Upbound Group, Inc. Q3 FY2021 Earnings Call

Good morning and thank you for holding. Welcome to Rent-A-Center's Third Quarter Earnings Conference Call. As a reminder, this conference is being recorded, Thursday, November 4, 2021. I would now like to turn the conference over to Mr. Metrano. Please go ahead, sir.

Thank you all for joining the Rent-A-Center team this morning to discuss our results for the third quarter of 2021. We issued our earnings release after the market closed yesterday, and hopefully you had a chance to review it. The release and all related materials, including a link to the live webcasts are available on our website at investor.rentacenter.com. On the call today from Rent-A-Center, we have Mitch Fadel, our CEO; Jason Hogg, Executive Vice President of Acima; Anthony Blasquez, Executive Vice President of the Rent-A-Center Business Segment; and Maureen Short, CFO. As a reminder, some of the statements provided on this call are forward-looking statements, which are subject to many factors that could cause actual results to differ materially and adversely from our expectations. These factors are described in our earnings release as well as in the company's SEC filings. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. This call also will include references to non-GAAP financial measures. Please refer to our third quarter earnings release, which can be found on our website, for a description of the non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Mitch.

Thank you, Brendan, and good morning to all of you who have joined us today to discuss our third quarter results. We certainly appreciate your interest, and are pleased to have the opportunity to update you on the developments in our company as we continue to be among the leaders in the advancement of leasing as an alternative solution for consumers in today's rapidly evolving commerce and payments landscape. Over my career, I can't think of another period of such innovation and disruption as we're seeing today, with the range of developments, things like digital wallets, cryptocurrency, super apps, buy-now-pay-later, and most importantly, new lease-to-own options, which we often refer to as LTO. And with our leadership position in consumer leasing solutions, we are in a great position to benefit from this environment. Take, for example, the current proliferation of buy-now-pay-later. We get asked a lot if it's a threat. But we believe it's actually the opposite. Lease-to-own is very complementary to buy-now-pay-later because we see little customer segment overlap, and LTO could drive incremental sales in the buy-now-pay-later waterfall. In fact, we're seeing this benefit firsthand in our business today with growing interest in our virtual LTO offering from potential merchant partners who realize they're leaving money on the table with customers that don't qualify for buy-now-pay-later. Similarly, consumers are seeking payment services that work for them, rather than for the benefit of an established system that is perceived to take advantage of and exclude consumers. In contrast, LTO is one of the most inclusive payment options, serving even unbanked consumers; it is highly flexible, and getting approved doesn't require a hard credit inquiry that can impact credit scores. Because the LTO solutions include returnable consumer durable products like furniture, appliances, and electronics, transactions typically have a higher average ticket size, and longer average payment horizon than other payment solutions like buy-now-pay-later. So, you can understand why we're really optimistic about our future, following the Acima transaction earlier this year, which made us a leading LTO player and the only one with our span of omni-channel capabilities across our segments. The integration is going well, and we're on pace to achieve our synergy targets. On top of that, we can factor in the Acima Ecosystem which is targeted to be up and running in early next year, and we believe can revolutionize LTO, potentially doubling our addressable market to around $100 billion. As LTO continues to gain momentum, we think our scale and omni-channel capabilities provide us with a competitive advantage because processing more applications and managing more customer relationships will enable us to hone those capabilities even further. This should translate to even more consumers and merchant partners. This data and technology aspect of our business is underappreciated, and we're investing meaningfully to capitalize on it. And by mid-next year, we'll have migrated the enterprise data warehouse to a cloud-based environment. We'll be employing state-of-the-art tools like Snowflake and Databricks, which will further enhance our predictive analytics and AI machine learning capabilities. These initiatives will drive savings from datacenter costs and productivity gains in processing activities, and can benefit our commercial activities by reducing time for solution launches. When you put those pieces together, strong category momentum, a favorable competitive position, and a dynamic growth agenda, it should translate to compelling financial performance. We continue to believe that in 2023, the company will generate at least $6 billion of revenue in the mid-teens adjusted EBITDA margin. Factoring our strong free cash flow generation, already solid financial position, and focus on deploying capital to drive shareholder value, we believe that EPS should increase significantly over the next few years. Now, turning to the third quarter, the team continued to execute very well. The store-based business advanced a number of initiatives focused on ecommerce and the in-store experience, which Anthony will update you on. At Acima, we continued adding new merchant partners, including an exclusive strategic account, P.C. Richard & Son, one of the largest appliance retailers in the U.S. That was a competitive win for us, and we think it demonstrates the value proposition other strategic partners will find in our differentiated capabilities. We also saw positive developments with the Acima Ecosystem. Jason will elaborate more on that shortly. Our third quarter revenue of $1.2 billion grew 66% year-over-year on a reported basis, and 13% on a pro forma basis, in other words, as if we owned Acima in the prior year period. And we had good organic growth across all segments. Acima generated pro forma year-over-year GMV growth of 19%, and the Rent-A-Center business portfolio was up 14% year-over-year, at end of September. Typically the third quarter is a slow season for the lease-to-own industry, because with the vacations and back-to-school calendar, people tend to be less focused on household durable goods. So, we're pleased to see that top line trends remained favorable even with stimulus, and even with other programs that supported consumers winding down. With our strong lease portfolio momentum heading into the last few months of the year, we believe we are very well-positioned for the fourth quarter, and for early 2022. Adjusted EBITDA margin for the third quarter, of 14.4%, was down sequentially from the second quarter, which was consistent with our remarks on the second quarter earnings call in August. We'd expected seasonality and less favorable customer payment activity related to stimulus winding down would result in some margin contraction. Non-GAAP earnings per share was $1.52 in the quarter, compared to pro forma non-GAAP earnings per share of $1.04 in the prior year. Now, looking forward, we have updated our full-year 2021 guidance, primarily reflecting changes in the timing of normalization in customer payment activity due to stimulus winding down, as well as some impact on merchant partners from global supply chain disruption, primarily impacting the Acima business. We expect the customer payment activity to normalize in the back half of the year. Quite frankly, they normalized faster than we expected. We got caught a little short on our collection labor, and had to play catch-up. We have since staffed up and taken steps to stabilize payment activity trends for Acima at about where we expected them to normalize. The supply chain headwinds at our retail partners, as I mentioned, are also affecting Acima's growth. And the combined impact of those two things has lowered fourth quarter revenue and margin for Acima than we had previously forecasted. Even with this timing-related issue, our 2021 outlook for consolidated revenue and non-GAAP EPS is still within the range we provided with our second quarter results in August. So, we increased it in August, and we're still within that range now. Maureen will provide additional discussion on guidance here in a few minutes. So, in closing, I want to thank all the members of the Rent-A-Center team for their continued effort and dedication. It's been quite a journey over the past few years, and I'm really thrilled with the progress we've made in 2021, and the tremendous opportunity I see in the future. With that, I'll turn the call over to Jason to update us on the Acima business.

Thanks, Mitch. Picking up on your comments about the market opportunity, it really is amazing to see how people are changing the way they think about paying for products and services, meeting other financial needs, and even the lifestyles which people aspire to. Consumers today increasingly value services that are flexible, personal, and inclusive over traditional services that are rigid, uniform, and exclusionary. This is disrupting the competitive landscape, and benefiting innovative business models like buy-now-pay-later, and other alternative payment solutions, like Acima. As we're witnessing this play out, it validates the Acima acquisition, our strategy, and the tremendous opportunity that we have for the company's future. These same trends drove us to develop our product suite over a year ago that we eventually reframed as the Acima Ecosystem, including the Acima App, Acima browser extension, Acima Marketplace, and the Acima LeasePay Card. We discussed the Ecosystem at some length on our second quarter call, in conjunction with an announced soft launch in early August. So, before getting into a discussion of broader performance for the quarter, I'll share some insights from our preliminary findings. Keeping in mind that the primary focus for the launch, at this stage, has been testing and learning, we've seen encouraging early results that reinforce our belief in the transformative potential of the ecosystem. The Acima App, which is essential mission control for the Ecosystem, already has over 220,000 active users at the end of three months. The users are largely comprised of existing customers that were either unconverted or had unused approval amounts. Looking forward, we believe we are on pace to reach the one million user threshold during the second quarter of 2022. To put this in perspective, it took Facebook and Twitter 12 and 24 months respectively to hit that milestone. If today's leading fintech companies like Klarna and Afterpay reach the 1 million download milestone in around 6 months to 12 months, that would be right in line with our projection for Acima. Among these active users, we are seeing some compelling conversion rates. For instance, mobile app users average 2.07 leases per customer, significantly higher than the portfolio average. While we believe this is reflective of the exuberance of early adopters, we expect this improved ease of access to increase the lifetime ratio of leases per customer. As we are seeing greater customer engagement via the mobile app, the ecosystem average ticket size remains similar to the portfolio average. Since the launch of the ecosystem, we have seen conversion rates grow 20% over the last two months as customers get more acquainted with the expanded choices. To date, the ecosystem has generated transactions with over 2,200 different merchant locations, including more than 40 merchants who aren't even integrated with Acima like BestBuy. This demonstrates Acima's ability to use patent-pending technology to allow customers to utilize LTO payment options with brands or merchants that do not have a relationship with Acima without the heavy investment in complicated integrations. Customer feedback suggests the value proposition is resonating across relevant decision factors like delivering 'a wonderful experience,' providing 'easy access and helpful information,' and 'working with customers.' Switching to the merchant side, these transactions are illustrating the significant potential value Acima can provide compared to other partners by driving incremental sales from lease-to-own customers who otherwise may not have been able to transact with those retailers. Rather than just offering another form of payment to existing customers, Acima can bring incremental customers and revenue to the retailer. The early ecosystem activity is also providing important data and insights that we are incorporating back into our offerings to improve them in preparation for the ramp up to a full rollout plan for early 2022. For example, the Acima app just had its fourth release and we are continuing to iterate and refine the product. To date, enhancements include a streamlined customer application process, embedding the mobile app into our in-store texts to apply process, expanding the mobile marketplace, adding store location functionality, and adding the ability to create and execute a lease in the app. Most importantly, we can now use our presence on the customer's mobile device to drive re-engagement and return-to-shop opportunities for our retailers. We've experienced consistent customer acquisition costs well under $100 per lease and see those costs continuing to decrease as the number of leases per customer grows. Moreover, as our lease volumes increase, we'll apply learnings from transactions to further improve marketing efficiencies and conversions as we ramp our efforts through 2022. So, the preliminary data is really encouraging, but it's premature to confidently project the timing of the material P&L impact. It's probably easier to conceptualize the scale of the opportunity over the next three to five years. Consider that we have a target consumer database of approximately 50 million consumers who fit the profile of an Acima customer. The Acima LeasePay Card will effectively increase the Acima network from 30,000 merchants to over 2 million Mastercard merchants where durable goods are sold. In terms of next steps, the virtual Acima LeasePay Card is already available, and we are on track to pilot the physical card by the end of the year. Shifting to broader performance, we made significant progress on the Acima integration, getting the right organizational structure in place and enhancing operational capabilities. At the same time, we continue to execute well commercially, adding over 2,700 new retail partners during the quarter. In addition, we took back more than 750 retailers from competitors, including P.C. Richard & Son and Sonic Electronix by leveraging our enhanced value proposition; the ability to acquire our own customers, the digital ecosystem and enhance retailer engagement through the mobile app. We also signed an exclusive partnership with Whirlpool, which is an e-commerce relationship and demonstrates our ability to win in any e-comm channel. All of these factors equate to incremental sales for our retail partners, which, as we're seeing, is preferable to the rebates our competitors are offering. The Acima integration continues to be a high priority for the third quarter. It's generally gone according to plan, and we continue to expect to realize $25 million in synergies in 2021 and ultimately $40 million to $70 million of run-rate synergies. Another top initiative this quarter was converting staffed and former preferred lease locations to virtual Acima locations. This was a major undertaking and included converting cons and Ashley corporate stores among others. The conversions often are not only profit enhancing, but also should ultimately translate to a better experience for merchant partners and consumers, because Acima offers a more flexible and seamless experience. We essentially finalized the organization structure aligning key related activities under one leader to facilitate better coordination of support and market-facing activities. So, our sales and operations organization report to one leader, Ron Schoolcraft. Digital product development and product management report to Tom Abel. And technology and data services report to Chris Uriarte, who recently joined the company. I worked with Chris at Aon and at American Express. He's a talented technology leader and will be a huge asset for Acima as we continue down the path of becoming a digitally oriented fintech business. I believe we have the right pieces in place to successfully execute on our strategy. Moving on to third quarter financial results, my comments will reflect pro forma performance as Acima was included in the prior year. The retail partner business revenues grew 17.1% led by 19% GMV growth in the face of retail supply chain headwinds and changing consumer behavior as government financial support wound down. E-commerce continued to gain momentum and accounted for 14% of lease transaction volume, including the Wayfair partnership. Adjusted EBITDA margin was 13.9% in the quarter versus 16.5%. Adjusted skip/stolen losses were 8.7%, up approximately 30 basis points year-over-year on a pro forma basis. As Mitch noted in his comments, we anticipated that during the third quarter customer behavior would start to revert to more normal trends for customer payment activity and losses, which would negatively impact margins on a sequential basis. Our expectations were directionally right, though we under-anticipated the extent of sequential margin decline due to the factors Mitch discussed earlier. Looking forward over the rest of the year, our top objective is to ensure the business is well-positioned for a strong start to 2022. With that, I'll turn it over to Anthony.

Thanks, Jason. Staying with the topic of the changing environment that consumers and our business are experiencing today, it may be surprising to some people just how well the Rent-A-Center Business segment has been performing. But for those of us close to the business, we know just how solid the underlying fundamentals are and how much opportunity there is to generate consistent growth over the long term. This was illustrated again in the third quarter with revenue growth of 5.6%, including 12.3% same-store sales growth, and that was comping against 8.6% revenue growth and 13% same-store sales growth in the prior year period. That makes it 15 consecutive quarters that we have generated positive same-store growth and five consecutive quarters of double-digit same-store growth, which is a testament to the unique value proposition we offer customers: high-quality products, flexible lease-to-own solutions to fit everyone and a great experience. Importantly, we continue to evolve with the consumer and are meeting their preferences with a growing omni-channel platform that has played a key role in our performance over the past year and a half. In the third quarter, our e-commerce revenue grew 9% as it lapped 71% growth in the prior year. E-commerce accounted for 21% of revenue, a substantial increase relative to just 13% in the third quarter of 2019. Importantly, we believe we remain in the early innings of capturing the long-term opportunity in the e-commerce channel. The team's strong execution, including sourcing product, marketing, merchandising and collections translated to 14% year-over-year growth in the portfolio for the third quarter. So, we feel we're in great position heading into the home stretch this year and for a solid start to 2022. Profitability also remains solid in the third quarter with adjusted EBITDA margins of 22.9%, up 60 basis points year-over-year, despite loss rate expansion of 140 basis points due to the normalization of trends following the wind down of government stimulus. We still believe that over the long term, our loss rate should be around 3% given the improvement we're making in collections and decisioning. Longer term, the business is well positioned to capitalize on expanding consumer interest in flexible and affordable payment options. We have a relatively large core consumer base to whom we provide a specialized service that makes a difference in people's lives every day. We still have considerable opportunities to expand our retail business in our existing footprint through surgical openings, new store concepts, and expanding into new product categories. In addition, we have tremendous e-commerce opportunity that leverages our differentiated omni-channel capabilities. While e-commerce will play a critical role in our future, we feel the brick-and-mortar business is just as important because many of our consumers today, especially lease-to-own customers, still prefer an in-store experience. Moreover, brick-and-mortar allows us to participate in transactions holistically, including sourcing product, purchasing at wholesale cost, having the ability to establish competitive pricing for customers and to provide the last mile logistics for our e-commerce channel. Looking out over the next few months and into 2022, we feel good about the business environment and believe the set of initiatives we're focused on such as e-commerce enhancements, customer engagement and support and employing continuous improvement tactics should set us up very well for next year. I'll now turn the call over to Maureen.

Thanks, Anthony. As Mitch noted earlier, we delivered solid results in the third quarter, despite some anticipated headwinds that we called out on the second quarter call including some typical third quarter seasonality and a reversion to more normal ranges for customer payment activity, loss rates and early payouts. Reported revenues of $1.2 billion increased 66% year-over-year and consolidated adjusted EBITDA of $170 million almost doubled. Much of that growth is attributable to the Acima acquisition that closed in mid-February. On a pro forma basis, consolidated revenues grew 13.3% and adjusted EBITDA grew 4.1%. This translated to a margin of 14.4% in the third quarter, compared to 15.7% for the prior year period. The year-over-year contraction in margins was primarily attributable to normalization in customer payment activity for delinquencies and loss rates from the wind down of government stimulus, as well as a mix shift to the high-growth Acima business. Margins for the Rent-A-Center business segment, Mexico segment and corporate costs were all favorable year-over-year, while the franchise segment margins were down 135 basis points. Below the line, net interest expense was $19.7 million reflecting the debt financing from the Acima acquisition. The effective tax rate on a non-GAAP basis was 24% compared to 23.3% in the prior year period and diluted share count was 68.2 million. GAAP EPS was $0.31 in the third quarter compared to $1.15 in the prior year period and included one-time costs related to the Acima transaction and integration. After adjusting for special items that we believe do not reflect the underlying performance of our business, non-GAAP EPS was $1.52 in the third quarter of 2021 compared to $1.04 in the prior year period. We generated $55 million of free cash flow in the third quarter and returned $38 million to shareholders through a $0.31 quarterly dividend and share repurchases. Year-to-date through October, the company has repurchased 0.8 million of common stock at an average price of $56 per share. At the end of October, the company had approximately $170 million remaining on its current share repurchase authorization. At quarter end, we had a cash balance of $159 million, gross debt of $1.3 billion, net leverage of 1.7 times and available liquidity of over $600 million. Regarding our financial outlook for the full year of 2021, we are lowering the high end of our previous guidance ranges for consolidated revenue and non-GAAP EPS. We now expect consolidated revenues of $4.55 billion to $4.64 billion and non-GAAP EPS of $5.90 to $6.15. Guidance for adjusted EBITDA is now expected to be between $645 million to $675 million and free cash flow within the range of $280 million to $320 million. For the Acima segment, we expect revenues of $2.32 billion to $2.38 billion and adjusted EBITDA of $300 million to $320 million. This outlook reflects the continuing supply chain headwinds our retail partners are facing, a more rapid shift back to pre-pandemic trends than we had anticipated for customer payment activity and loss reserves due to the wind down of government programs that had supported consumer spending during the pandemic. We had previously incorporated a more gradual reversion of those factors, which impact both top-line and margin over the next couple of quarters in our forecast. Even with supply chain headwinds and more normalized lease performance metrics, we still expect Acima to generate 20% to 25% annual GMV growth in 2021 and approximately 14% EBITDA margins in Q4. Looking beyond the fourth quarter, the business should largely be past this set of internal and external adjustments and, as Mitch mentioned, we remain confident in our longer-term targets for the company. For the Rent-A-Center business segment, we are not adjusting prior guidance. Revenues are still expected to be between $2.02 billion and $2.06 billion and same-store sales growth in Q4 is expected to again be in low double digits. Adjusted EBITDA is still expected to be between $480 million and $500 million and the midpoint of our guidance implies an EBITDA margin of approximately 23% in Q4, higher than last year and flat sequentially despite recent wage increases and added headcount. Turning to capital allocation, our priorities are unchanged. The top priority is appropriately funding our business and investing in value-enhancing growth. Next, we will opportunistically look at M&A that can generate favorable returns. After satisfying investment needs, we return capital to shareholders through a combination of dividends and share repurchase. With share repurchases employed opportunistically, we remain committed to a sound financial structure that supports our growth strategy and total shareholder return objectives. To conclude my comments, our third quarter efforts were a successful piece of the huge undertaking the company has been engaged in over the past 10 months. We have completed the largest acquisition in the company's history, integrated two organizations without letting up on execution and we developed and are launching a new fintech payments ecosystem. Looking forward, I think we are well positioned for this next stage in our evolution and the highly compelling opportunities to create shareholder value should become more evident. I'm also very excited to announce we are planning an Investor Day for late Q1 next year and, of course, more details to come. We will post detailed income statements by segment to our website and file our 10-Q later today. Thank you for your time this morning. I'll now turn the call over for your questions.

Your first question comes from Bobby Griffin with Raymond James.

Good morning, everybody. Thanks for taking my questions. Hope everybody is doing well.

Morning, Bobby.

First, I just wanted to talk about maybe on a month-by-month basis — I know that typically you don't get into that type of color, but now that things are starting to normalize, it would be helpful: how did payment activity and skips/stolens trend during the quarter? And then did it kind of level out in October, and that's what you're assuming carries forward in the fourth quarter? Or are you assuming it continues to build back up a little bit in November and December?

Yes, good question, Bobby. It deteriorated as the quarter went on, as we got farther away from stimulus. But the good news is that as we got into October, especially as we ramped up from a staffing standpoint — we got caught up from the staffing standpoint in the collections center — we've seen really good trends in October. So, that gives us the confidence going forward that it's certainly normalized faster than we thought. But October gives us a good feeling and confidence that it was a short-term blow.

Okay, that's helpful. And then secondly — longer-term, inside the Acima business, obviously we got an outlook for really good revenue growth. Maybe just help us unpack where you see some margin opportunities in that business within the P&L as we look two to three years out. I know gross margin can move around a lot based on what the customers are and so on. So, where could there be upside on margins, and what are some of those moving parts?

Thanks, Bobby. When you look at some of the things I was talking about earlier, we've got some key differentiators that are out there, particularly when you look at the Ecosystem. So, having declining customer acquisition costs while simultaneously having increases with regard to the number of leases per customer, when the average ticket is holding, enables us to get margin expansion in that regard. So, having this ongoing relationship is critical. Also, as we continue to bring on more partners, like I had mentioned P.C. Richard, Whirlpool, and Sonic Electronix, you're getting sort of a coattail effect that's taking place there as well because we not only have the ability to originate through the traditional locations, but now originate on our own customers, and drive them towards optimized retail origination experiences. I'm sorry, Bobby. The other thing I'd add to that, when we think down the road, is in our legacy staffed business, we've got about half of those stores converted, and we'd do the other half early next year. With the Acima decisioning and so forth, and what you've seen in the numbers, we'd expect, in the long term, the losses to be lower in our legacy business as we convert over to Acima. It's a faster platform and can reduce losses in those stores that we haven't converted yet. So, as we go forward, the staffed business has some opportunity; that's part of the long-term synergies we expect anyhow. Overall, you'll see lower losses as well.

Yes, and then we're going to continue optimizing by channel, using, as Mitch was talking about, our machine learning and AI, so that every partnership, every channel, every product continues to get crisper from an underwriting perspective.

Okay, that's very helpful. Mitch, that was actually my follow-up, which was just the labor opportunity. I'll go ahead and jump back in the queue because you answered it, but I appreciate the time, and best of luck here in the fourth quarter.

Thanks, Bobby.

Your next question comes from John Rowan with Janney.

Good morning. Can you remind me what is included and not included out of your current objectives in the guidance for 2023? Just run through, because I believe there was a lot that was basically excluded from that number that you're currently undertaking. Thank you.

Well, the guidance excludes any share repurchases. And so, really that's the primary stipulation when it comes to our guidance.

And when we're really talking EBITDA margins when we say $6 billion — we expect to be at least $6 billion at mid-teens EBITDA margin. From an EPS standpoint it would not include share repurchases if you try to back into EPS numbers. It assumes 20% to 25% GMV growth over those couple years to get there. It assumes achieving the synergies we're on track to achieve. It assumes the Rent-A-Center business running mid single-digit growth next year, because there's quite a tail coming into the year with that portfolio, as Anthony mentioned, still up 14% year-over-year. Then in 2023, you'd look at low to mid single-digit growth in that business. So those are the base assumptions we've talked about.

But what about big retail partner wins and/or additional growth spurred by the omni-channel fintech platform?

That's a great follow-up. What we don't know yet is the material timing and magnitude of ecosystem-driven wins. We know how big the total addressable market is with the Acima Ecosystem and LeasePay Card in the marketplace, and we're already seeing some great results, like transactions in stores where we're not even integrated — that's really exciting and potentially transformational. But we haven't baked broad ecosystem adoption into our near-term guidance. It's hard to make assumptions on how quickly that scales. It could be meaningful upside if the ecosystem ramps faster than expected, but at this point we're trying not to build that into the base assumptions.

Okay, thank you.

Thanks.

Your next question comes from Vincent Caintic with Stephens.

Good morning. Thanks for taking my questions. So first, thinking about the run rate going into 2022 — I understand you're not giving 2022 guidance yet — but when I think about the fourth quarter guidance, is there any sort of one-timers or anything that might change as we run-rate into next year? It seems like when I look at fourth quarter guidance you are having EBITDA margin expand quarter-to-quarter. Maybe there's credit normalization in the third quarter, and some reserving was taken up front. So I'm just wondering if there's anything when we think about the fourth quarter that we should consider if we're modeling into next year. Thank you.

Well — go ahead, Maureen.

There are some reserve adjustments that were made, both in the Rent-A-Center business as well as the Acima business, that are meant to predict based on customer payment activity and loss trends what we think should be reserved for into the future. So, there were some one-time adjustments made for that normalization. As we mentioned in our prepared comments, we expected that normalization to happen over a couple of quarters, maybe even slightly into 2022. So, there were some adjustments made this year that should set us up better for 2022, since we've taken some of those reserves that we likely would have taken a couple quarters from now.

Okay, that's helpful. Is there anything else in the fourth quarter we should be thinking about as we consider a run-rate into next year, or is the fourth quarter a good proxy for how we should be thinking about going forward?

I think you're talking about a growing business. If you go into the future, 19% GMV growth last quarter, and as we think about the year, we're starting to comp over a big account like Wayfair added last year at this time. That can decelerate the GMV a bit. Converting the staffed stores to the Acima system can cause short-term drops when you convert — you sometimes take one step back to take two steps forward. But then you have new accounts coming in, like the P.C. Richard win. We're adding many stores — 2,700 new stores last quarter — so when you're growing that fast, quarters can be lumpy. We had some third-quarter margin decline because of stimulus winding down and faster normalization than expected and staffing catching up, plus supply chain. But overall, with 20% to 25% growth rates, there can be some quarter-to-quarter lumpiness, yet the long-term trajectory remains strong.

To Vincent's point, it's a step function. What we're seeing are lead indicators: competitive wins, new products in the marketplace. There's a ramp associated with them, and you start to see acceleration once they reach an exit velocity and normalize.

There's also additional synergies that we're assuming will take place in 2022 that we haven't fully realized yet, because we haven't finished the full integration. Some of those synergies were masked in the back half of this year because of normalization, but we're seeing strong growth and synergies play out. It just made things a little choppy this year. But 2022 we should be at a more normalized rate.

Yes, nothing has changed our long-term outlook.

Okay, perfect. That's really helpful. And then a follow-up on Acima: a lot of really exciting data. I saw the Ecosystem video on your website which was interesting, as well as the marketplace with merchants like BestBuy, Home Depot, Overstock. I was wondering if you could talk about the pipeline and how you're seeing it. You touched on buy-now-pay-later partnerships showing interest in Acima. Could you talk about the merchant pipeline and partnership pipeline and the timeframe for that?

I'll take that in reverse. Regarding partnerships, we've been saying for a couple quarters that buy-now-pay-later is complementary. It brings people more accustomed to alternative payments, which feeds into our ecosystem. For the Ecosystem, we're in a test-and-learn environment. We rolled out the mobile app and have over 220,000 active users. Now that we've validated our metrics, we're continuing to add to the marketplace and are seeing fantastic volume with some merchants, even without tight integrations. We're accelerating efforts from a consumer standpoint. One important thing: embedding our native mobile app allows customers to transact on their phones after leaving the store, driving re-engagement and return visits. The LeasePay Mastercard expands our reach dramatically. As we build a larger consumer base on our platform and move physical cards into the hands of consumers, their ability to spend across 2.2 million locations makes it a ubiquitous solution. That ubiquity helps with retailer discussions and reduces the need for complicated integrations, changing how retail partners view our solution — more like another debit or credit option for customers, which is compelling.

Your next question comes from Anthony Chukumba with Loop Capital Markets.

Good morning. Thanks for taking my question. Quick clarification first: you keep using the word 'accounts' and also 'stores.' I'm assuming that 2,700 is 2,700 doors, right? That's doors, not 2,700 completely disparate retailers?

That's correct. It's 2,700 doors.

Okay. Since you mentioned the 2,700 number, can you disclose the total number of doors for Acima at this point?

We don't talk about the precise total other than previous statements indicating over 30,000 doors right now. So it's north of 30,000 and growing at a significant rate.

Okay. No, fair enough. One last follow-up: regarding the normalization in collections activity, it sounds like stimulus checks started to wear off and maybe you guys hadn't been as aggressive with collections because customers were more current. So it sounds like you hired more people and allocated more hours in collections to respond. I'm trying to understand exactly what happened operationally.

On the Acima side, when Mitch talked about being a little short, we were converting over operations and started to see normalization accelerate. We saw our staffing ratios drift relative to delinquent account loads. We've since brought staffing back in line, adjusted collector workloads, and leaned on Acima's automated streams to reduce manual intervention. The exit velocity for 2022 should be back in line with our guidance.

And you are talking about centralized call centers?

That's correct.

For the Rent-A-Center business, historically the third quarter is softer from a payment perspective. We knew stimulus and enhanced unemployment were winding down, so we proactively staffed up throughout the quarter. Headcount year-over-year is up 7%. That allowed us to react as normalization occurred, but we also calibrated to avoid over-correcting and harming the portfolio. Our leading indicators give us confidence that historical trends for the fourth quarter will continue and that loss rates around 3% going forward are achievable.

Got it, very helpful. Keep up the good work, guys. Thanks.

Thank you.

Your next question comes from Brad Thomas with KeyBanc.

Yes, thanks. Good morning. Just to follow up on that last line of questioning. On the Rent-A-Center side, as we look into 2022, you think annual losses can still be in the 3% range? Any detail on the confidence in that would be great.

Yes. I do expect that. The normalization is happening and what we're seeing from customer payment behavior gives us confidence. We're not expecting to go back to pre-pandemic numbers; we now have centralized decisioning available in all stores, enhanced customer communication tactics employed during the pandemic, and ramped-up digital payments. Those factors together make us confident in a go-forward range around 3% for Rent-A-Center.

Nearly 60% of payments are now happening outside the store, which is important for collections and customer engagement.

That's really helpful. On the Acima side, the theme of this quarter has been normalization happening faster than expected. Yet Acima losses expanded sequentially. Can you talk more about your line of sight to 2022 and how you make sure you don't get overconfident in models and experience a more abrupt move back to normal trends?

For 2022, we're looking at a normalization rate of roughly 6% to 8% within the virtual book. The key to avoiding overconfidence is our ability to break underwriting down by channel, product, and partner. We don't have one monolithic decision engine; our machine learning and AI constantly run optimizations and can exploit lower-risk segments while minimizing exposure to higher-risk segments. We track this in real time and review it regularly.

Really helpful. Maureen, can you give an update on where you stand year-to-date on synergies? How much you think you'll get in the fourth quarter and your current plan for 2022?

We believe by the end of the year we'll achieve the $25 million in synergies we discussed. A number of initiatives have been deployed, others will extend into 2022, which is why we talked about a longer-term run rate of $40 million to $70 million. Most of what we anticipated rolling out in 2021 has already occurred, and we expect some of those benefits to show through in the fourth quarter. There has been some offset with the timing of normalization, but we're on track to achieve those synergies. Integrating the preferred lease business with Acima will make us a better company and help us reach mid-teens EBITDA margins over the next year or two.

I would add that a tighter credit environment is beneficial to us in the long run, even if it impacts short-term performance. We're already seeing some improvements in the credit profile of new vintages, and a tighter credit environment generally increases demand for lease-to-own solutions.

Absolutely, thank you all so much.

Thank you.

Thank you.

Thanks.

Your next question comes from Kyle Joseph with Jefferies.

Hi, good morning. Thanks for taking my questions. On the credit side, normalization is underway. Can you give a sense for potential offsets in a credit-tightening environment and remind us how the Rent-A-Center business performed in a negative economic scenario like the GFC, and how you envision Acima performing in such an environment?

Both businesses generally outperform in adverse economic environments. If you look back to the worst recessions, including 2008, Rent-A-Center had solid growth rates and losses didn't spike dramatically. Acima should be similar — it's the same lease-to-own business model where customers can return products and we can re-rent them through Rent-A-Center. So while a tighter credit environment impacted us in the short term during the third quarter, in the long run it benefits LTO. Rent-A-Center has the on-the-ground capability with in-store collectors, and centralized decisioning and digital payments reduce the short-term impact. So overall, both businesses have resilience in tightening credit conditions.

That makes sense. Quick follow-up on supply chain for Rent-A-Center: how is inventory positioned heading into the holiday season?

We're in a strong position across major categories. Held-for-rent inventory ended the quarter up 24% versus the prior year. Merchants and vendor partners have done a good job sourcing inventory. Remember we buy fewer SKUs but in deeper quantities, so we can ensure staple items are available. We're still seeing expansion in categories like tools, tires, handbags, and e-bikes, and we feel confident about meeting fourth-quarter demand given the inventory position.

Got it. Thanks very much.

Thanks, Kyle.

Your next question comes from Tim Vierengel with Northcoast Research.

Good morning and thank you for taking my question. Most of my questions were answered, but one bigger-picture question for Anthony and Mitch: consolidation is happening in many fragmented industries due to supply chain issues and limited capital of smaller operators. Should we expect similar consolidation in the legacy brick-and-mortar business, and have you seen any easing competitive environment recently?

Tim, there isn't a broad wave of consolidation in our legacy Rent-A-Center brick-and-mortar business. We're one of the few expanding store footprints; many competitors are closing stores. We'll likely see some small acquisitions of independent operators, but they would be relatively modest in scale. Larger M&A opportunities are more likely on the Acima or payments side than in the brick-and-mortar Rent-A-Center footprint. We'll pursue opportunistic M&A where it makes strategic and financial sense.

Thanks. Do you have a sense for what percentage of store doors are independent today? I recall a figure around 45% a few years ago.

You're not far off — it's between roughly 35% and 45% today.

Okay. Thank you so much for answering my questions.

Thanks, Tim.

Your next question comes from Carla Casella with JPMorgan.

Hi, just two quick ones. One on labor costs: it sounds like you pre-hired labor in the third quarter. Are you still hiring through the fourth, or are you fully staffed? How comfortable are you with labor cost levels?

Good morning, Carla. We did catch up in the third quarter and into October. There's still regular hiring because we have normal turnover, but by the end of October we're in pretty good shape. The late third quarter into October was primarily a catch-up period; ongoing hiring now is just routine.

Okay, great. Second, as you mentioned several times, you returned to more normal patterns sooner than expected. Are you seeing any change in how you have to compete with retail partners or customers on Acima or Rent-A-Center? Are you changing terms or seeing changes in the average length of contracts or anything unusual as you return to normal?

No unusual changes. As credit tightens, it impacts payments, but it also pushes demand to LTO since customers who are underserved by prime credit options still need solutions. We're seeing more retailer interest because as retailers add buy-now-pay-later, they see turndowns and recognize they need the LTO option to capture more customers. That dynamic actually helps our growing Acima business.

Great, thank you.

Thanks, Carla.

I will now turn the conference over to Mitch Fadel for closing remarks.

Well, thank you, operator, and thank you everyone for your interest this morning. I appreciate your time. It's been an interesting year — a heck of a year so far. We need to finish strong. We started the year by closing Acima and there was some lumpiness in the third quarter as things normalized faster than we expected and supply chain issues had an impact. Overall, we're in a much stronger position than we were at the beginning of the year and we're comfortable with the midpoint of the EPS guidance we provided, which is higher than prior expectations. There can be quarter-to-quarter lumpiness but the big-picture outlook for the long term has not changed. In fact, a tighter credit environment is a benefit to lease-to-own over the next couple of years. We're really excited. With that, we'll let you get back to your day and we'll get back to work. Thank you everyone.

Thank you for participating. You may disconnect at this time.