All right. Good morning, everyone. Welcome to the last day of our TD conference. My name is Hoang. I'm part of the consumer finance team here at TD Cowen, and I'm the lead analyst for the lease-to-own sector. It's great to have with us today Upbound CFO Fahmi Karam with us for a discussion on the company. Upbound is a major lease-to-own provider in the U.S., if not the biggest. They have a large presence in both store-based and virtual lease-to-own across the country. The format of today's discussion will be a 30-minute fireside chat. You can ask questions by clicking on the top right of your screen. I will be able to ask those questions anonymously for you. With that, let's get started. Welcome to our first conference, Fahmi. Great to have you here.
Thanks for having me on. It's great to be here.
Great. So why don't we kick off with maybe the topic of consumer health? Is there any update or overview that you want to kick off with? What are you maybe seeing in terms of the health of your consumers, how are they behaving versus maybe last year? And is there any difference between Rent-A-Center and Acima going on right now?
Sure. Yeah. The consumer has been, I would say, very resilient over the last year or so. Obviously, the non-prime consumer, especially kind of the bottom and the deep non-prime consumer, was really hit hard by inflation. They've had to adjust how they prioritize their cash. And of course, we had to adjust our underwriting over the last 12, 18 months as well. So I would say they're still under stress, but stable. Wage growth has helped a little bit, but things are still very expensive out there in their daily lives. So I would say stressed, but stable, generally speaking. And as I mentioned on our underwriting, we have adjusted our underwriting. I think our underwriting posture continues to be very cautious, just given the environment that we're in.
In some cases, I would say we're actually tighter today than we were maybe a year ago, especially on the Acima side. On Acima, we've had a nice increase in our application flow. And so that's allowed us to be a little bit more selective, just given the environment that we're in. So I would say not really a lot of changes over the last year, relatively stable from a consumer health, consumer payment standpoint. And the differences between RAC and Acima, I would say like-for-like, credit quality. The consumer has behaved relatively the same. Obviously, the Acima consumer is probably a notch above from a credit quality standpoint than the RAC consumer. But like-for-like credit, so the bottom end of the Acima credit quality or consumer population and the RAC consumer have been behaving pretty consistently amongst the two segments.
Sorry, I was on mute. Got it. I think we can all be a little bit more positive after this morning's economic data print. I mean, we see wage growth. I mean, that's a positive for you guys. And I think strong employment helps as well. But maybe if we can dive a little bit into Rent-A-Center. So historically, it's a store-based business. You guys have made a lot of efforts to digitize the business, launching or improving on your e-commerce capability. So how do most consumers interact with Rent-A-Center today? And maybe what digital investments are you making to support that business? And what does it mean for your long-term plan around store count and expansion?
Yeah. So the Rent-A-Center business, again, 50-year-old business, very mature business, is always going to be focused around the store. We rely on the stores for a lot of various things, whether it's the sales, upfront sales, whether it's helping with the underwriting, delivery of the product. And so we are definitely store-based when it comes to the Rent-A-Center side of the business. But we've done a really good job, especially since the pandemic, on growing the e-com side of the business. Now that accounts for about 26% of our revenue comes from the e-com channel. And so the interactions with the customer, we really want to be wherever they want to be, whether it's in-store, start and stop in-store, or whether they want to start online and then come into the store, or just do a full online checkout online. We want to be there for our consumer.
Obviously, the trends have shifted to where more and more people want to shop and transact online. And we've, as you've said, really over the last two or three years, really made an investment on time and resources on improving that customer experience online. I think it's a, even though we've been doing it for a couple of years, I do feel like there's a lot of opportunity for us to grow the portfolio through our e-com capabilities. I think you've heard us mention a few times on how many people visit Rent-A-Center.com. We have about 65 million people visited Rent-A-Center.com last year. About a third of those people came in to make a payment on their account. So you have quite a bit of a big population of people coming in to shop. And when people go to Rent-A-Center.com, whether digitally or in-store, they usually have purchase intent.
They're coming for a pretty specific product. So we should be able to capture more of those customers coming online and browsing into transacting on the lease. And so we're doing that. We're leaning into that and really attacking it two different ways, I would say, both just the customer experience, customer journey, taking out the friction points on the shopping experience and making it very seamless between online and in-store and making sure that the customer, we try to limit the fallout places where people fall out of that journey. The second place that we are spending a lot of time and resources on is around underwriting. We've talked a lot in the last couple of calls around leveraging the Acima platform for the legacy Acceptance Now business.
All the benefits that we've mentioned around why that makes a lot of sense to us applies to the Rent-A-Center business, especially the Rent-A-Center business through the e-com channel as well. Obviously, putting in the Acima sophistication and data usage and the fraud tools on Acima going into RAC will mitigate losses. But in our mind, it would also increase our deliveries and increase the portfolio size. Because when you don't have those tools, when you're not looking at enough data, especially online, you tend to be a little bit more conservative, and you start declining a large swath of folks. And so being able to underwrite correctly, be more precise in our underwriting, we think actually will actually approve more people online. And that should help the Rent-A-Center business continue to grow.
Got it. Thanks for the very detailed answers. We have to think about Rent-A-Center. I mean, you guys are at almost 2,000 stores now. I mean, how do you think about that going forward in terms of store count, footage, now that you also have the Acima side buffering up the Rent-A-Center side?
Yeah. We think, as you said, between the franchise business and the company-owned stores, we have a little over 2,300 stores now. We think the footprint is solid. We think we have a lot of coverage. We're in the right places. But we're continuously evaluating the store count as well as the square footage per store. And I think what you've seen, the trend for us really has been to downsize the store square footage where we can. Because more and more people are shopping online, you don't need as big of a showroom anymore as what you did maybe 10 years ago. And so really leaning into how consumers are shopping, that is digitally, and that's online. So as leases come up in our stores, we continuously evaluate location as well as the size of the stores.
Shrinking the stores from 5,000 or 6,000 sq ft down to 3,000 or 4,000 sq ft to us makes a lot of sense. We've been doing that now for a couple of years. We'll continue to do that just to right-size expenses, especially as people continue to shop online and the stores become more account management, relationship building, and fulfillment centers. You don't need as much square footage as you had in years past. And so again, as leases come up, it takes time to get through all 2,000 stores that are company-owned. But that's the trend. The trend is smaller stores and really leaning into the web.
Got it. I think one of the selling points of acquiring Acima, I think in the beginning, is the synergies between Rent-A-Center and Acima. You mentioned one of that synergies that is to leverage Acima's underwriting. I think another synergy is being able to use Rent-A-Center stores as a point of return for Acima merchandise. So maybe can you talk a little bit about your progress in implementing those synergies and what areas have you completed and what are you still working on at this point?
Yeah. So we obviously feel like there's a lot of synergies between the two businesses. And we're in the early innings of really monetizing those synergies and putting them in place. And so we feel like there's a lot of opportunity. I think I mentioned underwriting is obviously a very big synergy. We've already started to see the benefit of that as far as the legacy Acceptance Now business being able to put in the Acima decision engine. I just mentioned the same benefits to the Rent-A-Center business of using Acima's underwriting capabilities. Yeah. On the collection synergies, I think, or the account management synergies, I think it works both ways. What we've started to do last year was actually take a lot of the expertise from the Rent-A-Center side of the business and apply that to the Acima account management. And we've seen an uptick in our payment behaviors.
We've seen obviously lower delinquencies throughout 2023, and that continues into 2024. We've just seen Rent-A-Center has been able to really fine-tune their account management capabilities. Applying that over to Acima has been a big benefit. There's still room to improve from there. As far as the return capabilities, that's definitely something that we are working on and is a big initiative for us in 2024. As we speak today, any consumer on the Acima side that wants to return the product can go to any Rent-A-Center location and return their product. We've also now started to send out the Rent-A-Center trucks for bigger items. If the consumer doesn't want to drive over to our Rent-A-Center, we'll actually pick it up from a Rent-A-Center location. We'll send a Rent-A-Center truck out and pick up those products.
And then we are dabbling with other ways to leverage the footprint at Rent-A-Center, maybe with some additional Acima-type vehicles to pick up, but being based outside of a Rent-A-Center location. So we feel like there's a lot of opportunity for us to improve the account management, improve our pickups on Acima, but also just give our consumers an easier way to return product to us when the time is right. Obviously, that's one of the big benefits of having a lease is being able to return the product with no obligations going forward. And so we want to make it as easy as possible for the Acima consumers to return product to us.
Got it. Maybe we can now switch gear to what people care most about, which is Acima. You guys obviously deliver very strong growth coming out of 1Q. Can you talk about what has contributed to that strong trend at Acima? Is there any product category that you would point out? And when it's all said and done, once we lap over this period of high inflation and everything, how should we think about the normalized growth level for Acima going forward?
Sure. So obviously, we're very pleased with the Acima trends from a GMV standpoint, coming off two quarters in a row with almost 20% growth. We're on pace to do that again in the second quarter of this year. A lot of momentum on Acima with GMV. On the why, I think we've talked about it over the last couple of calls. I think it's a combination of new merchant locations, more productivity in our existing merchants. Then on a smaller scale, our direct-to-consumer marketplace channel. If you think about the first quarter, again, almost 20% growth. Almost half of that came from adding locations. So we had 9% growth in the number of active locations in the first quarter year-over-year. Almost half of that growth came from new locations.
The other growth came from existing locations and being more productive inside of those locations. So whether that's us moving up to First Look or having exclusivity at certain locations, but also some of the bigger names that we've mentioned that were existing but have changed their LTO lineups, whether it's Ashley.com or Wayfair, those are part of that productivity gains that we mentioned. So that's the other kind of half, if not about 45% of the growth in the first quarter came from those being more productive inside of our existing merchants. And that last 3%-5% bucket is probably the direct-to-consumer, obviously on a much smaller scale. But we've done a lot of things on adding unintegrated retailers to the marketplace and to both the app and Acima.com. That should be a bigger part of the story going forward.
As far as kind of what's normalized, I think very consistent with what we announced in our three-year plan last year. I think a normalized growth rate is somewhere in the 10%-12%. In 2024, we guided for the year to be up double digits. I think this year, and you said it, the comps this year, how we get to those double digits may be a little bit different than a normal year where the first half of this year is going to be up 20% and we'll have smaller growth in the second half of the year. But I would say kind of year in, year out, we think 10%-12% is kind of the right growth rate for GMV at Acima.
Got it. That's helpful. I think, I mean, one of the advantages that you guys mentioned about Acima is its large sales force, which has contributed to a lot of merchant growth. Maybe can you talk about how that is driving your merchant count, how the sales force is helping you guys increase penetration at your existing merchants and maybe talk about the pipeline that you guys have right now. Congratulations on the Ashley ad, so.
Yeah. Thanks. I think, yeah, the sales force, when we bought Acima, I think the two big things that we saw at the time of acquisition that we really felt like we could leverage, one talked a lot about, which is underwriting capabilities. We thought that was definitely an upgrade to what we were doing pre-Acima. And the other thing was the sales force. Having an established sales force, both external sales and internal sales teams, working the phones and working the small, medium-sized businesses was a huge competitive advantage for Acima. And being able to leverage that and continue to grow locations, I think, is one of the reasons why you've seen us continuously take share and grow GMV the way we've been able to grow it. And the focus shifts. At one point, maybe 2020, maybe four or five years ago, it was all about number of locations.
Now it's about number of locations and increasing the GMV per location, I think, is also a critical part of what we have the sales team focused on. How do we get each location to send us one more lease per month? And when you're dealing with 30,000+ locations, that one lease per month adds up very, very quickly. So yeah, I think the sales force is something we'll continue to lean on. It helps us continue to grow while we want to grow with enterprise accounts. We've talked about how long of a lead time enterprise accounts take. While we're working those types of names, the regional and enterprise names, we're able to continue to grow in the small, medium-sized businesses because of our sales force.
Got it. As you mentioned, enterprise accounts, we know that Acima tends to have a strong background in SMB, but obviously, you guys are working on enterprise as well. Maybe can you point out some of the differences between SMB and enterprise? You mentioned one of that being longer lead time at the enterprise, but any other thing that you want to highlight for our audience?
Sure. Yeah. Part of the benefit of the Acima platform, in our mind, is its diversity, both from a retailer standpoint and a product standpoint. And I think I'll touch on the products. I think that was one of your questions from the last one. But I think part of what makes Acima, the ability for it to grow and our performance over the last 12-18 months is around diversity, diversity of retailers, and diversity of products. And so for us, we think the right balance of retailers is to find both small, medium-sized businesses, which has been our core, as well as the regional and national accounts. And so we have that mix, right? We have the Ashleys of the world. We have Wayfair, Rooms To Go, folks like City Furniture, those types that are really strong regionally and really have really strong e-com businesses.
You've seen that with what that generates from a growth standpoint. The differences between an enterprise account and a small, medium-sized business is obviously with the enterprise accounts, you get the scale. Day one, you get a lot of volume from those names. You get typically exclusivity for a period of time, called three to five years. Typically, with the bigger box chains, you typically get a better customer, credit-quality customer as well. So your losses are typically lower. Now, to get those exclusivities and to get those long-term contracts in place, they usually come with some kind of commitment on marketing spend, some kind of commitment on rebates. They tend to have lower margins than the SMB names where you typically may not have a rebate for all of those names. I think there's pros and cons to both.
That's why we want to have a balanced approach when it comes to GMV and comes to our network of partners and retailers. We want to have both. We want to have the small, medium-sized businesses, which allows us to continue to grow, but also have the enterprise accounts, which gives us the scale and exclusivity, which keeps our losses at a certain level.
Got it. Maybe switch gears over to trade down. I mean, it's been heavily discussed among the conferences this time. I mean, can you talk about some of the trade down behaviors that you are seeing in both Rent-A-Center and Acima? Are you seeing relatively higher income versus your normal customer base coming down to your products? And maybe on the Acima side, since you have more insight about the lenders above you, how are you seeing the tightening from those lenders in the waterfall that you participate in?
Sure. Yeah. Trade down is obviously a topic that gets a lot of attention. It's something that it's hard to kind of really put your finger on it and say, "Here it is. We're starting to experience it." But when you're growing at the clip that we've grown at the last couple of quarters, part of that has to be trade down. Our third-party scores, risk scores are up year-over-year, but just slightly up year-over-year. And I think we've seen a couple of years ago a lot of score inflation, and those started to migrate down. So being up year-over-year tells us there's definitely some trade down at work that's helping GMV. People have been talking about the typical lenders, the traditional lenders have been talking about tightening now for quite some time. So I think they're doing that.
I think the late fee rules have definitely helped as far as them adjusting their approval rates and have people flow down to us. I do think you see it more on the Acima side than you see on the Rent-A-Center side. Just as you said, you're there side by side with the waterfall versus somebody intentionally going to Rent-A-Center or Rent-A-Center.com. So you definitely see it more on the Acima side than you do on the Rent-A-Center side. So look, we're ready for it if it comes into more material ways. Right now, I would say we're seeing signs of it. We're definitely seeing it in our GMV numbers. Hard to pinpoint exactly where it's coming from. But we know the lenders above us are tightening.
As we talked about earlier around the health of the consumer and kind of the macro, there's still a lot of uncertainty out there. I think the regulatory aspects also kind of point to it. So it's not in our guide for the rest of the year in a material way, but I think it could be upside if the macro does get worse.
Got it. Maybe talk about lease performance. I think we have seen industry lease performance normalizing to 2019 level. So kudos to the industry for that. But can you talk about some of the initiatives you are working on to further improve on that? I know that you guys have mentioned about integrating the legacy Acceptance Now platform into Acima and hopefully trying to get a lower loss on that. How is that progressing right now?
Yeah. The conversion over from the legacy Acceptance Now decision engine over to the Acima decision engine has gone really, really well. I would say probably better than even our internal expectations as far as we knew the underwriting was going to be good. We knew that losses were going to come down. And the early indicators are that's going to happen. What's been really positive for us is the productivity and the flow-through and the conversion rates that we're being able to see. As I mentioned earlier, when you don't have the right fraud tools in place and you're not looking at the right data, you tend to be more conservative and decline a lot more people than you probably should.
That's exactly what we've seen with the conversion from Acceptance Now to Acima is that our approval rates are really up across the board, really across all risk bins and across all different product categories. Our conversion rates are up as well. So I would say, as expected, we knew that was going to be a tailwind for us. Early indications are that it's working just fine. That's why we have really high hopes for its impact on the Rent-A-Center business and the Rent-A-Center e-com business as well. For us, it seems continuously to look at underwriting at a very granular level. I mentioned the evaluation of fraud tools. We're continuously updating and refreshing what variables we're looking at, what data sets we're looking at on both businesses.
At the Upbound level, we've combined the teams to make sure that we're applying the best practices and methodologies across both segments. So I think just our continuous evaluation of kind of the tools that we're using and the data that we're using will help us get even more smarter on making decisions.
Thanks. That's helpful. I think, I mean, one of the advantages of Upbound being the largest lease-to-own provider in the country is that you guys have a lot of data on the non-prime consumers. And not just their financials data, you guys know what they are buying. So how are you leveraging that data into new opportunities for growth, new products, new services? How should we think about that?
Yeah. I think that is definitely part of kind of the strategy, as we kind of laid out during the last year during our Investor Day presentation. We feel like we have a lot of information. We've been in business for a very long time dealing with the non-prime consumer. So we feel like we have an expertise around that consumer. And given that longevity, we have a lot of experience of repeat business. And we know we have a big database of consumers. And so how do we leverage that and do more? And with Acima, we have a platform now and the technology that allows us to add different products to that platform. And the first way we've done it is really with the credit card partnership that we've talked about a little bit over the last few months.
How do we take our payment history with our customers, apply that to other product offerings, and help them graduate from product to product? Obviously, lease-to-own has a lot of flexibility to it, but a lot of folks liked having more of a traditional credit card product. And so how do we help our consumers using our data? How do we help them graduate from a lease to more traditional lending product? And that's what the partnership is all about, is figuring out how do we apply our data that we have on our consumers, kind of combine that with the Concora team's history on the non-prime side, and hopefully offer a lot more individuals the ability to have a credit card or a more traditional product. And that's step one.
So we have other things in the pipeline that we think we can leverage our data and continue to take non-prime consumer wallet share with our niche consumer base.
Gotcha. That's helpful. We're almost near the end of our time, but maybe to wrap up, knowing that lease-to-own is some sort of a slightly less followed space within consumer finance, what do you think the market is missing about the space and about the Upbound stories? And what may be underappreciated about the companies?
Yeah. No, I appreciate that question. I think the diversity that I mentioned earlier on the businesses between Rent-A-Center and Acima, we have the ability to be there for the non-prime consumer wherever they want to shop, whether it's in one of our stores, whether it's one of our partner stores, or e-com. I think having that diversity and that omnichannel experience is important for us to balance out. I think the resiliency of the business model is also maybe underappreciated a little bit. We've weathered several cycles on the Rent-A-Center side. There's a reason why we've been in business for as long as we have been. And that's because the business model itself is very resilient and can adapt to really any environment. When things are going well, our core consumer is doing well, demand is up, payment rates are strong.
When things aren't going as well and the macro is a little bit softer, then you get the trade down benefits that we've talked about before around having better credit-quality consumers dip down into our space. And so that resiliency and that flexibility in the model to really adapt to any environment, I think, is underappreciated. And then the story itself from an Upbound perspective, I think doing what we talked about a little bit about adding products into the mix, but that story of taking a 50-year-old company that is very mature, stable, that generates a lot of strong free cash flow, and then putting that cash flow to work in our growth engines, that's part of our strategy. And of course, we need to execute on that strategy. And hopefully, then the market gives us a little bit more credit for it.
There's a handful of things that we are very high on that we feel like are a lot of opportunities for us and a lot of runway for us to grow.
Gotcha. Unfortunately, we are out of time, though I still have many more questions. But with that, really appreciate your participation. And thank you very much, Fahmi.
Thank you, Hoang. Appreciate it. Have a good one.
You too.