Thanks. This weekend we can go back and forth.
Yeah.
Good afternoon, everybody. Thanks for joining us today. I'm Bobby Griffin, Covered Consumer Hardlines here at Raymond James. Today we're privileged to host Upbound Group at our conference. With us from the company are Executive Vice President, CFO, as well as incoming CEO, Fahmi Karam, and VP of Treasury Investor Relations, Jeff Chesnut as well. Today's format's going to be a fireside chat between Fahmi and myself. Before we get started, I just want to thank you guys for attending. You guys have been long supporters of our conference, so we really do appreciate that.
Thank you for having us, Bobby.
Absolutely. Fahmi, maybe to kick us off, we do have probably some new investors in the room. Can you give us a little bit of a high-level overview of the Upbound Group? I mean, for some here, you might remember this as Rent-A-Center. Maybe kind of let's talk on the different business units for a little.
Sure. Thanks again for having us, and thanks for everybody's support. Yeah, Upbound Group, we changed the name from Rent-A-Center. It's been a couple of years now. We're a data-driven, technology-driven company focused on financial solutions dedicated to the underserved consumer. About a four and a half, almost a four and a half billion top-line company with about $475 million of consolidated EBITDA. As Bobby mentioned, we do have three major segments: two that you guys may have heard of, and one we just acquired a month ago. Start with Rent-A-Center. Rent-A-Center is our mature business. Been in business now for 50-plus years. Operates about 2,300 stores, of which about 1,850 of them are corporate-owned stores throughout the U.S., Puerto Rico, and about 130 of them in Mexico. Rent-to-own business, mostly furniture and appliances. About 70% of the business is dedicated to furniture and appliances.
Strong free cash flow generation business that supports our growing businesses. Rent-A-Center this past year grew at about 1.5%, so low single-digit growth, but generates a lot of free cash flow to support the growth engine of our platform, which is Acima. Acima is a virtual lease-to-own business that we acquired in February of 2021. The main differences between the two business segments are when a consumer walks into a Rent-A-Center is obviously one of our locations. The difference with Acima is that they walk into somebody else's location and still ends up with a lease transaction. Obviously, given the digital aspects of Acima, it allows us to scale. The business grew the top line last year about 17% from a GMV and revenue standpoint, and EBITDA around $300 million or so in 2024.
The guide for next year is to continue to grow, grow high single digits to low double digits. Our newly acquired platform is a company called Brigit. Brigit is a financial health app that gives us out of the lease-to-own space and adds on a credit-building product, a credit-building product that allows the consumers to save while they build their credit, but also gives them access to instant cash through earned wage access liquidity solutions. Really excited about adding them into the mix. We closed that deal on January 31. Looking forward to getting them integrated with some cross-marketing opportunities and getting their 2 million subscribers introduced to Rent-A-Center and Acima, and then get our millions of customers on Rent-A-Center and Acima introduced to the Brigit product.
We're really excited about adding them into the mix and adding their cash flow underwriting into the mix. That's something that historically we haven't done on the Rent-A-Center and Acima side and gives us a lot of transparency, a lot of new data to hopefully make better underwriting decisions as well as service the customer much more efficiently.
Very good. Yeah, I think we should probably dive into each one of those a little bit more. Let's first switch, maybe talk about your core customer, health to consumer. What are you seeing from the core customer, Dan? Kind of how do you view the we're getting a lot of questions on the consumer today versus three months ago or six months ago. What are you guys seeing from your customers?
Yeah, it's been a big topic today during the conference. I think every single person has asked it maybe twice. Yeah, the health of the consumer. Our core consumer, and maybe just to kind of level set on who our core consumer is on the Rent-A-Center and Acima side of the house, and even with Brigit, it's the same demographic. On the Rent-A-Center business, you're thinking about folks that make $25,000-$35,000 of annual income. On the Acima side, maybe $50,000-$60,000 of annual income. Your typical underserved consumer on the non-prime space. That consumer, although very resilient and has proven to be resilient over several cycles, has been under pressure really since the end of 2021 and into 2022 when inflation really, really kicked in.
I would say that continues through today that they are still very much under pressure, and we have to manage the portfolio. We did see a little bit of deterioration around the bottom end of our credit tiers really throughout 2024, where we had to adjust underwriting again. We are continuously adjusting underwriting, but we did do some tightening across the board in the August-September timeframe and just seeing some of that deterioration. We do that at both Rent-A-Center and Acima, but it impacts the businesses in different ways. At Acima, we are able to tighten up on the bottom, but then also benefit from the trade-down aspects of that business. If you think about how Acima generates its new customers and where it picks up its new customers, it is at real time at the store level at the point of sale.
That trade-down aspect of consumers getting declined through the traditional lenders that sit above us in waterfalls, we're able to capture a lot of that trade-down and have the luxury and the benefit of being able to tighten up on the bottom and still get a lot of applications coming to us through our better risk tiers to continue to grow the business. We're able to grow in the fourth quarter despite those tightening efforts of about 15% year over year in the fourth quarter. The tightening is working. You can see that through our delinquency rates. You can see that through our losses. Losses improved sequentially in the fourth quarter about 20 basis points and improved about 90 basis points year over year.
On the Rent-A-Center side, similar tightening adjustments were made in the end of the third quarter, but the impact of the business is a little bit different. With unemployment where it's at today, you're not seeing a lot of that trade-down on the Rent-A-Center business. When you do have to make those tough decisions to tighten up, it does put a little bit of pressure on the portfolio size, which also puts a little bit of pressure on margins, which is reflective in our guide in 2025. Still healthy margins at 15% and still generate a lot of free cash flow for the consolidated entity.
Very good. What do you kind of think we are in the trade-down cycle? It's been a nice tailwind for the Acima business. You're starting to hear more reports of the top-tier tightening. Do you think we're kind of middle innings of that, or what is your view of the trade-down cycle?
Yeah, our estimate is that it's going to continue throughout 2025. I think some folks feel optimistic in the second half, and we hope they're right as far as the macro improving and the consumers picking back up in the second half of the year. My estimate, given all the uncertainty in the market today and over the last few weeks, is that trade-down will continue, and our guide for the year has it continuing both from a margin standpoint and from a GMV standpoint really throughout 2025.
One of the interesting aspects, I mean, is the GMV growth on Acima is kind of coming despite the core categories probably actually not growing given that trade-down dynamic. If you had your dream scenario, what works better? The categories growing or the trade-down or kind of a mix of both? Yeah, just talk through maybe that a little.
Yeah, I think the strength of the categories for sure will definitely take more demand and more applications through just diversity of our product mix. Between a weaker economy and a stronger economy, we're going to pick the stronger economy because our core consumer will be coming from a position of strength, will be able to stay on rent longer, maybe even pick up a second or third lease with us. We'd prefer a stronger economy, but the business model is resilient. The business model has proven itself, at least on the Rent-A-Center side for decades through several cycles to be able to adapt really to any environment. We do benefit from trade-down, and that's great for Acima to be able to continue to grow.
It does have a short-term headwind to gross profit margins that we experienced in the second half of 2024 that you're starting to see some of the benefits on the loss line from that trade-down. Generally speaking, we can adapt to really any economic cycle. Let me touch on furniture because furniture obviously is a big category for both of our businesses. We get asked a lot about how that product category is going. Furniture, even though it's month to month, getting slightly better, it still is very much under pressure when you look at it on a merchant by merchant or location by location basis. What Acima has done a really, really good job of doing over the last few years is diversifying where the GMV comes from.
In the middle of headwinds on the furniture category, we've had to diversify where our GMV type of merchants and the categories. You can see from our last presentation, wheel and tire now is up to 25% of GMV. Jewelry is in the 15% range. When furniture does come back into strength, we'll still have all of those merchants onboarded, and it should be a real nice tailwind for the business.
I think one of the other aspects is from you guys versus some other industry peers. I mean, your customer base, I think throughout Acima is more diverse, right, in terms of largest customer percentage of GMV, even across all the product categories.
Yeah, I mean, if you look at the history of Acima and how it kind of started 10 years ago, it's consistently been focused on the small, medium-sized businesses. Think of merchants that have two to five locations. What that allows us to do is, one, diversify where the GMV comes from, but also allows us to continue to add new locations through our sales force. We add hundreds of locations every month. We add about a 10%, almost 10% increase in the number of active locations in 2024 compared to 2023. Brought over a million new customers to Acima last year. You're right, from a GMV concentration standpoint, our top 10 merchants equal about 30% of our GMV. It really drops off from there from a diversity standpoint.
Whether it's product or whether it's merchant, the business is well diversified and allows us to adapt.
Let's dive maybe a little further into Acima. You got great momentum coming on the GMV side. Talk about the EBITDA conversion, some of the operating goals for 2025. You mentioned a little bit of the gross margin pressure as you kind of get a little bit different of a mix of customers. How do you think that plays out this year? What can some of the kind of flow-through from this good growth look like?
Yeah, we're really, really pleased with how the Acima business is doing. We talked a little bit about the top line growth. It obviously starts there. With trade-down, you do have a lot more of folks choosing the 90-day buyout feature of the lease transaction, which definitely puts pressure on gross profit margins, but is a good trade for us because, one, it brings us new customers. Those customers that exercise the 90-day buyout feature tend to come back for a second and third lease. Those are more profitable for us, whether they exercise the 90-day buyout option or not. As we said, really throughout 2024, some of it was timing. You're going to see the gross profit pressure first, and then you're going to start seeing the benefit on the loss line.
You will start to see the benefit from an expense and operating leverage standpoint. We started to see that in the fourth quarter of last year. We had margin improvement of about 60 basis points sequentially, still down year over year, but we are starting to see that improvement in the fourth quarter. Our guide for 2025 is a continued improvement in margins at Acima. We will start off low. The first quarter is the low point of the year from a seasonality standpoint, given a lot of the tax season and the buyout activity. As the year progresses, our expectation is trade-down continues to happen. 90-day buyout activity continues to happen.
Flattish gross profit margins, but you'll start to see improvement on the loss line and start to see improvement from an operating leverage standpoint, and it'll drop down to the EBITDA margins, working its way toward the mid-teens area. I get a question, what do you mean by mid-teens? To me, that's 14-15% EBITDA margins for the Acima business. If we can grow it double digits, keep our losses in the 9% area, and generate 14-15% EBITDA margins, that's a great combination for us.
You brought up the tax side, so I'll go ahead and just ask the tax question that everybody asks. I feel like every year we're debating different weeks of when they're falling and whatnot, but what are you seeing from the tax refund season? How does that impact the business? What do you guys look for in that?
Yeah, I would say we were delayed about a week. Definitely we're watching it on a daily basis, especially on the Rent-A-Center side. You can see the cash come in on a daily basis. We're basically caught up to where we were this time last year. It seems like per refund, it's up year over year almost 10%. That's a great signal for us for our consumers to have a little bit more disposable income. What's been really interesting this year for us is having the Brigit team in the mix as well. I touched on it a little bit with their cash flow underwriting capabilities, having access to bank account information in real time.
To be able to see the tax money hitting folks' bank account, it's been really interesting to see how much more data in real time that we're going to be able to get with the Brigit folks in-house now. So far, it's played out very much consistent with our plan, very much very consistent with where it was this time last year, and expect it to be a strong season.
Yeah. Yeah, let's talk about Brigit a little bit. Maybe to kick it off, new acquisition, you guys talk about the strategic rationale behind that, kind of the process of why you feel it's a good fit for the different end markets that you're participating in, and we'll dive in from there.
Sure. As I mentioned, we are a platform dedicated to the underserved consumer. As we looked around our product offering a little over a year ago, credit building was one area that we thought was missing from our platform that a lot of other folks have. Honestly, where our consumers are interested in are spending some of their time. What Brigit gave us was much more than just a credit building product. It gave us a business that has over 2 million subscribers, about 1 million paying subscribers, and just under 1 million using the free version of the app. It more than doubled our active consumer base when you compare it to our active users on Rent-A-Center and Acima. It came with some scale, came with a lot of demand for the instant cash product.
Without us, they were profitable on a standalone basis for the last two years. Scale, profitable on their own, growing at 50-60% per year on our top line and subscriber business. You mix in the cash flow underwriting that I've mentioned, and it's from somebody who has spent a lot of time underwriting the non-prime consumer for us to be able to verify employment, verify income, verify affordability using real-time data, and then all the other attributes that you get based on cash levels throughout the month, where they spend their money, those types of different aspects of the business in real time versus looking at more lagged information. For the non-prime consumer, it's hit or miss on the type of information you get.
From an underwriting standpoint, that was a real powerful way for us to say, how can it improve our core business? That cash flow underwriting is definitely a way we can improve our core business. Customer engagement was really kind of the icing on top for us. If you think about our consumer on the Rent-A-Center and Acima side, think about large durable good transactions that you do not have to buy a sofa or a fridge that often. The customer engagement level on the Brigit side is fantastic. Most folks open the app six to seven times per month, and about a quarter of their subscribers use it on a daily basis.
That interaction with our consumers, coupled with the cash flow underwriting to be able to target them with personalized offers at the right time, we think is going to be a game changer for us. It checked off a lot of boxes for us, and obviously, we're very excited to have them.
What's the kind of integration goals for the first year? And then maybe to dive in a little further, I think the cash flow kind of monitoring aspect from a risk profile is pretty unique to at least my time in the lease-to-own industry, getting that capability. So is there a test of that going on, or is that a year two or year three type integration aspect? Let's dive into that a little further.
Yeah, I think our first goal is to continue to allow the founders and the great team that they've built to continue to grow the company, continue to spend money on R&D and the pipeline of different ways that we can add to the bundle. I failed to mention it's a subscription model. Over 80% of their revenue comes from the subscription fees on a monthly basis. We want them to, first and foremost, continue down their roadmap and continue down the plan of continuing to provide for consumers and grow their business the way they've been growing it. On top of that, the cross-marketing aspects, we talked a little bit about it when we announced the deal in December. Their consumer is Rent-A-Center and Acima's consumer.
The demographics, there is a lot of overlap between the customers that we target, even though there is not a lot of active users that use both Brigit and/or Rent-A-Center and Acima. There is a lot of ways for us to cross-market using the same demographic. Introducing Rent-A-Center and Acima customers to Brigit and introducing Brigit to Rent-A-Center and Acima customers is step one. On the cash flow underwriting side, the underwriting teams have already started to collaborate, figure out ways that we can hopefully get some quick wins. No, we are not waiting until next year on at least those two fronts. We will hopefully see some impact of it by the end of the year.
Very good. Maybe let's switch gears a little to some of the current events out there. I mean, you guys mentioned furniture as a category. How do you think about tariffs? The news that came out recently is tariffs might impact your business.
Sure. With our business, there's always kind of some pros and maybe some things that put a little bit of pressure on us. I think most people, when they think of tariffs, they're thinking about higher costs, and that impacts the Rent-A-Center business. We had to go through this in 2018 when tariffs first kind of came up during the last time Trump was in office. A lot of our vendors switched their manufacturing locations from China into other countries. What we did see is, even though our cost may have gone up, given our format and the way we market to our consumers is based on a weekly payment, we can easily pass on maybe $1 or $2 a week and pass on that cost.
We can even add on maybe a week or two at the end of the lease to extend the lease a couple of weeks and easily offset any short-term impacts on increasing costs. We have had some suppliers, mostly on the appliance side, so far announce a few price increases, but as I said, we can easily pass those on with just a dollar or two weekly rate increase. The other aspect of it is if there is some price inflation around products that actually pushes a lot of folks potentially into the lease-to-own category. I have been pointing today to at least one product category specifically around TVs. TVs was a big rental item for Rent-A-Center historically. Over the last two or three years, that has definitely come down as a percentage of our mix because TVs have become pretty inexpensive and no need to lease them.
There are other aspects. If the cost does go up to a certain point on certain products, that will push more people into the trade-down aspect and may push more people to a rent-to-own or lease-to-own solution. We think we can pass on the cost, and in some ways, it could be a good part of the trade-down story.
Maybe when we kind of put it all together, you got a core business, putting off a lot of cash, Acima growing business, Brigit, a growing business, take some investments. How does it all flow in from a capital allocation, cash flow aspect? What's some of the goals to do with this cash flow?
Yeah, I think first and foremost is reinvesting in our growth businesses. We think, as I mentioned, that combination of growing Acima, growing it at mid-teens EBITDA margins is a great use of our capital. Obviously, we did use leverage to make the acquisition. It took leverage from about 2.7 times to 3 times leverage post-acquisition. If we hit the midpoint of our guidance for the year from a GMV and an EBITDA standpoint, we should generate $150 million-$250 million of free cash flow and use that to pay down debt and get us back from a leverage standpoint back to pre-acquisition levels by the end of the year. Of course, that's going to depend on Acima. If it grows again, 15%-17% like it did in 2024, that will eat up some of the free cash flow, but we think that's a good trade.
That sets us up for a big 2026, and we can deleverage through EBITDA growth that way as well. Of course, the dividend. We raised the dividend last year, another 5%. Obviously, a very healthy dividend yield. That is the way we return capital to shareholders. For now, it is about reinvesting in the business, paying off a little bit of debt, and supporting the dividend.
When you look at the store business today, the Rent-A-Center business, you guys have done some nice work around the portfolio, some less productive markets back into the franchise operations, some tight control on costs. Where do you think the portfolio sits today from the market you're in, and what do you think some of the other levers you might have from a cost side of things could be?
Yeah, I think you're right. We did do some store optimization last year. We always look at our stores every time a lease comes up, and we reassess that location. We are always looking at the store footprint. We did consolidate about 55 stores last year. We did franchise another 55. We'll continue to evaluate the footprint. For now, we're pretty happy with the coverage of it. For Rent-A-Center, the growth opportunity there is web conversion. About 26% of our revenue today is from the web channel. We have millions of customers that come to rentacenter.com to shop, a little over 3 million a month. We can do better on converting those shoppers into actually funded leases. To the extent we are successful at converting more on the web, that gives us a little bit more flexibility on the store footprint.
For now, we're happy with where the stores are.
When you do that conversion or consolidate, what do you typically keep in or picking up or spreading? I guess think of it as spreading over the remaining stores from a contract basis. How does that leverage point work?
For last year, the 55 stores, the criteria for us to consider whether we wanted to consolidate them or not was we had to find a store that was in two or three miles of another store. Leases were going to expire within one or two years. The lease buyout from that standpoint was not too punitive. What we have seen is we have been able to retain about 65% to 70% of that portfolio. You can see the benefits of maybe saving some of the operational costs and still being able to generate 65%-75% of the revenue. We do look at it community by community and geography by geography and try to make the best decision for the company.
I think we got a couple of minutes left, maybe two, three. Fahmi, I mentioned when we started, new title, incoming CEO starting here, I believe in May. First, congrats on that. Really just be curious. You've been around the company a couple of years. What excites you? What do you want to dive into now as you take over the reins?
Thanks, Bobby, for that. As I told the team internally, everybody wants to know what the new person is going to do. I don't feel new. I've been here for two and a half years sitting side by side with Mitch and helping build the strategy over the last two and a half years with him. No drastic changes to the business, no drastic changes to the strategy, but continuing the evolution, going from traditional retail, brick and mortar, Rent-A-Center to Upbound, to buying Acima, to now Brigit, continuing the digital evolution of our business. Even inside Rent-A-Center, as I mentioned, 26% of the business is now on the digital web aspects, continuing to push on that. We're excited about the opportunity in front of us. The businesses, as I mentioned, in great shape. We had a great quarter.
We have a great 2025 ahead of us. We're going to continue down the path of kind of the digital evolution.
Very good. I appreciate you joining us today. Thanks again.
Thanks, Bobby. Appreciate it.