Upbound Group, Inc. Q3 FY2024 Earnings Call

Good day. Thank you for standing by. Welcome to the Q3 2024 Upbound Group 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 third 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, which can be found on our website 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. I'll begin with a review of the key highlights from the third quarter, Fahmi will share a more detailed review of our financial results and our financial outlook and afterward we will take some questions. To begin, I'm very pleased to share that our third-quarter revenue was nearly $1.1 billion, adjusted EBITDA was approximately $117 million, and non-GAAP earnings per share was $0.95, which was right at the midpoint of the guidance we provided on our last call and a couple of cents above the average of our street consensus estimates. Acima led the way with revenue up 19% year-over-year with Rent-A-Center delivering a 110 basis point improvement in revenue against the prior year despite the impact of about 50 store closures we mentioned last quarter, in addition to a recent sale of 55 stores in the New York metro area to an existing franchisee, and I'll discuss the successful execution of that franchisee sale in more detail shortly. Acima delivered another strong quarter of GMV growth with a 13% increase year-over-year, which was in line with our stated guidance of low double-digits growth as we start to compare against the accelerated performance from the latter part of 2023. Last quarter, we also shared our outlook for the third quarter lease charge-off rates and also consistent with those projections, the seamless lease charge-off rate improved sequentially and year-over-year to 9.2%. On the Rent-A-Center side, as expected, we did experience a seasonal sequential increase to 4.9%, which was slightly above our earlier expectations as the environment for our consumers remains challenging. Now despite the tick up in losses at Rent-A-Center, they remain at an acceptable level of optimized risk-adjusted returns, especially when you think about the environment we're in, while also delivering EBITDA margins in line with our targets. Rent-A-Center's adjusted EBITDA margin of 16.3% increased 130 basis points year-over-year, while Acima's EBITDA margin came in at 13.3%. And that slight decline in Acima is in line with our target of low to mid-teens adjusted EBITDA margins and reflects some trade down dynamics that I'll speak to in the segment results. Importantly, based on our current visibility, our forecast for the holiday season, and our ability to maintain operating levels at each of our larger segments, we expect to achieve the full year guidance we provided last quarter. Now before we review our segment results, let's discuss one of the key themes we've seen across this past quarter. At Acima, we've continued to see credit tightening above us, driving trade down with better credit quality consumers coming to us. The lenders above us and retailer checkout flows have implemented mitigating actions in response to higher delinquencies and pending regulatory changes for credit card late fees, which allows us to selectively tighten our underwriting in certain higher-risk areas as we work to optimize our risk adjusted returns. But even as we adjusted the bottom, our business still enjoys strong prospects for growth across our portfolio, and that's the benefit of trade down activity. Our Acima business experienced over a 25% increase in applications compared to a year ago quarter, and our overall applicant pool had higher third-party scores. And with Acima continuing to grow its overall number of retail relationships, we're able to reach more new customers even as we're more selective in our decisioning. So with that context, I'm very pleased that our team delivered results that met expectations on revenue and adjusted EBITDA and non-GAAP EPS. I'm confident their performance will help us achieve our full guidance across the balance of the year while managing through these uncertain times. So let's move on to Slide 4 in our presentation and we'll talk through more specifics about our segment results. At Acima, we continue to be a growth leader in our industry as we achieved our fourth consecutive quarter of GMV growth with a 13% lift in Q3 compared to a year ago period. As we mentioned last quarter, we expect that the rate of year-over-year growth to moderate in the second half of the year as we start comparing against the acceleration of our growth and the elevated performance that really began in September of last year. Now powering that growth is Acima's proven algorithm, which is supported really by three pillars: adding new merchants to the Acima network, expanding our productivity with existing retailers, and inviting consumers to start their shopping journey through Acima's direct to consumer marketplace. Our field organization grew our active location count again this quarter, increasing 10% year-over-year, while working with our retailers to boost our lease productivity metrics. We also had several joint marketing campaigns with our retail partners promoting their sale events in the quarter, things like Way Days at Wayfair and Amazon Prime Days. We're continuously promoting our retailers whether it's in-store, on their e-commerce sites, or through our own marketplace. And our direct-to-consumer marketplace continues to grow, contributing toward the GMV growth in the period, and that effort will remain a focus for us going forward. The visitors we welcome to our marketplace are generally returning customers, which means lower underwriting costs, stronger loss performance, and higher lifetime value than the broader set of our customer universe. These growth pillars translated into a 19% revenue lift for Acima year-over-year and our proactive risk management strategies helped yield that lease charge-off rate of 9.2%, which was down 40 basis points sequentially and down 20 basis points year-over-year. Segment-level gross profit and EBITDA margins were down against both year-over-year and sequential comps, driven in part by the residual impact of the ANow transition and an increase in 90-day purchase option activity, which was heightened due to trade down dynamics. We're excited about the opportunity that trade down represents, but the performance profile of these generally higher scoring customers is a bit different than what we've experienced recently from our core consumers. These customers tend to elect more often the earliest purchase option on the lease transaction, which is the lowest margin outcome for Acima other than a charge-off account. The upshot and the bright spot of all this is that we're meeting new customers and helping them at the point of checkout when their traditional options are less available. But since customers that exercise the purchase option typically execute repeat transactions, we'll encourage them to visit our third-party retailers through our marketplace, which we believe will enhance our lifetime value with that consumer and drive more sales to our partners. All that being said, even with EBITDA, it takes a while to catch up with all the strong GMV growth in our business, the remaining headwinds, as we work through the legacy ANow back book and an increase in lower-margin early purchase activity, Acima still came in within our long-term low to mid-teens EBITDA margin range at 13.3%, a really strong quarter for Acima across the board. Let's shift over to Rent-A-Center, where the competitive landscape has changed notably since our last update. Rent-A-Center saw some of its long-time competitors go private, some reorganizations, and even liquidations. Our recent results highlight the strength of the Rent-A-Center brand and our coworkers who bring that brand to life through connections with our customers and their communities. Between Rent-A-Center's leadership and our thousands of store associates, we're ready to support those customers that may be seeking a new store in their neighborhood or even online options to help access the everyday products they need to improve their quality of life. Along those lines, we're actively marketing to those potential customers to guide them in the moment they may be looking for alternatives. We're using tools like geographic overlays and geofencing, behavioral data, and even contextual AI to sharpen our targeting efforts and increase the efficiency and effectiveness of that campaign. That's on top of our strong foundational marketing efforts that we do every day. Those marketing levers, along with our continued focus on operational improvements, helped Rent-A-Center finish the third quarter with same-store sales growth of 2.6% against last year's Q3. Others are struggling, even shutting down, yet the strength of Rent-A-Center's brand and value proposition and people has now driven three consecutive quarters of same-store sales growth at adjusted EBITDA margins above 16%. Really pleased with the performance of the Rent-A-Center business as well. From a channel perspective, Rent-A-Center's e-commerce activity represented over 26% of revenue in the third quarter, an increase from approximately 25% in the third quarter of 2023 due to our team's efforts to optimize our digital customer experience. We've also launched a partnership with Google to leverage generative AI to enhance the personalized experience on our rentacenter.com website that should drive even better performance in the future. Even with the adjustments to Rent-A-Center's store count, the segment achieved revenue growth of 1.1% year-over-year with a gross profit margin in line with prior quarters. As expected, the lease charge-off rate at Rent-A-Center was elevated in Q3, landing at 4.9% compared to 4.3% in the prior year, partially due to seasonality, but also due to stress on Rent-A-Center's traditional customer. As I've mentioned, we're monitoring performance closely and making adjustments in real-time to protect that margin profile. So wrapping up this slide, I'd emphasize this quarter was a busy one with a number of strategic initiatives in flight that we believe will position us to have a successful finish to the year and a strong start to 2025. Acima added numerous new clients to help sustain our GMV growth and started building the next generation of the staff model stronger performing go forward portfolio. The Rent-A-Center team executed an EBITDA enhancing transaction with a key franchise partner while reacting in the moment to capitalize on a market opportunity related to competitive developments. Collectively, these achievements have us on track to meet the 2024 guidance we provided across the course of the year.

Thank you, Mitch, and good morning, everyone. I'll start today with a review of the third-quarter results, then discuss our outlook for the rest of the year, after which we will take questions. Let's begin on Page 6 of the presentation. We are very pleased to report another strong quarter with revenue growth over 9%, EBITDA growth of 10%, and EPS growth of 20% compared to last year. Consolidated revenue for the third quarter was up 9.2% year-over-year with Acima up 19.1% and Rent-A-Center up 1.1%. Rentals and fees revenues were up 8.8%, while merchandise sales revenues increased 18.2%, reflecting a larger portfolio balance at Acima coming into the quarter, more customers exercising a 90-day purchase option, and promotional initiatives at Rent-A-Center. Consolidated gross margin was 47.8% and decreased 300 basis points year-over-year with a 280 basis point decrease in the Acima segment and a 90 basis point decrease in the Rent-A-Center segment. Consolidated non-GAAP operating expenses excluding lease charge-offs and depreciation and amortization were down low single-digits due in part to non-labor operational efficiencies at Rent-A-Center combined with overhead labor savings. The consolidated lease charge-off rate was 7.4%, a 40 basis point increase from the prior year period and broadly in line with our expectations. On a sequential basis, the consolidated lease charge-off rate increased 20 basis points due to a 70 basis point sequential increase at Rent-A-Center. Consolidated adjusted EBITDA of $116.9 million increased 10.3% year-over-year, due to higher Acima and Rent-A-Center segment adjusted EBITDA in addition to lower corporate costs. Adjusted EBITDA margin of 10.9% was up approximately 10 basis points compared to the prior year period, driven by approximately 130 basis points of expansion at Rent-A-Center in addition to a decrease of approximately 70 basis points in corporate costs as a percent of sales, which was partially offset by approximately 200 basis points of margin contraction at Acima. I'll provide more detail on segment results in a moment. Looking below the line, third-quarter net interest expense was approximately $26 million, which was a slight decrease from the prior year period. The effective tax rate on a non-GAAP basis was 26.2% compared to 25.5% for the prior year period. The diluted average share count was 56 million shares in the quarter. GAAP earnings per share was $0.55 in the third quarter compared to earnings per share of $0.08 in the prior year period, which was driven by the prior year tax impact associated with the vesting 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 $0.95 in the third quarter of 2024, compared to $0.79 in the prior year period, representing 20% growth year-over-year. We distributed a quarterly dividend of $0.37 per share and we finished the third quarter with a net leverage ratio of approximately 2.6x after paying down our revolver in the quarter. Let's move to the segment results starting on Page 7. For Acima, double-digits year-over-year GMV growth continued for the fourth consecutive quarter. Following approximately 20% year-over-year growth in the prior three quarters, GMV grew 13% in the third quarter. The GMV lift was driven by year-over-year growth in key underlying drivers with active merchant locations up approximately 10% year-over-year, more productivity per merchant, and an increase in applications of over 25%. 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 16% year-over-year. Revenue increased 19.1% year-over-year, including a 17.9% year-over-year increase in rentals and fees revenue and a 23.5% increase in merchandise sales revenue due to a larger portfolio at the beginning of the third quarter compared to last year and the impact of the trade down. Lease charge-offs for the Acima segment were 9.2%, 20 basis points lower year-over-year and 40 basis points lower sequentially. The year-over-year decrease in Acima lease charge-offs was driven by our continued underwriting discipline, the recent uptick in early purchase option elections, and the wind-down of the ANow back book. Non-GAAP operating costs excluding lease charge-offs were up on a dollar basis approximately $4.3 million in the third quarter, which was 70 basis points lower as a percentage of revenue. Adjusted EBITDA of $75.3 million was up 3.4% year-over-year, primarily due to the 19.1% increase in revenue that was partially offset by a 24.2% increase in the cost of goods sold. Adjusted EBITDA margin of 13.3% decreased approximately 140 basis points sequentially and decreased approximately 200 basis points year-over-year, primarily due to a 280 basis point contraction of gross margin compared to the third quarter of 2023. The decrease in gross margin compared to the prior year was a result of a few factors, including an increase in merchandise sales, which represented a larger percentage of revenue compared to the prior year period due to more consumers electing the 90-day purchase option and the conversion of Acceptance Now locations to the Acima platform. For the Rent-A-Center segment, at quarter end, the same-store lease portfolio value was roughly flat year-over-year while same-store sales increased 2.6% year-over-year maintaining the momentum from the 2.6% year-over-year increase in the second quarter of 2024. Total segment revenues grew year-over-year for the third consecutive quarter increasing 1.1% compared to the third quarter of 2023. The increase in revenues was driven primarily by a 1% year-over-year increase in rentals and fee revenue offset partially by a 40 basis point decrease in merchandise sales revenue compared to the prior year quarter. Lease charge-offs were 4.9% of revenue in the third quarter, 60 basis points higher year-over-year and 70 basis points higher sequentially, a reflection of expected seasonal trends as well as conditions that remain challenging for our consumers. 30-day past due rates averaged 3.4% for the third quarter, up 30 basis points from the prior year period. Although there was a slight uptick in losses and delinquencies, they both remained in an acceptable range for us to produce strong EBITDA margins. During the quarter, we made tactical adjustments to our decisioning to help achieve our full year target lease charge-off rate in the 4.5% area and position us very well for 2025. Adjusted EBITDA margin for the third quarter increased 130 basis points year-over-year to 16.3%, primarily due to lower non-labor operating expenses. This is reflected by a 260 basis point year-over-year decrease in the ratio of non-GAAP operating expenses excluding lease charge-offs to segment revenue. For the Mexico segment on a constant currency basis, revenue increased year-over-year while adjusted EBITDA remained relatively flat. The franchise segment revenue decreased year-over-year while segment adjusted EBITDA increased compared to the prior year period. Non-GAAP corporate expenses were approximately 4.3% lower compared to the prior year. Let's shift to our financial outlook. Our outlook assumes a stable macro backdrop consistent with current conditions. Durable goods demand still recovering and a holiday season that's not disrupted by external factors. As Mitch noted earlier, for the full year, we expect to achieve the midpoint of the guidance that we raised on the second quarter call. We are tightening the ranges around the midpoint for the full year. Revenue should be in the range of $4.2 billion to $4.3 billion, adjusted EBITDA in the $470 million to $480 million range and non-GAAP EPS in the range of $3.75 to $3.90. For the fourth quarter, we're pleased with the start through October and expect it will translate to low double-digits year-over-year GMV growth at Acima, which is higher than we expected coming into the quarter and a strong outcome given the 19% GMV growth at Acima posted in the fourth quarter of 2023. That higher-than-expected GMV growth also means that this year's free cash flow, which funds that growth is now expected to finish towards the lower end of our guidance. We expect Acima's revenue to grow mid-teens year-over-year with gross margins similar to the third quarter of 2024 due to the mix shift towards the earliest purchase option. Lease charge-offs in the fourth quarter should be relatively flat sequentially and lower than a year ago quarter in part due to the proactive measures we've taken to fine-tune our underwriting in certain risk segments. Expenses excluding losses should be lower, resulting in slightly higher Acima adjusted EBITDA margins compared to the third quarter. Rent-A-Center's fourth quarter outlook should see revenues down low single-digits due to the franchise sale in the third quarter with lease charge-offs and adjusted EBITDA margins similar to the third quarter. Corporate costs are expected to be up low single-digits year-over-year. Our lease charge-offs are slightly elevated compared to our long-term normalized target ranges for each segment, but remain at acceptable levels for us to continue to grow and achieve our target EBITDA margins. We are consistently reviewing our portfolio performance and our decision engines are continuously adjusting approvals and approval amounts to remain competitive and disciplined in loss mitigation. We prudently manage our decisioning based on real-time data to guide the business towards our targets, despite the difficult operating environment we've seen in the past few years. We're confident in our tools and our data-driven approach to maintain losses at an acceptable range until the macro improves. In addition, if trade-down continues, charge-offs should improve as that GMV becomes a larger mix of the portfolio. While trade-down has contributed to the Acima's revenue growth, in the near term it will continue to impact Acima's gross margins and adjusted EBITDA given the higher proportion of lower margin early purchase outcomes, but it will eventually benefit losses and loss rates that volume flows through the P&L. In terms of the fourth quarter, we expect adjusted EBITDA to range from $120 million to $130 million with non-GAAP EPS in the range of $0.97 to $1.12 per share. Interest expense is expected to be modestly lower compared to the third quarter, while a non-GAAP tax rate should be consistent at around 26%. In terms of cash flow, we expect the GMV growth at Acima will more than offset the cash generated at Rent-A-Center, but as noted, we still expect to be within the full-year range for our free cash flow guidance. We are assuming a fully-diluted average share count of 56 million shares for the quarter with no share repurchases assumed in our guidance. We started this year with a very strong guide for our performance across 2024, given the momentum we started building in the back half of 2023. Despite an uneven macro backdrop, ongoing softness in demand for consumer durables, and the continued stress on our consumers, I'm very pleased to see the progress we've made towards achieving our goals. Our team will continue to focus on meeting and exceeding expectations as we finish 2024 and move into the New Year.

Our first question today comes from Vincent Caintic with BTIG.

Hi, good morning. Thanks for taking my questions. So first question on the Acima, the trade down activity. So it was nice to see the merchandise sales being up and it seems like that's all incremental. And so if you could talk about that the economics of the trade down business model in more detail, if you could talk about where you expect the gross margins will fall out. And I guess with the lower losses that you're expecting, does that mean that the economics of that trade down business is kind of similar to the rest of the lease business once you account for the lower losses?

Hey, Vincent. Good morning. So generally speaking, the 90-day purchase activity is usually associated with trade down comes to us at a lower margin. But what trade down really allows us to do, especially in this backdrop of the macro being so uncertain, and it allows us to keep GMV up and it also allows us to be a little bit more selective kind of on the bottom end of our core consumer. As we mentioned, applications were up 25%, approval rate was down about 60 basis points. But if you exclude some of the staff business that moved, most of that moved from the ANow to the Acima platform, our approval rates were actually down closer to 300 basis points. So it really allows us to be more selective in who we allow onto the balance sheet, who we give leases to. But it does come, as I mentioned, at a lower margin and you saw that reflected in our gross margin this quarter and we expect that to continue into the fourth quarter. As we said in our prepared remarks, it does give us the ability to get to new customers into the Acima platform. Those customers that come to us through trade down typically do exercise a 90-day buyout option, but they also have repeat business. And that second and third lease that they do with us typically has better margins than the first lease. It's good business for us. We're excited about having that opportunity, as it's continued to trend up through the year. As you mentioned, you start seeing some of the loss improvement, as it rolls through delinquency and into the P&L. You haven't really seen that just yet, just because it takes a while to go through the P&L, but you are seeing some of the headwinds associated with the gross profit margin.

Okay, great. That's super helpful. Thank you. And then last question, just switching over to the Rent-A-Center business, understanding that the charge-offs were up, part of that was due to seasonality, part of that's due to the consumer. But it was interesting to also see that margins were actually up 130 basis points year-over-year. So I'm wondering how you're thinking about sort of managing that business if perhaps maybe the higher loss content is there, but there's higher profitability in that business. You can talk about how you manage that? Thank you.

Good morning, Vincent. This is Mitch. Thank you for your question. It's an important one because EBITDA margins at Rent-A-Center are quite strong. We're always managing the interplay between losses and overall profitability, ensuring we have enough volume to cover the operational costs of a brick-and-mortar business, unlike Acima. We're satisfied with the margins, and the losses were anticipated. For the year, we still expect to maintain our guidance in the 4.5% range. However, we do need to tighten up a bit, and we're taking a cautious approach. Looking at delinquency rates, which can help forecast future losses, they have increased similar to last year in the third quarter, showing almost identical trends. In October, we're seeing a leveling off in the fourth quarter, just as we observed last year. We anticipate peaking at 4.9%. Although we're tightening our approach, it's crucial that we maintain a certain volume to keep our EBITDA margins around 16%. We are comfortable with the overall margin and typically observe peaks in summer regarding losses or delinquency rates, which have also leveled off like last year. Furthermore, we’ve experienced three consecutive quarters of same-store sales growth at Rent-A-Center. While there are some competitors exiting the market, Rent-A-Center is performing well and likely capturing some of that business. In my earlier comments, I mentioned our strategy to pursue this business, which usually depends on geographic factors related to closing stores. We have fortunately not been affected on the Acima side by the closures of these competitors, as we’re not involved with those businesses that are shutting down. Overall, this situation presents a tailwind for Rent-A-Center, particularly in attracting subprime customers and also may provide some advantage for Acima. As for the losses, we feel confident with our current position, acknowledging that they've stabilized in the fourth quarter. We're equipped to adjust our approach as needed, and it's a balancing act, but we are comfortable moving forward.

Our next question comes from Bobby Griffin with Raymond James.

Good morning. Thanks for taking my questions. Congrats on another good GMV quarter. I guess first, Fahmi, I want to just touch on the Acima segment and the EBITDA flow-through. Is it just a matter of timing? You see the gross margin pressure, but then you get the relief later on with the skips and stones or if this customer dynamic stays, maybe it's a faster-growing or stronger dollar growth business with a little bit less margin upside. Just help us think about the moving parts there and more importantly the timing. And I guess I'm just asking in context, could we see margins in EBITDA growth accelerate in ‘25, if it really is just a timing dynamic that we're seeing that's pressuring the flow-through?

Good morning, Bobby. Thank you for your question. I agree with your comments regarding the timing, particularly in relation to the trade-down activity and the increase in 90-day buyout activity. You'll see merchandise sales increase, as we observed this quarter, and we anticipate that will continue into the fourth quarter, which will put pressure on our gross profit margin. Over time, the GMV from higher credit quality consumers will constitute a larger part of the portfolio, leading to improvements in our loss figures in a few quarters. Looking ahead to 2025, while we won’t provide specific guidance, we expect to see some normalization of our gross profit margin and hopefully a better loss rate in that year. This would position Acima's EBITDA margin exactly where we want it, in the low to mid-teens range. As a reminder, we have guided for Q4 to be relatively flat regarding charge-offs, but we also anticipate a slight uptick in the EBITDA margin for the Acima business. This trade-off allows us to grow GMV, and while there may be some near-term headwinds on gross profit, improvements in losses should become apparent in a couple of quarters.

As you mentioned, Fahmi, we expect to see a slight increase in EBITDA margin in the fourth quarter, starting in 2024 rather than waiting until 2025, which was your question, Bob. Additionally, I would like to highlight the repeat business aspect of our customers. Once they become aware of Acima and have the Acima app on their phones for making payments, a significant portion of repeat business shifts to our own marketplace. The margins on our marketplace are higher compared to direct deals with retailers. Often, customers who don't need more furniture might choose to purchase from our marketplace instead, opting for retailers like Amazon, Target, or Best Buy, which offers a better margin and lower underwriting costs. Notably, repeat customers tend to pay off their second account earlier and at a lower rate than their first. Through our marketplace, we avoid some of the costs associated with retailers for product sales. Thus, repeat business proves to be more profitable than first-time transactions, contributing to the increase in EBITDA margins as we engage more customers over their lifetime value.

Thank you, I appreciate that. That's helpful. Lastly, it seems you're exploring various areas of the business, including the potential to franchise more stores. Could you discuss your perspective on the opportunities in Mexico? The business has maintained a consistent level of profitability, but it hasn’t been a primary focus. What are your thoughts on the long-term potential there?

Yes, that's a great question. As I mentioned earlier, we believe we have effectively reduced our corporate store count, and we're very pleased with the recent franchise sale. We're also happy about the stores we closed earlier this year and how we've managed to retain a good portion of their revenue by transferring those accounts to nearby stores. This has all been beneficial for Rent-A-Center. Regarding Mexico, we're quite optimistic. The business is having a solid year, with EBITDA remaining relatively flat, having increased slightly for the year. The currency situation has posed some challenges due to the peso being weaker against the dollar compared to last year. However, the overall business remains strong, and we are looking forward to expanding Acima there next year, which presents a wonderful opportunity. From Rent-A-Center's perspective, it's contributing around $7 million or $8 million of U.S. EBITDA annually, which isn't substantial. While adding $1 million would make a difference, it's not significant enough to impact our overall business. On the other hand, Acima has the potential to considerably influence our growth in a large market like Mexico. We're eager to expand our virtual platform there, and while our Rent-A-Center stores are performing well, an additional million in EBITDA won't dramatically shift our situation, even though we value their contributions. But the potential for Acima in that market is truly exciting for the future.

And what we've done, Bobby, this year in Mexico on the Rent-A-Center side is really the reason why we're up on a year-to-date basis is because we've gotten our losses under control. We've started to build a centralized decision engine down there. The team has done a great job in rolling that out. It is now fully functional down there and really paves the way for us to be more aggressive next year with the Acima platform.

That was the precursor is them doing the decisioning right for the Rent-A-Center business to allow Acima to then use it and tweak it and so forth. So, like I said, we're pretty excited about that.

Our next question comes from Hoang Nguyen with TD Cowen.

Thanks for taking my questions, guys. So you said that there's going to be a lag on the benefits of the trade down on credit, I guess, on delinquency and losses down the road. But I mean, you're still seeing a tick up in loss and delinquency this quarter. So maybe can you talk about what segment of your customers is contributing to this? And maybe what action that you're taking to manage this group of now higher-risk customers? And I have a follow-up.

Yes, that's a good question, Hoang. It's important to note that the trade down primarily involves Acima, and their losses are decreasing both sequentially and year-over-year. Rent-A-Center is not experiencing the same level of trade down, as they are not facing similar challenges with retail partners. While Rent-A-Center has seen an increase in delinquency similar to last year, there isn't a significant positive impact from trade down, and even with some other subprime retailers closing, customers are less inclined to take the early purchase option. The trade down scenario at Rent-A-Center differs significantly from that at Acima. The focus on trade down is mainly at Acima, where their losses are decreasing notably, contrary to the trend seen with most lenders. From a loss perspective, Acima's performance is improving both sequentially and year-over-year. In response to the latter part of your question, we're confident in our underwriting capabilities to manage this situation. We monitor it closely—Fahmi and I check in weekly with Tyler Montrone, who oversees Acima, to make any necessary adjustments. We feel assured about the trends since their losses are indeed on the decline.

Got it. Thank you. And maybe this is for Fahmi. So I saw that you guys incurred an estimated settlement expenses $7.5 million for all three outstanding legal matters with CFPB, New York AG and Multistate AG. Can you give a little bit more color around that estimate? I mean, is this your estimate currently for all three issues?

Hi, Hoang. Thanks for the question. Yes, look, I can't comment too much on the open litigation and open settlement talks. But from an accounting standpoint, once something becomes probable and reasonably estimable, we then put an accrual on the books. It doesn't mean that's where we're going to necessarily shake out, but that was our best estimate given the number that we have in front of us at this time. And as far as some of those investigations and litigations go, I would just point you to the 10-Q that we're going to file. We'll have updated disclosures across the board, but that's how we came up with the accrual this quarter.

Our next question comes from Brad Thomas with KeyBanc Capital Markets.

Hi. Good morning and let me add my congratulations as well on a nice quarter here. Mitch, I was hoping to follow up just on the outlook for Acima and its GMV growth. A year ago, you laid out a multi-year plan through 2026 to be growing revenue in the segment by 10% to 12%. Clearly, the GMV in recent quarters has been even stronger than that. Can you just talk a little bit about your confidence that you can be in that range as you look out to 2025?

Certainly, Brad. I'm eager to discuss Acima's growth, which has been quite strong. We believe there are several years of low double-digit growth ahead for Acima. There is still a significant amount of untapped opportunity in the market. As we've mentioned, we've raised our fourth quarter comparable sales guidance to low double-digits, following a 19% performance in the fourth quarter last year. This gives us confidence that low double-digit growth will be our trajectory for many years to come. We've experienced numerous successes in retail, and while some attention has been given to a single retailer we lost, it's important to note that we've acquired many accounts from our competitors over the past couple of years. This includes notable names such as Wayfair, Ashley, and Sleep Outfitters among others, totaling at least six major furniture retailers taken from that same competitor. Overall, our wins far outnumber our losses, and we have led the industry in growth for the past couple of years. We are optimistic that this trend will continue. Our sales team is performing exceptionally well, and our integration process for retailers is the simplest in the industry. Our marketplace significantly increases volume for retailers, and we offer more options than anyone else. This includes various models of support from our sales team, which is the largest and, I believe, the best in terms of results. When we consider our growth, we feel very excited about all the successes we've had, and our GMV reflects that. Although I find it somewhat frustrating to see a focus on our one loss, it clearly wasn't significant enough to hinder our GMV projections for the fourth quarter. The other wins are more than compensating for that loss, and we anticipate even more success ahead. We are truly excited about Acima's growth prospects.

That's helpful, Mitch. Absolutely a lot to be excited about from you all. And no question, the results have been really good. I want to ask a follow-up just on marketplace and wondering if you could share any more color on how big that's been. And as we look to next year, how much you think that could be contributing to the GMV growth?

I'm pleased you asked about the marketplace. We briefly discussed it earlier, and I find it really exciting, especially regarding our new AI leasability engine. This innovation enables us to onboard retailers much more quickly—taking about 10 days instead of a month and a half. The previous slow onboarding process was due to the need to sort through products to identify what was leasable. Adding retailers like Amazon required careful consideration to avoid issues, like leasing food or other restricted items. However, our new leasability engine is performing excellently, thanks to the hard work of our team and a great partnership. We've recently onboarded large names such as Walmart, Amazon, Target, and eBay, with these lease billings going live in the first week of October. This growth is not even reflected in the approximate 30% increase we achieved in the marketplace during the third quarter. Looking ahead, while I won't go into too much detail about next year, I believe this will certainly contribute to achieving low double-digit growth. If the engine performs as well as we anticipate, it could enhance those projections. Currently, we're experiencing low double-digit growth, which is impressive considering we previously reported over 19%, and this was before adding major retailers like Amazon and Walmart. So, when we mention low double digits, it should be viewed as the lower end of potential growth given the new additions. I'm genuinely excited about the marketplace and its future.

Our next question comes from John Hecht with Jefferies.

Thanks guys. Good morning and let me add my congratulations on all the good momentum. Actually one of my questions was just asked, so I'll just have one question. And that's that given the consumer trade down effect, happening in real time as we enter the holiday season. Are there any differences that you guys expect in terms of the mix or type of transaction and how that flows through?

Good morning, John. I don't know if I would expect any real changes over the holiday season. Obviously, those five weeks are very important to us to generate a lot of GMV. And then, if you think about kind of the flow into the first quarter with tax season, that's typically our highest 90-day purchase option activity anyway. With trade down, we'd probably expect to see some of that activity continue. But as far as kind of where the GMV is coming from by channel, new and returning customers, I'm not expecting a big shift year-over-year.

Our next question comes from John Rowan with Janney Montgomery Scott.

Good morning, guys. Just a quick question for me. The settlement with the CFPB that the $7.5 million that covers specifically the issue that they raised with Acima regarding the difficulty of returning leases and whether or not it was actually non-recourse. I just want to make sure that that settlement covers or expects to cover that specific issue.

John, we don't disclose kind of the specifics. But I will say it's not just that one issue. So it's not something we're going to disclose on which one of the issues, it's not something we typically do.

It's not a settlement; it's an estimate. It's accounting for money that we expect to settle at some point. So it's not finalized. It's our best estimate right now regarding the settlement of those three issues combined.

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

Good morning. Thanks for taking my question. So, I mean, you've laid out your fourth quarter guidance. I'm sure this is factored into the guidance. But how do you think about, I guess, two things, the fact that we do have this presidential election next Tuesday and then the fact that it's going to be five fewer shopping days between Thanksgiving and Christmas? Thanks.

Yes, that's a good question. We have taken that into account, although November leading up to Black Friday is typically very strong for us. The number of shopping days this year is indeed fewer than last year, which could have an opposite effect depending on where Thanksgiving falls in the calendar. However, the period leading up to Thanksgiving is particularly strong, so the impact is not as significant as it might be for traditional retailers. We are perhaps being a bit conservative due to the calendar situation, but applications are up significantly, as we've noted—25% in the third quarter—which gives us a lot of momentum. We have factored all of this in, and you are correct about that. Thank you, operator, and thank you to everyone who joined us today for the update on the third quarter and our outlook for the fourth quarter and for the rest of the year. I'm really thankful for the efforts of our coworkers and our merchant partners, who helped us deliver an impressive quarter in a few different ways, especially on GMV and of course, Rent-A-Center same store sales results, we're also very impressive. So, we're grateful to all of our coworkers for all their hard work. We got a bunch of people working really hard for our shareholders and it shows. And we're also grateful for our shareholders and for the interest and support of them and look forward to updating you next quarter on our continued progress towards our goals in 2025. We'll be talking about soon enough. Thanks, everybody.

This does conclude today's program. You may now disconnect.