Earnings Call Transcript - UPBD Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Upbound Group Second Quarter Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today.

Fahmi Karam, CEO

Thank you, Jeff, and good morning, everyone. Before we review the results of another strong quarter, I'd like to lead off by emphasizing our excitement as we continue to implement our growth strategies and the digital transformation of our company, which will fulfill our mission to elevate financial opportunity for all. As we always have, we will relentlessly work each day to turn our mission into a reality by capitalizing on our unique strengths, including our differentiated insights into a large and growing consumer segment, our industry-leading capabilities, and our team of dedicated, passionate coworkers across the enterprise. We're focused on helping financially underserved consumers with the financial solutions they rely on, building off our lease-to-own foundation while adding new products and services like earned wage access and credit building that strengthen our relationship with our customers and enhance the value we deliver to them. Let's move to Slide 4 and talk about how those goals translate to our business. Today, we serve our customers by leveraging a platform that generated approximately $4.5 billion in revenue and roughly $500 million in adjusted EBITDA over the last 12 months. Upbound's size and scale provide a stable base for growth and a durable competitive position supported by a vast number of consumer data points that we accumulate each day when serving our millions of customers. That's the common thread that connects each of our segments, and we're leveraging that data to deepen our understanding of our customers' needs and guide the evolution of our business. As we capture, catalog, and unify the data across the organization, we will draw out new insights that inform our strategy, shape our product roadmap, sharpen our marketing efforts, refine our underwriting decision-making, and ultimately best position the business for sustained growth and success across economic cycles. With that background, let's move to the key highlights from the second quarter of 2025 as well as a discussion of the progress we've made on our priorities for the year, then I will share a more detailed review of our financial results and our outlook. Slide 5 shows some of the key drivers of our performance in Q2, which I'm pleased to report led to another strong quarter for the company. These results demonstrated our discipline in protecting our balance sheet with prudent risk management decisions while growing our digital assets at industry-leading levels and expanding margins. Acima's strong run of GMV performance continued this quarter with GMV up 16% year-over-year, representing its seventh consecutive quarter of GMV growth. Its convenient and flexible platform continues to outperform with both of its main stakeholders. Merchants know Acima as a trusted partner whose API-first integration, real-time underwriting, and embedded sales enablement lift conversion rates. Consumers appreciate Acima's easy process and strong customer service, which is why our rate of returning customer transactions continues to rise as they leverage the Acima marketplace for their future shopping needs. Compared to the second quarter of 2024, applications were up nearly 20%, and the approval rate was down more than 300 basis points. The growth in GMV and applications was distributed across Acima's broad set of retailer relationships and product categories. The top 10 merchants represented about 31% of total GMV, consistent with the prior quarter. Segment revenue grew 12%, and adjusted EBITDA grew 15%, in part due to operational leverage as we continue to scale the business. Acima's lease charge-off rate improved 30 basis points from the year-ago quarter, which also contributed to the 40 basis point lift in EBITDA margin. Moving to our new fast-growing segment, Brigit. Brigit continues to thrive with nearly 40% revenue growth powered by another quarter of over 20% growth in subscribers versus the second quarter of 2024. The net advance loss rate of 2.6% came in relatively flat sequentially from 2.5% from the first full quarter and 20 basis points higher from a year-ago period. Brigit's second quarter customer acquisition costs were in line with expectations as the team tested marketing investments across new channels with new messaging. Brigit's adjusted EBITDA margin was nearly 28%, above our expectations due to the timing of marketing spend and other cost efficiencies in the quarter. Our customer acquisition efforts will significantly expand across the balance of the year as we look to further increase subscribers heading into the holiday season. As we make our planned investments in our marketing and customer acquisition efforts in the second half, we expect EBITDA margins will decrease to the low teens range. Overall, we are extremely pleased with Brigit's performance from a top-line growth perspective as well as its ability to generate meaningful EBITDA margins and free cash flow. Integration is on track with cross-selling efforts improving and gaining traction every day while we begin integration plans on data sharing and utilizing cash flow underwriting in our lease-to-own segments. At Rent-A-Center, same-store sales declined by 4% in the quarter, consistent with our expectations as a result of tactical decisions we made in the fourth quarter that we discussed on our last call. The intentional adjustments to our product lineup, combined with the impact of our underwriting tightening efforts, limited top-line growth in the second quarter. Rent-A-Center's lease charge-off rate of 4.7% was 10 basis points higher sequentially, partly as a result of the denominator effect from lower quarterly revenues. These impacts collectively reduced a 1.7 percentage point decline in adjusted EBITDA margin compared to last year. One of the operational metrics we do monitor is the number of deliveries, which ultimately underpins the overall lease portfolio value. I'm pleased to share that our delivery trends have stabilized across the quarter compared to the prior year, providing a level of foundation that we will build upon moving into the second half of the year. As we roll out new initiatives to spur customer engagement at Rent-A-Center with a focus on our digital and online capabilities, we will continue to prudently manage our risk profile to deliver responsible and sustainable results. Even with the operational and underwriting changes, the Rent-A-Center segment remains a cash generator, funding our reinvestment in our businesses and deleveraging. With year-to-date free cash flow conversion up year-over-year compared to the first half of 2024 and in line with last year on a dollar basis due to improved account and expense management. Let's move to Slide 6 and recap our consolidated financial results in Q2. Second quarter revenue of $1.16 billion was a 7.5% increase from the year-ago period, mainly driven by strength at Acima plus the addition of Brigit. Upbound delivered $133 million of adjusted EBITDA, which was a lift of 7% against Q2 2024, and adjusted EBITDA margin of 11.5%, which was roughly flat to the prior year quarter, but up 80 basis points sequentially. Non-GAAP diluted EPS was $1.12, which is 7.7% higher than the year-ago quarter. Our non-GAAP EPS included a $0.025 benefit related to stock-based compensation and the associated tax impact tied to our recent CEO transition and certain open executive roles that we are actively working to fill in the near term, which will normalize stock-based compensation in future periods. The second quarter results exceeded the midpoint or high end across every guided metric. Upbound also recorded a net usage of free cash flow of $10 million in the second quarter as we continue to support the growth initiatives at Acima and Brigit. Year-to-date, free cash flow was $117 million, representing an improvement of more than 3x the prior year. In terms of lease charge-offs, our disciplined underwriting has enabled the company to serve additional customers profitably while achieving lease charge-offs within our target range. On a consolidated basis, Upbound grew year-over-year second quarter revenue, adjusted EBITDA, and non-GAAP diluted EPS by at least 7% each, while delivering a lease charge-off rate that appropriately balances our risk and return objectives. Our growth businesses in Acima and Brigit continue to outperform our expectations. Acima is growing mid-teens and expanding margins. Brigit is growing its top-line nearly 40% this quarter while introducing new products to our customers and testing new marketing channels. We're really proud of these results and our ability to operate successfully despite a difficult market backdrop. Our cash flow engine, Rent-A-Center, is under top-line pressure due in large part to our underwriting tightening as our core consumer continues to be under pressure, fighting against the accumulation of higher prices for the past couple of years. These actions reduced deliveries, but we were still able to produce mid-teens EBITDA margins and generate significant free cash flow. Across the quarter, we did not see a direct impact to our business from the recent federal economic policy changes, but we're ready for that change if and when it starts to ripple through the economy. For our consumers, we expect there to be some puts and takes. Considerations like higher prices and enhanced requirements for certain governmental assistance programs like SNAP and Medicaid, in addition to the resumption of student loan payments may have a more pronounced impact on lower-income consumers. But unemployment and gas prices remain low, and recent legislation may put more money in our consumers' pockets through new tax policies covering tips and overtime. Overall, our core consumers remain resilient and have grown accustomed to a volatile market over the past couple of years. They are constantly evaluating spending priorities and recalibrating their spending behavior. We see it every day, and they're still spending, but being cautious on bigger ticket items, managing bills to align with their cash flows, looking for discounted deals, and focusing on making their dollar deliver more value than ever before. We are being equally as vigilant, and we continue to refine our decision-making across the enterprise based on early performance indicators. We're confident that our model and our consumer solutions will help us succeed no matter the economic backdrop. We're ready to help our customers navigate the shifting consumer landscape with our new liquidity solutions and our flexible lease-to-own solutions that provide customers with access to products they want and need through low payment structures with no long-term financial commitment. We are ready to welcome new customers as we grow our reach, and we will continue to support our current customers as their needs evolve. On Slide 7, I will share an update on the strategic priorities for 2025 that we outlined at the beginning of the year. At Acima, our ongoing digital investments passed a major milestone in the second quarter with the debut of Acima's new website, which features an updated look and feel with more streamlined navigation to make the customer experience more enjoyable and efficient. During the development phase, we also migrated the site to a new e-com platform, offering more scalability and flexibility for future enhancements. And that scalability is especially important as we began to pilot Acima's in-store virtual lease card in the quarter, which really opens up a universe of opportunities for consumers and retailers. Now a consumer with the Acima app can walk into any retailer selling durable goods and choose an item. The leasability engine in the app will confirm whether it's a lease eligible item or not in real-time in the card. The shopper can then tap to pay with Acima's virtual lease card while bypassing the usual waterfall of credit options, making leasing universally accessible on a foundation of safety, speed, and privacy. We believe initiatives like these will create more scale and efficiency, driving margin improvements in future quarters. In addition, these investments will keep existing customers and merchants engaged and returning as we will be able to send more and more customers back to our merchants, reinforcing Acima's value to our retailers. Merchant growth is also part of Acima's growth strategy, and I'm pleased to share that in the quarter, we were able to extend one of our largest accounts to a new 5-year agreement with a deeper regional commitment that now gives Acima lease-to-own exclusivity in all states that allow lease-to-own. Our technology and commitment to innovation have positioned Acima to continue increasing its market share and showcasing Acima's growing capabilities while serving as a marquee to attract new merchants of all sizes. Let's shift to Brigit, where our focus on innovation continues to power subscriber growth. To accelerate our momentum, Brigit is expanding its marketing efforts into additional customer acquisition channels using a test-and-learn approach. We expect to amplify our marketing efforts across the balance of the year as the cash advance product is expected to be more relevant than ever for our core consumers, especially if the macro environment worsens. Brigit is also innovating on the product side and is currently piloting a line of credit offering with a loan size ranging up to $500, which is twice the current $250 top end of the Instant Cash product. It's an efficient alternative for consumers carrying a variety of debt, including BNPL loans since this is a single product with a payment plan option up to 9 months. As we continue to cross-sell Brigit solutions to our Acima and Rent-A-Center customers, we're excited to feature another product that addresses our consumers' needs for liquidity and financial flexibility. Across the balance of the year, Brigit's priorities will continue to focus on growing the subscriber base by leveraging new acquisition channels and new products while increasing retention and managing losses. We believe the investments we're making this year in innovation and cross-company collaboration will accelerate Brigit's near- and long-term growth curve. At Rent-A-Center, we are targeting our investments towards near-term sales enablement efforts to better leverage our existing scale and return to growth. As an example, to offset underwriting tightening on the web, we've recently introduced preliminary approvals whereby select shoppers are invited to finish their application in-store, which helps us lift approvals and create store-based relationships while managing our risk profile. In addition, we're piloting Agentic AI to deliver real-time sales coaching and context-aware suggestions aimed at higher conversion and improved store productivity. The tool keys on contextual markers like shoppers' browsing history to deliver a more personalized interaction, and it leverages those outcomes to improve future suggestions, which we believe will drive higher lease volumes. I'm also pleased to share that last month marked the national launch of Rent-A-Center's Refer a Friend program, which enables our customers who already appreciate the value and flexibility we deliver to become trusted ambassadors who can introduce new consumers to our brand. In return, they'll earn rewards that can be redeemed towards future rental payments. We look forward to seeing these initiatives make a meaningful contribution to Rent-A-Center's growth over the coming quarters. Collectively, these investments across all of our brands will support our strategic imperative to serve our customers whenever and however they prefer, and that preference continues to migrate to online channels. Today, over 50% of our revenue is through our virtual platforms, and we look forward to driving that even higher in the coming quarters. Let's now turn to the segment results and then discuss our outlook for the balance of 2025, after which I will take questions. Acima delivered 16% year-over-year GMV growth in the second quarter, another strong result since last year's second quarter GMV grew at 21%. Together, that's 37% GMV growth on a stacked 2-year basis. This quarter's GMV balance equaled Acima's stimulus-fueled high watermark in Q2 of 2021, but this result wasn't driven by an unprecedented macro backdrop. It was powered by Acima's methodical and multiyear effort to enroll new merchants while boosting productivity at existing retailers. Those efforts paid off with a record number of lease applications, which was nearly 20% higher than the year-ago period. And as more consumers discover Acima's convenience, service, and flexibility, we're seeing more returning customers visit Acima's marketplace where they can start their shopping journey with a diverse lineup of leading national retailers. The Q2 GMV from Acima's marketplace was up over 130% year-over-year and was up more than 30% sequentially. Additionally, Acima's mix of returning customers increased from a year ago and now exceeds 40% of GMV. As we continue to grow our customer base, Acima remains well-diversified from a merchant standpoint with just over 31% of the GMV this quarter coming from the top 10 retailers. Our largest product category, furniture, represented less than 40% of GMV in the second quarter, slightly less than last year. As that category continues to remain under pressure, the Acima team has done an amazing job diversifying our GMV into higher-growth segments like wheel and tire, jewelry, and direct-to-consumer. When the cycle turns and demand for furniture, including mattresses, normalizes, Acima will be well positioned to continue its trend of double-digit GMV growth. Acima revenues grew 12% year-over-year, which was the sixth consecutive quarter of double-digit growth, and adjusted EBITDA was up 15% from a year ago. Adjusted EBITDA margins were up 40 basis points from Q2 of 2024, driven by two primary factors. First is that Acima's sustained GMV growth is leveraging the platform's economies of scale to realize margin enhancement. That's supported by a 100 basis point improvement in the OpEx efficiency ratio in the segment. Second is Acima's lease charge-off rate of 9.3%, a 30 basis point improvement year-over-year as the growth in applications has enabled Acima to drive GMV while maintaining a disciplined underwriting posture. Let's move to Slide 9 and recap Brigit's performance in the second quarter. The Brigit team finished with more than 1.3 million paid subscribers at quarter end, which was a 24% increase from a year-ago period and a 7.3% increase sequentially. ARPU, or average revenue per user was $13.45 on a monthly basis, a 12.5% increase from the second quarter of 2024 and a 4% lift sequentially. ARPU expansion reflects deeper marketplace engagement, expedited transfer revenue, and a mix shift to the premium subscription tier. Brigit originated over $350 million in advances this quarter, up 21% year-over-year and a record high in both number of advances and total dollars advanced. This performance underscores the strong product-to-market fit we have achieved and emphasizes the relevance of Brigit's offering for today's financially constrained consumers. For the second quarter, Brigit's cash advance loss rate was 2.6%, defined as cash advance losses divided by total originations in the period. In terms of financial metrics, Brigit recorded $52 million of revenue and $14 million of adjusted EBITDA for the second quarter with the top-line results representing an increase of nearly 40% against Brigit's performance from the corresponding period a year ago. Subscriptions made up 70% of the second quarter revenue with EBITDA transfer fees and marketplace income representing the balance. Adjusted EBITDA margin of 28% was driven by the timing of marketing investments originally planned for Q2 that will now be deployed in the second half of the year. As I mentioned earlier, we are pleased with Brigit's performance. On a stand-alone basis, it's our fastest-growing and highest-margin business with future cross-selling opportunities that will supercharge growth in the future. Let's move to the Rent-A-Center results starting on Slide 10. As a reminder, last quarter, we combined the Rent-A-Center and franchising segments into a single reporting unit. In the second quarter, the Rent-A-Center segment recorded $467 million of revenue, down 7.1% from the year-ago quarter, in part due to the sale and consolidation of 110 stores in 2024. This outcome was consistent with the mid-single-digit step back we highlighted on our last call. Same-store sales were down 4% year-over-year, reflecting fewer deliveries in the second quarter relative to the prior year period. This resulted in part from our decision in late 2024 to tighten underwriting and exit certain merchandise categories, coupled with softer demand year-over-year for furniture, which is Rent-A-Center's largest category. Collectively, furniture and appliances represented approximately 67% of the mix, which is consistent with the year-ago and sequential periods. Rent-A-Center's adjusted EBITDA was $68 million, down 17% from the second quarter of 2024 due primarily to less rental income off a smaller lease portfolio value. Rent-A-Center is a business where scale matters, and we're focused on turning around the trends in the lease portfolio value while maintaining our disciplined approach to risk management. As I mentioned earlier, I am pleased that Rent-A-Center deliveries, which are an early indicator of future lease portfolio value, have stabilized over the past couple of months. As we work to better balance the portfolio size, the loss rate for the second quarter finished at 4.7%, which was up 50 basis points from the year-ago period and 10 basis points sequentially. Rent-A-Center's adjusted EBITDA margin was 14.6%, which was down 10 basis points sequentially and 1.7 percentage points from the year-ago period. As we manage through a difficult operating environment, we believe our investments in our digital capabilities will drive portfolio growth in a responsible way and will help drive sustainable margin improvements over the near and medium term. Let's cover our liquidity and capital allocation policies on Slide 11. We finished the second quarter with $276 million in liquidity between cash on hand and our revolver availability. Our net leverage ratio was approximately 3x on June 30, generally consistent with the end of the first quarter. Our business generated approximately $117 million of free cash flow year-to-date, up substantially from $34 million in the prior year. That cash flow supports our capital allocation priorities, which remain unchanged from our guidance across prior quarters. First, we will continue investing across our business by elevating our current capabilities and developing new digital-first products to better serve our customers and merchants while advancing our competitive position. We're also focused on strengthening our balance sheet with an ongoing focus on deleveraging as we continue to work towards our target leverage ratio of 2x. Finally, although we are going to be very intentional to drive further growth in all of our brands, we also remain committed to supporting our regular dividend, which is $1.56 per share annually for a yield of about 6% at current prices. We are confident that our disciplined capital allocation strategy will fund responsible and profitable growth while we create long-term shareholder value. Let's shift to our financial outlook, beginning with an update on tariffs and consumer behavior. While the timing and levels of the potential tariffs are uncertain, we can say two things with confidence. One is that the Rent-A-Center business has seen no tariff-driven merchandise price increases as of today, though some suppliers have signaled that pricing actions may follow depending on the final outcome of trade policy negotiations. The other is that both of our lease-to-own businesses are poised to protect their margins using the operational levers we discussed last quarter. With modest adjustments to the weekly payment rate or the overall term of the lease, Rent-A-Center and Acima can respond to cost increases at a level that protects both our volumes and maintains consumers' low weekly payments. To date, we have not seen any change in consumer behavior that we can pinpoint as being tariff-related, but we monitor our KPIs daily so that we can respond in real time. Additionally, it is possible that macro forces could result in higher prices for a period of time. If this dynamic puts pressure on consumer liquidity, it could make the value prop of our lease-to-own offerings more relevant to more people, creating another wave of trade down. Similarly, Brigit's instant cash and financial wellness offerings may see incremental demand against that backdrop. We are prepared to welcome new customers and merchants while supporting our current relationships with our expanding lineup of financial solutions. As we consider our guidance, we are aware that the impact of near-term tariff and trade developments are difficult to predict. However, we know that our business is durable and resilient with growth opportunities available across all economic cycles. With our strong start to the year and with the continued momentum in Acima and the Brigit segments, we are tightening the range of adjusted EBITDA to $515 million to $535 million and raising the midpoint of our full-year non-GAAP diluted earnings per share guidance by tightening the range to $4.05 to $4.40 per share. In terms of the third quarter, we expect revenues ranging from $1.05 billion to $1.15 billion, adjusted EBITDA of $120 million to $130 million, and non-GAAP EPS of $0.95 to $1.05. Rent-A-Center's revenue should follow the same seasonal sequential path as 2024 with a mid-single-digit step back in Q3 compared to Q2, with EBITDA margins down slightly sequentially despite an improvement in loss rates. We expect Acima to deliver low double-digit GMV and revenue growth with EBITDA margins slightly better than the year-ago period and lease charge-offs are expected to remain stable year-over-year. Brigit's Q3 revenue should be slightly up sequentially with expected low teens EBITDA margins and a net advanced loss rate in the 3% area as new models are refined, new campaigns are run and new products are tested. For corporate costs, we expect the impact to adjusted EBITDA in Q3 to be consistent with Q2. Also at the corporate level, our net interest expense in Q3 should be in line with Q2. We expect the tax rate to be consistent with 2024 at approximately 26% and steady across the quarters with an average diluted share count for the year of approximately 58.7 million shares, which includes the shares issued for the Brigit acquisition. During the second quarter, we continued to have discussions with counterparties related to the various pending legal and regulatory matters, including the previously disclosed Multi-State AG matter and the McBurnie, California class action related to the legacy Acceptance Now business. After evaluating the status of our negotiations under the relevant accounting guidance, we recorded an additional accrual of $31.7 million in the second quarter. Last week, after the quarter closed, Upbound reached an agreement in principle for $14 million to settle the McBurnie matter, which was substantially reserved for as of June 30. The McBurnie settlement in principle remains subject to finalizing a definitive settlement agreement and approval of the class settlement by the trial court. The balance of the accrual relates primarily to the Multi-State AG matter, and we will continue to evaluate and update the accrual estimate each quarter based on the current status of the matter. Let's wrap up with some key takeaways. There is no shortage of data points about the economy and our consumers, but it is important to separate the headlines and general consumer sentiment from our portfolio and our core consumer. The macro environment is uneven with some mixed signals, but our business is fundamentally strong and built to succeed across cycles. Our customers are accustomed to financial pressures and are resilient and adept at seeking out solutions that reduce those pressures. That's where Upbound products, which offer accessibility, flexibility, and convenience can and do make such a difference. That's why Acima has logged seven consecutive quarters of impressive GMV growth with expanding margins, and it's why we continue to invest in new technologies and capabilities to sustain that growth as conditions change. The Rent-A-Center business is working through a purposeful pullback in underwriting and product categories, but maintaining mid-teens margins and producing reliable free cash flow. The Brigit platform continues to grow, and we believe its new marketing channels and innovative new products will position it for growth in subscribers, revenue, and earnings. Overall, I'm tremendously excited about the results we've achieved and even more so about the opportunities ahead of us as the company continues to transform and focus on digital asset-light growth opportunities. Our business and our teams are fully aligned to our mission and strategy, which we know will help our consumers and our merchants be successful and will create sustainable value for our stakeholders. Thank you for your time this morning. Operator, you may now open the line for questions.

Operator, Operator

Our first question comes from Vincent Caintic at BTIG.

Vincent Albert Caintic, Analyst

So great results and nice to see the improvements continuing in Acima and Brigit. I wanted to talk about Rent-A-Center, and you described that there were adjustments made last year, and those are still flowing through. So I was wondering if you could maybe first in the near term, talk about if it's possible to describe the drag to results from those adjustments and maybe also from the product categories you have. So I know like there's still a lot of exposure to furniture and appliances. And then if you could talk about the long term of Rent-A-Center, what's your view of the long-term growth potential? Could it be? What level of growth should we be expecting once all of this normalizes?

Fahmi Karam, CEO

Vincent, thanks for the question. Yes, look, I think as we discussed last quarter on the Rent-A-Center side, we did do a purposeful pullback on the credit side and tightening around underwriting. And that's going to have an overall impact on revenue and EBITDA as we saw in the quarter, consistent with how we guided at the beginning of the year and how we've guided last quarter. So a couple of factors, right? You have a reduction of 110 stores or so this year versus last year, underwriting tightening around especially new customers coming through the web. And then the product categories that we talked about around mobile phones mostly, which is another form of underwriting, all of that has impacted the Rent-A-Center results. And in this environment, we feel like taking a more conservative approach in underwriting is prudent. As we've talked about, our consumer generally is resilient, but it's still under pressure just from the accumulation of higher prices over the last couple of years. Your question around how big of a drag is it on the results. Without these moves, I would say, without the tightening on underwriting in the product categories, we would have been flat to maybe slightly up on a same-store sales basis. We are going to lap some of these changes starting in the third quarter. From a general underwriting standpoint, we started to tighten midway through the third quarter. The product categories really were eliminated in the middle of Q4. So we'll start seeing some lapping of that underwriting in the second half of the year. But we're not waiting for that. As I mentioned on the call, we have done some initiatives to try to help drive more deliveries without loosening up on the underwriting. And one way we're doing that is taking folks who start on the web and who would normally be declined online and asking them to come into the store where we can have our store coworkers do more of a formal interview with the customer. Our approval rates are much higher in-store, and we're seeing some traction there, especially in furniture and appliances when somebody walks into one of our stores. So the good news is we have losses under control, up 10 basis points sequentially. Delinquencies are flat year-over-year and have improved sequentially. So we feel like we just got to find our pockets to drive deliveries, and we're doing that. So in this environment, being down 4 percentage points or 4 points on a same-store sales basis, is we think it's prudent to take a conservative approach to underwriting.

Vincent Albert Caintic, Analyst

Okay. Great. That's super helpful detail. And then switching over to Brigit, very nice results this quarter and your discussion about marketing investments and new products in the second half of the year. If you can maybe if you could describe those marketing investments in more detail and how much you intend to invest? And are there other products that might be interesting here because as part of the Upbound umbrella, you're kind of wanting to serve the consumer more fulsomely. So you talked about the line of credit product. I was just wondering if you think long-term other products might make sense as well.

Fahmi Karam, CEO

Thanks, Vincent. I'm really pleased with Brigit’s performance, which has exceeded our expectations. It fits well within the Upbound Group, and the team dynamics and collaboration have been excellent. We've had a strong initial six months since taking ownership. The platform has shown its capacity to grow subscribers and make strategic decisions about operating expenses, whether related to marketing or R&D. This quarter, we nearly reached a 28% EBITDA margin, which was slightly above our target due to additional focus on R&D for new products. We're particularly excited about our new line of credit product, which offers higher limits than our $250 Instant Cash product, increasing up to $500 and extending the term. We were drawn to Brigit partly because of their R&D strength and their responsiveness to consumer needs. This line of credit developed directly from listening to our customers, and the pilot program has shown impressive results. The idea is to increase liquidity with a $500 option and provide longer credit terms over a 6- to 9-month period, allowing us to test and learn what works best in terms of performance and risk. For marketing, we're traditionally focused on social media and exploring new channels, including Reddit and other platforms, to enhance our outreach. We're also implementing marketing efforts in-store and at points of sale, starting with signage in Rent-A-Center and Acima locations. We'll monitor and adjust our strategies to optimize consumer response. Overall, I'm very excited about Brigit's achievements and future potential.

Operator, Operator

Our next question comes from Bobby Griffin at Raymond James.

Robert Kenneth Griffin, Analyst

Congrats on a good second quarter. I guess first to start, a lot of detail on the different customer segments of your business. So maybe just a high level, would you call your core customer across the platform stable versus maybe 1Q or 6 months ago? Just trying to connect kind of where the customer is first here.

Fahmi Karam, CEO

Bobby, you're breaking up just a little bit, but I think I got the gist of your question being around the consumer and how it's trended. I would say stable over the last few months, few quarters, still under pressure, as I mentioned in our prepared remarks, the core Rent-A-Center and maybe the bottom end of the Acima business, that consumer has to deal with high prices and inflation is still high. But there are some puts and takes. On the good side, unemployment is still low. Gas prices are still relatively low. There is some wage growth, and some of those new tax policies that I mentioned around not tipping or not taxing on tips and overtime, should be net positive to the consumer. But overall, there's still a lot of uncertainty. So I would say stable as far as just general consumer behavior and strength of the consumer, but we are being very mindful of it and still taking a pretty conservative approach from an underwriting standpoint. And as we look at just the overall portfolio strength at both Rent-A-Center and Acima, as we've been able to tighten our underwriting and look at where our portfolio sits today compared to where it was a year ago or two years ago, the mix has definitely shifted to the upper end of our risk profile. So we feel really good about where the portfolio sits. And that's just something that we manage day-to-day. But generally saying, the consumer is pretty stable. As we've mentioned, they're pretty resilient, but still face some pressure and there's some uncertainty in the macro environment.

Robert Kenneth Griffin, Analyst

Hopefully, you can hear me a little better. I actually used half of my questions, so that's perfect. I guess secondly for me was just on the Acima growth; we continue to see really strong growth there in GMV. I understand you have been expanding the product offering. What are you seeing from a trade-down perspective? Is new door growth the primary driver? What is pushing the core merchants to utilize the platform more and adopt more aggressive sales tactics? Is there anything that can help us better understand the strength across the apps as well as the GMV side?

Fahmi Karam, CEO

Thank you, Bobby. Acima continues to show strong performance with a 16% growth this quarter, which is particularly impressive given the 21% comp from last year. This adds up to a 37% growth on a two-year basis, which is remarkable, especially considering that some of our larger categories, like furniture and appliances, are still facing challenges. Achieving these growth targets showcases excellent execution by the team, especially as we also expanded our EBITDA margin by 40 basis points this quarter and 170 basis points year-over-year in the previous quarter. Growing while maintaining margins is a significant achievement for the Acima team. The growth is coming from a mix of new merchants and productivity improvements per merchant. This quarter, around 80% of the growth is attributable to new merchants we've onboarded over the past year, while about 20% comes from productivity gains. One noteworthy point is our direct-to-consumer channel, which has been our fastest-growing segment, having grown 130% year-over-year and now accounting for over 5% of our overall GMV. We plan to continue investing in this channel. Currently, it's mainly focused on returning customers, but there's substantial potential for growth with new customers as well. Returning customers now make up over 40% of our GMV, much of which is driven by our direct-to-consumer marketplace. Overall, Acima is well-diversified in terms of both merchants and products, leading to broad growth. As demand for furniture and mattresses returns, Acima is well-positioned to maintain double-digit growth.

Robert Kenneth Griffin, Analyst

And I guess one last quick one, if I can. On the loss ratios in Acima, down year-over-year, but they did tick up sequentially. And I think you guys were looking for flat when we spoke last quarter. So just anything there? Or is it just timing or anything we should think about there?

Fahmi Karam, CEO

Most of that, Bobby, I would say it's more mix. One of our fastest-growing segments outside of the direct-to-consumer has been in the jewelry category. That's been growing now a couple of quarters in a row much faster than some of our other categories and becoming a bigger and bigger part of the overall portfolio. And that tends to have a little bit higher loss ratio, tends to have a little bit higher 90-day buyout activity, which puts pressure on our gross profit margins, but also probably ended up being 10, 20 basis points higher from a loss ratio standpoint, but still well within our range of losses. And as I mentioned, it trickled down into a positive EBITDA margin year-over-year. So nothing really there, still very much under control.

Operator, Operator

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

Bradley Bingham Thomas, Analyst

And we too think these were very good results in a tough environment out there. I wanted to start with a follow-up on Brigit. You all said that you thought revenue would improve slightly on a sequential basis. And obviously, you gave a very positive framework for how you're thinking about sales and EBITDA over the next couple of years at the time of acquisition. And so I was wondering, having owned the business for 6 months, if you could share a bit more about how you're feeling about that outlook potential because obviously, it's positioned to be a very significant contributor to sales and EBITDA over time.

Fahmi Karam, CEO

Brad, thanks for the question. Yes, as I mentioned, very, very pleased with the performance overall, still very much on track, hitting our 2025 guide as well as positioning the company to hit the big ramp-up in growth in 2026. And as you recall, the 2026 number really didn't have any benefit of some of the cross-collaboration and cross-selling that we have been working on. So I feel like we're well positioned there. We are being pretty methodical in how we tap the Rent-A-Center and Acima customers and really testing and learning there, but feel really good about Brigit on a stand-alone basis, being able to hit the numbers that we expected at the time of the acquisition. The first half of the year has been above our expectations, as you mentioned, both on the top line and on the EBITDA side. So nothing that we've seen in the first six months has really slowed us down. If anything, we're more and more positive about the acquisition and the future cross-collaboration between all the segments.

Bradley Bingham Thomas, Analyst

That's very helpful. And if I could add a follow-up on the Rent-A-Center side. You've already given a fair amount of detail here. But just as we think about the quarters ahead, and I know this is kind of a macro call that I'm asking you to make here. But is there a good way to think about when some of the EBITDA dollar pressures could potentially subside and when you could at least flatten out, if not start to get back to growth for that segment?

Fahmi Karam, CEO

Yes, I mentioned that we will start seeing the effects of the changes we implemented in underwriting during the second half of the year. We will notice some benefits in the third quarter and a bit more in the fourth quarter. Additionally, we will also be past some of the store closures and consolidations from last year. By early 2026, we expect to have a more straightforward comparison and hopefully return to growth as we implement initiatives that should improve delivery. If the overall economy improves, we may be able to be strategic about our underwriting. The tightening of underwriting affects Acima and Rent-A-Center differently. Rent-A-Center, with its fixed costs and physical stores, requires a balance between growth and prudent risk management, while Acima can grow its store count by benefiting from trade-downs. I believe the comparisons will begin to ease in the second half, and by 2026, we should see a return to growth.

Operator, Operator

Our next question comes from Hoang Nguyen at TD Cowen.

Hoang Manh Nguyen, Analyst

I want to start with Brigit. Obviously, very strong results. And if you look at the cash advance volume over the past couple of quarters, it's been decelerating. I think you mentioned that you guys are going to increase marketing in the back half of the year. So can you talk about maybe your expectations for Brigit going forward and how you are looking to reaccelerate growth?

Fahmi Karam, CEO

Yes. Look, Hoang, thanks for the question. The Brigit growth, I think, speaks for itself. As I mentioned, 40% revenue, almost 25% subscriber growth year-over-year. The advances don't have necessarily a financial impact on the business given the subscription-based model. But the other thing that we mentioned in the prepared remarks was the average revenue per user per month growing mid-single digits sequentially and up over 12% year-over-year. That is one thing that I would also call out as something that we are actively pursuing and seeing that grow sequentially, again, low single digits into the second half of the year. The traction that we get, as I mentioned, both on the Instant Cash product, the credit building product, and now the line of credit really justifies the market need and the market demand for this product and being able to offer our customers across all the brands, these liquidity solutions is really powerful for us. It expands our market outside of just durable goods. It gives us another solution to offer our customers and keep them in the network. So again, not to repeat too much, we're very pleased with what Brigit is doing, including its growth profile.

Hoang Manh Nguyen, Analyst

Got it. Regarding leverage, considering the revenue challenges you face with Rent-A-Center, which is about to become more favorable, and the rapid growth you're experiencing with Acima, how does this impact your ability to reduce leverage quickly? Also, when can we anticipate reaching your target leverage ratio?

Fahmi Karam, CEO

Yes. Free cash flow, you compare this year to last year, this year, year-to-date, we're at $117 million. Last year it was about $34 million. So free cash flow is a real positive story for us, and that's including the growth at both Acima and Brigit. Some of that betterment year-over-year is the pullback at Rent-A-Center. Obviously, the EBITDA declines in there, but also fewer and fewer purchases is also in that free cash flow number. So free cash flow has actually been a really positive story for us in the first 6 months. The big beautiful bill that was passed also gives us some cash tax benefit that we'll incorporate into the guide going forward. But needless to say, it will be a significant plus to free cash flow for at least the next couple of years. So we will get down to our 2x leverage target. I would say, over the next couple of years, Hoang, it depends on how fast we can grow Acima, how fast we can grow Brigit. But if you just look at the guide for 2025, what we said was we could get leverage down to pre-acquisition levels by the end of the year. So let's hit that first, and then we'll try to get down to 2x as we progress.

Operator, Operator

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

John J. Rowan, Analyst

Do you know what percentage of your customers are affected by the change in tax policy on tips and overtime?

Fahmi Karam, CEO

It's really hard for us to kind of pinpoint the exact percentage. But if you think about Rent-A-Center customer making $25,000, $30,000 a year annual income, Acima's $55,000 to $60,000 and Brigit somewhere in between the two, it's going to be a lot of service-type folks. And those folks are the ones that have a lot of tips and a lot of overtime. So we think it's going to be a net positive, but I don't have an exact percentage, but it's a meaningful percentage of our consumers.

John J. Rowan, Analyst

Okay. Has there been any change in the market since the CFPB rescinded some of the guidance documents?

Fahmi Karam, CEO

No. Obviously, there's been a lot of news around that, the open banking rules even this week, the CFPB sounds like they may come back to the rule as the courts to hit pause on the ongoing case. So nothing to date, John, has changed officially, but it's something that we're actively monitoring through the Brigit team. But nothing to date has necessarily changed as far as the new ruling.

John J. Rowan, Analyst

Okay. I just want to clarify. The $32 million set aside for legal matters, is that intended for future litigation, for settling one of the matters, or both? If it involves both, could you provide some details?

Fahmi Karam, CEO

Yes, it addresses many of the different cases we disclose. We will have the 10-Q out this week, which will include more details regarding all the cases. As mentioned in the prepared remarks, most of it pertains to the Multi-State AG matter that we've been working on for several years. I consider this good news as we are making progress. Many of these matters have been longstanding and primarily relate to legacy practices, including the McBurnie case that we settled after the quarter. That case was raised five years ago and is linked to our legacy Acceptance Now business. The ability to settle it, which was almost fully reserved for at the end of Q2, is a positive development. We will continue to update the accrual based on ongoing negotiation progress and hope to resolve these issues soon.

Operator, Operator

Our next question comes from Bill Reuter at Bank of America.

William Michael Reuter, Analyst

I just have two. The first is the growth of Acima, I find particularly impressive in light of general store closures across retail. I guess, is that something which is negatively impacting all the positive momentum? And are you having some of your partners that are closing their stores?

Fahmi Karam, CEO

Thank you for the question, Bill. One of the significant advantages of Acima's platform is the diversity in both products and merchants. Since a majority of our business comes from small and medium-sized businesses, the closure of a single location or merchant doesn't significantly affect our overall business. So to answer your question directly, there hasn't been anyone who's closed down that has truly impacted us. We are continuously adding hundreds of locations to the platform, so it hasn't been a setback for us. As we've discussed, furniture is a major category for Acima, and despite that category facing pressure due to the pull forward of stimulus, the team has excelled at diversifying our GMV into various high-growth categories. Jewelry and electronics have performed exceptionally well for us as we expand in the marketplace and bring on larger retailers. So again, to answer your question directly, it hasn't had a notable impact on us.

William Michael Reuter, Analyst

Great to hear. And then secondarily, you talked about getting towards 2x leverage towards the end of next year potentially. I guess I'm wondering whether given all that's going on with the growth in Brigit and Acima, whether you would consider additional acquisitions at this point? Or you have so much going on internally plus the leverage target that kind of those are going to be your focuses?

Fahmi Karam, CEO

I believe that's a reasonable point, Bill. It's important to keep an open mind about mergers and acquisitions if they align with our strategic goals or enhance our offerings for consumers. However, as you've pointed out, we have significant opportunities ahead with our three main brands: Rent-A-Center, Acima, and Brigit. We have ample potential to execute our strategic plan with our existing resources. Right now, we need to focus on further integrating Brigit, returning Rent-A-Center to growth, and ensuring Acima continues its double-digit growth while also exploring new ways to serve our customers. Simultaneously, we need to reduce debt, achieve our target leverage ratios, and prepare the company for accelerated growth in 2026 and beyond.

Operator, Operator

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

Anthony Chinonye Chukumba, Analyst

I have a quick question. You mentioned that there was a 50 basis point increase in the lease charge-off rate year-over-year in the Rent-A-Center business. Could you explain what contributed to this change?

Fahmi Karam, CEO

Anthony, thanks for the question. Yes. Look, I think it's 50 basis points year-over-year. Some of that is why we tightened late last year, why we removed some of those phones. Some of that has to go through the portfolio, and you're seeing that. I'd characterize it as stable. It's only up 10 basis points from the first quarter. And we've always said that 4.5% range in this environment, give or take, 10-20 basis points is kind of fine for the Rent-A-Center business. So some of it is why we tightened in the fourth quarter and earlier this year. So some of that just has to work through the portfolio. But again, it's within a range that we find acceptable, especially as you have pressure on deliveries and the top line.

Anthony Chinonye Chukumba, Analyst

Got it. That makes sense. You mentioned previously that after acquiring Brigit, there would be a plan to eventually transition their decision-making engine to Rent-A-Center and Acima. I'm curious if there are any updates on that.

Fahmi Karam, CEO

No real update. It's definitely still something we're very focused on. Anthony, to be candid, it kind of comes down to prioritization of where we feel like we can get the best bang for our buck, if you will, with our time and resources. Similar answer to what we said on the marketing side on the cross collaboration between R&D, developing new products and growing Brigit versus having some of the data sharing and cash flow underwriting. We are going to do some testing this year around that just through the overlap of customers that we currently have. So we are starting on it. It is something that we think will be a big benefit for the combined company, probably not something you'll see in 2025, probably something that we'll tackle in 2026.

Operator, Operator

I'm showing no further questions at this time. I would now like to turn it back to Fahmi for closing remarks.

Fahmi Karam, CEO

Thank you, operator, and thank you to everyone who joined us today for an update on our Q2 performance and our outlook for the balance of 2025. Before we conclude, I'd like to extend my sincere gratitude to all of my colleagues at Upbound. Thank you for your unwavering contributions and support of our mission, our values, and our customers. Have a great day, everyone.

Operator, Operator

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