Good afternoon, everybody. Thanks for joining us. I'm Bobby Griffin. I cover retail consumer hard lines here at Raymond James, and appreciate you guys being at the conference. This afternoon, we have the pleasure of hosting a fireside chat with Upbound Group. With us from the company are CFO Fahmi Karam, right here, and as well as Jeff Chesnut, Senior VP of Strategy and Corporate Development. So Fahmi and I both realize we're standing in the way of, you know, maybe some after-conference activities, so we'll try to get through this fireside chat in a nice orderly fashion.
Sounds good.
Yeah. So Fahmi, thanks, thanks first of all, for joining us, and we always appreciate the support. Maybe for some of the newer investors that are listening as well as in the room, can you, can you start us with just a brief overview of Upbound Group, maybe the three big segments or the few big segments, and kind of what type of area of you guys or the business you participate in?
Sure. First, thanks for, thanks for having us today. It's been a great day to meet a bunch of investors. As far as Upbound goes, Upbound is a leading lease-to-own solutions provider in the market. We have two main segments. First is the Rent-A-Center segment, which is a over a 50-year-old brand. It's our store-based channel. Then we have our virtual channel, which is Acima, which we acquired in February of 2021. Rent-A-Center, think about Rent-A-Center as a segment as our, you know, mature, stable, high free cash flow generation, generation bid-generating business. We have about 2,400 stores altogether, about a little over 1,800 in domestic in the U.S., and about 30 or so in Puerto Rico. We have 130 in Mexico, and then we have about 400 franchised.
On the Acima side, we're in about 35,000+ locations throughout the country. And the big difference between Rent-A-Center and Acima, it's still a lease-to-own transaction. But the difference is instead of walking into one of our stores, somebody walks into somebody else's store, typically we'll apply for traditional credit, get declined from a primary lender and a secondary lender, and then waterfall down to Acima. So both businesses do lease-to-own. Think about it as non-prime consumer-focused. You know, Rent-A-Center is heavy on the furniture and appliances. Acima is a little bit more diversified in their product category, still heavy on furniture, but does have an auto and a jewelry component to it as well.
Very good. Maybe to get us started, let's talk a little bit about what you're seeing from the core customer. You know, it's been a tough period for kind of an inflationary side of things, but you guys actually did deliver just a little bit of growth despite kind of the pressure on the portfolio pretty close to 2022 and 2023 levels. So maybe just a little bit about what's going on on each side of the business.
Sure. So, you know, the consumer and specifically the non-prime consumer and our core consumer was hit hard by inflation. So we always say that, you know, they kind of went through their own mini recession in 2022 when inflation really ticked up. We're talking about on the Rent-A-Center side, thinking about annual income somewhere between $30,000 and $40,000. On the Acima side, maybe a little bit higher than that, $50,000 or $60,000. So as inflation took hold, obviously they were very cash-strapped, they're already cash-strapped, so they had a hard time adjusting their budgets. And you saw that in our loss rates, really throughout 2022. They had to adjust. We've had to adjust our underwriting, and you've seen our loss performance really stabilize in 2023 in both segments. I think the consumer is very resilient, especially the non-prime consumer.
I think things have definitely stabilized for them, but they're still under pressure. Things are still very, very expensive out there, and they're managing it. We have to be very disciplined in our approach from an underwriting standpoint to manage that. As I mentioned, both segments have shown really good loss improvement, stabilization in 2023 coming off the peaks and, in Rent-A-Center's case, you know, historic highs in the second half of 2022 to really stabilize in 2023. Acima ended the year just over 9% from a loss rate standpoint, and Rent-A-Center just around 4% from a loss rate standpoint.
Very good. Maybe where, where are we today in the customer payment? You know, some customers exercise the 90-day option versus historical standards. Kind of what does that mean for the margin outlook as well as the revenue outlook as we go forward the next couple of years?
Yeah. 2023, we characterize it on the Acima side as a normalization from a 90-day buyout activity. You know, during the stimulus era, everybody had excess cash. We had a lot of activity with people buying out, utilize that feature, the 90-day feature, to purchase the product. And what we saw in 2023 was a reversion to the norm. We saw payment activity really normalize. And with that, we saw our expansion in our gross profit margin. Acima, as a segment, expanded gross profit margin by 340 basis points compared to 2022. EBITDA margins increased almost 500 basis points in the year compared to 2022. And that's a combination of the payment activity as well as loss performance for the year. So we think this is normal, as far as the payment activity on the 90-day buyout.
We think it's right in between our 2018 vintage and our 2019 vintage. Our guide for 2024 is very consistent. We feel like this is, this is the norm, and our guide includes the same payment behavior we saw in 2023.
Yeah. Maybe let's talk let's move over to Acima a little bit. You know, one of the more interesting developments from last quarter was the strength in GMV. I guess let's start maybe unpacking kind of what you saw that breaks a trend that was carrying on for maybe a little bit better than a year of pressure on GMV. How sustainable do you think that is? And then maybe any detail around the categories that you're seeing some success in.
Yeah. You know, this time last year, we were kind of forecasting Acima to have a slow start to the year, kind of flatten out mid-year, and then grow in the fourth quarter. And so it was great to see that actually play out, like it did in 2023. And then the fourth quarter achieving 19% growth, year-over-year was great. And seeing that continue into January at 15%, and then in February, a very similar number. So we've definitely seen that momentum pick up as we expected, right in line with our expectations. How we got there is kind of what we've talked about all year, which is, you know, continuously adding new merchant locations into our network. For the fourth quarter, we grew our locations up mid-single digits.
We also spent a lot of time and emphasis with our sales team on how do we penetrate the existing network even further? So how do we get our existing network to send us one more lease per month for each each location? And the combination of those two really drove the 19% growth. And combine that with our direct-to-consumer channel, obviously on a much smaller scale. But as we mentioned on our last call, you know, that volume doubled in the fourth quarter. Again, on a much smaller scale, but that will be a bigger and bigger part of the story. So our ability to continue to add small, medium-sized businesses and even win some regional accounts really helps us continue the growth plan. And as we've seen the first part of 2024, we find that it is sustainable.
You know, our guide for the year in 2024 from a GMV standpoint was up, mid- to high-single-digits. So up early in the year, and then we start hitting some tougher comps, later in the year to average out for the full year, up mid- to high-single-digits.
For the retail growth side of things on the doors, is that more of a function of you guys putting feet on the street, or is it retailers coming to you because they see a need for the product or a function of both?
A little bit of both. You know, we do have one of the largest sales force in the industry out there calling on the small, medium-sized businesses. So it's a little bit of taking share from the small, medium-sized players, and then also even in, inside our existing network when you have three or four different LTO providers trying to get us to be exclusive with them or at least first look with them. So we're defining ways to, to further our, our penetration. And then on the new side, you know, with, with, with people above us in the in the waterfall tightening up, we're out there talking to new retailers around, you know, having a third look to be able to catch a lot of those apps that may come fall through the waterfall. And I think we're getting traction on both fronts.
Are you finding when you're on the ground that it's customers that didn't historically have a lease-to-own product, or is it more you're winning, you know, more share from your peers? I guess the second part of that is anytime we hear share gains, we get worried about pricing. Have you seen anything irrational in the market, as you guys are probably now growing probably the fastest in the market?
It's a little bit of both. And I think your, your question is probably around more the national account accounts and some of the enterprise accounts. You know, there hasn't been a lot of those who have converted and added lease-to-own in a couple of years or so. The conversations and the pipeline is growing, but the lead time, as we've talked about, it takes a while to actually get those folks to say yes and then eventually to get them to integrate. So the growth that you're seeing right now is more of us continuing to add new merchants into our network. Some may be new to LTO, but on the smaller end of the spectrum from a small, medium-sized business. But we are taking some market share away from our competitors on some of the regional side, as well.
And then as far as product goes, the different product categories, you know, furniture is still under pressure. You know, that pull forward from, from 2021, is still real. It's still out there. So furniture is a little bit under, under pressure. And what we've done to combat that is really diversify where our GMV is coming from. And so now you see things like jewelry, obviously it was a big category for us seasonally in the fourth quarter. Wheel and tire on the auto side is a big category for us, and we've been able to grow that. So when furniture does come back and we're further and further away from, from that pull forward, you know, that will be a nice tailwind for us from a growth perspective across all categories.
Good. I think on the last earnings call as well, you guys called out, I believe it was up over 20% application growth. So, you know, very impressive statistic there. But kind of when you dive into that, are you seeing any new demographics coming into the pipeline from the product? I mean, what question we get all the time is trade-down potential finally starting to happen.
Yeah. You know, early on in 2023, we saw an uptick in our third-party risk scores, you know, at the beginning part of the year, and then it really stabilized throughout 2023. We did see over the last, call it, four to six weeks, another small uptick in those credit scores. So there's some of it is trade-down, but I wouldn't say a meaningful part of our of our growth came from from trade-down. Still have that as an opportunity, if things do get worse out there and people do start tightening tightening up above us, that we're there and ready to catch those applications. So we haven't seen it in a meaningful way, so far. But it is something that, if it does happen, we'll be ready for it.
And then maybe on switching gears to the regulation front, I think we got the notice this morning about some of the late fees against the credit card companies. Any exposure there for you guys? And what do you think that ultimately, and I guess more importantly, is what do you think that can mean for your business as their business models could be changed a little bit?
Yeah. We actually talked a little bit about that a couple of weeks ago during the call. We view that as an opportunity, as a form of trade-down. Again, haven't seen it yet materially, but those late fees, especially for the non-prime credit card providers, you know, that's a decent size of their yield. And so you take away 75% of that, with these new rules whenever they actually get implemented into production, you know, that's gonna hurt their profitability. And so the way they're gonna combat that is to either increase their APRs, increase the merchant discount that they charge the retailers, or tighten up their credit buy box, or a combination of all three.
So we feel like it's an opportunity for us to pick up a few more apps of, you know, potentially better credit quality customers that may come our way if they tighten up above us. And they're not waiting for the rule to get into place. They're having those conversations today with those retailers. We're also having conversations with retailers. For the ones that have LTO in place, we're talking about expecting us to have more apps. We can be a little bit more selective in our approval rates, but hopefully grow GMV that way.
For those that don't have an LTO offering today, you know, it's really important for them as they start seeing their approval rates potentially decline from the primary and secondary lenders that they need that third-look person in there to catch those applications if they wanna say yes to their customers, at the same clip that they're doing today. So we think it's an opportunity for us. We'll see how it plays out over the next several months, but definitely, an opportunity. It's not in our guide for 2024, whether it's trade-down from a recession, a typical recession, or from, you know, the late fees with the credit cards, but it could be a tailwind for us.
Very good. And then, is there any exposure? I guess that seems like it could be a potential tailwind, any exposure from some of the changes or regulation against how you guys from a charge standpoint or.
Not directly impacting us on these late fees, you know, with our partnership on the credit card, it doesn't impact our fee generation, but it could impact the approval rates from our partner, which could impact us that way. But it's not a direct impact.
Maybe let's switch gears a little bit, move over to the, the Rent-A-Center store business. You know, business that generates a ton of cash, and, and maybe talk a little bit about kind of the, the multi-year outlook of kind of the strategy there, some of the initiatives you're working on, and, and what is the right level kind of margins for that business over the next couple of years?
Yeah. So it was great to see Rent-A-Center just like Acima turn to positive growth in the fourth quarter. We had 1.5% growth from a portfolio value year-over-year in the fourth quarter, which is great to see. And so that's also turning the tide there, as well. The big opportunity for us on the Rent-A-Center side really comes in two bigger initiatives that we're working on in 2024. One we've touched on a little bit in our previous calls, which is, you know, new categories. We talked a little bit about how Acima is diversifying their product mix. They've we've leaned into jewelry. We've leaned into wheel and tire. Those are two products that Rent-A-Center has not had historically. And so introducing those products into our stores and through the dot-com is very important to us.
And if you think about the mix of Acima and how much we generate between those two products, that's a real opportunity for Rent-A-Center as well. And then the other thing that, you know, we're looking ahead as far as initiatives go for Rent-A-Center is around web conversions. You know, we talked a little bit in the fourth quarter that our web traffic was up over 30%. Web orders were up 16% for the year. We have over 65 million people who click on Rent-A-Center.com in 2023. How do we get those people going from browsing to actually execute a lease? So we're looking at the customer journey, trying to take out as many friction points as we possibly can, make it easier for them to transact with us. And so we're working on that flow for the customer as well as underwriting.
Underwriting online is a relatively new kind of concept for the Rent-A-Center business. The first time we had a centralized decision engine was really in the pandemic. Otherwise, it was done at the store level. So now that over 25% of our revenue comes from e-commerce, putting in the right fraud tool, the right virtual decision engine that we can leverage from the Acima side of the house is something that we look forward to doing on Rent-A-Center in 2024. Not only is that a loss mitigation tool or potential, but it also will help us approve more people on rentacenter.com. So it's actually a something that we look at for growing the top line as well as keeping our losses at acceptable range. And between those two things, we think we can hit our guide, which is flat to low single digits, for the year.
Okay. Very good. And maybe just for the benefit of some of the people newer to the story, it does seem like, you know, when you look at your two core businesses, they're starting to maybe turn a little bit. And the way these businesses work is historically, you think of them as kind of a portfolio-type business. So what is the historical lag of, you know, when you see GMV and the portfolio turn before then the revenue starts to come in, and then how does that flow through to the earnings side of the business?
Yeah. I didn't answer your one question around the typical margins for Rent-A-Center.
Well, we'll come back to that.
We'll come back to that. Yeah.
There is a lag between booking the lease GMV-wise or on the Rent-A-Center side before you start seeing the revenue come in. I would say it's somewhere between two or three months, probably a quarter worth before you really start seeing the impact of that. And that's actually why we guided for 2024 to have a little bit slower start in the first quarter and then really pick up in the second half of the year. A large part of that is because of the GMV growth that we've seen in the fourth quarter and then into the first couple of months of the year, really kind of naturally flowing through the P&L. As far as margins go, for both segments, you know, the Rent-A-Center segment, we feel is a high teens EBITDA margin business. Right now, it's in the 15%-16% range.
Acima is somewhere in the low teens to mid-teens range. Today, it's just hovering around 15% EBITDA margins. But if we're successful in going after the larger accounts, the national accounts, those tend to have a lower margin profile. Obviously, it comes with other benefits around scale and GMV growth, but tends to have a smaller EBITDA margin. And so the low teens to mid-teens is the right kind of range for Acima. Very good. What's the dependent variable to move the store business, the Rent-A-Center business back up a few points?
It's all about portfolio size. Obviously, you have a fixed base cost with the brick-and-mortar stores. And so being able to leverage those stores and grow the portfolio is the way we can get back into the high teens. And even we had over 20% during the stimulus era. So to get there, we need to grow the portfolio. And the way we're gonna grow the portfolio is basically those two initiatives, and mainly around the web conversion, is how we're gonna grow it.
As the web conversion from a traffic funnel standpoint continues to build steam, you know, what, what opportunities are there kind of, if there is, to reorganize the P&L or to or to move parts of the, the cost structure around to be able to service that in a different way, I guess?
Yeah. We do have levers to pull from an OpEx standpoint. You know, we've done things around store hours, the number of employees per store to try to minimize that, but we can always find ways to be more efficient. One of the ways we're looking at now is how do we organize our fleet, you know? So we have over 3,000 vans and trucks at our stores that deliver product, pick up product. You know, being a little bit smarter about the routing and the logistics behind that and being more efficient about how we drive is another way we can potentially reduce some of our OpEx spend. So we do have some levers. We're really focused now on getting the underwriting that we can leverage from the Acima platform right. We think that will be a big opportunity for us to approve more people.
Mm-hmm. And on Acima, when you're going after the larger retailers, is that what's the capabilities that are needed within the organization to kind of go after those kind of bigger, bigger pools of potential business?
Yeah. So historically, Acima has gone after the small, medium-sized businesses, and we've done that now for the last, you know, 10 years, or so. And late in 2022, we established a team. We hired a few folks and built a small team around going after those national and enterprise accounts. And so what do you need to service those accounts? You need to have the right attention, the right Salesforce team, and the right people on how to make sure that they're fully attended to. You know, so the table stakes are scale, liquidity, and a combined and a robust compliance program. We feel like we have all those things. And so the next way you compete is basically on your integration and your backend on the technology side. And we think the e-commerce business for us is a competitive advantage.
We think it's a differentiator for us and is how we're winning business to this day. So I think the enterprise accounts, our integration with their point of sale, our integration with the third-party waterfall providers that are out there, we've pretty much integrated now with all the major waterfalls. And so that seamless integration with us is definitely something that makes it easier to win those bigger accounts.
Very good. And one of the questions we get some is it's been a little while since a larger retailer signed on to a virtual lease-to-own product. So when you look at the pipeline today, I guess a two-part question, are you seeing more inbounds, whether it's either small, regional, or even national players? And, and two, what do you think it's gonna take kind of to get over that hurdle to see another very large national account move into the virtual lease-to-own space as one of their credit offerings?
Yeah. I think, you know, that there's definitely definitely good traction, both on the regional side and the national side. As things have gotten tougher for them from a comp standpoint, they're looking to do incremental sales. And we can provide that, for them. So the conversations have definitely shifted from 2021 where they didn't have any inventory in stock, and they had really no reason to go after that incremental sale because credit was good and available. Where now those conversations are changing where they do want that incremental sale. They wanna approve more people. And lease-to-own is definitely an opportunity for them to do that. So the pipeline has grown. The conversations, the tone of those conversations have shifted.
But the lead time for those products or for those retailers takes a long time to get their IT resources lined up, to get buy-in from the top of the house. It does take time for us to win the business, but then integrate the business at the same time.
Understood. What are you seeing, switching back maybe to the product side of things, what are you seeing from an inbound input cost? You know, you say you source your goods in source, furniture, appliances, bedding. What are you seeing from kind of the cost of goods that you're purchasing? And what do you do? It seems like we're maybe moving into a little bit more deflation environment for some GM. What do you do with that savings? You pass it on with a lower contract or it flows through? How does it go exactly? How does that work?
So when things were going up, in 2021, supply chain issues were happening. The cost of everything was going up. Our approval amounts didn't go up one for one with that cost. And so what that does is it limits the amount of product that our consumers are approved for. So it limits the amount of products that they actually pick at a retailer. So our approval amounts aren't going to increase to that same level just from a risk mitigation standpoint. And so let's assume that our approval amounts stayed relatively flat. As things have gotten a little bit cheaper, our consumer will have more options at the retailer to pick out the different products for them, whether it's the nicer, the upgraded TV or the bigger TV. Those things become more affordable for our consumers.
We've seen some of that as inventory levels have increased. Demand on furniture has softened. There's a lot more promotions out there from the retailer to drive more traffic.
Yeah. All right. We've got about five minutes left or so. So maybe two final questions. One, I mean, when you look at the business today, you've, you've now been here for, I guess, a little over a year, not quite two, right? You look at the business today, kind of what do you think it seems like both core businesses are turning, starting to show some nice momentum. So what do you think kind of the value creation story here is over the next two, three, or five years for, you know, A, the business, and B, shareholders as we look out?
Yeah. You know, the algorithm that we laid out for folks during our investor day last year, I would say, is, is relatively straightforward, right? The two segments that we, we talked about when we started with Rent-A-Center, you know, we think that's a 2%-4% top line growth business, you know, going over the next couple of years or so. And then from an EBITDA margin standpoint or EBITDA growth standpoint, about 3%-6%. So, so low single digit growth, you keep your losses in line with where they are today. Maybe you have some operating leverage to get to that 3%-6%.
And then on Acima, you know, returning to growth that we achieved in the fourth quarter and into the first part of 2024, we said 10%-12% growth on the top line and 10%-12% growth on EBITDA as well. So you have the top line growth. You keep margins kind of where they're at. We generate a lot of free cash flow. We pay down debt. And you couple that with our robust dividend, and you get to that kind of high teens, low 20% return.
Mm-hmm. And then near term, what's the balance or the focus on? Is it debt paydown, dividend? I mean, obviously, dividend, you're gonna grow over time. Debt paydown or share, share buyback? What's kind of the near-term focus?
Yeah. I think the priority is continuing to grow GMV, right? You know, having enough cash flow and liquidity to fund our GMV growth. And then after that, it would be, you know, supporting the dividend and then debt paydown. We'll be opportunistic in nature with share buybacks just like we've been. We try to take a balanced approach, and we did a little bit of that in 2022, did a little bit of that in 2023. But, you know, we're sitting at 2.7 times leverage. We'd like that to trend down. So I would say the priority between the two would be paying down debt.
And then what about, you know, M&A? You know, you guys did purchase Acima. So M&A is in the history of the company a little bit. How do you think about that as a potential add-on? Or is it more tuck-in from a capability standpoint? What's some thoughts around that?
Yeah. I think we still have plenty of room to, to grow with what we have in front of us, whether it's on the Rent-A-Center side as we discussed or with the Acima side. We definitely have room to continue to grow the business there. So I don't see anything on the forefront as far as transformational acquisitions go, but tack-ons or tuck-in acquisitions that kind of advance our digital capabilities or add something new, to the product lineup that our consumers are using outside of our network. We're definitely out there looking at those types of opportunities, but, but they would be smaller in scale than, definitely than the Acima acquisition.
Very good. Well, I appreciate the time. Yeah, thank you, everybody, for attending.
Thank you, guys.