Upbound Group, Inc. Q2 FY2024 Earnings Call

Good day. Thank you for standing by. Welcome to the Q2 2024 Upbound Group, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, 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 first speaker today, Jeff Chesnut, Head of IR. Please go ahead.

Good morning, and thank you all for joining us to discuss the company's performance for the second quarter of 2024. We issued our earnings release this morning before the market opened, and the release and all related materials, including a link to the live webcast, are available on our website at investor.upbound.com. On the call today from Upbound Group, we have Mitch Fadel, our CEO; and Fahmi Karam, our CFO. As a reminder, some of the statements provided on this call are forward-looking and are subject to factors that could cause actual results to differ materially and adversely from our expectations. These factors are described in our earnings release as well as in the company's SEC filings. Upbound Group undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. This call will also include references to non-GAAP financial measures. Please refer to today's earnings release for a description of the non-GAAP financial measures and the reconciliations to the most comparable GAAP financial measures. Finally, Upbound Group is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. Please refer to our website for the only authorized webcasts. With that, I'll turn the call over to Mitch.

Thank you, Jeff, and good morning to everyone on the call today. I'll begin with a review of the key highlights from the second quarter, and then I'll hand it off to Fahmi for a more detailed review of our financial results and our financial outlook. And after that, we'll take some questions. We're very pleased with the results from the quarter, which included revenues of nearly $1.1 billion, adjusted EBITDA of approximately $125 million, and non-GAAP earnings per share of $1.04. Our concentrated focus on execution paid off with Rent-A-Center's revenue up nearly 2% against the prior year and Acima's revenue up 19%, consistent with prior quarters. These results were driven by a steady focus on performance in both segments. Acima continued strong momentum with growth in merchant count, enhanced productivity of our existing merchants, and a growing contribution from Acima's direct-to-consumer e-commerce channel. Our lease charge-offs were in line with our expectations as Acima finished the quarter at 9.6% and Rent-A-Center slightly better than expected at 4.2%. We also delivered strong sequential improvement in Acima's adjusted EBITDA margin to 14.7% compared to 11.6% in the first quarter, which we'll discuss in a little more detail later in the presentation. With these results and based on our current expectations for the balance of the year, we're raising the midpoint of our previous guidance for revenue, adjusted EBITDA, and non-GAAP diluted EPS. So before we review our segment results, let's discuss some of the enterprise-wide themes we've seen across the past quarter. The economic backdrop for our business this quarter continued to evolve. Unemployment edged higher to the 4% area, and while still low by historic standards, it's up from the 54-year low of 3.4% in April of last year. We also monitor inflation levels, especially in categories like rent, food, and fuel, and we're pleased to see June's headline CPI, which was the first negative month-over-month print in four years. That will be welcome news to our consumers since inflation can have a larger impact on lower-income households. Other factors like credit card debt and delinquencies, hard goods demand, BNPL balances, and election uncertainty mean that the lower-income consumer is confronting a blizzard of economic variables, but that's nothing new for our consumers. They're being deliberate in their spending choices as they seek value and flexibility while working to stretch their incomes. So it's not surprising to see more reports of trade down activity, especially when factoring in the ongoing uncertainty over the credit card late fee regulations. As the credit lenders above us and merchant waterfalls have implemented mitigating actions, we believe some have also further adjusted underwriting, which can introduce new consumers to lease-to-own solutions. Although the read-through isn't exact, we are seeing recent trends of more applicants and higher scoring applicants on average, especially in our Acima segment. Our data analytics team is constantly evaluating and adjusting our underwriting to adapt to this new dynamic environment to achieve reasonable risk levels while continuing to focus on sustainable and profitable earnings growth. As this particular economic cycle evolves, we believe our business will be well-positioned for continued success. As someone who's been around this business for a long time over four decades in the industry and with this company, I've seen all variations of cycle tonight, and I know that our business and our value proposition is not only durable; it's resilient. Our consumers appreciate the low predictable payments that fit within their budget and the flexibility to continue to renew their short-term leases to acquire ownership or exercise an early purchase option and save or just terminate the contract at any time without penalties or even terminate and reinstate as the circumstances warrant. And we're truly omnichannel with a differentiated model across both of our main segments that enables us to meet the customer where and when they're ready to shop. Our online presence offers convenience and selection while the in-store experience offers key values like seeing and testing out products. We're building a relationship with our neighborhood-based store teams. For our retail partners, we can deploy our staff model, which puts an Acima leasing subject matter expert in their stores and can drive significant improvements in conversions. Supporting all of these channels and team members are our centralized support functions where we optimize underwriting, account management, marketing, and operations across the company to minimize costs and maximize efficiency while supporting our business units and delivering value to our retail partners and our customers. Importantly, we have scale both with our 2,000-plus branded stores and our 35,000-plus partner locations. And the business model has been built and tested for over 50 years now and at uncertain times like these, scale and liquidity are critical to manage through the headwinds and position the company for long-term success as the environment improves. So the business is counterbalanced with an algorithm that supports profitable returns across economic cycles. Leaner macroeconomic cycles generally increase our business opportunities through trade down while more robust economies, with healthy labor markets will generally see all cohorts performing better and generating lower losses. And that's how we deliver nearly 10% top-line growth this period with a consolidated loss rate that's in line with our expectations and geared to optimize profitable returns. Now, let's walk through the details behind our segment financial results starting with Acima. We achieved our third consecutive quarter of GMV growth in the 20% range, with an improvement of 21% in this most recent quarter. Other than the stimulus period in 2021, we achieved a new record for the highest second quarter GMV that Acima has ever recorded. Similar to last quarter, this was powered by two primary factors: the addition of new merchant partners, as well as the lift in productivity from our existing network of retailers, which means we're transacting more leases per location. In terms of new partners, Acima's business development team has signed up nearly 10% net new merchant nameplates year-over-year. Now we do focus on enrolling new retail partners; we're equally committed to providing our current merchants with top-tier service tailored to their particular business in retail specialty. And by collaborating with them on our marketing initiatives, we're able to more effectively deliver the right message to consumers at the right time, like data-driven marketing campaigns or themed promotions, which provide a better experience for our customers and drive better outcomes for the retailers' top line. Our current merchants see the value in these efforts, which is why active location count was up nearly 10% against the year-ago period. As a result, we saw a notable 35% lift in applications compared to last year. When you add together the more merchants and more effective within those merchants, we achieved 35% application growth over last year. But it's also important to remember that in the intervening year, we've deepened our relationships with two of our enterprise partners, Wayfair, and ashley.com, and we'll start to see their enhanced volumes later this year. I'm also pleased to share that Acima's direct-to-consumer offering continues to grow with GMV from that funnel, up over 50% as we add brand name retailers to the site and continuously improve the shopping experience for our consumers. While most consumers first encounter Acima when shopping at a retail partner, either in-store or online, our Acima marketplace also enables customers to start their journey directly with us. And with shopping destinations like Ashley, IKEA, Amazon, and Best Buy, our customers can quickly and easily find what they need and complete their lease on our site, 24 hours a day, seven days a week, 365 days a year. Collectively, these are the efforts that resulted in Q2 revenues being up 19% year-over-year. Similar to Q1, average ticket size was down a little bit, so the top line lift was driven by the expanded penetration and the productivity that I've been talking about. Overall, Acima exited the second quarter with a funded lease count that was approximately 24% higher versus last year as well as sequentially higher when comparing it against the first quarter of 2024. From an underwriting standpoint, we continue to take a proactive and vigilant approach to risk management. Our Acima segment loss rate was 9.6%, in line with our expectations and flat sequentially to last quarter. Despite the volume of applications increasing 35% year-over-year and the strong growth numbers we've been talking about, a seamless approval rate declined 160 basis points from last year. In terms of delinquencies, Acima's 60-plus past due rate in the second quarter was down 80 basis points from a year ago and down 90 basis points sequentially to the first quarter this year. These results were in line with our expectations for the second quarter, and with the Acceptance Now integration into Acima's decision engine nearly behind us, we remain very confident in our risk management outlook for the year. As noted earlier, I'm pleased to share that our adjusted EBITDA margin at Acima improved by 310 basis points to 14.7% in the second quarter compared to the first quarter, as we began to experience some of the flow-through we talked about with that higher GMV. The EBITDA margins from a year ago's second quarter were atypically high and driven by the macro backdrop at that time. So expecting the next couple of quarters of EBITDA margins at Acima to follow the current performance curve and land in this area, which is right in line with our expectations of low to mid-teens for the segment. Our team at Acima has committed to running a lean business that realizes the scale inherent in this virtual platform model and I'm confident we can continue to deliver sustainable profitable growth. Now on Rent-A-Center, we finished the second quarter with a same-store lease portfolio that was up 140 basis points year-over-year, and that portfolio growth helped drive positive same-store sales growth of 2.6% as we carried forward the momentum from last quarter's positive same-store sales growth. Rent-A-Center's web channel volume continues to perform, representing approximately 26% of revenue in the second quarter, consistent with the year-ago period. These elements helped deliver revenue growth of 1.9% year-over-year, which flowed through to gross profit with a similar lift. Operating expenses increased approximately 4% compared to last year due to a combination of elevated labor benefits costs, delivery costs, and store technology investments. We expect the labor benefits expenses to normalize in the back half of the year, especially with the store consolidation efforts this past quarter, and our fleet management team is actively working on operating strategies to optimize efficiency. Our continued emphasis on underwriting and account management at Rent-A-Center resulted in a lease charge-off rate of 4.2% for the quarter, down 30 basis points from the second quarter of last year. Our past due rate, which is an early indicator of potential future lease charge-offs, was stable at 2.7% for the quarter, down 40 basis points sequentially. Although the pace of inflation has recently abated, which will reduce the economic pressure on Rent-A-Center's customer base over time, our account management efforts will continue to be an important element of customer connectivity in the near to medium term to maintain our delinquency and charge-off rates at our target ranges. Overall, we're very pleased with our operating and financial results in the second quarter. Both segments successfully anticipated and met our customers' and merchants' expectations, enabling us to achieve that 21% GMV growth at Acima, while meeting that mid-teens EBITDA margin target along with the same-store sales growth at Rent-A-Center. These results, along with the momentum we've already seen in the early July results, give us confidence that we're tracking well towards achieving our updated and increased full-year targets. So on Slide 5, let's review the status of the strategic priorities we outlined for the year. At Acima, we believe we continue to grow our market share with a nearly 10% increase in merchant partners year-over-year, with additions such as Purple mattress and iFIT, whose family of brands includes NordicTrack and ProForm. We also onboarded two of the top 50 furniture retailers in the U.S., Levin Furniture and Slumberland furniture. And while we haven't yet seen the third-line category fully recover from the pandemic era pull-forward, we believe our lineup of merchants in that vertical is poised to accelerate when it does. In fact, we now partner with six of the top 15 furniture retailers in the U.S. And it's important to note that in addition to maintaining a strong presence among the largest furniture retailers, our teams have the talent and technology to deliver superior service and outcomes to sizable partners in a number of retail categories. And even as we add National and Regional accounts, Acima's merchant network remains well-diversified. In the second quarter, our largest retailer represented approximately 6% of total GMV and the top five were collectively about 20%. We strongly believe that the diversification of our merchant base and product categories will help provide a stable foundation of predictable and sustainable growth for the future. So we continue to add national and regional players, but we also have the smaller players to keep that diversity and grow. One of our recent operational priorities has been the migration of the Acceptance Now staff business from the legacy underwriting platform over to Acima's decision engine. I'm pleased to report that this journey is nearly done with only a few stores in Puerto Rico remaining. As we wrap up our conversion, I'd like to speak to the benefits of the initiative. For our retailers, we can embed Acima team members onsite at certain high-volume locations to supplement the merchant's in-house team. Our representatives can serve as the leasing coordinator to help customers complete an LCO transaction in between transactions that can reinforce the training we provide to the retailer staff about Acima's leasing process. At hundreds of locations across the country, our team can drive nearly double the conversion rate of a non-staffed store, allowing the retailer to redeploy resources more efficiently. In terms of underwriting and the consumer experience, the shift is a really important milestone for Acima. The legacy platform was not designed for virtual e-com transactions. Given Acima's fully virtual model, the decision engine was designed from the beginning to handle digital orders and should deliver stronger lease outcomes with lower losses. From a customer experience standpoint, the Acima platform allows our customers the flexibility to fully check out online without speaking to one of our representatives or physically going into the retail store like they had to do at Acceptance Now. This should improve conversion and increase GMV at these locations because now they can best handle the whole spectrum of customer interactions. We're excited about the opportunity to improve yields, increase GMV for those merchant partners and supplement our staff business with a sophisticated underwriting platform. At Rent-A-Center, we've highlighted our continuing investments in technology and in particular in our digital channels to help us seamlessly serve our customers, whether it's in-store or online. And those investments are paying off with nearly 17 million visits to rentacenter.com in the second quarter, which increased double-digits against the year-ago quarter. Our web business being up double-digits reflects our team's efforts to drive online traffic and create a consistent friction-free customer experience across each of our channels. More specifically, we've added new identity validation steps to expedite the online checkout process for customers while improving our ability to screen out fraudulent traffic. As we see more of our customer interactions shift to digital channels, we have an opportunity to optimize our store footprint, which is already closely managed based on key store level metrics we look at and what's going on in the local area. And based on those variables, we consolidated 55 stores or approximately 3% of our company-owned stores during the first half of the year, most of which took place in the second quarter. We expect to maintain those relationships with the majority of customers by serving them in a nearby store or by engaging them online. Going forward, we'll keep working to strike the right balance to serve our customers efficiently across all our connection points while optimizing Rent-A-Center's scale and productivity. At the Upbound level, we continue to test and learn in the consumer credit space through our partnership with Concora. We've made sequential progress each month since we launched the pilots in February for the Acima Classic Credit General-Purpose Mastercard and the Acima Private Label Credit Cards, each of which expands our offerings as well as financial access for our customers. In particular, we've been pleased to see that the private label offering has resonated with our existing and prospective retail partners. Some of our current merchant partners are looking to streamline their vendor relationships, and our combined second-look and LTO offering delivers increased opportunities to serve more consumers with our leading solutions. We've also found that potential clients, especially those without an incumbent second-look credit provider, appreciate the one-stop-shop approach, especially when considering integration efforts for the POS systems. As a reminder, we structured our existing partnership with Concora so we're not taking any credit risk, and our economics are driven by upfront fees and revenue sharing. Also at the Upbound level, we continue to make significant investments in digital technology to support our business. Our strategic initiatives on the connected enterprise are on target to supercharge our omnichannel strategy within Rent-A-Center and across the organization. The recent launch of RecPad, our next-generation cloud-native POS system, sets the direction towards an integrated customer experience across all channels. Its microservices architecture promotes swift development of features and product integration, prioritizing customer experience and boosting coworker efficiency with user-friendly workflows. Our online traffic continues to show double-digit growth, and to support this increased demand, we're introducing a new e-commerce platform based on a modular architecture that will allow our brands to adopt, deploy, and scale an omnichannel sales approach focused on increased conversion and retention rates. As we reduce our data center footprint, both of these initiatives mark a significant milestone of improving scalability of our operations, reducing technical debt, and bolstering our cyber resiliency, which are key components to support our growth. Overall, there is still plenty of uncertainty in the market, whether it's where the economy is headed, consumer sentiment, industry dynamics, or even the upcoming election. But we view that as an opportunity as our business is built to succeed across these cycles. We're already passionate about serving our current customers, and we expect new customers will discover our product offerings as trade down continues. And when they do, we'll be ready as a trusted brand to help them get the products they need to live their daily lives to the fullest. Now before I hand it off to Fahmi, I'd like to briefly address the lawsuit of Acima leasing filed against the CFPB last week. We brought this action in Texas Federal Court seeking to halt what we intend is the CFPB's unauthorized attempt to expand its authority, which is limited by federal law and the long-standing comprehensive state regulatory framework governing our industry overseeing the leasing industry. As you know, we previously disclosed that the CFPB has been conducting an investigation of Acima that began prior to Upbound's acquisition of the company in 2021. After this protracted investigation, the CFPB threatened an imminent enforcement action against Acima. Now I want to make clear that Acima filed this lawsuit reluctantly. Despite our long-standing cooperation, we ultimately concluded that the CFPB was not prepared to settle with Acima and accept all terms. Then as expected, the CFPB subsequently initiated an enforcement action against Acima on July 26th for alleging violations of various federal consumer financial protection statutes. We believe the CFPB is engaging in forum shopping by filing a lawsuit in Utah after our lawsuit was already pending in Texas, addressing the same subject matter. We strongly contest our claims and will vigorously defend ourselves against them. So as you would expect, because of the pending litigation we're not able to comment any further on this matter. So as I wrap up my section, I'd like to thank my exceptional teammates across all corners of our business for their energy, their enthusiasm, and their dedication. I know they're just as excited as I am about carrying the momentum from the first half of the year across the second half and beyond. Whether working on segment-specific projects or collaborating on enterprise-wide priorities, our co-workers are the driving force who help us deliver a strong finish to the year. And with that I'll turn the call over to Fahmi.

Thank you Mitch and good morning, everyone. I'll start today with a review of the second quarter results and then discuss our outlook for the rest of the year after, which we will take questions. Beginning on page 6 of the presentation. Consolidated revenue for the second quarter was up 9.9% year-over-year with Acima up 19% and Rent-A-Center up 1.9%. Rentals and fees revenues were up 9.7% while merchandise sales revenue increased 17.3%, reflecting a larger portfolio balance at Acima coming into the quarter. Consolidated gross margin was 49.4% and decreased 230 basis points year-over-year with a 190 basis point decrease in the Acima segment and a 40 basis point decrease in the Rent-A-Center segment. Consolidated non-GAAP operating expenses, excluding lease charge-offs and depreciation and amortization were up mid-single-digits led by a low-double-digit increase in non-labor operating expenses, including delivery costs at Rent-A-Center, and a high-single-digit increase in general and administrative costs, which was a result of targeted corporate investments in technology and people. The consolidated lease charge-off rate was 7.2%, a 30 basis point increase from the prior year period and in line with our expectations. On a sequential basis, the consolidated lease charge-off rate increased 20 basis points due to a 50 basis point sequential improvement at Rent-A-Center. Consolidated adjusted EBITDA of $124.5 million decreased 4.6% year-over-year with higher Acima segment adjusted EBITDA offset by lower Rent-A-Center segment adjusted EBITDA and higher corporate costs. Adjusted EBITDA margin of 11.6% was down approximately 170 basis points compared to the prior year period with approximately 160 basis points of contraction for Rent-A-Center and approximately 210 basis points of margin contraction for Acima offset by a 20 basis point increase in corporate costs as a percentage of sales. I'll provide more detail on the segment results in a moment. Looking below the line, second quarter net interest expense was approximately $28 million, which is roughly flat compared to the prior year period. The effective tax rate on a non-GAAP basis was 25.8% compared to 25.5% for the prior year period. The diluted average share count was $55.8 million shares in the quarter. GAAP earnings per share was $0.61 in the second quarter compared to a loss per share of $0.83 in the prior year period, driven by the prior year tax impact associated with divesting of restricted stock awards issued in connection with the Acima acquisition. After adjusting for special items that we believe do not reflect the underlying performance of our business, non-GAAP diluted EPS was $1.04 in the second quarter of 2024 compared to $1.11 in the prior year period. During the second quarter, we generated $600,000 of free cash flow, which decreased from $24.7 million in the prior year period, primarily due to the increase of GMV at Acima. We distributed a quarterly dividend of $0.37 per share and we finished the second quarter with a net leverage ratio of approximately 2.8 times. Drilling down to the segment results starting on page 7. For Acima, double-digit year-over-year GMV growth continued for the third consecutive quarter. Following nearly 20% year-over-year growth in the prior two quarters, GMV grew 21% in the second quarter and approximately 15% on a two-year stacked basis. The GMV lift was driven by year-over-year growth in key underlying drivers with active merchant locations up 9.8% year-over-year, more productivity per merchant and applications increasing over 35%. Those tailwinds were partially offset by lower approval rates as we remain disciplined in our underwriting approach as inflation continues to impact our core consumer base. The net asset value of inventory under lease was up approximately 23% year-over-year. Revenue increased 19% year-over-year including an 18.2% increase in rentals and fees revenue and a 22% increase in merchandise sales revenue due to a larger portfolio at the beginning of the second quarter compared to last year. Lease charge-offs for the Acima segment were 9.6%, 70 basis points higher year-over-year and flat sequentially. The year-over-year increase in Acima's lease charge-offs was in line with our expectations as the ANow leases originated on the legacy decision engine continue to wind down. The conversion will strengthen our underwriting capabilities and should reduce lease charge-off rates as prior cohorts from the legacy system wind down throughout the year. Operating costs excluding lease charge-offs were up on a dollar basis approximately $4.6 million in the second quarter, which was 60 basis points lower as a percentage of revenue. Adjusted EBITDA of $81.3 million was up 4.5% year-over-year, primarily due to the 19% increase in revenue that was partially offset by a 22.5% increase in cost of goods sold. Adjusted EBITDA margin of 14.7% increased approximately 310 basis points sequentially and decreased approximately 210 basis points year-over-year, primarily due to a 190 basis point contraction of gross margin compared to the second quarter of 2023. The decrease in gross margins compared to the prior year was a result of a few factors including a growing portfolio where revenue lags GMV production, an increase in merchandise sales, which represented a larger percentage of revenue compared to the prior year period, and the conversion of Acceptance Now locations to the Acima platform, which increases merchandise depreciation expense and cost of goods sold. EBITDA margins were impacted by higher labor costs and underwriting costs as application volumes significantly surpassed the prior year, and the performance of the legacy ANow portfolio increased our LCO rate. All of these headwinds were in line with our expectations, were included in our guide for the year, and are expected to improve as we get into the second half of this year. For the Rent-A-Center segment, at quarter end the same-store lease portfolio value was up 1.4% year-over-year, while same-store sales increased 2.6% year-over-year, improving from an 80 basis point increase in the first quarter of 2024. Total segment revenue grew year-over-year for the second consecutive quarter increasing 1.9% compared to the second quarter of 2023 and improving from a 20 basis point year-over-year increase in the first quarter of this year. The increase in revenue was driven primarily by a 2.1% year-over-year increase in rentals and fees revenue, while second-quarter merchandise sales revenue increased 1.6% year-over-year, an improvement from a 3.6% decrease in the first quarter. These charge-offs were 4.2% of revenue in the second quarter, 30 basis points lower year-over-year and 50 basis points lower sequentially, a result of ongoing underwriting and account management efforts. The 30-day past due rates averaged 2.7% for the second quarter, up 10 basis points from the prior year period and 40 basis points lower sequentially. Adjusted EBITDA margin for the second quarter decreased 160 basis points year-over-year to 16.3%, primarily due to higher operating expenses including elevated labor benefit costs, delivery costs, and store technology investments. This is reflected by a 150 basis point year-over-year increase in the ratio of non-GAAP operating expenses excluding lease charge-offs to segment revenue. For the Mexico segment, adjusted EBITDA was higher year-over-year and the franchise segment's adjusted EBITDA was lower. Non-GAAP corporate expenses were approximately 7% higher compared to the prior year, primarily due to additional investments in technology and people. Shifting to the financial outlook. Considering our sustained momentum through the first half of the year and the latest projections for the macroeconomic environment, we are pleased to raise the midpoint of our full-year 2024 targets for revenue, adjusted EBITDA, and non-GAAP diluted EPS. Our portfolio and GMV growth coupled with low delinquencies give us confidence that we can improve margins in the second half of the year and achieve these updated targets. Our forecast continues to assume a generally stable macro environment with durable goods demand remaining under pressure and continued discipline in our underwriting. At Acima, we'll start comping against higher growth rates in the third quarter, so we expect GMV growth to drop from the 20% area we've achieved for three consecutive quarters to low double-digits in the upcoming quarter. Rent-A-Center's portfolio value is expected to seasonally drop in the third quarter from the second quarter, similar to the prior year. For both Acima and Rent-A-Center, we expect third-quarter revenue to follow the same sequential pattern as in 2023 with a slight increase sequentially at Acima due to a growing portfolio. We expect losses to remain within our previous guidance commentary for the year with Rent-A-Center experiencing a typical seasonal uptick in the third quarter from the second quarter and to be in the 4.5% range. Acima losses are expected to improve in the third quarter as the legacy ANow portfolio continues to wind down and finish in the 9% area for the quarter. In terms of adjusted EBITDA margins for the third quarter, the Rent-A-Center segment will follow a similar seasonal trend from Q2 to Q3 as we experienced last year and be down sequentially to the mid-teens area. The store optimization efforts this past quarter will have a minimal impact on the financials for the year, with pressure on total segment revenues offset by lower expenses, which should slightly improve adjusted EBITDA margins going forward. We expect Acima to realize an improvement in adjusted EBITDA margin sequentially, as flow-through from higher GMV continues to benefit the P&L and lower loss rates. If trade down activity continues to expand, GMV could improve from our guidance today. We are assuming a fully diluted average share count of 55.8 million shares for the quarter, with no share repurchases assumed in our guidance. Interest expense and our tax rates are expected to be similar to the second quarter, resulting in a non-GAAP EPS range for the third quarter of $0.90 to $1. For the quarter, we expect to generate $60 million to $75 million of free cash flow and increase sequentially due to the pace of growth changing at Acima, lower inventory purchases at Rent-A-Center, and timing related to other working capital needs that were recorded in the second quarter. For the year, we are revising revenues to be in the $4.1 billion to $4.3 billion range, adjusted EBITDA to be $465 million to $485 million, and we're tightening our full-year guide of non-GAAP EPS to a range of $3.65 per share to $4 per share. Our 2024 outlook reflects our continued focus on execution to drive sustainable and profitable growth. The midpoint of our revised guidance compared to 2023 represents a 4% increase in revenue, a 5% increase in adjusted EBITDA, and an 8% increase in non-GAAP EPS with no share repurchases assumed. Our ability to navigate this challenging environment and generate earnings growth at both segments while meeting our margin and loss targets is a testament to the entire team's effort and dedication to drive shareholder value. In terms of capital allocation, we have a proven business model that generates strong operating cash flows over time and an experienced management team to allocate those cash flows in support of our strategic priorities. Our first priority continues to be supporting growth with profitable leases and innovative ideas that will improve our customer interactions and merchant outcomes. Concurrently, we will focus on enhancing shareholder value by maintaining our commitment to our dividend program and being opportunistic regarding share repurchases. I'm pleased to share that during the second quarter, we optimized our capital structure in support of our long-term capital allocation priorities. Capitalizing on our strong recent performance and favorable market conditions, we refinanced our term loan debt which resulted in over 60 basis points of annual interest savings while also extending the maturity of our $550 million ABL revolver through 2029. Combined, these enhancements to our capital structure secure our liquidity position while reducing the cost of capital for the company. We expect the balance of our free cash flow this year will go towards deleveraging as we progress towards a net leverage ratio of under 2x and towards our long-term target of 1.5x. We ended the second quarter at 2.8x, up from 2.7x at the end of the first quarter due to an increase in working capital needs to support GMV growth. The strength of our balance sheet helps to insulate us from market volatility and enables us to act confidently and decisively when pursuing our strategic priorities. As of the quarter end, we carried nearly $0.5 billion of available liquidity which enables us to invest during periods of broader uncertainty, whether supporting our homegrown initiatives or targeted inorganic opportunities. Wrapping up on Slide 11. We're encouraged by the company's sustained momentum across the first half of this year, which included top line growth at both primary segments, GMV growth at Acima, and same-store sales growth at Rent-A-Center, and importantly, a notable improvement in adjusted EBITDA margins at Acima in line with our low-to-mid-teens target. Our prudent risk management and account management strategies helped deliver loss rates that were in line with our expectations and allowed us to raise the midpoint of our guidance as we look out across the balance of the year. Going forward, we will continue to execute against our day-to-day priorities to serve our customers and elevate our retail partners' businesses while pushing forward with new ideas and business strategies that will help us achieve our long-term growth plans. Thank you for your time this morning. Operator, you may now open the line for questions.

Thank you. At this time, we will conduct the question-and-answer session. The first question will come from Vincent Caintic. Vincent, your line is open.

Good morning. Thanks for taking my questions and great results this quarter. First, I wanted to focus on the trade down opportunity you've discussed and it was very encouraging to see that 35% higher applications. I'm wondering if you could talk about how much that's lifting your business so far the trade down opportunity if you see more of it? And then you brought up Concora and I was just wondering if there are opportunities to grow that with this trade-down opportunity or if there's other ways to take advantage of that? Thank you.

Good morning, Vincent. This is Mitch. I appreciate your questions. The trade down trend is quite prominent in our analysis and is reflected in our advantage scores. We're observing similar patterns across various businesses, and we are experiencing this as well, particularly with the 35% increase in applications. When assessing growth sources, we project a 10% increase in merchants and a 50% rise in our direct-to-consumer segment, which, though small, contributes to the overall 21% growth in GMV. The key factor regarding trade down is the productivity of the merchants, combined with our team's efforts to provide better training and secure prime positions or exclusivity in stores.

I don't know if I had to break down 21%.

Yes, tends with new merchants. One or two maybe is coming from the direct-to-consumer even though that's 50% growth it's a small number. The rest is a combination of the trade down and our sales team working with those merchants to get in a better position. So maybe it's somewhere between, I don't know, Fahmi, 30% and 40% of the 21%. It's hard to put a number on it, but it's definitely a part of it.

I would break down the growth in GMV as approximately 50% coming from new merchant locations, with 5% attributed to direct-to-consumer and marketplace growth. The remainder is from merchant productivity, which likely reflects some trade-down impact, possibly around 25% to 40%. It's certainly more significant than just 1% or 2%. We expect this trend to continue, and if it accelerates, it could lead to further upside in our numbers.

Regarding the Concora question, I believe that with the second-look provider, it remains a subprime or near-prime offering through our retail partners. There is significant interest due to the tightening in the near-prime market with prime lenders, which creates opportunity. As noted in our prepared comments and as Fahmi pointed out, retailers have responded positively; we are hearing many good anecdotal stories about the appeal of one-stop shopping. Overall, it seems to be gaining traction, and we see this as a beneficial opportunity in the current environment.

Okay. Great. That's very helpful. And actually following up it's a good segue. Just I want to get a sense of maybe the merchant engagement and if any of those merchant discussions have evolved and changed? I guess, to your point about if there's trading down and what's happening? Is that the higher credit providers are tightening up? And I would assume that there would be more merchant need for your product. So if you could maybe talk about merchant engagement now that's the opportunities there? Thank you.

Yes, I think that's certainly occurring with our small and medium business segment, considering the 10% net merchant growth year-over-year. We had several signings last quarter, including notable furniture retailers like Levin and Slumberland, and we have more in the pipeline. The team at Acima is doing a fantastic job of bringing in new partners. While larger partners typically involve longer cycles, the regional businesses and SMBs they are attracting are performing exceptionally well.

Okay. Great. Very helpful. Thank you.

Thank you. The next question comes from Hoang Nguyen with TD Cowen. Your line is now open.

Hi, teams and congratulations on the quarter. Just wanted to touch on the guidance. It looks like you guys raised the high end of revenue guidance, but I mean didn't raise the high end for EBITDA and EPS. I mean, can you touch a little bit on the rationale behind that? I mean does it have to do with more mix of merchandise sales versus rental and have a follow-up?

Good morning, Hoang. Thanks for the question. Yes, I think the guide for the year especially on the revenue side really reflects the GMV growth that we've experienced over the last couple of quarters. Obviously, this is the third quarter in a row where we've had nearly 20% growth in GMV and we started to reflect that now into the revenue guide. As far as the margin profile goes, I think we talked a little bit about it last time as far as having some really tough comps coming into the year, especially in the first half. We think that improves when we get into the second half, especially on the Acima side. We expect Q3 to be better than Q2 and so nothing really as far as the mix goes, just more kind of where the trends have been heading towards the margin profile for the year, and then where revenue is coming in. I think for Q3, the guidance remains consistent, will be up on the revenue side and then flat to slightly better on the margin side.

I think I'd add to that, Hoang. This is Mitch. As Fahmi mentioned, as we talked about last quarter, the margins take a little longer to catch up with the large GMV growth. We saw it this quarter, right, with the 310 basis point improvement in Acima's EBITDA margin. So, you're starting to see that flow through and there's more to come, but it does run a little behind the revenue. It's kind of the short answer to your question.

From a guidance perspective, we had significant momentum at the start of the year. In the fourth quarter, Acima achieved nearly 20% growth in gross merchandise value, and Rent-A-Center was beginning to see positive same-store sales. This momentum was expected to continue. We anticipated some trade-down effects and had set a solid initial guidance. Our original revenue guidance was a 3% increase year-over-year, and EPS was projected to rise about 6%. However, we have since updated our projections. The new revenue guidance is now a 5% increase year-over-year, and EPS is expected to rise from 6% to 8%. We began with relatively ambitious figures.

Got it. And maybe if you can talk a little bit about the court fight with the CFPB. You guys sued them in Texas, they sued back in Utah. I mean can you talk high level about the next step in the process? And maybe in terms of the value and what's the next milestone will be? Thank you.

Well, I can't say much in my prepared comments due to ongoing litigation. We believe that they are attempting to expand their authority and undermine the state regulatory framework that governs our industry, and that's really the essence of the situation.

Thank you.

Thanks, Hoang.

The next question comes from Bobby Griffin with Raymond James. Your line is now open.

Good morning, everybody. Thanks for taking my questions and congrats on another good quarter of momentum. So Mitch, my first question really is kind of on a high-level aspect. It seems, if we look at your results as well as some of the peers' results, the industry is really starting to see some inflection points, whether it's on GMV growth, trade down, the portfolio performance, etc. What could potentially derail that? I guess, if the question is, is it just the availability of credit becoming more available again? Or like, when you kind of sit here and you kind of think out on a multi-quarter or even kind of a year basis what do you worry about that could derail some of this momentum?

It's a good question. I'm usually optimistic, and I see only positive developments regarding the trade down. We've discussed how resilient we are in a good economy, where we performed exceptionally well. We're still aiming to match the record figures we achieved from stimulus money. When consumers have disposable income, we do well too, showcasing the strength of our model. You're witnessing this now. Some traditional retail sectors are facing challenges, especially with many closures, but the lease-to-own industry is thriving. Rent-A-Center is performing positively, and the alternative of Acima within our retail partners is also showing strength despite the challenges in subprime retail, as I mentioned earlier. This reflects the advantages of our lease-to-own business model, which serves retailers and customers without credit without needing to go through subprime stores. Moreover, the closures I referred to may actually create tailwinds for companies like Rent-A-Center. Overall, I'm more focused on our strategy and execution and whether we are capitalizing on every opportunity. However, I don't foresee anything that could derail our trend.

That's helpful. I have a follow-up question about the Acima side of the business. With the momentum we're currently seeing in the industry and in your results, how is the competitive landscape looking? Are competitors behaving similarly, considering how tough the competition is? Additionally, could you clarify how you define pipeline? What exactly constitutes the active merchants you're in conversation with about engaging, versus just a list of potential merchants? How can we assess the reality and timing of these prospects becoming actual customers?

When I refer to the pipeline, I mean active conversations rather than just a list. Last quarter, we mentioned some promising regional players in the pipeline, and we subsequently secured deals with Levin, Slumberland, Purple, iFIT, and others. Some of these are regional furniture companies, while Purple is more of a nationwide e-commerce player for mattresses, despite having some physical stores. We are discussing real ongoing conversations. Our sales team, consisting of over 100 field and inside sales representatives, is engaged in numerous discussions with one, two, and three-star merchants, and they are experiencing nearly a 10% increase year-over-year. They continue to perform exceptionally well, as they have for many years. The competition level seems stable; I wouldn't say it has become tougher or more unpredictable in terms of offerings. That has remained fairly consistent. Additionally, competition in the Rent-A-Center space is likely less intense than before, considering the ongoing store closures among some of our indirect competitors that target the same customers. As I noted earlier, we view some of these closures as potential opportunities, particularly on the Rent-A-Center side.

Thank you. Very helpful. Best of luck for the remainder of the year.

The next question comes from Brad Thomas with KeyBanc Capital Markets. Brad, your line is open.

Hi, good morning and congratulations on the impressive results. I wanted to delve deeper into the growth, Mitch, which is certainly well-deserved. Could you provide more insight on what you're observing from a category perspective? I'm aware that many of your end markets are facing significant challenges. I'm curious about the dynamics you're noticing regarding new merchant growth, as well as your observations on direct-to-consumer and productivity aspects. Thank you.

Good morning Brad. This is Fahmi. Yes, I think from a category standpoint it's been pretty steady year-over-year as far as kind of our mix of where the GMV is coming from. But I would say that we are starting to see some greater mix coming through the e-com channel. We've talked about Wayfair and ashley.com. So we've seen a greater mix of e-com which tends for us to be heavier on the furniture side. So when you look at the categories, I would say there's softer demand on furniture and some of those household categories that we've talked about. But for us we're offsetting that with some of the productivity gains and some of the merchant gains that we've talked about. So even though furniture may have some softer demand in applications on a per-location basis may be down, what we're seeing is that 35% increase because of some of the things that we've talked about. So the mix is changing a little bit as far as whether brick-and-mortar versus e-com. I would say auto and jewelry also very strong when we look year-over-year from growth in applications and the growth in GMV standpoint. So the growth is coming across the board. We also talked about average ticket size. Average ticket size has come down. That's also partly due to mix. Typically, our average ticket size is lower on the e-com side, but there are some pricing benefits that we're seeing across the board as well. So some of that is also underwriting as we look to tighten on the bottom we do cut the average ticket size. So I would say the growth is coming across the board across all categories.

Yes, that's well articulated, Fahmi. However, Brad, when we review the situation, it might seem counterintuitive, especially in the furniture sector, where many public and even private companies report negative same-store sales. Nevertheless, when we combine growth and downtrading, we are still experiencing growth in furniture. For instance, a major furniture company that announced its results this morning reported slightly declining revenue, but we are seeing growth with that merchant. Whether this is due to downtrading or our superior product offering is uncertain; likely, it's a mix of both factors. Therefore, we can achieve growth with a merchant that is seeing a revenue decline. Additionally, once we factor in a 10% growth in merchants alongside the trade down, it becomes clear how we can experience an upward trajectory, even when the general sentiment in the furniture industry might suggest otherwise.

That's very helpful. Maybe to follow up a little bit on Bobby's question. I don't know that I'd say derailing, but a question that we had asked is sort of thinking about how different macro scenarios might impact you all. And so I guess the question Mitch would be, as you maybe look at a year and think about potentially tail opportunities on the economy and if we get discretionary really coming back, maybe how do you think that affects you? And maybe vice versa if we saw unemployment rise, how do you think Upbound Group fares?

I believe in the resilience and durability of our model. If we see improvements in the economy, we can begin to enhance our underwriting process and increase retention, especially on the Rent-A-Center side as disposable income rises. This ultimately strengthens our portfolio. While there may be fluctuations in trade down behavior, our model adapts and remains robust in varying economic conditions. As demand for household furnishings rebounds, I view this positively for both Rent-A-Center and Acima. With people moving again and interest rates declining, we anticipate an increase in purchases of starter homes, which will further drive sales, particularly in this category most impacted by mortgage rates. It's not just home improvement and loans benefitting from increased mobility; our industry will also gain from a resurgence in household furnishings and appliances. There are numerous favorable conditions to consider, with few challenges ahead. Even in improved conditions, we expect solid performance from the industry for the reasons previously mentioned. If the situation worsens, such as a spike in unemployment, we're equipped to navigate those challenges, and we typically see more trade down during such times. Overall, we remain quite optimistic.

Thank you. Thanks so much, Mitch.

Thanks Brad.

One moment for the next question. The next question comes from Derek Sommers with Jefferies. Your line is open.

Hi. Good morning, everyone. What's the typical GMV ramp time when you are on board with a new retail partner?

The ramp time depends somewhat on the industry and the size of the company. Larger companies may experience a slower ramp-up because they might start by testing in a few stores to ensure everything is functioning properly. In contrast, a small two-store chain may have a very quick ramp-up, possibly reaching full operation within a month. Overall, it takes a couple of months to ramp up, even for larger partners. Staffed stores tend to ramp up faster than unstaffed ones.

Great. Thanks. Helpful color there. And then just one quick one on the RAC store count, how should we think about store count moving forward? Was most of that kind of consolidation exercise concentrated in this quarter? And how do you think about same-store sales trends moving forward?

Yes, that's a good question. I believe the consolidation was mainly focused in that quarter, and we don't expect much more this year. We are continuously looking for ways to optimize. We've also opened new stores, so it really depends on the market conditions. However, we don't see this consolidation as an ongoing issue. Throughout the pandemic and with sufficient stimulus, we didn't have any stores that were significantly underperforming. Looking back three years, the stores we closed represent only about 2% or 3% of our total. Most of those closures were due to underperformance, and nearly all of them were within three miles of another Rent-A-Center location, making up around 90% of the closures. This allows us to still serve those customers effectively. Our team runs weekly reports that track the customers from closed stores to their nearest locations, analyzing retention levels. Recently, we reviewed data from the last two years, and we found that the stores currently closed averaged seven months of closure, with over 80% customer retention during that time. This indicates a strong retention rate despite the elimination of store overhead. To summarize, we don't expect further significant closures. We are seeing positive results in same-store sales and anticipate that this trend will continue through the year, with no indicators suggesting a return to negative growth. Therefore, we expect low single-digit growth in same-store sales moving forward.

Great. Thanks for that. That’s all for me.

Thanks, Derek.

One moment for the next question. The next question comes from John Rowan with Janney Montgomery Scott. Your line is now open.

Hey, guys. Good morning. So obviously you can see the trade down pretty clearly in the Acima business with the applications coming down from a waterfall. But are you seeing the same type of trade-down benefit in the core RAC business that you're seeing from whatever it might be, people tightening up above you because of impending or recently enacted credit card regulations?

Yes. Good question, John. It's certainly not as direct at Rent-A-Center, right? You don't really see it. It takes a little longer because the customer is not in a waterfall at a retailer or online where they got denied and then their next option would be a lease. So it takes longer. I'd say positive same-store sales will tell us we're seeing a little. Certainly, the vantage scores don't have the increase like we're seeing at Acima and things like that. But I think that we're seeing a little bit. It's just a lot slower happening. And it probably picks up over we don't have it in our forecast that a lot of trade down would pick up on the Rent-A-Center side going forward but it probably picks up. It just takes a little longer because it's not that direct sale like at a retail partner the way Acima does it. But I mentioned it earlier too John I think there's some opportunities. There are some store closures out there where Rent-A-Center and they're in our neighborhoods. Some of the ones the two larger chains nationwide that announced closures in the last couple of weeks. We're in the same neighborhood. So we see that only as an opportunity. And thankfully on the Acima side, we don't do business with one of those two, so it's nothing positive to us.

Okay. And I'm going to ask one question on the CFPB broad question if you can answer it, I won't hold it against you. But I'm just trying to understand, the main tenant of your lawsuit against them, I'm assuming, it's an assumption that it's based on the legal definition of a lease in Dodd-Frank and whether or not the CFPB actually has jurisdiction over it. Is that correct?

Well, as I mentioned in my prepared comments, we believe they are attempting to increase their power and undermine the state regulatory framework that oversees our industry, and that really sums it up.

Okay. All right. Thank you.

Thanks John.

One moment for our next question. The next question comes from Carla Casella with JPMorgan. Your line is open.

Hi. Thank you. You talked about the store closures and it sounds like you're getting good transfer retention to your other stores. Have you given the number of how many more you see opportunities to close? And if there's any specific kind of regions where they're concentrated?

No, Carla, we haven't anticipated more closures this year. There may be one or two here and there due to lease expirations and market changes. We've opened a few stores when opportunities arise as well. So while we haven't specified a number, we don't foresee any significant closures in the near future. We conducted a review of nearly every store in the system, particularly the underperforming ones. To answer your question, it wasn't limited to a specific region; it mainly involved underperforming stores located within three miles of each other. There was no particular region of the country that was affected more than others.

Okay. Great. You mentioned deleveraging from both EBITDA and cash flow as well as reducing debt. It seems that the only debt you currently have is the ABL. Could you elaborate on whether you are considering anything beyond that? Perhaps addressing the term loan with your future cash flow?

Yes, it's Fahmi. We currently have around $80 million outstanding on the ABL. The plan for deleveraging will involve a mix of reducing the ABL and potentially prepaying the term loan, depending on our cash flow situation. This will be driven by both EBITDA growth and the process of reducing our total debt. Our cash flows this year have shown a significant variation compared to last year as we invest in GMV growth at Acima and support some technology advancements. We anticipate changes in growth rates throughout the year as we compare against larger numbers from the previous year. We expect free cash flow to increase in the second half of the year, and we project it to be between $60 million to $75 million in the third quarter, with a portion allocated to debt repayment.

Okay. Great. That's helpful. Thank you.

I am showing no further questions at this time. I would now like to turn it back to our Chief Executive Officer Mitch Fadel for closing remarks.

Thank you, Elizabeth, and thank you to everyone who joined us today for an update on our second quarter and our outlook for the rest of the year. I'm really thankful for the collective efforts of my teammates and our merchants who helped deliver such strong GMV and the same-store sales results for the quarter. And we're grateful for your interest and your support. We look forward to updating you next quarter on our continued progress towards the goals we've outlined. So have a great day everybody. Thank you.

Thank you for joining the participation in today's conference. This does conclude the program. You may now disconnect.