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

Hi, everyone, and thank you for joining today. I'm Jason Haas, and I cover retail hardline and lease-to-own industry here at Bank of America. I'm very fortunate to be joined today by the management team from Rent-A-Center. We have Mitch Fadel, CEO; Maureen Short, CFO; and Jason Hogg, EVP of Acima. So thank you all for being here with us today.

So to get started with questions. You recently announced the closure of your acquisition of Acima. Can you talk a little bit more about the rationale for making that acquisition and how the integration is progressing so far?

Sure, Jason. I'll start with that one. Thank you, everyone, for joining us. The reason for -- the rationale for it was relatively simple from our standpoint. The white space available in the retail partner business for lease-to-own that's just so vast, such a big opportunity that we wanted to get into that business. We were getting into the virtual business. We've had our legacy brick-and-mortar business. We've had our e-com business over there. We had a staffed kiosk version of lease-to-own for a retail partner. We wanted to get deeper into the virtual business, and we were developing our own programs for that. Bought a small company back in 2019 to give us some platform. It's just that when we looked at Acima, it held us up a couple of years to feed to market bottom line. So big white space and this can get us [ there ] a couple of years faster because they have so much of what we're going to try to develop and best-in-class in the things we looked at and we could -- and then we bought it at the right multiple. So it was -- for us to want the company was a no-brainer. And then when we could buy it at the right multiple, the right mix cash and equity, it just all came together. As far as the integration -- it's going very, very well to answer your question, Jason. [ Hogg on our ] end is handling it, and he can speak to it in a second. But what I would say about it is that because we were just barely in the virtual space, this is a very complementary acquisition for us. So it's not like -- it's not a heavy integration. It's mostly a little bit of us migrating some of the stuff we were already working on, putting it into their system and more of a migration into their system than the heavy integration. So it's a complementary acquisition. And again, pretty light integration. So not one of those where there's a heavy, heavy integration risk.

Thanks. Could you talk more about your plans to leverage Acima's decisioning capabilities. From your latest call, it sounds like that will be a big part of the integration process or a big benefit of acquiring Acima. So any more color on really what their secret sauce is, would be helpful.

Sure. I'll take that one. Having done and been in the payment space for decades now, Acima truly does have like a best-in-class decision engine. And when you look at a lot of different technologies like I have over the course of -- especially just even in the past 5, 7 years with machine learning, AI coming on board, there's a few kind of very unique characteristics. First and foremost, they have an incredibly sophisticated two-part decisioning engine that utilizes about 25 independent data sources. On one side, one part is the fraud prevention tools, which are fantastic. And on the other side, is the underwriting. And they've been able to pull together over the course of, call it, the past 7-plus years a phenomenal data set with regard to what the performance is on leases, what's good, where risks are, and they've been able to calibrate that across a multitude of verticals. And -- so that's been incredible. The fun part for us and where the combination really takes off is in the fact that, one, we're now able to share our learnings and data sets. And so kind of teaching up the model even more and providing a broader array for the model to get taught. And then the second thing is, as we start pushing into more e-commerce based businesses and other form factors because we're trying to curate an ecosystem where our consumers are very consumer-centric versus a transaction-centric ecosystem. Our consumers will be able to move fluidly in between mobile origination, portal based in-store. We have a browser extension that's currently in testing, and we've also talked about a marketplace and the decision engines, ability to work across those form factors and also from an e-com perspective, is going to really give us a fantastic advantage.

So you just touched on it, but I did want to ask for more color on those investments. So I think you mentioned the 3 that I was going to ask about; the mobile application platform, browser technologies and also the marketplace that you've talked about. So either for Jason or Mitch or -- yes. Just any more color on sort of like the next -- where the next phase of growth is? Where those investment dollars are going?

Yes, I'll jump in on that. So our -- the way we look at it is, you have to pull back, first of all, and we've spoken about this. We've spoken about this a number of times over the past couple of quarters. We've curated a list of over 50 million consumers. And we look at there being between $50 billion and $100 billion of open-to-lease capacity across that consumer base, right? And it's tied up because the current lease-to-own kind of ecosystem is very much kind of focused on either pure e-com and/or store, and it's very difficult to move fluidly in between. So our mobile application that has been in test since the fourth quarter does a few things. Number one, it enables us to radically reduce our origination times. You only need to fill out 3 fields to get going. One is your [ last 4 digits of your social security number ] and then you just set up an account with your e-mail and a password. And you're then -- we're able to render a decision and then the consumer is able to go. But the second thing is it also then creates this portable real estate and this ongoing relationship with the customer, where we're able to continue to cross market and to create capabilities for the consumer to continue to spend. So we're trying to provide ubiquity of access to this underserved consumer segment. On the browser extension side, one of the other things that we found is that -- and this is something that's another proprietary approach, is that if you look at a lot of the competition that's out there, it's heavy in the integration. They're either having to integrate into waterfalls or integrate directly into the e-commerce site. And the proprietary nature of our browser extension and also, ultimately, our marketplace, is it doesn't require any integration. And we've filed a very robust patent suite, dating back over a year now, on how to do that, right? And so there's kind of -- you hear the different things. But what we want to do is we want to be able to curate this huge universe of retailers where our customers can go, and again, have access to be able to buy the goods and services that they want. And so the browser extension is now live and also in test. And we'll be coming out within the next few months with more on that with some results. The marketplace, the final one, is currently in the prototype and beta testing phase as well. And I think about it like an Affirm or a [indiscernible] for lease-to-own. And so setting up and providing access to this very important consumer segment that's traditionally been unaddressed and underserved. And so all of this is essentially enabling our consumers to just move fluidly between online and off-line transactions and provide them a greater choice of merchants in which to shop.

And Jay, and I would only add to that with the Acima acquisition bolting, which you just talked about, we've been developing now for a year, putting it on top of their foundation, their infrastructure, their back end, whatever you want to call it is, we're obviously very excited about that. That's just still complementary. We couldn't have written a script this way a year ago that [indiscernible] back-end to bolt this on to.

Yes, absolutely. If we try to draw it up, we wouldn't have drawn it up. We drawn it up this successfully. I mean, because everything I'm talking about is front-end, providing access, consumer-facing. And then now Acima has a beautifully integrated from origination, multiform factor, portals, online, mobile, text apply to their world-class decision engine I just talked about. And then from there, it's got a fantastic servicing platform as well. And so we're just literally now in the process of plugging in all the technologies, either proprietary technologies I described into that platform, which, by the way, is highly scalable, cloud-based architecture.

That's really helpful color. So sticking with the Acima business, how do you feel about your current pipeline of potential new retail partners? How is it impacted by the pandemic? And what are you expecting to see in terms of potential conversions this year?

Mitch, do you want me to take that one?

Sure. Go ahead, Jay.

Yes. So we are in the discussions. We've mentioned, we have innovation partners that we've been working with, with a number of national retailers, and we're in later-stage discussions with a number of national retailers as well. I think so we have now -- because we have the technologies that we're describing and the ability to kind of easily either integrate or provide access to those retailers, you're going to see an acceleration during this year because we've got that foundation now almost complete to be able to begin plugging in. So that's the first thing. Second thing is we've curated a robust pipeline, and you'll see other strategic partnerships that we are on the verge of announcing, one of which was recently signed that will provide a large ecosystem of access to big merchants in the states. The pandemic, which was interesting when you look at and Mitch can comment even better on this than me, but when you look at it, one of the nice things about the Acima business is it's so diversified that if we were able to bounce back kind of went through and weathered the storm, so to speak, of the pandemic incredibly well. And our retailers that we had on the Preferred Lease side prior to the merger also bounced back and came back incredibly strong during the second half of the year.

Yes. I would love to add to that, Jason. I think as far as the pipeline, keep in mind, we were working on big accounts [ and ] Acima was, so a simple way to think about it is 2 pipelines coming together in one. So obviously, that makes it pretty robust. Two teams come together as one and put their notes together, so to speak. So that makes it pretty robust in the first place. And then just back to the pandemic that Jay was talking about. When you think about the buy now pay later growing so fast, with the Affirm and those kind of companies and Afterpay and all that. Of course, you have to have good credit for them, but they are bringing buy now pay later in the small payments into the mainstream and that's what lease-to-own is for people that don't qualify for that higher [indiscernible] with a higher level of credit for Affirm and so forth. In the pandemic and coming [ out of ] the pandemic, the cash and credit constrained customer [indiscernible] going to be there for us. So just as buy now pay later becomes more mainstream, lease-to-own just follows the coattails of that becomes more mainstream for those that don't have 700 credit score or whatever.

And as we think about the 20% to 25% long-term revenue growth outlook that you've given for Acima to what extent is that -- is that based on -- or does it require new partnership wins versus seeing your existing customer base just to expand penetration within those existing retailers?

Yes. I'll start, and Jay, if you have anything to add. It's going to be a combination. They've grown much faster than that. If we keep growing at the pace they've been growing -- you've seen the numbers, Jason. I mean, they've grown much higher than that. We're trying to be conservative in our forecast. So it's still a combination. We probably wouldn't get all the way to 25% just with our current partners. So you'd have to add [indiscernible] but they've been adding on thousands a year. It really doesn't involve a large national retailer. If large national retailers will improve upon that 20% to 25%, so it's a combination really of a current -- growing with our current partners, some new partners, regional partners, some of the products that Jay was talking about with the mobile app browser extension in marketplace and then national and national accounts only will add on to that and make the number even bigger.

And then similarly, your long-term EBITDA margin guidance for Acima is mid teens. I did notice that the stand-alone business, I believe, is running at a higher, I have here, 18%. And there should be some synergies. So I'm curious, if I have those numbers right, that would imply either some conservatism or maybe just some offsetting cost of not baking in? So just any more color you could provide on long-term framework to that EBITDA outlook?

Yes. I can speak to that. So in 2020, Acima, as a stand-alone business, did have 18% EBITDA margins. And part of that was some of the benefits of the pandemic. They did have higher collections activity than what they had in the past, just given some of the higher credit quality customers that came into the portfolio and there were some cost savings initiatives that were onetime in nature that they took in 2020. And so it was a little bit higher than the run rate the previous year and the expected run rate going forward. We do expect synergies of about $25 million in 2021 and a run rate of much higher than that. We are -- we feel there is some conservatism in the synergy estimates. And so could we get back up to 18%? We're not building that into our model, but I think there's some potential upside there from the mid-teens guidance and longer-term guidance that we've provided.

So switching over to the Rent-A-Center business now. Could you provide some more color on the investments you're making to grow the Rent-A-Center's e-commerce business. There's been a lot of focus there from investors lately.

Yes. Good question. On the Rent-A-Center side, our legacy business, they've had, as everyone probably knows, really, really strong growth. I forget, off the top of my head, it's like 15%, 2-year same-store sales that we reported last quarter and with a robust portfolio. And most of that growth spend coming from e-com and -- over 50% last quarter on the e-com side and the e-com side just goes into that legacy business. And where we're investing there is really on -- to answer your question more specifically, Jason, is really on the user experience, speed, less friction. We put the automated decision -- put an automated decision on, so that it's much faster to get approval in seconds versus manual kind of decisioning. Soon, we'll switch over the Rent-A-Center business to the Acima decision engine projects that Jay was talking about, which will improve it even more. So speed -- it's a very unique situation we have in that e-com [indiscernible] stores. When I talk about user experience, the store does the final mile [ in other words ]. When I talk about user experience, what we're developing is something -- have developed. It's very unique in retail. In that, you go on a rentacenter.com and you order a product and pay for it online, your local store will do the final mile, but it's also -- when I talk about user experience, how much you as the consumer interact with that store is up to you. You can -- this was just added recently, you can do the whole transaction, never talk to the store, they're just bringing out and delivering. You can then make all your payments online and virtually, again, never talk to a store or you can talk to the store as much as you want. You put in your order, you -- the local stores handling it. It's not the retail situation like most retailers like Nordstrom. If you order some online, the store doesn't [ have ] to do it, right? They have a whole separate infrastructure. We only have one infrastructure. You order online, it goes to that local store and they fulfill it. They will set up the delivery with you and everything, and you'll decide how much you interact with. You want to call the employee in the store and say, "hey, I picked out this living room online. But I really -- I can't really tell if that table is dark brown or light brown from the picture and the person standing right next to that table in the store or in their store room?" So you've got that local interaction mixed with a best-in-class website user experience and the customer decides how much they do on their own versus using the [ store on the stores ]. You're not talking to an 800 number and somebody, you're talking to somebody a mile away or two miles away. So a very unique user experience, and it's just been going great. It's a big part of the growth over there.

That's helpful color and segues well into my next question, which is just on how you're thinking about the store base going forward? And specifically, I was going to ask about any potential for further refranchising?

Yes. When I say that about the stores with the final mile, our franchise stores do the same thing off of our national website. It's about -- in the U.S., we got about 100 stores in Mexico, but in the U.S., it's about 1,850 stores and then about 400 franchise stores, around 2,300 in the U.S. and another 100 in Mexico, like I said. But the 2,300 in the U.S., again, you're talking about 80% of the company owned. But the franchisees get the benefit of the website as well, the same way I just described it. And the -- specifically, the question is, is there an opportunity to franchise more stores. It's -- we're really in a great position, Jay. And the opportunity is there. Our stores are doing better than ever. Like I said, growing at 15% 2-year comps, 13% last quarter, just fantastic growth. Lease-to-own is becoming more mainstream. So the demand is there for people to buy our stores. We could sell a lot of stores to franchisees. On the other hand, we're 20% 4-wall EBITDA numbers -- over 20% 4-wall EBITDA numbers in those stores. So that we're not willing to sell very many more and trade off the heavy profit we're making now versus what you'd make in royalties. We've sold some [ source ] some markets, not every market was making great profit. So we sold some where we thought the franchisee could do better. We sell California last fall when we felt locally owned and operated would be better for the customer. And we weren't giving up anything trading off our current EBITDA for the royalty EBITDA. So I guess the short answer, Jason, is we could sell a lot more, the demand is there. But the numbers don't make sense, if they ever do make sense in a particular market then we've got that arrow in our quiver, we could go to any time and sell more stores if we needed to. Just right now, the math doesn't make sense on most of them. But if we ever need to -- it really provides, you might call it downside risk, if we ever need to sell stores. There's a big demand for our store right now. We could sell hundreds. We just -- the numbers are better keeping them in the way they're performing.

Got it. That makes a lot of sense. So sticking again with the Rent-A-Center business, I'm curious if you could speak to the competitive environment there. And if you anticipate any sort of pressure from the growth of virtual lease-to-own? And then just additionally, what you're seeing with regards to other, I guess, more traditional, lease-to-own stores out there?

Yes. I mean, the traditional lease-to-own stores, our competition has been been pretty much the same for a few years. There's not a lot of growth. And actually, our competitors don't have a lot of same-store sales growth either. We've got a lot of same-store sales growth, and have leveled off in our store count as well. So we're really happy with our growth there. I said earlier e-com is driving it. We're not seeing much change with our competitors, not growing a whole lot. In fact, they've been [indiscernible]. So we're -- we feel like we're in a great spot on that brick-and-mortar and the e-com business. As far as the [indiscernible] the way the growth is, is the virtual lease-to-own and we talked about that why [ we bought this team ] and so forth, but that's actually helping so far. That's still nothing, but help our legacy business in that as lease-to-own becomes more mainstream, people hear about leasing in a retail store, the more they hear about leasing, more they hear about smaller payments, the better it is for the industry in general. And it actually is, we believe, driving traffic in the Rent-A-Center business as well. Because when we are in a retail store or like the browser extension that Jay's talked about right now in any of our current partnerships, yes it's not like he calls 100% of people you present a lease to, people might get turned down for traditional credit. They hear about leasing, they're presented leasing, maybe for the first time in their life because this has not been a real mainstream product. Now it's a mainstream product. To hear about it for the first time, only 40% to 50% do it, whether you're talking about our product or any of the competitors' product in the retail partner space. So the other 50%, 60%, still leaving the store without getting your order fulfilled. Now we think we can improve on that. But you got a lot of people hearing about leasing not pulling the trigger that day, but [indiscernible] driving more traffic to Rent-A-Center as well. Do people get in their car and say, well, heck, if we're going to -- if leasing is our best option and let's look at rentacenter.com and put an order in there. And so forth. So just as we're growing the whole space, and we talk about omnichannel all the time, as we grow lease-to-own with retail partners, it's helping lease-to-own brick-and-mortar, helping lease-to-own e-commerce on the Rent-A-Center side and we're really putting this together to be complementary [ to book ] businesses. So we don't see it as competition as much as just growing the overall pie. And it's really helping Rent-A-Center at the same time.

Thanks. So turning over to the numbers a little bit. Could you provide some more color on how you're thinking about the cadence of comps through 2021? So your lease portfolio was up 10% at year-end. I know there's other factors involved in that calculation of comps. And I do know the compares get more challenging through the year. So just any color there on the cadence would be helpful.

Well, you're right, Jason. The portfolio ending 2020 around [ 10% -- little -- 10% ] ahead of the year before is a great leading indicator of same-store sales because it's a portfolio of business. And even though the comps do get tougher later in the year, and I don't think we'll keep running 13% comps, we believe we can continue in the mid single-digit range because it takes a lot of momentum in that portfolio. And it's not a retail business where we start a quarter 10% ahead, and we say, hey, last year, we had 12% comps. Well, that doesn't mean if you started the quarter with your portfolio 10% a year before, it doesn't really matter that you had 12% last year. You're heading towards 10% again. So I think the portfolio -- you don't start over any particular quarter. So you could be -- you're never up against that one quarter tough comp that you can't comp over because you've got a trailing portfolio, a trailing credit, if you will, of how you're going to collect. Our average lease runs about 6 months on average. So you got a lot of visibility. And even though they they do get tougher later in the year, it's not like we're going to drop off a cliff and go from 13 to negative 1. I mean, we may see -- we've talked about seeing more mid single digit in the long term, but we don't drop-off of a cliff like a lot of business because of that recurring revenue nature of the business.

Yes. Just to add on to that a little bit. As Mitch mentioned, we do have high expectations early in the year, given our portfolio balance. And then in the back half of the year, we're expecting flat. So we don't expect to go negative, but even though we're comping over significantly positive results from 2020 in the back half of the year, we still expect to be around flat or slightly positive.

Later in the year and for the full year, we'll be in that mid-single-digit range. And even going forward, we've said for many years, we believe low to mid-single digits is doable on an ongoing basis. So even if we get closer to flat later in the year, we're still going to be a good mid-single-digit for the year and then even going into 2022. So there's no huge drop off.

That's right. We expect e-commerce to continue to grow significantly. We were -- we ended the year around 22% of revenue in the e-com business and expect that to get to 30% over the next year or 2. So still continued low to mid single digit, same store sales expectation for the Rent-A-Center business going forward.

If I could ask a follow-up on that, the more longer-term outlook. It sounds like e-commerce will be a big portion of that. I'm curious if there's any other factors to think about in terms of maybe like store traffic versus ticket or maybe in terms of industry growth versus how much you're taking share? Just any other color on kind of how you've built up to think that comp rate is a good long-term target?

Yes. Good question. Besides e-com growth, I think we've seen our largest competitor talk about -- we've heard them talk about reducing the store count by about 25% over the next couple of years. So that's a win for us, a benefit for us. We see Acima in some verticals that we're not in, in the brick-and-mortar space. We've just added it. We're adding some of those verticals that we see do very well on lease-to-own. We've just added tires as a new vertical in all our stores. So between new verticals, less brick-and-mortar competition out there and the enhancements we're making to the website, I think those are the -- and then if you think about where is the consumer after the pandemic, the cash and credit constrained consumer, if you look at our history over 30 years, has always been there, it could shift. Some people will be better off after the pandemic. Some won't be any better off. Some will have worse credit. But we've always had that swing where as some customers come up, there's -- other customers might move out of the lease-to-own transaction down the road in a more thriving economy like what we saw in 2019, but that also brings customers up into the transaction. So we have the swing. We bring people up from the -- from one side or down from the other side, and that's just been a tremendously resilient business model and really no matter what the economy is doing, the model has been very resilient because of what I just said. It could swing to a different side in the tough economy. You get people pushed down into lease-to-own and in a better economy, get people pulled up into it from maybe even below it now, and it's been very resilient. And -- so when we think about all of that, Jason, we think the mid single-digit comp is something we can do for quite a while.

Sorry, go ahead.

I was just going to add in. The only other thing is on the business side, right? So just -- I know we're talking about core Rent-A-Center, but also on the Acima side, you look at all the factors that Mitch just talked about from a macroeconomic standpoint and the resilience of it. And now more than ever, small businesses need solutions, and they need to be able to be connected to large consumer bases and help to generate revenue. And that's what the platform and lease-to-own also provides. So it's really a dual platform with all the consumer aspects that Mitch just talked about as well as a business platform, right? So...

Got it. That's very helpful. And then I wanted to switch over and ask about margins. I don't know, Maureen, maybe you're best to answer this. But just how should we think about puts and takes for the Rent-A-Center business as we look at 2021 on the EBITDA margin side?

Sure. So we expect to be in that around 20% EBITDA margin range for the Rent-A-Center business. And the way that we're able to just have consistent margins with 2020 with some of the really strong margins we had is there's some offsets there. So we did some furloughs and cost savings initiatives in 2020 when the pandemic first hit. So those were onetime items that we won't have in 2021. But with the strong revenue growth and the same-store sales growth that we've talked about, we'll further leverage the business. And so we expect to have fairly flat, very strong EBITDA margins in that 20% range.

Thanks. So we're nearing the end of the session. So I just wanted to remind the audience, if anyone would like you can add a question, and I'll be happy to answer it. But I still have a few more here. We have time. So the next one is on more recent trends. So I'm curious if you could talk about what you saw in terms of impact to your business from this last round of stimulus as compared to the first round? And as it seems, very likely now that we'll get another round shortly, curious how you're thinking about potential tailwinds from that?

Yes. Certainly, that [indiscernible] seems real current when we talk about stimulus. When -- we think about the way the 2 stimulus checks of 2020 reacted on the Rent-A-Center business [indiscernible] I mean very positive. For the people that know our business, we've got people on lease-to-own contracts. They can return it any time, they can also buy it out any time. So when you get extra money like that, it does create a few more payouts. Some people will take the discount and buy out their products. So we get a few more payouts, which is positive for cash flow and profit that particular month. But also it increase demand, both times in 2020 and we would expect the same thing. So it increases demand, which more than makes up for any of those early purchase options. And to refill that portfolio, and that's why the portfolio ended the year still strong. And then once you refill that portfolio, you've got a tailwind. This isn't a -- we won't only do well the monthly stimulus hits like other businesses might want and that money has gone in 2 months or wherever it is after 2 months, we'll have the portfolio grow in those 2 months to them build on going forward. So it's -- like I said, referring back to what we've seen in -- with the last 2, you get a few more payouts, but more important than that, you get a build-up portfolio when people have extra money. And then you get a tail of that a lot longer than the traditional retailer would because of our recurring revenue nature of the business. So very positive and not just positive in a one-and-done frame, positive really for the whole -- it really sets us up for a really great year.

That's great. So we're nearing the end of time here, but maybe a last question here. How are you thinking about consumer spending habits as the country reopens? Do you have any concern that households may start to allocate more dollars towards travel and other services at the expense of some of the household good categories that you play in?

No. That's a good question. And I could see where that would be a strong question for maybe more of a prime retailer versus a subprime retailer. It's not like our customer is going to jump on American Airlines and head to Europe as soon as the pandemic is over either. So with the subprime, the lease-to-own customer, which is probably one step from a creditworthiness standpoint, one step below subprime, that doesn't -- that's not a big issue for us to worry about.

Great. That's really helpful. So we're hitting allotted time now. So I just wanted to say thank you again so much for joining us. It was really pleasure to learn more. So again, thanks for joining us.

Thank you.

Thanks, Jason. Really good questions. We enjoyed being with you today.

Thank you.