Upbound Group, Inc. (UPBD) Earnings Call Transcript & Summary

Good day and welcome to the Stephens Inc. Rent-A-Center conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Vincent Caintic. Please go ahead.

Thanks, Elaine, and thank you, everyone, for joining the call for this portion. My name is Vincent Caintic. I'm the Stephens equity analyst covering specialty finance -- specialty consumer finance. I'm pleased to host this morning Rent-A-Center's CEO, Mitch Fadel; and CFO, Maureen Short. Before we get started, I just want to talk briefly about the format of this call. I like to have these calls be interactive with the audience, so I'm tempted to poll for questions. It's obviously [indiscernible]. Investors' questions are always more interesting, so please have them ready to jump in the queue. If you'd rather have me ask the question, just e-mail me at [email protected]. That's Caintic is C-A-I-N-T-I-C. And I'll ask your question now once I get the questions. With that, we'll get started. Mitch and Maureen, thank you very much for joining the call and your time this morning. First, Mitch, if you could give an introduction on Rent-A-Center and the rent-to-own industry for the most part. We get some investors in the call who are new to you, to rent-to-own and Rent-a-Center. Also if you could maybe describe that customer set. We spent Rent-a-Center, your differences and your competitive advantages.

Sure. Glad to do it, Vincent. Thanks for doing this. And thank you, everybody, for your time. As Vincent said, I'm Mitch Fadel, the CEO of Rent-A-Center, and I think I'll be able to describe what Rent-A-Center is all about then. So I was at Rent-A-Center -- for those of you who don't know it, in 1983, and so I've been doing this a long time, left for a couple of years, but it came back a few years ago. So it's been most of my adult life. So Rent-A-Center is just like the name says, rental company, really we call lease-to-own now. It's leasing with an option to own -- with a lot of flexibility, household durable goods. So you can lease anything for the home from furniture to appliances to electronics, even handbags, tools, things like that, most everything inside the home. And a lease where you have an option to own, but you also have an option to return it. That's certainly a key variable this day in age. We're not a subprime lender. Our customer is lower income demographic, average income in the $35,000 household annual income range. That's an average, depending what part of the country you're in. It's a range more like from $15,000 if you're talking about some of the lower income -- lower cost of living areas to that $50,000 range in some of the higher cost of living areas. Again, it's a customer that's cash and credit constrained and needs leasing because we can take risk with a customer that doesn't have a good credit score. Because if they can't pay us, we just pick it up and rent to somebody else. The lease equity doesn't transfer till the end. So we can do business with customers that understand their flexibilities. It allows us to do business with them. And the margins are good doing business this way, and we have the flexibility of the return, which is good under any circumstances. So -- and like I said, we just rent to somebody else. About 2,000 corporate-owned stores in the U.S., another 120 in Mexico, about 300 franchise stores, so about 2,300 brick-and-mortar. Then we also have another segment called Preferred Lease, which is a lease-own option within retail partner business. We do it 2 different ways. We can staff their kiosk if they have a lot of volume. And we can benefit from supplementing their labor by doing more business, although we do it virtually. And it's a business that has even more interest now because it's more often than not is in a waterfall where somebody gets turned down for traditional credit, they will do a lease-own agreement right on the spot in that retail store, whether it's with one of our employees, the salesperson could do it or it's just virtually done. So -- and that's the growing part of our business. E-com is a big part of our business, both on the Preferred Lease side, through the retail partners, and of course, on the Rent-A-Center side, skyrocketing these days up over 100% to last year, just like you're hearing from a lot of retailers. And we feel good about our business model because of the flexibility and because our products are home products, and that seems for the next little while, year or 2 anyhow, that products for the home are where you want to be. And that's the background on Rent-A-Center.

Okay. Great. So maybe if we'll go to today. So I think the eye in the market are very impressed with how close everything was to business as usual in the first quarter and your -- and the color we gave last week on your earnings call. I guess, are we back to normal? Now that we're 2 weeks into May, maybe if you could update us on your -- on what you're seeing in the performance and anything different from what you've experienced on your earnings call?

Not too different from the earnings call, which was just last week. So certainly, what we said in the earnings call will hold. And I don't know that we're back to normal, maybe we're back to a new normal. But you said, Vincent, you were surprised how close we were to normal numbers. And I would just say that, I mean that's the benefit of having a recurring revenue stream. Even as some stores had to close -- on the retail partner side, let's use that example. So if a retail partner store had to close, we still had revenue stream. We've got a very -- a very variable cost structure. So we furlough the employees, but money is still coming in. Now the portfolio, you don't want to do that very long or your portfolio, obviously, the payments run out at some point in time as people take ownership of the product. So I do that forever. But in the short term, you have a recurring revenue stream, you can cut your expenses because we've turned our cost structure very variable. And now it's the reopening, they're seeing really good demand, a lot of pent-up demand and we're back growing the portfolio again. So I would just say it's a great time to have a recurring revenue stream. You think about the Rent-a-Center side of the business, the brick-and-mortar side, same thing. We had about 25% of our stores at one point had to close a showroom. They could still operate. Only a handful of stores ever got shut down totally. But we stayed open pretty much everywhere as an essential business, because we have appliances and computers and things people needed to get through this. Again, cash and credit constrained, where else they're going to get a refrigerator, where else they're going to get a computer to do home schooling or to work from home and so forth. So we were able to stay open. But in some cases, we had to close a showroom and just work off web orders, phone calls, curbside and so forth. So -- but we're able to furlough some employees because we didn't need quite as many. And then as the showrooms very open, bring them back. So the recurring revenue stream allowed us to stay pretty close on our numbers, as you said. And relative to traditional retail, quite a bit ahead and a pleasant surprise that people that hadn't thought about our business model. It wasn't a surprise to us. We know our business model. But it surprised a lot of people that this business model could -- I guess, a lot of people hadn't focus on the fact, with the recurring revenue stream, you're not going to have the drop that traditional retail has. With the fact that people can return it, you're not going to have the huge losses that maybe a lender would have because our equity doesn't transfer till the customer takes ownership at the end if they do the buyout. So we can pick it up and rent to somebody else. And all that does is save us money from not having to buy a new product to rent to somebody else. So a lot of the inherent benefits, I think people are just starting to open their eyes to. But normal, I guess it's a new normal. Web orders are through the roof, doubled from last year, like we said on our earnings call last week, do a lot more business on the web, and people are shopping. They're just shopping from home a little more than they were, but demand is strong.

Okay. Perfect. And yes, I appreciate the discussion about the stability due to the portfolio nature of the business. So I guess if we look for the next -- through the rest of the year, how do you -- what are the variability in the way you can play out? And when you think about, say, the bull case, that looks the opportunities here versus the bear case? Is it fairly stable in your view about how it's looking like for the rest of the year?

Yes, good question. I think that the -- we have a seasonal dip usually in the summer. I don't know if we'll actually see that dip today. But I think the overall Street estimates are -- have a pretty normal in the second quarter, just like we talked about, a little bit of a dip in the third quarter because it's seasonally usually the lowest quarter for us in the summer from a revenue standpoint. But also as we bring back furloughed people and build a portfolio back up from the little bit of drop it had early on when coronavirus started shutting the places down, you got to build that back up. So you have a little bit of expense ahead of the revenue. So a little bit of a dip in the third quarter, but I think the -- on average, I don't know about every individual one, but on average, the Street estimates, we think got it right as a portfolio business, second quarter, we've guided pretty close to. And then the third quarter is seasonally a little low. And then when you think about the expenses coming back in, some of the furloughed expenses coming back in, in some cases ahead of the revenue, then you have a little bit of a drop in the third quarter until it's back up in the fourth quarter. Now so you do already have that drop built in. Most of the analysts have that drop built in, and that's about as bearish as I could be. On the bullish side, it's -- the demand is strong and there's a lot of pent-up demand as the retail partner stores open up. The retail partners are looking for more alternatives as lenders above us tighten up; we're already seeing that. So the bullish side is just doing a lot more business and doing even better than the numbers that are out there today.

Okay. That's helpful. So there's a typical third quarter seasonal drop in revenues. It sounds like since we're in, I guess, a new situation if things start to open up more, we could -- we could see some of that pent-up demand just drive incremental third quarter for sales. Is that kind of the bull case? And it sounds like that's pretty comfortable place to be actually?

Yes. I think that is the bull case. We don't want to predict it. We're not predicting it on this call. I'm just saying that we normally had a little bit of a drop. It seems like the average of the Wall Street has that built into a little bit of a seasonal drop, and there's a chance that we get better than that based on the new normal, which is more shopping for the home. And think about looking for flexibility, I mean a lease-own transaction gives you that flexibility where you can return at any time. So if you're looking for something for the home and you're looking for flexibility, the lease-own transaction is the way to go. We feel like we have the best value proposition out there for -- compared to our competition. And we're already seeing more new customers. We talked about the -- on our call last week, our web order volume is double, but here's a real important stat: The level on the Rent-A-Center side doubled from last year. But the new customer mix in their -- the percentage of new customers that are in there has held. So that means it's not -- we haven't doubled because our regular customers are sitting home using the Internet instead of coming down to the store. It's doubled on new customers as well. So it's a really positive sign from our standpoint.

Very helpful. So we're at the 15-minute mark. Elaine, if you wouldn't mind calling the line for live questions.

[Operator Instructions] We will take our first question from [ Aditya Bindra from Pinestones II ].

And appreciate all the color so far. I just had a question regarding the effect of stimulus and unemployment on your customers. As we kind of grow further this summer and we get to a segment maybe where some of this starts to wean off, how much do you think that's going to impact your average customer? Did you see any uplift on maybe weekly data around the time the net came out? I guess just how aligned do you think your average customer is on these tacticals?

Good question. First, on the stimulus side, it certainly helps -- from a demand standpoint, it helps people pay rather than having to return the product. So -- but mostly, it's helped on the demand side. And so I think that's a good thing, obviously, for us. If that runs out, and of course, we're going to see a lot of it all summer as paper checks go out, which is a lot of our demographic that didn't have their bank account on file. The -- so I think that's all good. It's been a positive impact. I think it will continue to be. But even after that, when you think about unemployment, we -- we have -- well, I guess the way we said it last week on the call, the cash and credit constrained customer, our customer, we -- kind of lives in the recession all the time. They're always under a lot of pressure. They're not going to be impacted by the stock market being down 50% and being up 20% and all that kind of stuff. So they live check to check all the time, and we're used to that. Our customer's used to it. I don't -- we don't see the unemployment so far scaling any bigger at our customer level than -- and maybe larger at other levels. A lot of our customers are the frontline workers out there and so forth. So -- and as factories reopen and things like that, I don't know that it's going to -- it's not going to impact our customer. We don't believe -- it's not impacting our customer more than other demographic sets. So we don't see an overweight there. Certainly, the supplemental unemployment helps. But again, we've been through recessions before, and our average payment is $25 a week for a product, whether it's a living room group or a TV or a washer dryer or an essential item for the house or a laptop, so you can -- the kids can do their school work or bunk beds for the kids' room and so forth. And again, the average payment is in the $25 range. So this isn't like you can't afford it because you're on unemployment. People are on the supplemental unemployment. And again, you can return it any time; we just rent it to somebody else. So we've got a program, some of you've heard us talk about in our structure now called Benefits Plus, where if the customer becomes unemployed, they pay a small fee every week to have this add-on program. There's a lot of benefits in there. One of them is the unemployment benefit and eligible customers can file for that. It's underwritten by AM. They then pay us directly for the product and the customer doesn't have to come out-of-pocket for those payments for as long as they're on unemployment. And we've seen a spike in those claims, but it's not off the charts. It's not like 20% of our customers are unemployed. It's not like that. So we're not seeing a huge impact there. That program certainly helps them, the ones that are unemployed. But again, a lot of our customers are the frontline workers and people that are working a heck of a lot right now. And I don't mean frontline just on the hospital side or things like that. But you think about the Walmarts of the world and the grocery stores and retail reopening, and those are our customers, and restaurants are now starting to reopen. So we -- again, we go back to the way we performed in 2008 during the recession. The biggest recession we had seen before this one, we performed very well. We didn't have a spike in losses because, again, it's not a loan. Maybe sub-prime customer, but it's not a loan, they can return it, we rent it to somebody else. So stimulus is good for us, the supplemental unemployment is good for us, but we don't see it going bad when that runs out either.

[Operator Instructions] For your information, we have no questions in the queue at this time.

We'll look at -- actually have a couple of email questions. But on the -- I guess, maybe a follow-up on the stimulus question, but did you see a lot of, I guess, incoming sales due to stimulus? This one question that an investor has is just a pull forward of demand maybe from future quarters because as soon as other people were bookmaking so payments on their ends.

Yes. I don't know if I'd call it hopeful. It helped a lot of categories. It helped people make the payments, it helps. And of course, it's still going out. And I don't think more than 60% or 70% of it's out yet. So it's still going out. But -- so we don't see quite that short term. It certainly helped people make their payments. It helps a few people -- you get a few more people paying out their contract, but then it helps demand to offset people paying out their contracts. So more money on the street, so to speak, is always good for us, whether people buy out their contracts. And most of you know, we re-rent to a high majority of our customers in the 70% range that come back and get another product from us. So we've got a lot of different products for the home. And even when stimulus drives a little, it does a couple of good things. It drives more revenue as people buy out their agreements -- as some people buy out their agreements. It drives a lot more revenue as people make their payments, and -- but it drives a lot more demand that makes up for those payouts as well. So we don't see it as something that we're forward -- the other shoe is going to drop on that money. And it's not in the way we performed during past recessions.

Okay. Great. Another investor question about maybe comparing what we're going through today versus the prior recession of what you're compared to different experiences. And any sort of data points that we should be paying attention to, to kind of track where we are in this recession on your performance.

Yes, good question. I think the model is still the same in the fact that the customer can return it if they can't afford it. And that keeps the losses from blowing up on you. So it's still not a loan. I think one of the things compared to 2008 recession is with what we've done on the Preferred Lease side, I think there's going to be more demand on the retail partner businesses as they look for alternatives to lenders tightening up, and we weren't ready for that in 2008. It was a brand-new business for us in 2008. So I think we'll be more ready for that to take advantage of retail partners that need pre-sell in their stores as financing tightens up. So I think that's going to be the biggest differences on the opportunity on the Preferred Lease side.

One thing to add on that. I think as far as benefit versus the financial crisis, we're in a much better position with our digital capabilities, our e-commerce is a significant portion of our business, and that's seeing tremendous growth during the shutdowns. So that's just our digital capabilities in general as well as our variable cost structure, I think the 2 favorable benefits versus the Great Recession that could have been a positive position.

Yes. It's good. Okay. Good point. Next, e-mail question, and this is sort of just describing the business question. So this investor is asking what's the various time of rental. How the percentage of the product that's eventually purchased and the percentages returned? And I guess, how much of your revenue and EBITDA is from a second or third rental?

Yes. See if I could keep track of all that. I don't have all those numbers in front of me. But the average rental time is in the 4- to 5-month range. Of course, it goes from as little as a week up to ownership, which I think the average contract right now is somewhere in the 16-month range; of course, you can buy it out early. So the average is 4 or 5 months, so gives us visibility out that long, pretty much through the summer. The numbers haven't changed much on the ownership levels and the net's all in our K, but off the top of my head, on the Rent-A-Center side, it's in that 35% to 40% range that will take ownership. So it takes 2 or 3 rentals on average. Some are 1 and some are 3. But it doesn't -- it's not in our system a long time. Average product is only in our system about the 16 months I mentioned, even with multiple rentals. So we don't have aging inventory. On the Preferred Lease side, a higher percentage take ownership, more in the 70% to 80% range take ownership on the Preferred Lease side because, again, that's a little bit different customer. It's a customer that came in a retail store wanting to buy something, ends up in a lease-own agreement but takes ownership at a much higher level. If they don't take ownership on that side, we end up rerenting it into Rent-A-Center store. So we've got a great outlet for anybody who doesn't think of ownership on the preferred B side.

Okay. Great. So next, I think if you can maybe discuss the sales that you've generated in more detail. So if you could -- and actually with e-com being one of the biggest things. So e-com has certainly helping quarantine times, something that you focus on since rejoining. I guess how -- maybe if you could talk about even more detail, how you're able to stand it up quickly? And how do you find your e-com customers, especially -- particularly new customers in this environment?

Well, the e-com is important for any business in these cases and ours is no exception. We've put a big focus on it. We get -- a lot of our orders come through e-com. We've got [ extensive ] benefits. One of our biggest benefits, if you think about the e-com business, because we've got 2,300 brick-and-mortar locations out there. And we -- they do the final mile. So you put your order in online and the store delivers it and then manages the account and picks it up if you ever want to return it. So we've got final mile built in. So when you think about it, e-com, e-com is not as an expensive proposition for us as it is for traditional retail. On traditional retail setting up e-com or I talk to retailers who, "Oh my gosh, my e-com business is through the roof these last 2 months," they have to add infrastructure. First thing they have to do is, "How am I going to deliver all that?" And what else? The distribution is the biggest problem. And infrastructure cost comes ahead of it. With us, we've got the infrastructure; it's our stores. So it can grow -- it's double right now what it was a year ago, and -- which is no surprise based on the people shopping from home. And we haven't had to add any infrastructure for it, for that part of the business doubling, because the stores are already there. So if anything, we're doing it with less labor right now, which is why the second quarter forecast is at the 10% or less on the revenue side, then so it was 10% or less on the profit side, too, because we actually doing it with less labor. So very positive stuff there, very high concentration of new customers, somewhere in the -- from a new customer standpoint, it's more than 1/2 of our e-com orders that come in our customers we've never seen before, and that continues. And even though it's doubled from a year ago, the number of overall orders, the percentage of new customers has also -- has maintained the same percentage. So that doubled as well, and it's more than 1/2, much more than 1/2 of the customers coming in. More like 2/3 of the customers coming in are new customers on the e-com side. And that's held at 2/3, even though the overall has doubled. So as you can probably tell, we're real excited about that.

Right. That makes sense. And 2/3 of new customers coming through e-com, that's -- new customers on e-com is really impressive. How are you -- in this environment, how are you able to source those customers? Is it marketing us your optimization? Or I guess, that's a pretty impressive number to be driven by quickly with any thoughts on how you're able to do that successfully?

Yes. That's a good question. And a couple of answers there. One is, lease-own is still relatively unknown. We -- just like you asked at the beginning of this call, so there's some people that aren't familiar with it, so go ahead and explain it. Well, we've been a public company for 25 years, and there's still people who don't know what we do. And the Wall Street side, it's the same thing on Main Street. There's still people that don't know the lease-own transaction. And there's a tremendous opportunity there to add new customers. And how we do it, it's mostly these days. One of the things I do -- when I came back in 2018, when I came back to the company, as you know, Vincent, I brought back a CMO that have been with us for a while before that. I brought Ann Davids back. And she's really gone down a digital path. And you won't see -- there's a little advertising that you'll see, whether it's radio or television or some print materials and so forth. You might see a little of it. But it's mostly digital, and so it's much more targeted to that customer base. Awful lot of search engine optimization money we spend, all kinds of ways to spend money digitally with that customer. Just like any other company, we know where that customers spend and you use cookies and so forth to tell all about our transaction and so forth. So it's very targeted and very digital. It's how we're driving it.

Okay. That's very helpful. And just talking a little bit more about sales in this environment. So it appears that certain accommodations on the stores like the curbside experience and the [ tractors ]. It doesn't seem that that's impacted business that much. I guess I'm trying to think about demand versus some of the questions that we hear. Are you seeing more than that? Or is the adjustments that you had to make to the business, it's not materially impacted the customers who are doing business with you or want to do business with you?

Yes, another good question. I think -- think about it this way, Vincent: we were able to maintain full operation in 75% of our stores. And even though we can threshold deliveries, we don't go inside the home yet. But, but still, you could go in the showroom and no social distancing and there's some states where there can only be a certain number of people in there and so forth. But we're a small box retail. So we never really had much a problem with that. So, so if you think about 75% staying open the whole time as an essential business, the other 25% with the showroom block and only doing phone orders and web orders and so forth, that did affect -- that does affect demand in those. And that's why it's good that we're down under 20% now as far as the stores, mostly in the Northeast, New York, Massachusetts and New Jersey. But that's good as that number goes down. So the demand is impacted there. But if you think about the 75% that are open with extra demand, that's the way to think about it. When you say, "Well, how could you close showrooms and not have any deterioration in demand?" We do have deterioration in demand in those stores in the closed showroom, but made up for in the ones that are open, and you end up coming up pretty close to even.

Okay. That's really helpful. On the Preferred Lease side and maybe tying that on Preferred Lease, I guess, how much of your business is coming from e-com on the Preferred Lease side? On both Preferred Lease and the Rent-A-Center business, how much -- I guess, we're at a new moment now, but how big could we -- could the e-com business get as a percentage of your overall mix?

Yes. Right now, on the Preferred Lease side, the e-com business depends on the retailer because a lot of the retail -- a lot of the e-com business comes through the retailer, like one of the furniture chains we're doing business with. 30% or 40% of all the business we do with them is their e-com. So it can be a high percentage there. We're not yet in any retailers that are e-com only. So it's a percentage of the business with everybody we're doing business with converting almost everybody. And then -- and straight e-com with someone that doesn't have any brick-and-mortar, say, Wayfair or somebody like that. We're not in any of those just e-com retailers yet on the Preferred Lease side. But it is in that 30% to 40% range, probably 30% is a better average, 30% range for the retailers we are in that the business starts either on their website or on our website. And then how big can that get? I just think the percentage is going to move over there. I think there's going to be great growth in general with our retail partners from a lot of areas, primarily, the lenders tightening up above us, number one. And number two, the products for the home. Because I think you're going to continue to take share. Do you think purchases for the home are going to take share from restaurants and travel and some other categories for -- probably until there's a vaccine. So for another couple of years, I think, products for the home will continue to do better than most products and more of that percent will come from e-com. On the Rent-A-Center side, I just think it's going to drive -- continue to drive even in a mature business like that, as we've talked about low single-digit same-store sales as that part continues to grow. Even as the traditional brick-and-mortar part of the business is flat or even down 1 or 2 points over the -- if you look 3 years out, like traditional retail would be -- when you look at the e-com side, we're very comfortable saying we'll maintain positive same-store sales, single-digit, low to mid-single-digit same-store sales for a number of years, and it's because of the e-com side.

Okay. That's really helpful. One of the e-mail questions I got, so I'll just read this out. I guess, if you could talk about how you execute a lease-to-own e-com with your retail partners? Are you like I guess, maybe describing the process, is it like a quick-to-ship process or the people that go through the store. So maybe if you could just describe e-com for Preferred Lease.

It varies on the retailer. In some cases, it just flows. If they put an order online, it will just flow through and be transacted like any other e-com program. They don't have to leave their home and it gets delivered by the retail partner. And we can do the lease-to-own agreement over the -- over the Internet, so to speak, and DocuSign and those kind of things. Other retailers, the customer has to come in the store to pick out the product. It just depends a lot on the retailer on whether they have to come in the store or not. Almost every retailer can pick the product out and start the order online. But then depending on the retail, you can either finish it online or come into the store.

Okay. Very helpful. Let's -- I'll pass here, and Elaine, if you could pull the line for questions again for our live Q&A.

[Operator Instructions]

Okay. There are no other questions on the line. I'll just continue on. Like, maybe next, if we could talk about on the credit side and the reserves side, just your expectations that you have in your guidance when you go into second quarter, when we think about the rest of the year, if the economy gets better or worse, even if it gets somewhat worse from here, should we be expecting much of bad debt expense beyond what you already are forecasting as we reserve for the second quarter?

Yes. I can take that. Sure. So we did build in some modest increases in the skip stolen reserve in the second quarter, just based on our collections and what we're seeing there and anticipating some increases in write-off, not significant write-offs. And for the full year, expect the same situation: modest increases, but not significant increases. And that's mainly due to what Mitch mentioned earlier, is the fact that we're not a sub-prime lender; we've got the collateral of the product that we can -- what the customer can return. And so when they bring back the product, we rerent it to other customers, and it doesn't result in an inventory write-off. And these are noncash inventory write-offs if a customer decides to keep the merchandise, stop paying us and we lose contact with them. We saw a very stable bad debt expense or reserves for skip still and mocking in the financial crisis, the recession, and so we expect a fairly similar situation that the customer can always return the product and they generally work with us to do that. So just a minor increase in losses in the second quarter, but nothing material.

Okay. That's helpful. And could you talk about -- so understanding that generally, there's no losses because the customer can return the car. If you could talk about how the return process works? And is that in a way, I guess, impact the P&L at all in terms of maybe depreciation or some other factor to the P&L?

Yes. So it doesn't -- sorry, Maureen, I was just going to talk about how we do the returns we can get it in the financial part. But it's a -- if a customer wants to return it, store picks up, cleans it and then rerents it to somebody else, and it affects the revenue, but we -- our revenues basically is on a cash basis with some accrual at the end of the month and so forth for payments. But it's -- it cuts off the revenue stream, but there's no write-off or anything like that because it's not a retail sale. We maintain ownership of the product. It gets returned. We rent to somebody else and pick up the revenue stream again and helps cash flow from the standpoint you don't have to buy another product. It doesn't mean we want returns. We'd rather have the revenue stream stay out there. And we'll go ahead and buy another product. We've got plenty of cash to do that. But there is an offset that you get to run to somebody else and not have to buy that product. So -- I'll let you answer the depreciation part of that line.

Yes. So when we book a reserve for skip stolen losses, it does hit the P&L, and it's included in the skip stolen losses that we talked about in our earnings call -- on our earnings call, it was 3.9% in the Rent-A-Center business in the first quarter and 12.2%. And those include any reserve adjustments that we make within the quarter as well as the actual skip loan losses in that quarter. And so that flows through other store expenses, so an operating expense on the P&L, depreciation is taken throughout the rental term and is not impacted by the skip stolen losses. It's just the portion of the product that we write off each week that we're renting the product. So when you bring back returns like Mitch mentioned, we rerent that product. There is almost never a need to write down anything as far as off the [ license ] or we have -- occasionally, the product comes back where it's not re-rentable, but that's a very small portion. There's not a lot of absolutes in our business. If we do get quite a bit of product back, not that we expected but we have every assurance to be able to rerent it based on what's taken place historically.

Okay. Great. That's really helpful in the financials. In this environment, are you seeing a lot of demand for used or return products, I guess? So to your point earlier, Mitch, I think some people have been maybe worried about there being a high level of returns. But maybe given the performance that you've seen so far, it sounds like maybe there's a lot of pent-up demand even for used products. So if you could maybe talk about the velocity of returns you're seeing versus actually the demand that people who want those returns lease those returns?

So if you think about the products, and you think about what we rent there for the home, mostly being essential products. And of course, essential, we can say they're all essential because that's the eye of the beholder category. But certainly, appliances where they're essential, computers these days are essential, even televisions, most people would say are essential to stay in touch with the world. Is a living room essential? I suppose so. I suppose sitting on the floor would not be very good. So a lot of essential products, who wants to return those things? If they're going to spend more time in the home, why would there be an influx of returns? Well, if they can't afford it, is the answer to that. ? Well, why wouldn't they be able afford it? The average payment is $25 a week. So it doesn't take much even on unemployment. Even without supplemental unemployment, we have a lot of people on a day-to-day basis paying us that are on unemployment. So this isn't where they got to return it because the ticket is so big, they can't afford it. So we're not seeing the increase in returns. And I think people will -- now obviously, money can get tight. It's always tight in our demographic, lower middle-income demographic. So why do they rent in the first place? I mean they need stuff for their home. These are essential products. And they fight hard to keep up with their payments rather than return it, and it's no different now. And then when they do return it, to your point, Vincent, we got people that want a used product. You go into one of our stores and a new living room group, the 6-month same-as-cash price might be [ $9.99, $11.99 ], something like that. And the used will all be $699 to take its ownership or something like that. So it's a better deal for the used products. So we've always been able to rent used product even sitting next to new product because it's a better deal. So for every customer who says, "No, I got to have brand-new -- I need a brand-new TV. It's got to be in the box and delivered to me." That's fine. The next customer right behind them will say, "I can save $300 if I think that one. It looks brand new." And you say, yes, you could save $300 if you take that one. So because we've already depreciated down the way Maureen's talked about. So there's always -- it's always been needed to rent it because people are always looking for a deal as well on the used.

Okay. That's really helpful. One of the things you touched on, and I think it's a differentiator for Rent-A-Center, is that Benefits Plus program and I think that's perhaps underappreciated. If you could talk about maybe how many people are using those are unemployed and how much of your performance is better because of Benefits Plus?

Yes. I think it's a good product for us. It's a product that has a lot of benefits in it for the customer. They pay a little bit weekly. We -- it's a good fee for us where we're -- under any circumstances, we pay a percentage of that fee to a subsidiary of AM so they underwrite some of the benefits like an APB or some of the insurance benefits that are in there, including unemployment insurance. So if the customer gets laid off and they're laid off, I think it's more than 2 weeks, they got to be laid out for 15 days, they show us they file for unemployment and so forth. And if they get all the eligibility requirements, then they would be and would pay their rental payments up to $1,000 in the aggregate until they're back to work. So it helps. We've seen a lot more claims come in these last 30 days, not -- it's not 20% of our customers or anything like that. It's actually surprised us that it hasn't been more. There's a spike there, but it's not -- and it's helpful, and it will be helpful -- and then we're starting to get the money in from AM and it allows people to keep the product. It's a nice supplement and helpful but it's not like it's holding up the business at 10% level or anything like that. So we have it. And it's helping some. But a lot of things are helping us.

Right. That's a lull. Let's see, maybe if you could switch to the expense side. So it was nice to see that your EBITDA expectations for the second quarter unit, your revenues are down 10%. EBITDA's down less than that and EPS is spot-ish year-over-year. If you could maybe talk about your -- how you were able to -- if could talk about the variability of your expenses and how you're able to kind of flex that if needed more going forward?

Well, you think about our 2 biggest expenses are product cost and on our P&L of that depreciation that Maureen was talking about. As products are on-ramp, we depreciate the product. That's our biggest expense. And the second one is labor. Almost as big, for that matter, is the labor side of the transaction. And then the least owned business, if you think about traditional retail, where you sell a product once and you make your margin. In rental, we talked about this earlier, on average, we rent every one of our products 2x or 3x. The margins are higher, the gross margins are higher than traditional retail. But there's a lot of expense in transacting it because you're making your money, $25 a week or on average -- the average product is in our system for, call it, 15 months. So it takes you 15 months to get your money out, which is at a higher margin, so it's worth it, but there's also a higher cost than the traditional retailer. Well, we've made it a very variable cost structure in that, if we don't need as much labor in the store, if the volume is down or in the case of those closed showroom stores, where they're running at about 70% capacity, we're able to take the labor out and furlough those employees. So we can do that and we call them back when we need them. So -- and any circumstance, even without furlough, we can now hire and reduce staff when we need to, based on the volume. Same thing with our trucks that do the delivery and the returns. Not every store has to have the same amount. Some stores have 1, some stores have 3 trucks. So it's variable all the way through it. We're getting help from the gas prices when we think about expenses as well. And we've got a lot of delivery trucks in -- out there doing deliveries and returns so -- in our Rent-A-Center side. So the deliverers, the biggest part is variable, and we reacted fast in this occasion. But we'll also bringing people back fast too to take care of the demand as those stores reopen the showrooms or as retail partners open up. It's extremely variable on the Preferred Lease side in that it's really a sales kiosk, the ones we do staff, and we've got the contact center, which you can expand and contract, just like any call center or contact center, whatever you want to call it, you expand and contract very efficiently in those kind of businesses. So Maureen, I probably forgot a couple of points that you could add to what I just said on our cost structure.

I think you covered the main topics. I mean there's other expenses that are always variable that we didn't have to change operations to make it variable, things like credit card fees, service expenses on the wear and tear of the product. Gas prices you mentioned, and just the fact that being less -- production runs that makes it more variable. But I would also say that one of the things that Mitch brought back is just a culture of trying to be as efficient as possible as an operation. And as everybody, I think, is aware, we went through transformational effort to reduce costs and pulled out over $150 million of expenses a couple of years ago. And we still have that money set internally that we want to make the most of every dollar that we spend.

I think a lot of it, when we went from 2 years ago, overall, if we've gone from 1,000 people to the office of the FSC to 5 50 or something like that. And then we go into something like this. A lot of it is not just cutting jobs. It's focus. What are the priorities? Let's make sure we don't have projects going on that if they don't move the needle a certain amount, we don't do them. We don't wait forever on something that may or may not pay for itself. So we go into something like this, and we're able to cut probably in the 20%, 25% -- I think it was about 25% on the FSC, and it gets focus down to the things you really have to do versus things that people like to do.

Okay. And actually, I just got an investor question on that, and it's on the ability to bring back your employees from furlough, how quickly can you do that, particularly given unemployment benefits are so strong now. So the investor's commenting it seems like there's a lot of growth opportunities going into the rest of the year. How quickly could you ramp back up if you need to and get your employees back just given you're competing with unemployment benefits?

Yes. We're in the process of doing that as certain states reopen and we get some of these deal. We've gone from 25% of our stores now closed room down to under 20%. So we've had to call back some people. A lot of retail partner stores have reopened for sure. So we've had to recall people. And we're having pretty good success. It's not 100%. There's some people that will take the short-term because the unemployment is higher. But it's at a high percentage. And that -- I don't have the exact number, but 3 out of 4 coming back when we need them to something like that, 75% or 80%. So we're not seeing a big problem with it -- with that. And with the unemployment rates being what they are, if only 3 out of 4 come back and you have to hire another one, they're certain to find people to higher. So I don't see that as a -- we haven't seen that as an impediment.

Okay. Great. I guess, maybe the last few topics if you can focus on your cash flow and your capital. So it's -- maybe you could talk about how your cash builds over time and particularly the -- so second quarter sequentially, you're guiding the cash flow is increasing. If you can talk about that dynamic and how you think about it, Maureen, for the rest of the year?

We're expecting cash flows to increase sequentially in the second quarter, primarily due to lower inventory purchases. So working capital benefits from the pressure we saw on the top line from some of the closures with the impact of the virus. Typically, the first quarter is our highest cash flow quarter of the year. Given varying tax refund season, a lot of customers use that money to buy out of and take ownership of their agreements. So this is a little unusual that cash flow will be even higher sequentially in the second quarter. But I think it's reflective of the strong performance that we're seeing with demand and then the swift actions that we took to reduce costs that will help generate sequential increases in cash flow, along with the slightly lower demand and some of the returns that we're seeing will allow us to buy less inventory within that quarter.

Okay. That's helpful. When you think -- obviously, your cash flow position is strong, I'm wondering if the rest of the industry is as strong and if you could -- maybe we might see consolidation in the rent-to-own industry from some of the stronger places such as yourselves. Maybe if you might be interested in consolidating. When you think about franchise partners, sort of what's your thoughts on that as well. So if you could talk about maybe any thoughts on consolidation of the industry?

Yes. I think the -- on the Rent-A-Center side, I wouldn't see much there. There's not a lot of competition, 2 public companies with us and Aaron's. There is some regional players, but I think this is going to be good for everybody. So I don't know that I see much consolidation there. I think our franchisees will stay strong. I think on the Preferred Lease side because there's quite a few start-up retail partner businesses out there that even though that business is going to be strong, you got to have a balance sheet to fund it. And I think that's where there may be some contraction at some of the smaller regional retail partner companies that have started up and now suddenly, I don't know that if you have a couple of months of downtime and then you got to have more money to fund even stronger growth going forward, it's going to be tough for some of those without the balance sheet. So I think you could -- if there's any potential for anything, Vincent, I would say it's on the retail partner side of the business. And of course, that's one advantage for us. The biggest advantage for us on the retail partner side of the business is that all these other companies and especially the start-ups and even the bigger ones that are out there do business the same way from a virtual standpoint and our advantage is we have what everybody else has from a virtual or an e-com standpoint. But we also will staff to supplementally staff location if there's enough volume there. So retailers like that. But even more important than that, we do business with unbanked customers. You don't have to have a bank account to get approved by us. We're used to doing business with unbanked customers. We do it in the Rent-A-Center side every day. So we do approve unbanked customers on the staff and virtual side. They can pay other ways with Venmo and things like that. So it's a big advantage. The 2 big advantages we have is the fact that we'll staff the stores, we'll supplement the staff if we need to or if there's enough volume to do it and the retailer wants us to and there's enough volume for us for it to make sense to us. And number two, as we do business with the unbanked customer, I suppose, to your point, Vincent, #3, it's the balance sheet would be the big advantages we have on the Preferred Lease side.

Okay. Great. One e-mail question I just got. What do you think -- how should we measure what you think about your excess capital position? And any thoughts -- I know this environment's tough, but any thoughts on your dividend and share buybacks?

Well, we did -- we just did the second quarter dividend at our normal rate. The cash flow is good, like you mentioned; liquidity is good. So once we got past the initial shock of coronavirus and places getting shut down, it became obvious to us that we could certainly continue the dividend. Maureen mentioned cash flow even being stronger in this quarter. So we just did that. And obviously, every quarter, the Board has to decide all over again. But if you look at our cash flow, kind of speaks for itself as far as that goes. Share repurchase, we did some in the first quarter. Now is not the time we're thinking about share repurchase. As we move forward, we want to reinvest in the business. There's going to be a lot of demand by a lot of product and the dividend's a pretty big percentage of our stock price. You think about the yield on our dividend, we're putting quite a bit of money back in the pockets of our shareholders.

All right. Agree. Okay. Mitch, thank you for that. Let's -- Elaine, if you could poll one last time to see if there are any live questions on the queue.

[Operator Instructions] For your information, we have no questions on the telephone at this time.

Okay. Well, with that, at the end of the hour or so, I will cut it there. Mitch and Maureen, thank you very much for your time. Really appreciate it, and I thought it was very insightful. Everyone on the call, thank you for your participation and for asking questions and for listening. Hope everyone stay safe and feel free to reach out if you have any additional questions. Thank you very much.

Thanks, everybody.

Thank you.

This concludes today's call. Thank you for your participation.