (loss) excluding special
items:

         
Table 2 Three Months Ended December 31, Twelve Months Ended December 31,
2018     2017 2018     2017
(in thousands, except per share data) Amount    

Per Share

Amount     Per Share Amount     Per Share Amount     Per Share
Net earnings $ 1,664 $ 0.03 $ 34,824 $ 0.65 $ 8,492 $ 0.16 $ 6,653 $ 0.12
Special items, net of taxes:
Other charges (1) 14,500 0.26 17,009 0.32 45,725 0.83 37,256 0.70
Debt refinancing charges 373 0.01 373 0.01 1,239 0.02
Tax Cut and Jobs Act gain (77,505 ) (1.45 ) (77,505 ) (1.45 )
Discrete income tax items   2,567   0.05   3,566     0.07     3,244   0.06   3,642     0.07  
Net earnings (loss) excluding special items $ 19,104 $ 0.35 $ (22,106 ) $ (0.41 ) $ 57,834 $ 1.06 $ (28,715 ) $ (0.54 )
 

(1) Other charges for the three months ended December 31,
2018 primarily includes financial impacts, net of tax, related to cost
savings initiatives, incremental legal and advisory fees, store
closures, capitalized software write-downs, and hurricane damage. Other
charges for the three months ended December 31, 2017 primarily includes
charges, net of tax, related to capitalized software write-downs,
hurricane damage, closure of Acceptance Now locations, incremental legal
and advisory fees, legal settlements, and charges related to previous
store closure plans. Charges related to store closures are primarily
comprised of losses on rental merchandise, lease obligation costs,
employee severance, asset disposals, and miscellaneous costs incurred as
a result of the closures.

Reconciliation of net cash provided by operations to free cash flow:

     
Table 3 Twelve Months Ended December 31,
(In thousands) 2018     2017
Net cash provided by operating activities

$

227,505

$

110,533

Purchase of property assets   (27,962 )   (65,460 )
Free cash flow

$

199,543

$

45,073

 
Proceeds from sale of stores

$

25,317

$

4,638

Acquisitions of businesses   (2,048 )   (2,525 )
Free cash flow including acquisitions and divestitures

$

222,812

 

$

47,186

 
 

Webcast Information

Rent-A-Center, Inc. will host a conference call to discuss the fourth
quarter results, guidance and other operational matters on Tuesday
morning, February 26, 2019, at 8:30 a.m. ET. For a live webcast of the
call, visit http://investor.rentacenter.com.
Certain financial and other statistical information that will be
discussed during the conference call will also be provided on the same
website. Residents of the United States and Canada can listen to the
call by dialing (800) 399-0012. International participants can access
the call by dialing (404) 665-9632.

About Rent-A-Center, Inc.

A rent-to-own industry leader, Plano, Texas-based, Rent-A-Center, Inc.,
is focused on improving the quality of life for its customers by
providing them the opportunity to obtain ownership of high-quality,
durable products such as consumer electronics, appliances, computers,
furniture and accessories, under flexible rental purchase agreements
with no long-term obligation. The Company owns and operates
approximately 2,300 stores in the United States, Mexico, and Puerto
Rico, and approximately 1,200 Acceptance Now kiosk locations in the
United States and Puerto Rico. Rent-A-Center Franchising International,
Inc., a wholly owned subsidiary of the Company, is a national franchiser
of approximately 280 rent-to-own stores operating under the trade names
of “Rent-A-Center”, “ColorTyme”, and “RimTyme”. For additional
information about the Company, please visit our website at www.rentacenter.com.

Forward-Looking Statements

This press release and the guidance above contain forward-looking
statements that involve risks and uncertainties. Such forward-looking
statements generally can be identified by the use of forward-looking
terminology such as “may,” “will,” “expect,” “intend,” “could,”
“estimate,” “predict,” “continue,” “should,” “anticipate,” “believe,” or
“confident,” or the negative thereof or variations thereon or similar
terminology. The Company believes that the expectations reflected in
such forward-looking statements are accurate. However, there can be no
assurance that such expectations will occur. The Company’s actual future
performance could differ materially from such statements. Factors that
could cause or contribute to such differences include, but are not
limited to: the general strength of the economy and other economic
conditions affecting consumer preferences and spending; factors
affecting the disposable income available to the Company’s current and
potential customers; changes in the unemployment rate; the outcome of
the litigation initiated by Vintage Capital and B. Riley challenging the
validity of the termination of the Merger Agreement and the Company’s
right, or the ability, to collect on the $126.5 million reverse breakup
fee; risks relating to operations of the business and the Company’s
financial results arising out of the termination of the Merger
Agreement; the effect of the termination of the Merger Agreement on the
Company’s relationships with third parties, including its employees,
franchisees, customers, suppliers, business partners and vendors, which
may make it more difficult to maintain business and operations
relationships, and negatively impact the operating results of the
Company’s business segments and the Company’s business generally; the
risk of material price volatility with respect to trading in the
Company’s common stock during litigation related to the termination of
the Merger Agreement; the Company’s ability to continue to effectively
operate and execute its strategic initiatives as a stand-alone
enterprise following the termination of the Merger Agreement; capital
market conditions, including availability of funding sources for the
Company; changes in the Company’s credit ratings; difficulties
encountered in improving the financial and operational performance of
the Company’s business segments, including its ability to execute its
franchise strategy; the Company’s ability to recapitalize its debt,
including its revolving credit facility expiring December 31, 2019, and
senior notes maturing in November 2020 and May 2021 on favorable terms,
if at all; risks associated with pricing changes and strategies being
deployed in the Company’s businesses; the Company’s ability to continue
to realize benefits from its initiatives regarding cost-savings and
other EBITDA enhancements, efficiencies and working capital
improvements; the Company’s ability to continue to effectively operate
and execute its strategic initiatives; failure to manage the Company’s
store labor and other store expenses; disruptions caused by the
operation of the Company’s store information management system; the
Company’s transition to more-readily scalable, “cloud-based” solutions;
the Company’s ability to develop and successfully implement digital or
E-commerce capabilities, including mobile applications; disruptions in
the Company’s supply chain; limitations of, or disruptions in, the
Company’s distribution network, and the impact, effects and results of
the changes the Company has made and is making to its distribution
methods; rapid inflation or deflation in the prices of the Company’s
products; the Company’s ability to execute and the effectiveness of a
store consolidation, including the Company’s ability to retain the
revenue from customer accounts merged into another store location as a
result of a store consolidation; the Company’s available cash flow; the
Company’s ability to identify and successfully market products and
services that appeal to its customer demographic; consumer preferences
and perceptions of the Company’s brand; the Company’s ability to retain
the revenue associated with acquired customer accounts and enhance the
performance of acquired stores; the Company’s ability to enter into new
and collect on its rental or lease purchase agreements; the passage of
legislation adversely affecting the Rent-to-Own industry; the Company’s
compliance with applicable statutes or regulations governing its
transactions; changes in interest rates; changes in tariff policies;
adverse changes in the economic conditions of the industries, countries
or markets that the Company serves; information technology and data
security costs; the impact of any breaches in data security or other
disturbances to the Company’s information technology and other networks
and the Company’s ability to protect the integrity and security of
individually identifiable data of its customers and employees; changes
in estimates relating to self-insurance liabilities and income tax and
litigation reserves; changes in the Company’s effective tax rate;
fluctuations in foreign currency exchange rates; the Company’s ability
to maintain an effective system of internal controls; the resolution of
the Company’s litigation; and the other risks detailed from time to time
in the Company’s SEC reports, including but not limited to, its Annual
Report on Form 10-K for the year ended December 31, 2017, and its
Quarterly Report on Form 10-Q for the quarters ended March 31, 2018,
June 30, 2018 and September 30, 2018. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as
of the date of this press release. Except as required by law, the
Company is not obligated to publicly release any revisions to these
forward-looking statements to reflect the events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.

     

Rent-A-Center, Inc. and Subsidiaries

STATEMENT OF EARNINGS (LOSS) HIGHLIGHTS – UNAUDITED
 
Table 4 Three Months Ended December 31,
2018         2018     2017         2017
Before After Before After
Special Items Special Items Special Items Special Items
(Non-GAAP (GAAP (Non-GAAP (GAAP
(In thousands, except per share data) Earnings) Earnings) Earnings) Earnings)
Total revenues $ 661,750 $ 661,750 $ 638,954 $ 638,954
Operating profit (loss) 32,283

(1)

13,624 (27,254 )

(3)

(54,893 )
Net earnings (loss) 19,104

(1)(2)

1,664 (22,106 )

(3)(4)

34,824
Diluted earnings (loss) per common share $ 0.35

(1)(2)

$ 0.03 $ (0.41 )

(3)(4)

$ 0.65
Adjusted EBITDA $ 48,955 $ 48,955 $ (8,543 ) $ (8,543 )
Reconciliation to Adjusted EBITDA:
Earnings (loss) before income taxes $ 22,368

(1)

$ 3,234 $ (38,605 )

(3)

$ (66,244 )
Add back:
Other charges 18,659 27,639
Debt refinancing charges 475
Interest expense, net 9,915 9,915 11,351 11,351
Depreciation, amortization and impairment of intangibles   16,672   16,672   18,711     18,711  
Adjusted EBITDA $ 48,955 $ 48,955 $ (8,543 ) $ (8,543 )
 

(1) Excludes the effects of approximately $18.7 million of
pre-tax charges including $12.3 million related to cost savings
initiatives, $4.3 million in incremental legal and advisory fees, $0.9
million related to store closure costs, $0.8 million in capitalized
software write-downs, $0.4 million related to the 2018 hurricanes. These
charges increased net earnings and net earnings per diluted share for
the three months ended December 31, 2018, by approximately $14.5 million
and $0.26, respectively.

(2) Excludes the effects of $2.6 million of discrete income
tax adjustments and $0.5 million of pre-tax debt refinancing charges
that increased net earnings per diluted share for the three months ended
December 31, 2018, by approximately $2.9 million and $0.06, respectively.

(3) Excludes the effects of approximately $27.6 million of
pre-tax charges including $18.2 million for capitalized software
write-downs, $3.5 million for hurricane impacts, $3.1 million for the
closure of Acceptance Now locations, $2.0 million for incremental legal
and advisory fees, $0.5 million in legal settlements, and $0.3 million
for previous store closure plans. These charges reduced net earnings and
net earnings per diluted share for the three months ended December 31,
2017, by approximately $17.0 million and $0.32, respectively.

(4) Excludes the effects of a $77.5 million gain resulting
from the Tax Cuts and Jobs Act and $3.

Contacts

Rent-A-Center, Inc.
Maureen Short
Chief Financial Officer
972-801-1899
maureen.short@rentacenter.com

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