Upbound Group, Inc. Q4 FY2021 Earnings Call

Thank you for standing by and welcome to the Q4 2021 Rent-A-Center Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentations, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Brendan Metrano, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you all for joining the Rent-A-Center team to discuss our results for the fourth quarter of 2021. We issued our earnings release after the market closed yesterday. The release and all related materials, including a link to the live webcast 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 fourth 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. Good morning, everyone and thank you for joining the call today to review our fourth quarter results and our plans for 2022. 2021 was an important and transformational year for the company. We completed the largest acquisition in our history, which has greatly enhanced our commercial and technology capabilities, growth opportunities, and potential for value creation. We also generated strong financial results with revenues of about $4.6 billion, up 17% on a pro forma basis on solid organic growth from both the Rent-A-Center Business Segment and the Acima business that we acquired last February. Non-GAAP EPS was $5.57, up from $3.53 in 2020 and we also paid out a healthy dividend of approximately $1.24 per share. From an operational standpoint, we made great progress on numerous initiatives that should position the company better for the future. Within the Rent-A-Center segment, we made great strides in our e-commerce business, which increased to 23% of revenue in 2021 from 13% just two years ago. We executed initiatives to lower delinquency and loss rates, including centralized decisioning, increased autopay penetration and digital payment capabilities. We also added new products and sourcing capabilities to drive incremental transaction growth. At Acima, we continued to grow the merchant base, including new relationships with strategic partners like P.C. Richard & Son and Whirlpool. We consolidated collection operations and completed the conversion of most of our preferred lease locations, which contributed to achieving the 2021 synergy target of at least $25 million. We also launched our proprietary digital ecosystem test that leverages Acima's scale and technology, including a direct-to-consumer model, which we believe could be a significant competitive advantage and growth vehicle long into the future. The more challenging aspects of the year primarily stem from operating in a dynamic macro environment that resulted from the lingering effects of the pandemic. This caused dramatic swings in customer behavior, especially around delinquencies and early payouts and renewal rates. For the first half of the year, the macro environment was a tailwind with government relief programs pushing expenditures on consumer durables and favorable payment behavior to levels that were above historical averages. In the latter portion of the year, the macro environment shifted to a headwind. Government pandemic relief programs that had supported higher rates of consumer spending ended. In addition, supply chain disruptions and a significant uptick in inflation diminished consumers' ability to access and afford products. We had anticipated some effect from the end of pandemic relief and implemented new tactics for decisioning and collections. However, we underestimated the speed and the magnitude of the changes in delinquencies and loss rates, especially for Acima. The combined effect of those factors had a large impact in the fourth quarter, which generated adjusted EBITDA and EPS below the expectations applied in our most recent annual guidance for 2021 and Maureen will expand on our fourth quarter results and our 2022 outlook in a few minutes. Over the past few years, we've built a foundation for the company's growth strategy to evolve into a leasing and payment solutions platform. We returned the legacy RTO operations to a resilient, profitable and strong cash flow generation business. In 2021, we took a major step forward in expanding our digital growth engine by acquiring Acima and then launching the digital ecosystem test. So today we have a compelling formula for value creation: strong current profitability and cash flow plus the potential for robust top-line growth and incremental learnings. From a strategic standpoint, we now have the right pieces with the leading omnichannel business and Acima as one of the top virtual lease-to-own franchises in the space and a proprietary direct-to-consumer business that we believe could provide a competitive advantage. While we are well positioned to move forward with a growth strategy and agenda that we've previously outlined in our long-term plans, it's unclear if the external environment will allow us to generate the desired results and returns on our investments this year. When you factor in the effect of ongoing macro headwinds and the material pull forward of consumer durable spending that occurred over the past 20 months, we think our core customer's ability to access and afford durable goods may be limited in 2022, especially in the first half of the year. So rather than push forward with significant investments and growth initiatives in an unfavorable environment, we are taking a more measured approach to execute in areas where we can influence outcomes and still enhance our position for long-term growth. For example, at Acima where delinquencies and losses have exceeded historical averages, the near-term plan is to focus on underwriting for yield and loss improvements, including shifting technology resources to that effort, which should also benefit our future underwriting. When the environment becomes more conducive for growth, we'll be prepared to pivot and ramp up investments in our growth initiatives, taking advantage of our strong cash flow generation. Now regarding our 2022 financial performance, we expect to generate revenue for the year of $4.45 billion to $4.6 billion; adjusted EBITDA of $515 million to $565 million, which excludes stock-based compensation of approximately $25 million; fully diluted adjusted earnings per share of $4.50 to $5.00; and $390 million to $440 million of free cash flow. While this revised outlook impacts the three-year targets we announced last year, I think it does demonstrate our resiliency and ability to generate solid financial results in more challenging business environments. Along those lines, given the extent to which late 2021 results and 2022 projections have been negatively affected by changes in the external environment, we will not reach our $6 billion revenue target by 2023. If you recall in the third quarter call, we discussed potentially hosting an Investor Day sometime towards the end of the first quarter. We think it's important to host an in-person event to most effectively communicate our story. So given the ongoing challenges for in-person events due to COVID variants, we've decided to push out the Investor Day until later this year. In closing, I want to thank the entire team for their continued effort and dedication. It's been quite a journey over the past few years, and I've been impressed with the progress we've made and the tremendous opportunity I see in the future. With that, I'll turn the call over to Jason to provide updates on the Acima business.

Thanks Mitch. Echoing your comments, 2021 was a transformative year for us. With the Acima acquisition, we essentially doubled the size of the company and took a big leap forward in our virtual lease-to-own business. Over the course of the year, we made good progress integrating the two businesses and launched our proprietary digital ecosystem test that we believe could effectively double our addressable market to almost $100 billion of open-to-lease capacity. Today, the company has established a solid foundation for the future with significant opportunities for growth and expansion as the external environment improves. The Acima segment grew GMV 23% and revenues 22% on a pro forma basis in 2021. Segment adjusted EBITDA margin was 12.2% in 2021. Those results would have been even better without the disruptive external environment that occurred in the latter portion of the year that negatively impacted customer spending on consumer durable goods and payment behavior. In the fourth quarter, those external factors negatively impacted GMV growth, delinquencies and losses. We started adjusting underwriting and collections back in the third quarter to mitigate deteriorating delinquency rates and loss rates. However, as the external headwinds worsened through November and December, the deterioration in delinquencies and losses accelerated despite the additional tightening. Bottom line, despite tightening, we can now see it was not fast enough to keep up with the changes in customer payment behavior. Attempting to get ahead of declining macroeconomic trends in January, we tightened further. In addition, we've implemented new augmentative fraud measures to further prevent losses as e-commerce continues to grow as a portion of our origination. And we will continue to implement additional augmentative fraud prevention technologies. Early missed-first-payment trends are encouraging. However, it will take a while for the improvement to show up in the P&L as leases that were booked prior to these changes in underwriting make their way through the performance lifecycle. Fourth quarter GMV grew 5% year-over-year on a pro forma basis driven primarily by increases in merchant locations. On a pro forma basis, revenues grew 12%, skip/stolen losses increased approximately 100 basis points year-over-year to 11.8% and adjusted EBITDA margin declined 540 basis points to 9.6% largely due to higher delinquencies and higher loss rates. Initial results from the ecosystem testing have been encouraging. By the end of this month, we expect the mobile app will have approximately half a million activated downloads with open-to-lease capacity, roughly double the number from our third quarter earnings call. We still believe we are on pace to reach one million activated downloads with open lease capacity midyear 2022. Optimizing the product and better understanding risk and performance is still the primary objective. So we will continue to operate methodically with targeted activation on previous Acima customers. Importantly, we still haven't leveraged the lease-paying MasterCard. The physical card was piloted on schedule in December with 1,000 cards issued and a larger scale launch is planned for some time in 2022. The strategic aspects of the ecosystem are also beginning to play out. Merchants have noticed how much volume our proprietary marketplace is driving and have approached us to learn more about the platform and how they can work with Acima to generate more business. It's been very exciting to see the ecosystem coming together and building momentum and we look forward to having all the pieces up and running this year. As Mitch highlighted, we expect the macro headwinds that impacted the fourth quarter of 2021 to persist through much of 2022. Based on what we learned from the second half of 2021, we think it is unlikely that heavy investments in GMV growth will generate appropriate returns in this environment. So while our product development initiatives are on track, we plan to take a more measured approach with the launch and ramp-up of the products than we previously envisioned. And when the environment and consumer behavior improve, we will be ready to scale. In closing, reflecting back over the past year, the team accomplished a lot and laid the foundation for what we believe can be a dynamic and disruptive business. I'd like to congratulate the entire team for the tremendous effort and execution in 2021. And I can't wait to see what we accomplish in 2022. I'll turn the call over to Anthony now.

Thank you, Jason. 2021 was an exceptional year for the Rent-A-Center business that demonstrated the strong value proposition we provide to our core consumers. We grew revenue 10% with same store sales growth of 15.4% and the lease portfolio finishing the year up 10.5%. This represents the 16th straight quarter of same store sales growth and is a testament to the long stability of our business model. As Mitch noted earlier, our e-commerce business had another strong year and will be the primary growth driver as we continue to enhance our omnichannel capabilities. Additionally, we've identified new areas for store expansion and begun the process to complement our growing eCommerce offerings and grow our portfolio. Adjusted EBITDA margin was 23% and increased 280 basis points year-over-year, while we continued to invest in the business. Perhaps even more compelling than our financial results is the sound work of our operations team who have managed through continuous COVID obstacles since the first half of 2020. Execution was certainly a key factor in 2021's performance, but we also clearly benefited from a more favorable environment. As Mitch and Jason both noted earlier, those tailwinds started to moderate in the latter part of the year, especially in the fourth quarter with revenue on the lower side of our expectations, and EBITDA below our expectations, but overall results were still impressive with revenue growth of 9%, including same store sales growth of 10.4%. E-Commerce revenue grew 17.9% year-over-year and more than 70% on a two-year stacked basis and accounted for 23% of revenue within the quarter. Adjusted EBITDA margin was 19.3% and declined 290 basis points year-over-year, due to higher labor costs, loss rates and other store expenses. Per store labor costs had been almost flat for the past two years and we believe labor investments were needed to keep up with wage growth and staffing needs to manage a much larger portfolio within a more normalized collections environment. Skip/stolen losses increased 140 basis points year-over-year to 4% due to the same factors affecting customer payment activity that Mitch and Jason discussed and longer term we expect it will average around the upper 3% range. Moving on to 2022, our top business priorities are focused around enhancing omnichannel capabilities. Our goal is to deliver a more seamless experience for our customers however they choose to shop with us. We have several significant initiatives underway that are aimed directly at driving sales and customer retention. We are working to create a better shopping experience for customers and enhance our e-commerce growth through improvements to the online checkout process, expanded product offerings and increased personalization in our sales and marketing strategies. We are also working towards making payments easier, implementing better communication strategies and improving personalized retention strategies to enhance our customers' journeys. We expect these efforts along with other initiatives will grow our portfolio beyond existing levels while also maintaining our key advantage of remaining embedded within our communities. I too would like to thank the Rent-A-Center team for the great work they've put in to deliver an exceptional 2021 and we look forward to another solid year in 2022. With that, I'll turn the call over to Maureen.

Thank you, Anthony. Fourth quarter revenues of $1.2 billion increased 63.5% year-over-year on a reported basis and 10.5% on a pro forma basis. Adjusted EBITDA of $124 million increased 28.2% on a reported basis and decreased 22.5% on a pro forma basis. Pro forma adjusted EBITDA margin was 10.6% in the fourth quarter, compared to 15.1% for the prior year period. The year-over-year decline in adjusted EBITDA and margin was primarily attributable to the large swing in delinquency and loss rates between the two periods, predominantly in the Acima business. As noted earlier, we believe this change in customer payment behavior is the result of the more challenging economic setting our customers experienced during the second half of 2021, which worsened throughout the fourth quarter. Other factors that contributed to margin contraction include higher labor and other store expenses in the Rent-A-Center business. Below-the-line net interest expense was $18.6 million compared to $3.1 million in the prior year, reflecting the debt financing from the Acima acquisition. The effective tax rate on a non-GAAP basis was 23.4% compared to 28.4% in the prior year period and the diluted share count was 65 million. GAAP EPS was $0.15 in the fourth quarter compared to $1.00 in the prior year period and included one-time costs related to the Acima transaction and integration. After adjusting for special items that we do not believe reflect the underlying performance of our business, non-GAAP EPS was $1.08 in the fourth quarter of 2021 compared to $1.03 in the prior year period. We generated $49.5 million of free cash flow in the fourth quarter and returned $388 million to shareholders through a $0.31 quarterly dividend and $370 million of share repurchases. At quarter end, the company had approximately $360 million remaining on its current share repurchase authorization. In addition, we had a cash balance of $108.3 million, gross debt of $1.6 billion, leverage of 2.3 times and available liquidity of approximately $280 million. Turning to our outlook for 2022. Mitch discussed the key consolidated metrics, so I'll focus my comments on some additional details and provide a view on the first quarter. First note that for 2022 and moving forward, we will exclude stock-based compensation from the calculation of adjusted EBITDA, which we think better reflects the underlying performance of the business and is consistent with the approach of peers. For the Rent-A-Center business segment, we expect 2022 revenues and same store sales will be down in the low to mid-single digit range. Adjusted EBITDA margin should be in the low twenties with the key drivers being higher loss rates and higher labor costs resulting from mid-2021 wage increases. For Acima, we can continue to add new merchant locations and grow e-commerce. However, macro headwinds and tighter underwriting are expected to negatively impact volume translating to a mid-single digit decline in GMV. After factoring in higher expected delinquency rates until the underwriting initiatives fully take effect later in the year, we expect a mid- to high-single digit decline in revenues. Adjusted EBITDA margin is expected to be in the low double digits, reflecting modest margin contraction on volume deleverage, higher delinquencies and higher loss rates. We expect the Mexico and financial businesses will generate similar results to 2021. Corporate costs are expected to increase mid-single digits with Acima integration synergies being offset by the investments we have been making in talent and technology to support our growth initiatives. Shifting back to consolidated results, we expect net interest expense of approximately $75 million and an effective tax rate of 25% to 26%. 2022 non-GAAP EPS guidance assumes a fully diluted average share count of 60.9 million and does not assume any share repurchases. Free cash flow for 2022 is expected to be between $390 million and $440 million, which is up year-over-year due to lower working capital investments, offsetting higher cash taxes. Regarding capital allocation, the top priority continues to be appropriately funding our business and investing in value-enhancing growth. For 2022, we expect CapEx will run a little over 1% of revenues with our emphasis on executing initiatives to help drive profitable growth. After satisfying investment needs, we will use our cash flow to pay down debt and return capital to shareholders through a combination of dividends and opportunistic share repurchases. Given the level of uncertainty, our approach for share repurchases this year will be based on balancing capital allocation priorities, risk and long-term value creation. We remain committed to a sound financial structure that supports our growth strategy and total shareholder return objectives. We also continue to have a longer-term net debt to EBITDA target of the low 1.5 times. The biggest variable for us is the external environment and how the path back to a normalized post-pandemic setting impacts our core consumers. The macro headwinds that negatively impacted the fourth quarter have so far continued through the first quarter and we expect they will persist through the second quarter. The environment may improve over the second half of the year, but given the current uncertainty, we are not assuming the business gets back to its normal run rate in 2022. Given the ongoing headwinds in the first quarter, we have decided to provide some additional details. For the first quarter, we expect the following: revenues of $1.125 billion to $1.155 billion; adjusted EBITDA of $85 million to $100 million excluding stock-based compensation of approximately $5 million; and non-GAAP diluted EPS of $0.65 to $0.80. We'll post detailed income statements by segment to our website. Thank you for your time this morning. I'll now turn the call over for your questions.

Your first question comes from Anthony Chukumba with Loop Capital Markets. Your question, please.

Good morning. Thanks for taking my question. I guess I'm just, well, the first question obviously this is a pretty significant miss relative to what your expectations were and I guess my first question is why didn't you pre-announce? I can't imagine that you wouldn't have had pretty good visibility in terms of the level of the underperformance quite some time ago. The quarter ended almost two months ago.

Yeah, Anthony, good morning. I'm not going to speak to the legal question of why didn't we pre-announce. We didn't have great visibility two months ago, obviously as January's P&L got printed and so forth visibility got clearer and clearer over the last six weeks. But obviously we chose not to pre-announce. As it got clearer, of course we were coming out with 2022 guidance for the first time also. So we wanted to make sure we had a feel for the full year guidance before we started talking about it. And then by the time we knew where our 2022 guidance is, we were a week away or something like that. So that's why.

Fair enough. And then my second question, as I just, and I'm focusing more on the fourth quarter performance, to some extent, it seems like a tale of two cities, right. Rent-A-Center business seems like it had a pretty good quarter, comp of 10% and EBITDA margin down, but not significantly particularly given the tough year-over-year comparison. Acima just seemed like, I don't know, it seems like the wheels kind of fell off. I'm just trying to understand, like, why is it such a divergence, right. These macro headwinds that you pointed to affecting the Acima customer, it seems like it's a similar customer, I don't understand why that wouldn't affect the Rent-A-Center business customer as well. So I'm just trying to reconcile the difference in the performance between the two, because there seems to be a pretty significant delta, particularly from a profitability perspective.

Yeah. Good question, Anthony. Rent-A-Center is still within the lower end of our expectations. So we saw some stress there, but the biggest difference between the two businesses, and Jason was talking about this, is the underwriting at Acima where we didn't tighten fast enough and deep enough back at the end of the third quarter and into the fourth quarter. Rent-A-Center collection is a lot different on the street with 2,000 stores worth of local collections versus Acima doing primarily call-center collections. Rent-A-Center, one of our synergies is for Rent-A-Center to help them with collections. But that's something that I think we mentioned on our last call was in test and it's really just kicking off. So the difference really is when you underwrite, if you underwrite poorly for a period of time without taking into account the changing macro environment, it's going to rear its ugly head a lot more so from a payment standpoint for Acima, because they don't have 2,000 stores worth of 4,000 or 5,000 collectors knocking on doors like Rent-A-Center does.

Okay. No, that's really helpful. Thanks for taking my question.

Our next question comes from Kyle Joseph with Jefferies. Your line is open.

Hey, good morning. Thanks for taking my questions. Follow up on Acima and the recent underwriting changes: can you give us a sense for what the portfolio duration at Acima is at this point and how long we would expect to take for the portfolio to cycle through at this point?

Go ahead, Maureen.

Sure. So good morning, Kyle. The average duration of the Acima leases is approximately six to eight months depending on how much same-as-cash activity takes place within the portfolio. So as we alluded on the call, we expect the front half of the year to be under more pressure given some of those performing leases need the time to work through the life cycle. So we do expect the underwriting changes that we're making to have improvements in the back half with delinquencies and loss rates, but the front half is going to be under pressure because the underwriting was not where it should have been given the drastic changes that we saw in the macro environment.

And more so in the first quarter than the second, but really it is a first-half issue, and you can see in our guidance how the first quarter is. That's why we wanted to point it out and give specific guidance to the first quarter because obviously, when you extrapolate the rest of the year, it improves as the year goes on primarily because of underwriting. Not because we're predicting when the macro environment is going to get better. We don't think that's necessarily our expertise to say the second half's going to be better. Like a lot of people are saying that, and that's certainly upside if it's better in the second half, but for us to predict that to improve as the year goes on, it's primarily because of the underwriting, not because we're predicting the future as far as the macro environment.

Understood. And then follow up on the macro environment: as long as I've followed your company in the space, it's been a relatively defensive space and when the economy has been more challenged your customers typically rely on you more. I recognize this is unprecedented coming out of record stimulus and with high inflation. Ultimately, over time, would you expect demand for credit to improve from your customers as a result of the macro changes and can you give a sense for availability of credit you're seeing above you and whether those lenders are tightening at this point as well?

Sure. Kyle, I think you hit on it. Certainly the flip in household income and spending levels pushed our customers to an all-time high earlier, so it's a bigger swing than normal. The first thing we see is more stress in our customers, more than ever before, and then, over time, as credit tightens above us, people get pushed into the lease-to-own channel. So far we have not seen material tightening above us but we would expect it as the environment gets tougher with inflation. So we would expect that to be a tailwind at some point.

Got it. Helpful. Thanks very much for answering my questions.

The next question comes from John Rowan with Janney. Please go ahead.

Good morning. Mitch, in the past you've characterized inflation as good for your business. I'm curious, what's changed? Is there a number where inflation changes from a tailwind to a headwind? I'm trying to understand whether inflation is good or bad for the rental business.

I think it has been a tailwind in the past and I think it will be again. I really think it's a matter of timing. I don't know when, because what inflation will do is push more business out of subprime financing as things get more expensive and credit tightens above us. It'll push customers into the lease-to-own channel. I believe that will happen again. It's just not happening yet. The first thing that happens is we see stress in our core customer and you lose some of them on one side of the funnel. But the other side because of inflation and tightening credit above us should be a tailwind somewhere down the road.

Okay. And then regarding Acima, losses there are running high. You talked a lot about fraud prevention. I'm trying to parse out whether losses in Acima are really just credit normalization, or if there's fraud given that you're seeing delinquencies above pre-COVID levels.

I'll start and let Jay talk about it. I think there are two different things: it is credit normalization — in fact, credit has gotten a little tougher than pre-pandemic levels — and then on the fraud side, as we do more and more e-commerce, you need more and more fraud tools. That's really what we're speaking about on fraud tools: the more e-commerce you do, which we're growing, you have to have more fraud tools.

No, that's actually spot on and I think what happens is we're continuing to tighten, as I mentioned in my comments, to get ahead of the macroeconomic trends that are taking place. We made those moves in January and in addition to that brought in new technologies. When Mitch was talking about shifting our technology and engineering focus further to underwriting, he was mostly speaking directly about the ability to integrate things that we use in a payment space that are very effective at minimizing any type of upfront fraud losses, including malicious or what they call friendly fraud, so that we can identify behavior before we let people into the ecosystem.

Okay. And last housekeeping question: Maureen, I think you said that for 2022 the assumption for the share count was 60.9 million, is that correct? And with the assumption that there are no share purchases, does that mean the diluted share count going into Q1 is actually 60.9 million?

Yes, that's correct. It's 60.6 million in the first quarter and 60.9 million for the full year.

Yeah. The share purchases, John, you end up averaging when you're in the fourth quarter and for the year of 2021, but then when you start the new year you start with a lower number.

Correct. I just wanted to make sure that it's basically flat-ish roughly 60.9 for the year without share repurchases throughout the year. I'm good. Thank you.

Your next question comes from Jason Haas with Bank of America. Your question, please.

Hi, good morning. Thanks for taking my questions. I wanted to dig into the GMV outlook for the Acima segment. I think you said you're expecting mid-single digit declines through 2022. How much of that is self-inflicted due to your own tightening versus customers pulling forward demand during the pandemic and now easing up?

Yeah, I would say the vast majority of it is because of our underwriting change this year. The key levers are application approval rates. To be clear, applications are still coming in at good volumes. In addition to that, new merchant doors are opening at good volumes and we're meeting targets. So it's more about us being more selective with regard to who we approve. Another component is conversion rates and the open-to-lease line capacity that we assign to consumers, which is also a controlled lever.

The good news is there's not any sort of precipitous drop-off in application volume or new merchants, which means when things improve, whenever that is, it's up to us to drive more GMV when things improve.

I would describe this as we now have the ability to proactively control how we want to grow the business and be opportunistic with regard to the macroeconomic environment and make decisions versus being completely reactive.

Got it. That's helpful. And then as a follow-up, what's the tenor of your conversations with retailers now? To what extent did supply chain and Omicron push out conversions or conversely might weaker retailer sales make them more interested in your financing?

In conversations so far this year, particularly in January, Omicron impacted operations with many employees out and it affected customers and employees. Supply chain issues have not improved since the fourth quarter and probably got worse in January. So most conversations were about those issues. As those ease, it's about supply chain and retailers needing lease-to-own. We expect that need to accelerate. We are still adding hundreds of doors a month on a net basis while controlling GMV with underwriting. I think the outlook for retailers needing lease-to-own will be a tailwind for us. The ecosystem is also showing merchants how much volume our marketplace is driving, and they're asking to learn more.

When you look at larger retailers and the strategic account pipeline, the ecosystem, because our Acima marketplace enables consumers to make purchases at large national partners without formal integrations, actually illustrates the power of the lease-to-own option. It also gives us metrics to center our conversations around. So instead of being a notional discussion, we're able to provide customer-level metrics into those discussions and we're seeing positive traction.

To sum up on Acima: it's not broken. We still think it was a great acquisition for the reasons we've spoken about. We still think there's better-than-double-digit growth potential in the future. The business is there; we still love the business. It's not broken long-term. The macro environment has us underwriting so tightly that we don't expect to see GMV growth in 2022, but that does not affect the long-term outlook. Yes, it pushed our timeline back. Is $6 billion of revenue still in our future? Absolutely. Is it in 2023? No. But it's still in our future.

Your next question comes from Brad Thomas with KeyBanc Capital Markets. Your line is open.

Hi, can you hear me now? Thanks for squeezing me in. A couple questions: following up on the trends at Acima, where have skip/stolen losses been trending into Q1 and how do you see that metric trending through the year?

In the first few weeks of the first quarter we've seen similar trends to what we saw in the fourth quarter. We anticipate that level will continue through the second quarter, and then in Q3 and Q4 we'll expect to see the changes in underwriting and some of the lower-performing leases to have already cycled through the system. So in the back half of the year we expect rates to move closer to normalized levels. Longer-term we still expect the virtual lease-to-own business to be in that six to eight percent loss-rate range, but this year given the environment and the shock our customers went through, there's going to be an adjustment period.

I'd add that the tightened underwriting recently has produced encouraging trends in first-payment missed numbers over the last few weeks. But we have older leases that still must run through and that's why losses will be higher in the first half. Long-term we still expect to meet in the six to eight percent range.

That's helpful. As we think about the tightening, how have approval rates changed, how much lower are they right now, and how should we think about the revenue and GMV step-down relative to the impact from tightening?

We don't want to get too specific on exact approval rates for competitive reasons, but this is what's driving the GMV to be mid-single-digit negative this year. Tough comps also play a role. The combination of tougher comps and tightening leads to the mid-single-digit GMV decline in our guidance. The approval rate is part of it, but also how much credit we extend to approved applicants and the terms we offer, which affect conversion rates and payments.

Last one: on free cash flow guidance of $390 million to $440 million, can you help think about how much of that is benefit or headwind from working capital or portfolio dynamics? The portfolio will shrink this year with revenue declining; what would normalized free cash flow look like?

There is a sizable benefit from working capital given the slowdown in GMV and the lower inventory purchases we plan this year to support the business. That is a key driver of higher free cash flow year-over-year. We had negative working capital over the last couple years as we grew significantly, and this will shift to a significant benefit. We expect CapEx to be around $50 to $60 million. Cash taxes will be roughly $60 to $75 million. The rest besides interest is a benefit from working capital as you flow through EBITDA excluding stock-based compensation.

To put it in context, free cash flow in 2021 was about $330 million in a growth year. So you have $330 million in a growth year and $390 to $440 million in a year where working capital is a tailwind. That gives you a sense of the range.

Your next question comes from Vincent Caintic with Stephens. Please go ahead.

Hey, thanks for taking my question. Stepping back to the 30,000-foot view: the last time you gave your three-year outlook in early 2020 we weren't in the pandemic yet. Now we're normalizing. If you could reiterate what might be different from the three-year outlook you had previously versus when you think about the business over the next two to three years. I can understand 2023 revenues of $6 billion would be tough because you're tightening underwriting in 2022. But when you think about 2024, if we're normalized then, are those kinds of revenues and EBITDA margins still achievable as laid out in 2020?

Absolutely. The portfolio size coming out of 2022 makes $6 billion not the right number for 2023, but we do think we can achieve that level of revenue. Timing's difficult to predict; whether it's 2024 or 2025 I don't want to predict that right now. Let us get a couple of quarters into 2022 and we'll be better positioned to predict timing. But it's certainly still achievable. On the Rent-A-Center side, even in a tough environment it's pretty stable. It may be slightly under flat in 2022 but with low-twenties EBITDA margins. Acima is still adding retail partners monthly. The long-term outlook hasn't changed; it's just a matter of timing — it may be moved out.

Okay, great. One more: besides inflation, is there anything else that needs to normalize? For example, buy-now-pay-later players are competing and not focused on profitability. Is there anything else that might be different this time around?

No, not other than inflation, which is a big one. Buy-now-pay-later and others on the credit spectrum could actually help us because as credit weakens and they tighten, that will push customers into our channel and help retailers look for other avenues. So I think that's more of a tailwind than a headwind. The main variable remains inflation and its impact on the customer.

This concludes our Q&A session. I will pass it back to Mitch Fadel for his final remarks.

Thank you operator. And thank you everyone for joining us this morning. We understand some of the numbers are disappointing. We're disappointed in our outlook for 2022, but we're extremely excited about our long-term potential. It's still there. We just got to get back to work. We're working hard to make sure that the things we can control, we do a good job controlling them — like underwriting and collections — and keep adding new retail partners every month and keep working on larger strategic accounts. Our long-term view of this business hasn't changed. It's not broken. Even though the 2022 numbers are disappointing, we've got great cash flow, so when the environment turns, we're ready to write a lot more leases based on the risk profile of the consumer. There are a lot of good things embedded here and we'll just keep working and deliver the best results we possibly can. Thank you everyone.

And with that, gentlemen, we conclude today's program. Thank you for your participation and you may now disconnect.