Good morning, and thank you for holding. Welcome to Rent-A-Center's Q3 earnings conference call. As a reminder, this conference is being recorded, Thursday, November 4, 2021. I would now like to turn the conference over to Mr. Metrano. Please go ahead, sir.
Thank you all for joining the Rent-A-Center team this morning to discuss our results for the Q3 of 2021. We issued our earnings release after the market closed yesterday, and hopefully, you've had a chance to review it. The release and all related materials, including a link to the live webcast, are available on our website at investor.rentacenter.com. On the call today from Rent-A-Center, we have Mitch Fadel, our CEO, Jason Hogg, Executive Vice President of Acima, Anthony Blasquez, Executive Vice President of the Rent-A-Center business segment, and Maureen Short, CFO. As a reminder, some of the statements provided on this call are forward-looking statements, which are subject to many factors that could cause actual results to differ materially and adversely from our expectations. These factors are described in our earnings release as well as in the company's SEC filings.
Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements except as required by law. This call also will include references to non-GAAP financial measures. Please refer to our Q3 earnings release, which can be found on our website for a description of the non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Mitch.
Thank you, Brendan, and good morning to all of you who have joined us today to discuss our Q3 results. We certainly appreciate your interest, and are pleased to have the opportunity to update you on the developments in our company as we continue to be among the leaders in the advancement of leasing as an alternative solution for consumers in today's rapidly evolving commerce and payments landscape. You know, over my career, I can't think of another period of such innovation and disruption as we're seeing today with the range of developments, things like digital wallets and cryptocurrency and super apps and buy now, pay later, and most importantly, new lease-to-own options, which we often refer to as LTO. With our leadership position in consumer leasing solutions, we are in a great position to benefit from this environment.
Take, for example, the current proliferation of buy now, pay later. You know, we get asked a lot if it's a threat, but we believe it's actually the opposite. Lease-to-own is very complementary to buy now, pay later because we see little customer segment overlap, and LTO can drive incremental sales in the buy now, pay later waterfall. In fact, we're seeing this benefit firsthand in our business today with growing interest in our virtual LTO offering from potential merchant partners who realize they're leaving money on the table with customers that don't qualify for buy now, pay later. Similarly, consumers are seeking payment services that work for them rather than for the benefit of an established system that is perceived to take advantage of and exclude consumers.
In contrast, LTO is one of the most inclusive payment options serving even unbanked consumers, and it's highly flexible, and getting approved doesn't require a hard credit inquiry that can impact credit scores. Because LTO solutions include returnable consumer durable products like furniture, appliances, and electronics, transactions typically have a higher average ticket size , and longer average payment horizon than other payment solutions like buy now, pay later. You can understand why we're really optimistic about our future following the Acima transaction earlier this year, which made us a leading LTO player, and the only one with our span of omni-channel capabilities across our segments. The integration's going well, and we're on pace to achieve our synergy targets.
On top of that, you can factor in the Acima ecosystem, which is targeted to be up and running in early next year, and we believe can revolutionize LTO, potentially doubling our addressable market to around $100 billion. As LTO continues to gain momentum, we think our scale and omni-channel capabilities provide us with a competitive advantage because processing more applications and managing more customer relationships will enable us to hone those capabilities even further. This should translate to even more consumers and merchant partners. This data and technology aspect of our business is underappreciated, and we're investing meaningfully to capitalize on it. By mid-next year, we'll have migrated the enterprise data warehouse to a cloud-based environment, and we'll be employing state-of-the-art tools like Snowflake and Databricks, which will further enhance our predictive analysis and AI machine learning capabilities.
These initiatives will drive savings from data center costs and productivity gains in processing activities, and they can benefit our commercial activities by reducing time for solution launches. When you put those pieces together, strong category momentum, a favorable competitive position, and dynamic growth agenda, it should translate to compelling financial performance. We continue to believe that in 2023, the company will generate at least $6 billion of revenue in the mid-teens% adjusted EBITDA margin. Factoring our strong free cash flow generation, already solid financial position, and focus on deploying capital to drive shareholder value, we believe that EPS should increase significantly over the next few years. Now, turning to the Q3, the team continued to execute very well. The store-based business advanced a number of initiatives focused on e-commerce and the in-store experience, which Anthony will update you on.
At Acima, we continued adding new merchant partners, including an exclusive strategic account, P.C. Richard & Son, one of the largest appliance retailers in the US That was a competitive win for us, and we think it demonstrates the value proposition other strategic partners will find in our differentiated capabilities. We also saw positive developments with the Acima ecosystem, and Jason will elaborate more on that shortly. Our Q3 revenue of $1.2 billion grew 66% year-over-year on a reported basis and 13% on a pro forma basis. In other words, as if we owned Acima in the prior year period. We had good organic growth across all segments. Acima generated pro forma year-over-year GMV growth of 19%, and the Rent-A-Center business portfolio was up 14% year-over-year at the end of September.
Typically, the Q3 is a slow season for the lease-to-own industry because with the vacations and back-to-school calendar, people tend to be less focused on household durable goods. We're pleased to see that top-line trends remained favorable, even with stimulus and even with other programs supporting consumers winding down. With our strong lease portfolio momentum heading into the last few months of the year, we believe we are very well positioned for the Q4 and for early 2022. Adjusted EBITDA margin for the Q3 of 14.4% was down sequentially from the Q2, which was consistent with our remarks on the Q2 earnings call in August. We had expected seasonality and less favorable customer payment activity related to stimulus winding down would result in some margin contraction.
Non-GAAP earnings per share was $1.52 in the quarter compared to pro forma non-GAAP earnings per share of $1.04 in the prior year. Now, looking forward, we have updated our full year 2021 guidance, primarily reflecting changes in the timing of normalization in customer payment activity due to stimulus winding down, as well as some impact on merchant partners from global supply chain disruption, primarily impacting the Acima business. We expected customer payment activity to normalize in the back half of the year. Quite frankly, they normalized faster than we expected. We got caught a little short on our collection labor and had to play catch-up. We have since staffed up and taken steps to stabilize payment activity trends for Acima at about where we expected them to normalize.
The supply chain headwinds at our retail partners, as I mentioned, are also affecting Acima's growth, and the combined impact of those two things is lower Q4 revenue and margin for Acima than we had previously forecasted. Even with this timing-related issue, our 2021 outlook for consolidated revenue and non-GAAP EPS is still within the range we provided with our Q2 results in August when we increased our full year 2021 guidance. We increased it in August, and we're still within that range now. Maureen will provide additional discussion on guidance here in a few minutes. In closing, I want to thank all the members of the Rent-A-Center team for their continued effort and dedication.
It's been quite a journey over the past few years, and I'm really thrilled with the progress we've made in 2021 and the tremendous opportunity I see in the future. With that, I'll turn the call over to Jason to update us on the Acima business.
Thanks, Mitch. Picking up on your comments about the market opportunity, it really is amazing to see how people are changing the way they think about paying for products and services, meeting other financial needs, and even the lifestyles to which people aspire. Consumers today increasingly value services that are flexible, personal, and inclusive over traditional services that are rigid, uniform, and exclusionary. This is disrupting the competitive landscape and benefiting innovative business models like buy now and pay later, and other alternative payment solutions like Acima. As we're witnessing this play out, it validates the Acima acquisition, our strategy, and the tremendous opportunity that we have for the company's future. These same trends drove us to develop a product suite over a year ago that we eventually reframed as the Acima ecosystem, including the Acima app, Acima browser extension, Acima marketplace, and the Acima LeasePay card.
We discussed the ecosystem at some length on our Q2 call in conjunction with an announced soft launch in early August. Before getting into a discussion of broader performance for the quarter, I'll share some insights from our preliminary findings. Keeping in mind that the primary focus for the launch at this stage has been testing and learning, we've seen encouraging early results that reinforce our belief in the transformative potential of the ecosystem. The Acima app, which is essentially mission control for the ecosystem, already has over 220,000 active users at the end of three months. The users are largely comprised of existing customers that were either unconverted or had unused approval amounts. Looking forward, we believe we are on pace to reach the 1 million user threshold during the Q2 of 2022.
To put this in perspective, it took Facebook and Twitter 12 and 24 months, respectively, to hit that milestone. Some of today's leading fintech companies like Klarna and Afterpay reached the 1 million download milestone in around six to 12 months, right in line with our projection for Acima. Among these active users, we are seeing some compelling conversion rates. For instance, mobile app users average 2.07 leases per customer, significantly higher than the portfolio average. While we believe this is reflective of the exuberance of early adopters, we expect this improved ease of access to increase the lifetime ratio of leases per customer. As we are seeing greater customer engagement via the mobile app and ecosystem, average ticket size remains similar to the portfolio average.
Since the launch of the ecosystem, we have seen conversion rates grow 20% over the last two months as customers get more acquainted with the expanded choices. To date, the ecosystem has generated transactions with over 2,200 different merchant locations, including more than 40 merchants who aren't even integrated with Acima, like Best Buy. This demonstrates Acima's ability to use patent-pending technology to allow customers to utilize LTO payment options with brands or merchants that do not have a relationship with Acima without the heavy investment in complicated integrations.
Customer feedback suggests the value proposition is resonating across relevant decision factors like delivering, quote, a wonderful experience, providing, quote, easy access and helpful information, and, quote, working with customers. Switching to the merchant side, these transactions are illustrating the significant potential value Acima can provide compared to other partners by driving incremental sales from lease-to-own customers who otherwise may not have been able to transact with those retailers. Rather than just offering another form of payment to existing customers, Acima can bring incremental customers and revenue to the retailer. The early ecosystem activity is also providing important data and insights that we are incorporating back into our offerings to improve them in preparation for the ramp-up to a full rollout planned for early 2022. For example, the Acima app just had its fourth release, and we are continuing to iterate and refine the product.
To date, enhancements include a streamlined customer application process, embedding the mobile app into our in-store text-to-apply process, expanding the mobile marketplace, adding store location functionality, and adding the ability to create and execute a lease in the app. Most importantly, we can now use our presence on a customer's mobile device to drive re-engagement and return-to-shop opportunities for our retailers. We've experienced consistent customer acquisition costs well under $100 per lease and see those CACs continuing to decrease as the number of leases per customer grows. Moreover, as our lease volumes increase, we will apply learnings from transactions to further improve marketing efficiencies and conversions as we ramp our efforts through 2022. The preliminary data is really encouraging, but it's premature to confidently project the timing of the material P&L impact.
It's probably easier to conceptualize the scale of the opportunity over the next three to five years. Consider that we have a target consumer database of approximately 50 million consumers who fit the profile of an Acima customer. The Acima LeasePay card will effectively increase the Acima network from 30,000 merchants to over 2 million Mastercard merchants where durable goods are sold. In terms of next steps, the virtual Acima LeasePay card is already available, and we are on track to pilot the physical card by the end of the year. Shifting to broader performance, we made significant progress on the Acima integration, getting the right organizational structure in place and enhancing operational capabilities. At the same time, we continued to execute well commercially, adding over 2,700 new retail partners during the quarter.
In addition, we took back more than 750 retailers from competitors, including P.C. Richard & Son and Sonic Electronix, by leveraging our enhanced value proposition, the ability to acquire our own customers, the digital ecosystem, and enhance retailer engagement through the mobile app. We also signed an exclusive partnership with Whirlpool, which is an e-commerce relationship and demonstrates our ability to win in the e-com channel. All of these factors equate to incremental sales for our retail partners, which, as we're seeing, is preferable to the rebates our competitors are offering. The Acima integration continues to be a high priority for the Q3. It's generally gone according to plan, and we continue to expect to realize $25 million in synergies in 2021 and ultimately $40 million-$70 million of run rate synergies.
Another top initiative this quarter was converting staffed and former Preferred Lease locations to virtual Acima locations. This was a major undertaking and included converting Conn's and Ashley corporate stores, among others. The conversions often are not only profit-enhancing but also should ultimately translate to better experience for merchant partners and consumers because Acima offers a more flexible and seamless experience. We essentially finalized the organization structure, aligning key related activities under one leader to facilitate better coordination of support and market-facing activities. Our sales and operations organization report to one leader, Ron Schoolcraft. Digital product development and product management report to Tom Abel. Technology and data services report to Chris Uriarte, who recently joined the company. I worked with Chris at Aon and at American Express.
He's a talented technology leader and will be a huge asset for Acima as we continue down the path of becoming a digital-oriented fintech business. I believe we have the right pieces in place to successfully execute on our strategy. Moving on to Q3 financial results, my comments will reflect pro forma performance as if Acima was included the prior year. The retail partner business revenues grew 17.1%, led by 19% GMV growth in the face of retail supply chain headwinds and changing consumer behavior as government financial support wound down. E-commerce continued to gain momentum and accounted for 14% of lease transaction volume, including the Wayfair partnership. Adjusted EBITDA margin was 13.9% in the quarter versus 16.5%.
Adjusted skip/stolen losses were 8.7%, up approximately 30 basis points year-over-year on a pro forma basis. As Mitch noted in his comments, we had anticipated that during the Q3, customer behavior would start to revert to more normal trends for customer payment activity and losses, which would negatively impact margins on a sequential basis. Our expectations were directionally right, though we underanticipated the extent of sequential margin decline due to the factors Mitch discussed earlier. Looking forward over the rest of the year, our top objective is to ensure the business is well-positioned for a strong start to 2022. With that, I'll turn it over to Anthony.
Thanks, Jay. Staying with the topic of the changing environment that consumers in our business are experiencing today, it may be surprising to some people just how well the Rent-A-Center business segment has been performing. For those of us close to the business, we know just how solid the underlying fundamentals are and how much opportunity there is to generate consistent growth over the long term. This was illustrated again in the Q3 with revenue growth of 5.6%, including 12.3% same-store sales growth, and that was comping against 8.6% revenue growth and 13% same-store sales growth in the prior year period. That makes it 15 consecutive quarters that we have generated positive same-store growth and five consecutive quarters of double-digit same-store growth, which is a testament to the unique value proposition we offer customers.
High-quality products, flexible lease-to-own solutions to fit everyone, and a great experience. Importantly, we continue to evolve with the consumer and are meeting their preferences with a growing omni-channel platform that has played a key role in our performance over the past year and a half. In the Q3, our e-commerce revenue grew 9% as it lapped 71% growth in the prior year. E-commerce accounted for 21% of revenue, a substantial increase relative to just 13% in the Q3 of 2019. Importantly, we believe we remain in the early innings of capturing the long-term opportunity in the e-commerce channel. The team's strong execution, including sourcing product, marketing, merchandising, and collections, translated to 14% year-over-year growth in the portfolio for the Q3.
We feel we're in great position heading into the home stretch this year and for a solid start to 2022. Profitability also remained solid in the Q3 with adjusted EBITDA margins of 22.9%, up 60 basis points year-over-year, despite loss rate expansion of 140 basis points due to the normalization of trends following the wind-down of government stimulus. We still believe that over the long term, our loss rate should be around 3% given the improvements we're making in collections and decisioning. Longer term, I think the business is well-positioned to capitalize on expanding consumer interest in flexible and affordable payment options. We have a relatively large core consumer base to whom we provide a specialized service that makes a difference in people's lives every day.
We still have considerable opportunities to expand our retail business in our existing footprint through surgical openings, new store concepts, and expanding into new product categories. In addition, we have tremendous e-commerce opportunity that leverages our differentiated omni-channel capabilities. While e-commerce will play a critical role in our future, we feel the brick-and-mortar business is just as important because many of our consumers today, especially lease-to-own customers, still prefer an in-store experience. Moreover, brick-and-mortar allows us to participate in transactions holistically, including sourcing product, purchasing at wholesale cost, having the ability to establish competitive pricing for customers, and to provide the last-mile logistics for our e-commerce channel.
Looking out over the next few months and into 2022, we feel good about the business environment and believe the set of initiatives we're focused on, such as e-commerce enhancements, customer engagement and support, and employing continuous improvement tactics should set us up very well for next year. I'll now turn the call over to Maureen.
Thanks, Anthony. As Mitch noted earlier, we delivered solid results in the Q3 despite some anticipated headwinds that we called out on the Q2 call, including some typical Q3 seasonality and a reversion to more normal ranges for customer payment activity, loss rates, and early payouts. Reported revenues of $1.2 billion increased 66% year-over-year, and consolidated adjusted EBITDA of $170 million almost doubled. Much of that growth is attributable to the Acima acquisition that closed in mid-February. On a pro forma basis, consolidated revenues grew 13.3% and adjusted EBITDA grew 4.1%. This translated to a margin of 14.4% in the Q3 compared to 15.7% for the prior year period.
The year-over-year contraction in margins was primarily attributable to normalization in customer payment activity for delinquencies and loss rates from the wind down of government stimulus, as well as a mix shift to the high growth Acima business. Margins for the Rent-A-Center business segment, Mexico segment, and corporate costs were all favorable year-over-year, while the franchise segment margins were down 135 basis points. Below the line net interest expense was $19.7 million, reflecting the debt financing from the Acima acquisition. The effective tax rate on a non-GAAP basis was 24% compared to 23.3% in the prior year period, and diluted share count was 68.2 million. GAAP EPS was $0.31 in the Q3 compared to $1.15 in the prior year period and included one-time costs related to the Acima transaction and integration.
After adjusting for special items that we believe do not reflect the underlying performance of our business, non-GAAP EPS was $1.52 in the Q3 of 2021 compared to $1.04 in the prior year period. We generated $55 million of free cash flow in the Q3 and returned $38 million to shareholders through a $0.31 quarterly dividend and share repurchases. Year to date through October, the company has repurchased $80 million of common stock at an average price of $56 per share. At the end of October, the company had approximately $170 million of remaining on its current share repurchase authorization.
At quarter end, we had a cash balance of $159 million, gross debt of $1.3 billion, net leverage of 1.7x, and available liquidity of over $600 million. Regarding our financial outlook for the full year of 2021, we are lowering the high end of our previous guidance ranges for consolidated revenue and non-GAAP EPS. We now expect consolidated revenues of $4.55 billion-$4.64 billion and non-GAAP EPS of $5.90-$6.15. Guidance for adjusted EBITDA is now expected to be between $645 million-$675 million and free cash flow within the range of $280 million-$320 million.
For the Acima segment, we expect revenues of $2.32 billion-$2.38 billion and adjusted EBITDA of $300 million-$320 million. This outlook reflects the continuing supply chain headwinds our retail partners are facing and a more rapid shift back to pre-pandemic trends than we had anticipated for customer payment activity and loss reserves due to the wind down of government programs that had supported consumer spending during the pandemic. We had previously incorporated a more gradual reversion to those factors, which impact both top line and margin over the next couple of quarters in our forecast. Even with supply chain headwinds and more normalized lease performance metrics, we still expect Acima to generate 20%-25% annual GMV growth in 2021 and approximately 14% EBITDA margins in Q4.
Looking beyond the Q4, the business should largely be past this set of internal and external adjustments. As Mitch mentioned, we remain confident in our longer term targets for the company. For the Rent-A-Center business segment, we are not adjusting prior guidance. Revenues are still expected to be between $2.02 billion and $2.06 billion, and same-store sales growth in Q4 is expected to again be low double digits. Adjusted EBITDA is still expected to be between $480 million and $500 million, and the midpoint of our guidance implies an EBITDA margin of approximately 23% in Q4, higher than last year and flat sequentially despite recent wage increases and adding headcount. Turning to capital allocation, our priorities are unchanged. The top priority is appropriately funding our business and investing in value-enhancing growth.
Next, we will opportunistically look at M&A that can generate favorable returns. After satisfying investment needs, we return capital to shareholders through a combination of dividends and share repurchases. With share repurchases employed opportunistically, we remain committed to a sound financial structure that supports our growth strategy and total shareholder return objectives. To conclude my comments, our Q3 efforts were a successful piece of the huge undertaking the company has been engaged in over the past 10 months. We have completed the largest acquisition in the company's history, integrated two organizations without letting up on execution, and we developed and are launching a new fintech payments ecosystem. Looking forward, I think we are well positioned for this next stage in our evolution and the highly compelling opportunities
To create shareholder value should become more evident. I'm also very excited to announce we are planning an investor day for late Q1 next year, and of course, more details to come. We will post detailed income statements by segment to our website and file our 10-Q later today. Thank you for your time this morning. I'll now turn the call over for your questions.
Your 1st question comes from Bobby Griffin with Raymond James.
Good morning, everybody. Thanks for taking my questions. Hope everybody's doing well.
Good morning, Bobby.
1st, I just wanted to talk about maybe just the month-by-month basis. I know that typically you don't get into that type of color, but just now that things are starting to normalize, it'd be helpful. How did kind of payment activity and you know, skips and stolen trend during the quarter? Did it kinda level out in October, and that's what you're assuming carries forward in the Q4?
Mm.
are you assuming, you know, it continues to build back up a little bit in November and December?
Yeah, good question, Bobby. It deteriorated as the quarter went on, as we got farther away from stimulus. The good news is that as we got into October, especially as we ramped up from a staffing standpoint, got caught up from a staffing standpoint in the collection center, we've seen really good trends in October. That gives us the confidence going forward that we've, it's certainly normalized faster than we thought. October, it gives us a good feeling going forward and confidence going forward that it was a short-term blip.
Okay, that's helpful. Secondly, is more just longer term inside the Acima business. You know, obviously, we got a outlook for really good revenue growth. Maybe just help us unpack, you know, where you see some margin opportunities at for that business within the P&L is. You know, I know gross margin can move around a lot based on what the customers are and stuff. Just maybe as we think two, three years out, where there could be upside on the margins and what some of those moving parts are.
Thanks, Bobby. You know, when you look at some of the things that I was talking about earlier, we've got some key differentiators that are out there, and particularly when you look at the ecosystem. Having declining customer acquisition costs while simultaneously having increases with regard to the number of leases per customer when the average ticket is holding enables us to get margin expansion in that regard. Having this ongoing relationship is critical.
Also, as we continue to bring on more partners, like how I'd mentioned P.C. Richard, and we have Whirlpool and Sony Electronics, you're getting sort of a coattail effect that's taking place there as well because we not only have the ability to originate through the traditional locations, but now originate our own customers and drive them towards optimized retail, you know, origination experiences.
Okay.
The other thing I'd add. I'm sorry, Bobby.
No.
The other thing I'd add to that when we think down the road is in our legacy business, the store legacy business. We've got about half those stores converted, and we'll do the other half early next year. With the Acima decisioning and so forth, and what you've seen in the numbers, we'd expect in the long term the losses to be lower in our legacy business as we convert over to Acima. As well as it's a faster platform and can it reduce labor a little bit in those stores that we haven't converted yet. I think as we go forward, the store business, you know, has some opportunity. That's part of the long-term synergies we expect anyhow. I think we'd...
Overall, in the business, you'd see lower losses as well. Yeah, we're gonna continue optimizing by channel using, as Mitch was talking about, our machine learning and AI so that every partnership, every channel, every product continues to get crisper from an underwriting perspective.
Yeah. Okay, that's very helpful. Mitch, that was actually my follow-up, was just the labor opportunity. So, I'll go ahead and jump back in the queue because you answered it. But I appreciate the time and best of luck here in the Q4.
Thanks, Bobby.
Your next question comes from John Rowan with Janney.
Morning. Can you guys remind me what is included and not included out of your current objectives in the guidance for 2023? Just run through, because I believe there was a lot that was basically excluded from that number that you're currently undertaking. Thank you.
Well, the guidance excludes any share repurchases. Really that's the only stipulation when it comes to our guidance.
We're really talking EBITDA margins when we say, you know, $6 billion, we expect to be at least $6 billion in mid-teens EBITDA margin. From an EPS standpoint, it certainly would not include that if you try to back in the EPS numbers. It's got 20%-25% GMV growth, you know, over those couple of years to get there. It's got us achieving the synergies that we're on track to achieve. It's got the Rent-A-Center business, John, running, you know, mid-single-digit growth next year because there's quite a tail coming into the year with that portfolio, as Anthony mentioned. You know, it's still up 14% year-over-year. Then in 2023, you'd look at low- to mid-single-digit growth in that business. Those are the, you know, base assumptions that we've talked about.
What about big retail partner wins and/or, you know, additional growth spurred by the omni-channel fintech platform?
Yeah, I think that's a really good follow-up question. You know, what we don't know is we know, as Jay was pointing out, we know how big the total addressable market is with the Acima ecosystem and LeasePay card and marketplace and so forth, and we're already seeing some great results as he mentioned, doing transactions in stores that we're not even integrated in. It's really exciting. It's transformational. But we don't have that figured in. I mean, that's, you know. It's hard to make those assumptions. And will it be worth, you know, $200 million in revenue next year or $500 million or in 2023, you know? At this point, we're trying not to build that in.
I think it's certainly that number, the 20%-25% is gonna take continuing to add on good strategic accounts, for sure. As far as the Acima ecosystem, it's you know, there's certainly upside when you think about it that way.
Okay. Thank you.
Thanks.
Your next question comes from Vincent Caintic with Stephens.
Good morning. Thanks for taking my questions. 1st, just kind of trying to think about the run rate maybe going into 2022, and I understand you're not giving 2022 guidance yet. When I think about the Q4 guidance, is there any sort of one-timers or anything that might change as we, you know, run rate into next year? Because it seems like when I look at Q4 guidance, you are having EBITDA margin expand quarter- to- quarter, and then maybe the credit normalization the Q3, maybe the, I guess, the reserving is taken up front. I'm just kind of wondering if there's anything when we think about the Q4 that we should be thinking about if we're modeling on to next year.
Thank you.
Well, go ahead, Amara.
I was just gonna mention there are some reserve adjustments that were made, both in the Rent-A-Center business as well as the Acima business that is meant to predict based on customer payment activity and loss trends, what we think should be reserved for into the future. There were some one-time adjustments made for that normalization. As we mentioned in our prepared comments, we expected that normalization to happen over a couple of quarters, maybe even slightly into 2022. There were some adjustments made this year that should set us up better for 2022 since we've taken some of those reserves that we likely would have taken a couple of quarters from now.
Okay. That's helpful. I guess, is there anything else in the Q4, just kind of when we're thinking about it, you know, going into 2022 or is the Q4 kind of a good proxy for how we should be thinking about the going forward?
Well, I think, you know, you're talking about a growing business and, you know, as you go into the future, still 19% GMV growth last quarter. And as we think about the year, you know, we're starting to comp over a big account like Wayfair added last year at this time of year, you know, so that can decelerate the GMV a little bit like the 19%. But, you know, converting the staff stores to the Acima system, you got some short-term drop when you think about anytime you're doing a conversion, and you take one step back, take two steps forward. But then you got the new accounts coming in, like Jay was mentioning, and that's what continues to drive it. You know, would you say, Jay, 2,700, you know, new accounts in-
Right.
In the last quarter. You know, there's a lot of ins and outs comping over a large addition. Obviously, you're not gonna comp over it unless you have other large additions. We feel real good about the large retailer in the Northeast, P.C. Richard, that we just signed an exclusive with, and we're kicking off here in November. For those of you who don't know it, they're one of the top 10 appliance retailers in the country.
You know, when you're growing the way we're growing, even though the Q3, the margins went down because of all the stuff we talked about, you know, stimulus and, you know, winding down, normalization faster, caught a little bit light on staffing as that happened, supply chain, obviously, and it's at, you know, you can guess on when that gets better. When you have a growing business, even it might be lumpy a quarter here or a quarter there like we just went through, Vincent. Overall, you got those 20%-25% growth rates. It would give or take a quarter of some kind of lumpiness like the stimulus ending. Overall, I mean, think about the stores we added. Not even talking about the Acima ecosystem, but 2,700 new stores, Jay, and so forth.
Yeah. To your point, I mean, it's a step function, but what we're seeing is the lead indicators are the competitive wins, the new products hitting marketplace, like Mitch is saying, then there's a ramp that gets associated with them. You start to see an acceleration once they get to their sort of exit velocity, right, when they normalize out.
There's also additional synergies that we're assuming will take place in 2022, that we haven't seen yet. We haven't finished the full integration yet. Some of those synergies were masked in the back half of this year because of some of the changes that we've seen with the normalization. The good news is we're seeing strong growth, and we're seeing those synergies play out. It's just some of that normalization that occurred that made it a little choppy. 2022, we should be at a normalized rate.
Yeah. Nothing that has changed our long-term outlook.
Exactly.
Good point.
Okay. Perfect. That's really helpful. Thank you for that. A follow-up question on the Acima. You know a lot of really exciting data. I saw the ecosystem video on your website. That was really interesting, as well as the marketplace. You know it's really interesting to see that marketplace, whether you've got Best Buy, Home Depot, Overstock.com. You've got a bunch of merchants in there. I was wondering if you can maybe talk about kind of your pipeline, how you're seeing that. You kind of answered it a little bit, but if you could talk about the pipeline there. Even partnerships such as you kind of touched on, these buy now, pay later partnerships, and they're taking an interest in lease-to-own and in the Acima.
Maybe if you could talk about the pipeline, both in terms of the merchant side as well as partnership sides and, you know, what's the, I guess, the timeframe look like for that? Thank you.
Yep. Thank you. I'll sort of take that in reverse order. When you look at the partnerships, the interesting thing, and what we've been sort of saying for a couple quarters now is we see this as a complementary set. As people become more used to buy now, pay later as a solution, it addresses a different segment than we address. For us, it's actually having the effect of getting people more accustomed to these alternative solutions. That's been feeding very nicely into our ecosystem like you talked about. With regard to the ecosystem itself, you know, we are a test and learn type of environment. We iterate. We rolled out the mobile app, like I talked about, with over 220,000 active users.
Now that we've started to get all of our metrics there, in line, and we've tested it out, we're continuing to add to the marketplace. We're seeing a fantastic volume going through the, you know, some of the merchants that you just mentioned, despite not having the integration. What you'll start to see is that we're accelerating then our efforts from a consumer standpoint. One very important thing, as Mitch mentioned, that, you know, with the 2,700 wins in other areas where we're succeeding, it gives our merchants the opportunity to take other bites at the apple because we are embedding our native mobile app, whereas before, customers walk in, have a very friction-free experience in the store, but then they leave.
Now we have the ability to execute, and what we're gonna be launching is executing on the mobile app and now having a stacking effect of customers so that when they do leave, we can continue to allow our merchants to continue to market to them, and more importantly, transact on their phones now versus having to come back into the store. The effect of that that'll have a sort of a force multiplier effect. The last thing I would say, which Mitch was talking about, and I mentioned briefly also, the LeasePay Mastercard. As we build a larger and larger base of consumers on our platform, we have more opportunities to allow them.
In our direct-to-consumer plays, we not only have the ability for them to make purchases at the merchants that you just described, but once we move the physical piece of plastic into that consumer base, their ability to start going to 2.2 million locations makes it a ubiquitous solution that is very similar. Why that's important is when we're having discussions with large national retailers, it helps us with integration. It helps us with not having to have a heavy integration. It also has completely changed the dynamic on how those retail partners view our solution as just another means, like a debit card or a credit card or any other means, for their customers to spend in the retail location.
Your next question comes from Anthony Chukumba with Loop Capital Markets.
Good morning. Thanks for taking my question. Just one quick point of clarification first. You said you keep using the word accounts, and then you also said stores. I'm assuming that 2,700, that's 2,700 doors, right? That's just 2,700 stores, not like 2,700 completely disparate retailers, right?
That's correct. It's 2,700 doors.
Okay. Given the fact that you've mentioned that 2,700 number, I guess my question is, what's the total number of doors for Acima at this point? Can you disclose that?
No. I mean, we don't talk about that other than we've made previous statements as to the size. Like I said in my comments, we say over 30,000 right now. That's growing at a pretty significant rate still.
Okay. No, fair enough. Okay, just one last follow-up. Just wanted to get back to the, you know, sort of the normalization, the collection activity. I just wanna make sure I understand this. Basically, it sounds like, you know, the effect from the stimmy check started to wear off and maybe you guys hadn't been as aggressive or didn't feel the need to be as aggressive with collections because everyone had stimmy checks and was making their payments and doing early buyouts. It sounds like you hired more people to, you know, now the collection or customer payment activity is normalizing to go after that, or do you allocate more hours or a combination of those? I'm just trying to understand exactly what that means.
Yeah, I'll start out on the Acima side then and pass it to Anthony for the Rent-A-Center side. You know, when Mitch was talking about being caught a little bit short, what we're talking about is we were converting over our operations, and in doing so, that's when we started to see the normalization accelerate. What we've seen now is our staffing ratios come back in line with regard to our account loads from a delinquent account load. The key is that our exit velocity for 2022 will be back in line with the guidance that we've provided.
You're talking call center in that case.
In that case.
Centralized call centers.
That's correct. The other thing is one of the nice benefits is the Acima platform has a number of other streams that are automated that enable us to enhance, not just having to have collectors, and we were able to then bring those online with a general portfolio.
Yeah.
Anthony.
Yeah.
Hey, Anthony. For the Rent-A-Center business, historically, the Q3 is softer from a payment perspective. We know that yearly going in, the Q3 is gonna wind down a bit as people go ahead and get prepared for school and vacations right before the school year begins. You're right, the people had stimulus checks in their pocket, but we knew that those were winding down. We knew that enhanced unemployment was ultimately gonna end as well. We took a proactive measure throughout the quarter to go ahead and get staffed back up. Actually, headcount year-over-year is up 7%. That not only benefited the opportunity when the normalization occurred to go ahead and react, it also sets us up for the Q4 from a demand perspective.
That one sort of unique situation that occurs is, you're right, the customers were more flush with cash in their pocket, and it's almost like a wait and see, like, when is the period that this normalization occurred? It occurs quickly. We, in turn, go ahead and respond, but there's also that balancing act to make sure that we don't overcorrect because we don't wanna go ahead and harm the portfolio as well. We went ahead, we normalized, and what we're seeing now in our leading indicators, we feel very confident that it, the historical trends for the Q4 will continue and the loss rates, like I said, around 3% going forward. We feel confident about that.
Got it. Very helpful. Keep up the good work, guys.
Thanks.
Thank you.
Thanks. Thank you.
Your next question comes from Brad Thomas with KeyBanc Capital Markets.
Yeah, thanks. Good morning. Just to follow up on that last line of questioning. So on the Rent-A-Center's side, as we look out to 2022, you think that annual losses can still be in the 3% range? Just any level of detail you go into on your confidence in that would be great.
Yeah. Thanks a lot, Brad. Yes, I do expect that that's gonna occur. 1st off, the normalization happening and what we're seeing right now from a customer payment perspective, we do feel confident. When you think about normalization, the way that I look at it in the Rent-A-Center business is I'm not expecting that we're gonna go back to pre-pandemic numbers. The reason that I can feel confident about that is because now we have centralized decisioning that's available inside of all of our stores. In addition to that, as a by-product of the pandemic, customer communication tactics and the initiatives that we employed there, and then the ramping up of digital payments.
When you put those things together, that's what makes me confident in the go forward of 3%, you know, around 3% being the range for RAC.
Yeah. Almost 60% of payments are now.
Yeah. Yeah
are happening outside the store now.
Yep. Approaching 60%, so, we feel good about that.
That's really helpful. Maybe a similar question for Jay on the Acima side. I mean, you know, the theme of this call, and I think others in the sector for this quarter, has been normalization happening faster than expected. Yet the Acima side, we're still seeing the losses down, you know, partially from having Acima within the mix. Can you just talk a little bit more, Jay, about your line of sight to 2022 and how you make sure you don't get overly confident in the algorithms and miss what perhaps would be a more violent move back to normal trends on consumers' part?
Yep. When you look at our 2022 loss projection, we're looking at somewhere around a normalization rate of 6%-8% within the virtual book. The key thing is how we don't end up getting, you know, kind of overconfident, to your point, with regard to the underwriting, is this ability to break it down by channel, by product, by partner. So there's not just one monolithic decision engine, but our machine learning and our AI is constantly running optimization and looking for exploiting the good portion of the population while minimizing the riskier portion of the population along those lines. We're able to track that in real time, and we meet on it on a regular basis.
Really helpful. Maureen, I apologize if I missed it, but can you just give us an update on where we stand year to date on synergies, how much you think you'll get in the Q4 and your current plan for 2022?
We believe by the end of the year, we'll achieve the $25 million that we talked about. There were a number of different initiatives, part of which we've deployed, others still extend within 2022, which is why we talked about a longer-term run rate of $40 million-$70 million. Most of what we had anticipated rolling out in 2021 has already occurred, but we are expecting some of those benefits to show through within the Q4. Like I mentioned earlier, we're on track with achieving those synergies. There's been some offset with the timing of the normalization, but we still feel very confident that integrating the Preferred Lease business with Acima, bringing those two companies together will make us a better company, will get us to mid-teens EBITDA margins over the next year or two.
Yeah. I think the other thing, Brad, when you think about the, you know, the future and a lot of questions obviously this morning about the future as compared to the lumpiness of where we are today. Remember the normalization of payments, what comes with that is a tighter credit environment. You know, you're talking to Jay's talking about the, you know, our own decisioning and certainly by vertical and even by retailer, and same in Anthony's business by vertical, how do we decision? And there's a tightening going on out there without stimulus. Everybody needs to remember that tighter credit environments are beneficial to us in the long run, even if in the short term they're not.
In the long run, lease-to-own business benefits from tighter credit out there above us. You know, and we're already seeing some of that in our vintages, in our what we call VantageScores. As people come into our portfolio, we're seeing a slight uptick in that customer credit worthiness, I guess you'd call it, or VantageScore. You know, you call it a lot of different things. We're seeing a better customer already, and we would expect that to accelerate. Everybody just needs to remember a tighter credit environment, even though in the short term we get you know, it impacted us in the Q3 and as we go into our Q4 and the guidance we gave, but in the long run, this is something that benefits LTO.
Absolutely. Thank you all so much.
Thank you. Thank you, Chris.
Thanks.
Your next question comes from Kyle Joseph with Jefferies.
Hey, good morning. Thanks for taking my questions. Not to beat a dead horse, but on the credit side, obviously it's normalizing. Can you just give us a sense for, you know, are there any potential offsets in the credit normalizing environment? Kind of, you know, remind us, you know, how the Rent-A-Center business did in a negative economic scenario like the GFC and then how you envision the Acima business performing in an environment like that.
Yeah. I think they both outperforming in an environment like that as we go and think about 2022 and 2023 as credit tightens. We've certainly seen that over the years with Rent-A-Center. You know, you go back to, you know, one of the worst recessions in the history of the company in the country in 2008. You know, we had good growth rates, certainly outperformed, you know, just about everybody when it comes to not only revenue, but, you know, our losses didn't go up and so forth. Acima should be very, very similar, Kyle. I mean, it's the same business. It's through retail partners. Of course, the Acima ecosystem stands, you know, can stand on its own, but it's still the same business.
It's still leasing where they can return the product, and we can re-rent those products through Rent-A-Center. You know, the recession resiliency story, I'm sure in 2022 and 2023, not that we're necessarily being in a recession as a country, but the impact will be there from a credit tightening standpoint. Credit tightening is good in the long run. You know, Rent-A-Center, when you look at not having to, you know, where we reduce the guidance on Acima, the annual guidance on Acima and not Rent-A-Center, keep in mind, I mean, Rent-A-Center's, you know, a couple thousand Rent-A-Centers out there have collectors in each store on the street.
If people aren't paying, they can react much faster to a technological collections of a centralized call center through virtual payments and so forth. The impact is gonna be much less on Rent-A-Center than Acima when this happened in the Q3 when the normalization was faster. Overall, in the long term, both should benefit from the tighter credit environment.
Yep, that makes sense. A quick follow-up on me, obviously, you talked about the supply chain impacting Acima, but just, you know, walk us through the Rent-A-Center side of the business. Any impacts from the supply chain, how your inventory is positioned heading into the holiday season there?
Yeah, Kyle. We're in a strong position from all the major categories. Good inventory levels, actually ended the quarter with held for rent up 24% versus the prior year. The merchants and the vendor partners have done a good job of sourcing inventory. We've said it before, just remember, in the Rent-A-Center business, we're able to go ahead and source for fewer SKUs, but buy deeper in them so that we have the staple items for the customers that are available. We're still seeing good expansion in categories like tools and tires and handbags and e-bikes, et cetera. We're looking for opportunities to expand the assortment that's available on the website as well.
Strategically, though, 'cause we wanna make sure that whatever we're showcasing to our customers online, that from a customer experience perspective, they're things that we can get. So we'll ramp those up as time goes on, as the supply chain loosens up. Overall, to meet the demand of the Q4, we feel confident, especially with that held for rent being up 24% year-over-year.
Got it. Thanks very much for answering my questions.
Thanks, Kyle. Thanks.
Your next question comes from Tim Beringhele with Northcoast Research.
Good morning, and thank you for taking my question. It seems like most of my actually questions were already answered, but I do have one bigger picture question for Anthony and Mitch. It seems like consolidation is happening in most fragmented industries in the US with, you know, all these supply chain issues and the kind of really limited capital of these smaller operators. I was wondering if we should expect something similar in the legacy brick-and-mortar business and if you guys have seen any kind of easing competitive environment, you know, recently. Thanks.
Yeah, Tim, this is Mitch. You know, besides us and you know the obvious one other public competitor, Aaron's, there's you know not near as much competition you know in the Rent-A-Center, either e-commerce or brick-and-mortar business as there is in you know the virtual environment. So it's not like competition has grown. We're growing. We're opening some stores this year, and we'll open stores next year. We're about the only ones growing stores. Our competitors are shutting down stores and on the regional side, we're not seeing any real growth there. So we're the only ones growing. You know, honestly, I think you know there'd be some opportunities for us to do some acquisitions here and there.
There'll be small ones that, you know, there's only one large competitor anyhow, so there'll be small ones, probably not all that material. You know, you can add a few million dollars of EBITDA here or there, but I think certainly there are probably some of them, but they'll be pretty small on that, in that side of the business. I think when you think about M&A, you know, using our great balance sheet for M&A or share repurchases and the capital allocation stuff that Maureen was talking about, you know, I think the opportunities are probably more, you know, on the Acima side and other business verticals like that, you know, in the payments world than it is, you know, on the Rent-A-Center side. We'll do them on the Rent-A-Center side, but they're gonna be pretty small.
Yeah, thanks. It's not so much the M&A activity I was interested in. You guys have been outperforming by, you know, I'm gonna say high single digits, for almost 24 months now. I was just trying to gauge, you know, how sustainable that is. Can you maybe remind us? I have, you know, a number in my head that, you know, 45% of the store doors in the industry are run by independents. Is that number much smaller now? Am I thinking of a number that's maybe, you know, five years old?
You know, I'd say it's. You're not that far off. It's between 35 and 45.
Okay. All right. Thank you so much for answering my questions.
Thanks, Tim.
Your next question comes from Carla Casella with JP Morgan.
Hi. Just two quick ones here. One on the labor cost front. It sounds like you pre-hired labor in Q3, but I'm wondering, are you still hiring in through fourth? Are you fully staffed, and how comfortable are you with the labor cost levels?
Yeah. Good morning, Carla. I'd say we caught up in the Q3 and into October. There's still hiring going on. There always is 'cause, unfortunately, you know, we have turnover as well. You know, I'd say we, you know, by the end of October, we're in pretty darn good shape and it's kinda normal going forward, the number of people we need to hire. The late Q3 and then into October was more of a catch-up.
Okay, great. Just as you mentioned a few times, you returned to more normal patterns sooner than you expected. As you see that, are you seeing any kind of uptick or change in the way you have to compete for either on the Acima side, retail partners or customers there, or on the Rent-A-Center side for your traditional customers? Like, are you changing any of the terms, or do you see any change in the average length of the contracts or anything unusual as you return to normal?
No, the good news in our business is that as credit tightens, it impacts our payments as we've been talking about this morning. From a demand standpoint, it actually pushes more demand as credit tightens above us, if you will, in the funnel. I think overall, Jay mentioned this on the Acima side, the proliferation of the buy now, pay later space where we really don't compete for that same customer, but there's a lot of turndowns in that space with our retail partners, and we're hearing from retail partners say, What do we do?
We need to talk to you about those, the turndowns we're seeing. As more people add more prime and near prime payment options for their customers, they start to see more and more customers they can't do business with as they add those options, and that just benefits us. Actually, you know, I hate to, I don't wanna call it easy, but it makes it easier to get their attention that they need the LTO option in the store.
Yep, absolutely.
Great. Thank you.
Thanks, Carla.
I will now turn the conference over to Mitch Fadel for closing remarks.
Well, thank you, operator, and thank you everyone for your interest this morning. Appreciate your time. You know, it's an interesting time. It's been a heck of a year so far. We gotta finish strong. You know, a heck of a year when you start off the year with an acquisition like Acima, you know, and I just. You know, we had some lumpiness in the Q3. Things normalized a little faster. We talked about the supply chain. Overall, you know, if we need to go back to our guidance at the beginning of the year after we closed Acima, we'd be delighted to be where we are today at the, you know, the from an EPS standpoint at a mid-point range in the $6.
You know, that's a lot higher than where we thought we'd be when we announced the Acima thing. Some lumpiness in quarters, but big picture, keep that in mind and just keep in mind that our outlook for the long term has not changed. In fact, you know, a tighter credit environment is a benefit to lease-to-own over the next couple of years. We're really excited. With that, we'll let you get back to your. Probably have another call coming anyhow, and we'll get back to work. Thank you, everyone.
Thank you for participating. You may disconnect at this time.