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

Good afternoon, everyone. I am Rayna Kumar, and I lead fintech equity research here at UBS. I'm lucky to have with us today, the whole Rent-A-Center team, Mitch Fadel, CEO; Maureen Short, CFO; Jason Hogg, EVP of Acima. Thanks all of you for joining me today.

Thank you, Rayna.

Great. So I always like to keep these fireside chats interesting. So if you have any questions for the Rent-A-Center team, feel free to type it into the chat window, don't be shy, and I will be happy to read them out to the team. But first, let's start off with my question. So Mitch, Maureen and Jason, lease-to-own is an underfollowed area of the payments market. I've been getting tons and tons of questions buy now, pay later. And and more recently on LTO. So maybe you can talk to me a little bit -- give us all a little bit of a high-level overview of the LTL market. And really how -- like how does the flow of an LTO transaction work? For people who are new to the topic.

Sure, Rayna. And this is Mitch, and good afternoon, everyone. Thank you for your time today. The lease-to-own business or rent-to-own, same -- really the same thing if you hear those 2 terms. And I'm glad to hear you're getting more requests for information about it, Rayna, in the last year. That's great. And it's been around for decades. Rent-A-Center is almost a 50-year-old brand. So the business has been around a long time and -- but it's primarily been through brick-and-mortar stores, through Rent-A-Center stores or a couple of competitors, but primarily, Rent-A-Center is the biggest in the industry, 2,400 brick-and-mortar locations. And that's how this -- about 1/3 of our country population has a credit score below 670. So we serve those customers, but only when they walked into a store for many, many, many years. Now the Rent-A-Center business, the legacy business, is doing gangbusters, doing just fantastic primarily through e-com. We've taken that business and it's pretty much an e-com channel. So that broadened it to a lot more people where they don't have to go into the store. And that's giving that legacy business, a lot of good growth. It's a misunderstood business. It's really -- drives a lot of cash flow for us. And again, it's growing through e-com. But more exciting even than that, with virtual technology, the lease-to-own transaction is now available to consumers all over the country through retail stores, and we'll talk a little bit more about our own ecosystem, which is a direct-to-consumer ecosystem as well. I'll let Jay talk about that. But as far as an overview, so you got the -- it's been around for decades, but because of technology today that we now have a couple -- we have millions of people that can now access it without finding 1 of those couple of thousand Rent-A-Center stores. So that's the big news is that the lease-to-own business is -- has been around a long time, but again, with technology, now it's available, so much more available to everybody, and we'll talk more about how that becomes more available to everybody through our retail partner channel. The 30,000-plus locations we have integrated with retail partners and this direct-to-consumer model. Now the way the transaction works, the big difference in the transaction before we talk about how we reach, we now can reach this $100 million addressable market that we only used to reach only through the brick-and-mortar stores. Now we can reach them electronically. I'll let Jay talk about that because he runs that division. But as far as the transaction, whether you're in a Rent-A-Center store or this virtual agreement, it's the same transaction really, the consumer gets a lot of flexibility. This is a lower credit score consumer, subprime consumer, if you will. So how do we do it? Well, lease-to-own is you make small payments along the way. Similar to the buy now, pay later, you can make small payments, and that's what everybody is looking for. And that's -- that makes the sale easy, small payments. The difference in the lease-to-own transaction versus an installment sale or the buy now, pay later, is you can return the product any time you want. So a customer in a -- let's say, a Bob's Discount Furniture store does a lease, they can -- ends up without traditional financing, does a lease instead, and they can return the product to a Rent-A-Center store anytime they want, and there's no obligation. So they don't take on any debt. They can make small payments. They'll have a 90-day or 120-day cash option, which is anywhere from $50 to $100 range as far as all we make on a 90- or 120-day option, if they buy it out early. If they go the whole length of the agreement, it will end up roughly 2x the original price, either over 12 months or 24 months, but they can return it any time, and that's the key component. So if you do keep it the whole time and take ownership at the end by making small payments, you pay for -- you pay a little more for that flexibility, but the flexibility is really what drives the transaction is you pay for it as long as you want, return anytime you want, take ownership whenever you want. The sooner you take ownership, the less you pay. It's really just that simple and very flexible. And certainly a transaction that customer with that lower credit score, the credit score below 650 or so, if you will, which is a huge part of the country, they've always liked the transaction just hasn't been available unless they went into a Rent-A-Center store till now. So having said all that, this is probably a good time for Jay to weigh in on how we took this retail partner business which is, again, about 30,000 stores for a little over 30,000. It's probably 75,000 nationwide counting our competition, which is a lot of a lot of stores they have this in, but we've got something even more exciting than that with our direct-to-consumer product. So Jay, I'll let you take it from there.

Yes. Thanks, Mitch. And thanks for having us on. I think the way I would start out would be to say that we've got 3 factors taking place and technology is enabling it. So 100% right in that this has been around for a long time, that to be able to scale it and scale it profitably and efficiently is really been affected by technology, particularly in the past couple of years. The first thing we're doing is we're actually changing it from a transaction-centric to a customer-centric relationship. And that means that we're able to -- whether it be through our mobile app, whether it be through our marketplace, whether it be through our lease card or whether it be through the brick-and-mortar that Mitch has described, which we have over 30,000 partners with, we're able to have established relationship with the customer to help them with their durable goods purchases. And then more importantly, we're able to move them in a friction-free fashion all the way through whether they come into a store and they end up leasing a couch with us and then they leave the store, they then have access of -- to still continue to use their unutilized capacity from the original lease line that we provided them. And it's as simple as clicking on 1 of our over 100 partners and growing in the merchant base. So someone can go and work with another merchant. Why that's important is the consumer is not used to actually being able to have a friction-free process. And that's why we're seeing significant ramp within what we call the ecosystem of those products to talk about. The other thing I would say is we're able to add because of our proprietary technology, we have over 30 patents pending, we're able to add orders of magnitude on where this can be used. So as Mitch had talked about earlier, the virtual lease-to-own space was approximately -- the whole space is about 100,000 merchants, where you could go and conduct that transaction. And now with our lease-to-pay Mastercard program, we have the ability to actually enable our customers to utilize their lease capacity in 2.2 million durable goods partners and merchants where Mastercard is accepted. So a huge increase in the ability to utilize the virtual lease-to-own and just the lease-to-own transaction. And then the last thing I'll sum it up is saying that what that's done is it's created this enormous white space for us and kind of have been in fintech and payments for the entirety of my 30-year career, I haven't seen white space like this since we innovated Affinity and co-brand credit cards back in the '90s. And what this is enabling us to do is to go to that segment that Mitch is talking about and unlock over 50 million consumers where we can have a direct relationship with them and that we estimate gives us a TAM of about $100 billion and do so, in a proprietary way.

Got it. So Jason, I heard you, but if you're able to get a little bit closer to your computer so we can hear you a little bit better. That would be helpful. I just want to make sure...

I'll just stand. Here you go.

Perfect.

Sorry for those of you that have to look at me more closely now.

No, this is great. I can hear you so much better now. All right. So Acima acquisition that closed in February, appears to have been a real inflection point for the company, doubled your size significantly enhanced your growth profile. If you can comment on what led you to that acquisition and how it's impacted your strategy and growth opportunities?

Yes, great question. So we were developing -- we had a retail partner business, nowhere near the scale of Acima. Our bigger segment at the time was Rent-A-Center. So we didn't have much scale and we brought Jay in the summer of -- 1.5 years ago to develop this direct-to-consumer product, him and his team, and they were in the process of doing that, and we saw it as transformational as it's proving to be as a game changer. And then we've known Acima over the years because we are competing with them for retail -- direct-to-retail business. And so I knew Aaron, the principal. And when -- we just started talking about if it was a good time to partner up. He was struggling to get larger accounts. The timing was right for him, struggling to get larger accounts as a private company as compared to being part of a public company and having the continuity and the longevity of our balance sheet versus PE investing and so forth. But -- so it was the right timing for him to partner. He wasn't necessarily looking to get out of the business, but we partnered. Took a lot of the sale price in stock so that he could be -- and he's still with us and he's helping us grow. So what really attracted us and attracted him to the transaction, so we take their great infrastructure and scale because again, our retail partner business was pretty small. Put it with the ecosystem that Jay building, it was direct-to-consumer, we thought together, this could really be amazing. And so far, so good. It has been pretty amazing. It's -- the ecosystem is performing. It gets fully rolled out next year, to Jay's point, and the scale of Acima has made us -- made that now the fintech part of our company is the larger part and a great growth vehicle for us. So it was about scale and matching that up with the direct-to-consumer stuff Jay was already working on.

I just -- I'd augment that with 1 comment, which is that in addition to that, One of the unique aspects that they had, and I see this from the background of being a member of the senior leadership team at American Express and a Blackstone PortCo CEO, they have 1 of the best decision engines around. It's actually true machine learning AI-based, everyone throws those names around, but this model is doing that. And why that's important is because it's enabling us to scale the business, do so profitably and also move into a wide array of product sets, learn very quickly, calibrate it and then begin to scale. And so one of the examples of that is we've just been piloting the mobile app in the marketplace, we have over 300,000 downloads and users on the mobile app, and we've had significant run rate increase. And what we're seeing is that the performance is holding consistent with the rest of the book, but we've been able to increase, as I talked about in our earnings call -- last earnings call, from 1.2 leases per customer to over 2 leases per customer in a very short period of time while the performance holds. And so obviously, that gets to the customer-centric approach that I was talking about. And that decision engine is a very powerful proprietary thing that sits behind it.

Got it. All right. So we have a question coming in from the audience. Can Acima grow 25% next year without a partner addition?

I would say that when we were -- we've talked about 20% to 25% growth for a number of years with the addition of Acima between the ecosystem and bringing on strategic partners. We've added some great strategic partners last quarter like we have Whirlpool and P.C. Richard up in the Northeast. So we are adding partners, couple of hundred stores every month and small regional players. But even for large partners in the last 12 months, we've added Conn's and P.C. Richard. And in Whirlpool we're integrating with now, Sonic Electronics is another good size e-com retailer. So there's -- and there's a lot more in the work. So we did say at the last quarter because of the supply chain that be more like the 10% to 15% range for now with the supply chain. So I think 2022 is not as big as 2023 because in the first half of the year, if the supply chain stuff continues, we're looking at 10% to 15% until the supply chain is strong again, that helps us for our retail partners, it gets us back to the 20% to 25%. So I think we still believe in 20% to 25%, the ecosystem -- will it come from the ecosystem? Will come from strategic partners? Will come from regional partners? And I think the answer is yes, from all of the above. And we believe we can get there, probably isn't back into the 20-plus range until the latter half of next year with -- as the supply chain gets better. But we still -- even with shortening, even with being in the 10% to 15% range temporarily with the supply chain issues that are out there, we still will be at the number we've talked about in 2023 and the $6 billion range of revenue with mid-teen EBITDA margins.

Got it. It's very helpful. So let's move on to your lease pay cards. You have that partnership with Mastercard very interesting. How did that come about? And do you see further opportunities to partner with similar companies going forward?

Yes, yes, very much so. So how it came about is we actually filed a very robust patent suite of over 30 patents 2 years ago. And as part of that process, what we wanted to do is provide ubiquitous access to this very large consumer segment that's been completely underserved and is usually going through a pretty high friction process in order to generate a lease. And so having obviously a number of years of experience within the payment industry, the team was able to pull together the partnership with Mastercard and why it's so important and exciting is, right now, it's completely changing the way in which folks are able to actually conduct the lease transaction. They're able to do a lease, they're able to pick out an item on their phone, whether they're in a store or whether they're shopping in the marketplace on their phone. They're able to execute the lease on their phone through our virtual card integration. But then what's truly unique is that we have the ability, similar to like a Venmo account, when you can add a card to the account someone can add a card to their -- lease pay Mastercard to their account. And that will enable them to go out there's -- in the Mastercard network of over 10 million merchants, there's 2.2 million that are specifically durable goods merchants. And so a customer will be able to go into a store, scan a barcode on a laptop, execute the lease on their phone. It will turn the card on and they'll be able to walk over just like anyone here in this conference and swipe their card and walk out with whatever their item is. And so that's a fundamental shift in a segment that is traditionally not been allowed to utilize payment vehicles like this.

Understood. Okay. So with the Acima acquisition, you announced some pretty compelling 2023 financial targets. If you could remind us what those targets are. And tell us how much confidence you have on actually achieving those targets?

Yes. The targets we set for 2023 is $6 billion in revenue. Acima will be about lot more than 2/3 of that, I suppose, we're right in that range. So the virtual business, the technology side of the business, will be 2/3 of that and be the growing part. So $6 billion with mid-teens margins in 2023. And the confidence level is high. The -- we've redone the numbers and kind of, as I mentioned earlier, shortened them a little bit for a period of time to put the supply chain impact in there and then the ecosystem impact in there that Jay is talking about and here we are a year later after we first said those numbers and still believe in them as much or more than we did when we said them then. So probably more because we're a year closer to it. So we haven't had to adjust them, which is means the integration has gone relatively smoothly. We haven't had to adjust our numbers since we first put that number out there a year ago.

And I would just add...

Go ahead, Maureen.

Sorry about that. Yes, I would just add, so we've talked about the longer-term targets of the 20% to 25% growth in the Acima business, excluding some supply chain temporary impacts. The Rent-A-Center business is also expected to grow low to mid-single digits over the next several years given that e-com growth. And then from a margin perspective, we expect mid-teens for Acima and 20-plus margins in the Rent-A-Center business, which if you factor in the potential impact of all of the additional national accounts ecosystem, you can extrapolate a very compelling EPS growth story.

Got it. Okay. And then I guess a follow-up to that, just like on the reverse side, what could go wrong where you wouldn't meet those targets?

Well, I think the supply chain, obviously, we're factoring in that, that will slow down, which I think most people agree is stabilizing and even improving in certain areas. So that's one opportunity that we see will reverse. And -- but if that does continue, obviously, that will impact our GMV growth. And then we're counting on the success of the rollout of our ecosystem. There's a direct-to-consumer marketing element that we'll be monitoring very closely. We've seen great results so far that Jay can speak to as far as some of the testing we've done with the lease pay card. So some of -- those are some of the factors that will influence achieving those numbers.

Yes, it's an interesting question, Rayna, because I agree 100% with Maureen just said, really, I think the only thing I can think of is the supply chain lingering past midyear of next year as far as the improvement. And I say it's an interesting question because you would expect someone who is -- even though we're not a lender or a lessor with an ownership option, but someone in a financial services type business, to talk about, well, if the consumer this or the consumer that, and one of the reasons that we don't have the same consumer risk of the consumer being under pressure, which sounds pretty strange to people for the first time they hear it, a subprime customer being under pressure, but you're not worried about it. The reason is over the years through different economic times, like, say, 2008, the Great Recession, where we outperformed because what happens when you're at our part of the funnel, our end of the funnel, if you will, basically the bottom part of the funnel, that even when our customer, the subprime customer is under pressure, and we can lose some of them they cannot afford to lease, it drives other customers into the business from above us. So those who are above us tighten up that pushes actually a higher credit quality customer into the lease-to-own transaction even if we lose some on 1 end, and that's been the resiliency of the model going back through many, many recessions, and we can show the numbers through all the recessions. And I've done this most of my adult life. So I've seen a few of them. And -- but most notably 2008, not talking about a recession going forward, but just when the customer is under pressure that it pushes customers into the transaction that makes up for the customer on the other end of the scale being under a lot of pressure at the low end. So that's what's made it so resilient. And why -- if you tell me the customer is going to be under a tremendous amount of pressure, that's unfortunate on one end, but it also pushes customer in our transaction on the other end. That's why when you say what could go wrong? We don't really think about the fact that the customer under pressure is a big headwind because, again, that can also be a benefit to us on the other side of the coin.

And I think I would just add 2 things. The first is that when you look at the 50 million consumers we talked about, those are consumers that we actually know and it's not a material number. And we are just scratching the surface, single digits on penetrating that segment. And then the second thing ran into a question you had asked earlier or someone had asked earlier, what else can this be used for? We're looking at taking the platform that we have, the key things. And part of our -- we have a multiyear plan, maybe a multiyear plan for product, technology and also expanding into new segments and into other categories. And so -- and it all builds off of this core technology in this ecosystem and the decisioning and the things that we're talking about. So when you look at those factors on top of what Mitch is talking about, sort of that's what gives us the confidence to get to the number by the end of '23. And it's a quantitative approach too. Right.

Great. No, it's really good detail. And maybe, Jason, while we're on that topic, why don't you run us through the various aspects of the ecosystem? How they all work together and where you think it could go in the future?

Yes. So the purpose of the ecosystem is to enable the customer and the merchant to connect, however the customer would like to. So traditionally, the industry has grown more from the physical retail location. And now a consumer has the ability to download our app and to apply and be granted a lease line, and then they have the ability to utilize that lease line like we were talking about, either through our marketplace in brick-and-mortar, we have a find-a-store function and they walk into a store. Now you have a consumer that's walking into a store where before, they had trepidation about they have bad credit, they don't have us fin file. And then they're concerned about making a large durable good purchase, and they have to go through a pretty cumbersome process prior to Acima and the ecosystem. Now they're walking in, knowing that they already have open-to-lease capacity and they have intent to purchase. So the conversions are very successful there. We also have a browser extension, so it enables consumers if they're using any other type of social media or other things. Our omnichannel approach enables them to click straight over and to begin shopping, apply again online. And then here's the key thing we've been talking about. And it also relates to the confidence in the '23 numbers, and we've also been talking about strategic partnerships. What it enables us to do is, this is a 0 integration solution, right? And that's sort of groundbreaking. So the ability to go to major retail partners, be it online or physical brick-and-mortar and to be able to use that capacity where no integration exists at places that the consumer is not used to shop at. So they may not even have an LTO option. And there are many retailers right now during the pilot phase that we have talked about that we've launched with regard to the actual physical lease pay Mastercard, we're actually at those merchants making purchases in our pilot environment successfully, just like any other consumer does. And so when you open up that opportunity for a consumer to go where they have not traditionally been able to make purchases, it has an acceleration effect. So it's meeting the customer where they are and connecting them to the merchant that they want to shop at.

Got it. Okay. And since BNPL is such a hot topic in the space, I'd love for you to just compare and contrast the BNPL and LTO? And do you view BNPL as a threat or an opportunity or neutral impact going forward to your business?

Yes, I'll start with that, and then Jay can add on if he has anything further. But it's certainly an opportunity and not a threat. And we're similar to BNPL, in that BNPL and virtual lease-to-own are both digital payment models. But BNPL is more prime and we're below prime. BNPL is more smaller ticket items, we're household durable goods. The tickets are much, much different. But even when some of the BNPLs move upstream and have installment products and go into the bigger ticket items. The fact is they're prime and we're -- our traditional customers below the 650 credit score. So it's a different type of customer, different credit score. The good news -- the reason it's complementary and even an opportunity for us is that it enlightens retailers to the need for the virtual lease-to-own. As retailers see -- as they bring in -- there are so many retailers for years and years and years, right? What have they had. They've had one credit card, the Synchrony credit card or type one of those type of traditional credit cards underwritten by somebody else, by Citi or someone, and you could apply for credit that way. And as they add in BNPL, it exposes them to how many people BNPL doesn't approve. And they need something below that, and that's where virtual lease-to-own comes in. So it enlightens retailers to digital payment options, which we're a different type of digital payment option, but we can -- like I said, it's opening their eyes when they see the turndowns of BNPL and we're the solution for those turndowns. So tremendous opportunity for us, I think it's very complementary for those reasons.

Talk to me a little bit about your credit process, like how do you make credit decisions? How do you keep credit losses to the minimal? That's always a big question I get on the BNPL company. So just would love to hear your take on it for your business?

I'll let Jay take that one.

Yes. Yes. No, as I've mentioned a little bit earlier, the decision engine itself is state of the art. What it enables us to do is it enables us to react in real-time as to what's happening from a macroeconomic trend perspective and to do so at a granular level. So we're not taking a blunt instrument to the entire decisioning for the portfolio. We're able to subsegment, whether it be by vertical, of merchant type, whether it's e-com, whether it's physical brick-and-mortar, whether it's our own ecosystem. And why that's so powerful is that we also have the ability to then optimize. So we -- every day, the engine is going through a process where it is optimizing to get return. And we are driving towards a yield. So it has the ability to drive towards that yield at an optimal level. And that's a huge asset as you're in -- as we've been talking about, and Maureen was also talking about like Mitch, with regard to a very fluid macroeconomic situation right now would be headwinds from a supply-chain perspective. And so it enables us to be thoughtful and efficient while still continuing to grow the business without having to completely tight down the hatches.

Understood. Okay. So just moving on to capital allocation. So Maureen, recent -- you recently announced a $500 million share repurchase program on top of the $250 million repurchase announced in August and completed in December. If you can discuss your capital allocation priorities?

Sure. So at these stock prices, we definitely believe that our share repurchase program offers a compelling value. So the Board did authorize an additional $500 million share repurchase authorization, and we utilize those opportunistically. But in general, our capital allocation priorities include, first, to invest in the business, both supporting current operations and, of course, generating additional growth. Second, we look at potential M&A opportunities that could help support or enhance our strategy and that will create value over time. And then third, we return capital to shareholders through dividends and opportunistic share repurchases. And along the way, we want to maintain a solid financial position, strong balance sheet and our long-term target for leverage is 1.5x.

Got it. Okay. Maybe talk to me a little bit more about the M&A. What kind of assets most interest you, higher valuations right now, what's your pipeline looking like?

Yes. So our focus for M&A is more along the technology or digital businesses, since that's really been our growth strategy for the company. We'll consider any transaction that really makes sense from a strategic and financial perspective. It could include companies, assets or talent. We think we've got a great decision engine. We've got a lot of data to support expansion with our consumer base. So there's multiple opportunities that we could look at to either expand our product lines or just increase the lifetime value of our consumer.

Got it. Okay. So we're getting to the last few minutes of our conversation. So I want to leave it with Mitch with the final 2-part question. I want to know, Mitch, what keeps you up at night on Rent-A-Center? And what are you most excited about going into 2022 for the business?

Well, what I'm most excited about, I'll start with that one first, is the ecosystem, the growth, we -- as evidenced by our by the share repurchases that you and Maureen were just talking about. And by the way, when we announced the $500 million share repurchase, we increased that dividend by 10% as well. Even though we're a growth company, there's a lot of cash flow for both. And what I'm excited about, even with some short-term headwinds like supply chain, like payments normalizing a little faster than we thought, after -- post stimulus, even with some short-term headwinds that are there now, primarily with the supply chain, we're very confident in our future, primarily because of the technology we have, the ecosystem, the scale that Acima has given us, talking to large retailers, we know what they're telling us and as resources free up, and they're seeing all the turndowns from BNPLs, we've got a lot of irons in the fire there with some tremendous partnerships coming along with the direct-to-consumer. So the growth opportunity with the Acima ecosystem is the most exciting and when I think about over the next couple of years and a lot of confidence in those kind of numbers we talked about earlier, the $6 billion with mid-teens EBITDA margins. And then want to use the balance sheet the way Maureen was talking about. You got some pretty incredible EPS growth relative to where we are now. Again, with these large share repurchases on top of the great growth and margin enhancement that we have going on. So very excited about our future. What keeps me up at night. I don't really -- nothing really keeps me up at night. I don't worry a lot about any particular. I worry about us just -- you're always worried about -- there's always more to do, more that you could be doing and you just were talking about M&A, and we could buy a couple of companies tomorrow, but how much can you handle? And I worry really -- about the only thing I worry, it doesn't keep me up at night, but my -- how do we focus and stay focused and not try to do too many things because there's so many opportunities for us. So I -- it's more a matter of just staying focused than it is anything that's worrisome.

Got it. Okay. Well, great. Well, Mitch, Maureen, Jason. Thanks for joining me today. It's great speaking to all 3 of you. To everyone else, thank you for watching and enjoy rest of your afternoon.

Thanks, Rayna. Thanks, everyone.

Thank you.