Upbound Group, Inc. (UPBD) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and thank you for holding. Welcome to Rent-A-Center's First Quarter 2013 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, April 23, 2013. Your speakers today are Mr. Mark Speese, Chairman and Chief Executive Officer of Rent-A-Center; Mr. Mitch Fadel, President and Chief Operating Officer; Mr. Robert Davis, Chief Financial Officer; and Mr. David Carpenter, Vice President of Investor Relations. I would now like to turn the conference over to Mr. Carpenter. Please go ahead, sir.

Thank you, Kurt. Good morning, everyone, and thank you for joining us. You should have received a copy of the earnings release distributed after the market closed yesterday that outlines our operational and financial results that were made in the first quarter. If for some reason you did not receive a copy of the release, you can download it from our website at investor.rentacenter.com. In addition, certain financial and statistical information that will be discussed during the conference call will also be provided on the same website. Please note the following additional important information. The statistical information will also include the 2013 first quarter segment data for rental merchandise and assets. We apologize that this information was inadvertently omitted from our first quarter earnings press release issued yesterday. Again, the 2013 first quarter segment data for rental merchandise and asset is available on the financial information page at investor.rentacenter.com. Also in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of EBITDA is provided in our earnings press release under the Statement of Earnings Highlights. Finally, I must remind you that some of the statements made in this call, such as forecast growth and revenues, earnings, operating margins, cash flow and profitability in other business or trend information are forward-looking statements. These matters are, of course, subject to many factors that could cause actual results to differ materially from our expectations reflected in the forward-looking statements. These factors are described in the earnings press release issued yesterday, as well as our Annual Report on Form 10-K for the year ended December 31, 2012. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements. I'd now like to turn the conference call over to Mark. Mark?

Thank you, David and good morning, everyone. Let me begin by saying how pleased I am with the results in our growth initiatives, specifically RAC Acceptance and Mexico. That said, we had a challenging and difficult first quarter in our core business. Results that we believe were negatively impacted by the macro environment, from the delayed issuance of federal income tax refunds, rising fuel prices and the higher payroll taxes. While we had anticipated and guided to down revenues for the quarter in our core business, it was greater than expected with our Core U.S. revenue down $58 million year-over-year. And while revenue growth in RAC Acceptance and International helped to partially offset the quarter decline, our overall results were disappointing with total revenue down 1.9%, and net earnings down 10.6%. Mitch will provide more quarterly details on each of the business segments in a few moments, but suffice it to say, it was challenging. In regard to the growth initiatives, I do remain very excited. In the RAC Acceptance business, revenues were up 45% in the quarter to over $127 million, and now represent nearly 16% of our total revenue and 20% of our total operating profit. Our operating profits continue to grow as the stores mature. For the quarter, operating profits were up $13 million year-over-year, totaling $16 million in the quarter. Very impressive and on plan. Regarding International and specifically, Mexico, their results were also good and in line with our expectations, with revenue growing over 150% in the quarter and totaling $9.5 million. We also opened 20 new stores in the quarter and now operate 110 in total. We remain very excited about the long-term opportunities Mexico provides for us. Robert is going to provide more specifics on the revised 2013 guidance as I noted in the earnings release last night, given the difficult first quarter, resulting in lower than expected ending portfolio in the core business, we are lowering our revenue and EPS expectations for the year. We are now expecting total revenue growth positive 3.5% to 5.5%, and EPS now in the range of $2.95 to $3.10. Of course, that does include the approximate $0.25 drag in earnings due to the International initiatives. We have faced headwinds before and while clearly disappointing, we believe that the company remains well-positioned and well-capitalized to execute its long-term strategy. The trends that we have seen in the Core U.S. business over the last several weeks are encouraging, up period-over-period, and support our belief that the first quarter was an anomaly, similar to what was seen in the broader retail market and that the need for our products and services remain strong. We're focused on regaining our portfolio throughout the year and have a number of initiatives in place to do so. I do want to thank all of our coworkers for their continued hard work and contributions. And as always, we appreciate your support as well. With that, let me turn the call over to Mitch to provide you more specifics on the operating results themselves. Mitch?

Thanks, Mark, and good morning, everyone. Well, as Mark mentioned, we are very pleased with the results in the growth initiatives, RAC Acceptance in Mexico. However, we believe our Core U.S. results were impacted by the macro headwinds. In overall same-store sales, we had forecasted the quarter to be down 2%, and we ended up down 4.3%. In the Core segment, we had forecasted the quarter to be down about 4%, and we ended up down 8.9%. In the quarter, we went into the quarter with a portfolio of accounts that was behind the year before, which is why we forecasted the Core at a negative comp of about 4%. With the delayed issuance of income tax refunds that are key part of our customer's total income, rising fuel prices and the higher payroll tax effect, we missed our forecast on both rental income and the sale income that is inflated by that income tax money being in the economy. The lower-than-expected revenues in the Core -- in the first quarter were equally split between rental income and sales income. So going forward in the Core, our plan is to drive additional traffic through strategic promotions and advertising, as we're 100% focused on getting that portfolio of accounts up to and above last year's comparable numbers. As Mark mentioned, we are seeing some of our implemented initiatives work in a very positive way and our recent trends within the portfolio have been good. Our collections metrics remain in line with our expectations and our customer losses in the Core rent-to-own stores came in at 2.4%, at the lower end of our historic ranges. Given the softness in the quarter, our inventory Held for Rent in the Core came in at 25.8%. As Dave mentioned, those numbers are now posted on our website but it came in at 25.8%, higher than we would like at the end of the quarter but we can work that down in the current quarter. In the RAC Acceptance segment, as we've mentioned, overall, we're pleased. Revenue of $127 million, operating profits of about $16 million and a positive comp of almost 34%, positively impacting our overall comp. Our key account is over 1,050. We've already got over 100 key [Audio Gap] inside of hhgregg, our recently added partner. And our delinquency metrics and customer keep rate metrics remain in line with our expectations. Overall, lots of positives in the RAC Acceptance segment. In Mexico, as Mark mentioned, we added 20 more stores and ended the quarter with 110 stores and an 80% count, another number that also positively impacted our overall count and we're currently on track to add 60 this year and we are on track to achieve four-wall breakeven in the country by the end of the year. Overall, a very good quarter in RAC Acceptance and Mexico, and improving recent trends in our Core business. Our focus will remain on continuing those positive trends in the Core. And for that, I would like to thank our 20,000-plus coworkers for all their efforts as we improve the quality of life for our customers. Robert?

Thank you, Mitch. I want to spend a few moments updating everyone on the financial results during the quarter and then review our revised 2013 annual guidance. After which, Tom will then open the call for questions. As outlined in the press release, our total revenues were $819.3 million during the first quarter of 2013, an approximate 2% decrease as compared to the first quarter of last year. This decrease was comprised of the following same-store sales comparisons: U.S. Core RTO was down 8.9%. Meanwhile, RAC Acceptance advanced approximately 34%, and Mexico had a same-store sales increase of 80%. However, given the composition of our sales mix in that the U.S. Core RTO revenues are in excess of 80% of our total revenue, our consolidated company-wide same-store sales comp declined approximately 4.3%, and as a result, our net earnings in the quarter declined approximately 10.5% to $46.5 million, for a total of $0.80 in diluted earnings per share. These results do include about a $0.06 drag on earnings in the first quarter due to the investment and ramp up of our International growth initiatives. As expected, these investments, along with the impact of our down comp, had a similar impact on operating margins in the quarter which were down quarter-over-quarter and equated to 9.7%. Our first quarter EBITDA equaled $98.7 million, and a margin of 12%. Positive cash flow during the first quarter exceeded $113 million. And during the quarter, the company repurchased over 465,000 shares of stock for approximately $17 million, repaid over $46 million in indebtedness, which was a combination of a mandatory payment and a reduction in the revolving lines of credit that were outstanding at yearend, as well as made our 11th consecutive quarterly dividend payment, and we ended the quarter with approximately $82 million in cash on hand. The combination of these factors allowed us to lower our leverage ratio from the end of the prior year to 1.52x as of March 31. We continue to believe our balance sheet is in great shape and as such, we believe we remain well-capitalized to execute on our growth initiatives and continue to provide long-term value to our shareholders. In terms of guidance. Given the results during the first quarter, both operationally and financially, we have revised our annual 2013 guidance. We now expect total revenues to increase between 3.5% and 5.5%. And with this projected increase in the top line, we expect our same-store sales for 2013 to range between a positive 1% and positive 2%. Overall, diluted earnings per share for 2013 are now expected to be in the range of $2.95 and $3.10, which includes an approximate $0.25 drag, primarily relating to our International growth initiatives. And as a result of the continued growth and ramp up of RAC Acceptance, we expect our gross profit margin to decrease approximately 50 basis points on a consolidated basis in 2013, although we expect total gross profit dollars to be up approximately 4.5% as compared to 2012. We expect both our operating and EBITDA margins to decline approximately 50 basis points while we continue to invest for growth and for the long-term. In terms of EBITDA and free cash flow, the company believe EBITDA will approximately -- approximate $400 million for the year, with free cash flow expected to be in the range of approximately $55 million. The 2013 guidance does not include any potential impacts of any share repurchases of common stock that the company may make, changes to future dividend, material changes to outstanding indebtedness, or the potential impact of acquisitions, dispositions or store closures that may be completed or occur after the date of this press release. With that, that concludes our prepared comments. Operator, would you please now open the call to questions.

[Operator Instructions] And your first question comes from the line of Budd Bugatch from Raymond James. Thomas J. McConville - Raymond James & Associates, Inc., Research Division: It's TJ McConville filling in for Budd. I have actually 1 on each of the segments. Guys, on the Core business, realize we're talking about a delay in the tax refunds and increased pressure on some disposable income with the customers. I would have expected, I think, a little bit more gross margin benefit in the quarter, in the Core segment. Anything you can offer there as to why we were only up 60 basis points when we may have had far fewer early payouts this year? Have anything to do with any of the merchandise coming from RAC over to the Core business?

No, TJ. I think, it's -- the 60 basis point improvement was based on less payouts. The revenue missed, remember, in the first quarter, was about half rental income, from our forecast at least, from that number where we thought the Core was going to be down 4% and it ended up down over 8%. That was split between sales and rental income at about half and half. So it wasn't all just sales. Had it all been sales, probably, that gross profit impact would have been even more positive from a percentage basis but there's about half and half. So that's why the 60 basis points, maybe we're expecting more, but remember, it's about half and half on what we missed our guidance by. Thomas J. McConville - Raymond James & Associates, Inc., Research Division: Okay. Fair enough. And that difference between the down 4% and down 8%, was that all 3 buckets or was that specifically the tax refund delay issue?

Yes, I would say all 3 buckets. I think, the tax -- my personal opinion is the tax refund delays was the #1 reason. The rising fuel price is up through February was the second reason and then the payroll tax would be third. I don't know that I'd put them equal, I think I'd weigh them more 1, 2, 3 that way. Thomas J. McConville - Raymond James & Associates, Inc., Research Division: Okay. That's helpful. In RAC, guys, we're always interested to hear about the competitive environment, any new development you're seeing on that front? And whether or not you're seeing any incursions from some of the other operators into new partners or maybe some of your existing partners if I can ask that?

Well, the pipeline remains strong. Our competition out there in that business model is more in the virtual space, mostly in the virtual space but as far as the main key aspect, there's nothing new going on there and the pipeline remains strong with all our partners and new ones like hhgregg and some more new regional players coming on as well. Thomas J. McConville - Raymond James & Associates, Inc., Research Division: Okay. And then lastly for me, guys, I appreciate you indulging all 3 but I noticed that in the supplemental here that you're calling for a four-wall breakeven in the International business by 2013. Certainly, very good news to hear. What does that imply, do you think, Robert, if you might have sort to guess, what that would look like on a reported basis, what kind of EPS drag might that look like? I'm sorry, beyond this year. Beyond the $0.25 this year?

Yes, we haven't provided guidance beyond this year, as you well know but when Mitch describes four-wall breakeven, we're talking about the store level, and by the end of the year, not cumulative for the year. So November, December, 1 of those 2 months, we're forecasting to be four-wall breakeven. How that translates into 2014 really depends on the rate of growth and how many stores we're going to open and the timing thereof, but suffice it to say, if we stopped closing stores at the end of 2013...

Stopped opening

Stopped opening stores in 2013, that drag will obviously wouldn't occur in '14. But if I were to hazard a guess, I don't know that we would be overall cumulatively profitable in 2014 but what we described is the rate of dilution would diminish, so $0.25 this year would become something much less than that in 2014.

Your next question comes from the line of Brad Thomas from KeyBanc Capital Markets.

This is actually Jason sitting in for Brad this morning. I was just wondering if you guys can discuss, I know you track a lot of metrics in terms of items per agreement, agreement per customer, pickups, deliveries. Which one of -- what are those metrics are you seeing really hitting an inflation point that tells that things are really improving as we move into second quarter and beyond?

Good question, Jason. The #1 metric when we talk about the demand over the recent weeks, the #1 metric there is deliveries, customer deliveries. So that's what gone in a real positive direction the last several weeks.

Okay. And then, by our calculation, it seems that in your -- at least in your Core RTO, the SG&A per store seems to be coming down. Is there anything that you guys are doing within the stores or what's really driving that down? And how much more do you think you can really pull out of the store operating cost?

No, nothing specific that is a big focal point if you will. We're always focused on managing our expenses and we continue to do so. We talked about in the past, setting up a more sophisticated spend management organization to manage all of our costs and what you're seeing is a reflection of the continuation of that focus.

And then kind of along with that, I think you mentioned last time, a new POS system. Can you give an update on kind of timing of that and what kind of spending you'd expect to do this year and into '14?

Yes. Our 2012 -- for 2013, CapEx forecast is $120 million, roughly $20 million of that is expansion CapEx. The remaining $100 million is split between technology and store maintenance, so call it $50 million. Some of that is for the new POS, about 40% of that $50 million is for the new POS, call it $20 million for 2013. We expect the rollout of the POS system to begin towards the end of this year and really take place during the course of 2014. And at that point, it would be less development cost and more maintenance cost going forward.

And in terms of once you start rolling out the SG&A impact, is that going to be a significant headwind in the back half or into 2014 or pretty minimal?

All of that is embedded in our forecast that we provided guidance to today.

Okay. And then, lastly, I was wondering if you can give an update on, I think, you guys still have 18 stores in Canada, do you have any plans and kind of what kind of drags you expect from those or are they profitable for the year?

They're not profitable yet. They're slightly negative though so it's not material. Our plan, we would like to franchise Canada, and have those stores have a franchisee develop kind for us as we focus on Mexico and beyond. So that's our plan. We'd like to get those sold and franchised. But the drag in the meantime is immaterial.

Your next question comes from the line of Arvind Bhatia from Sterne Agee. Arvind Bhatia - Sterne Agee & Leach Inc., Research Division: A couple of questions. First one is on the same-store sales guidance of plus 1% and plus 2%, Robert, as you mentioned. I'm wondering what that implies for the Core business? What you're assuming there for Core? And then second question on RAC Acceptance, wonder if you could give some more color on hhgregg and how the early -- I know you mentioned a little bit but just some more color on how that's going so far in the 100 locations and when do we expect to have maybe 200 locations or what the plans are and expectations overall?

Well, on the same-store sales, Arvind, obviously, the guidance that we've given is on a consolidated basis, to your point, and what that -- given the first quarter results, what that would imply for the balance of the year is that it would turn and accelerate towards the back half of the year. We haven't given specific guidance on the quarter. We did obviously, for the first quarter, just given where we ended the year in terms of the portfolio but we would expect the core to be positive within the fourth quarter from where it is today. So a similar trend over the course of remaining 3 quarters as you would imply on the consolidated same-store sales, just given it's the majority of the driver behind the comp to begin with. And hhgregg, Arvind, it is going well. We're over 100 stores now. It's running on average, at our model, actually slightly above our model, so we're doing pretty well in those stores and we'll have all -- I don't know, it's in the 180 range, I think, when we have them all done. We'll have them all done by the end of the summer, certainly in time for the most important time of the year for the consumer electronics business, so fourth quarter. So it will all be done by the end of summer and it's going very well with them and going well in the segment in general but going well in the rollout with hhgregg. Arvind Bhatia - Sterne Agee & Leach Inc., Research Division: And then final one, just more conceptual question that we discussed this in the last conference call as well. The question of is there any sign at all that your RAC Acceptance business is attracting customers from the Core business at all? I know a lot of this was macro but I didn't know if you guys had any more color there?

Certainly, we like the fact that RAC Acceptance is growing our U.S. rent-to-own business, as we talked about on the last call. And when you add them together, it does take some of the sitting out of the Core as far as the Core being down and obviously, the overall U.S. business, when you add RAC Acceptance to it, is much closer to flat, even in a bad quarter. So -- but more specifically, when we look at actual customer overlap, it's very, very de minimis. The -- because we know our customers' names and who's rented from us and who doesn't rent from us anymore, and when we look at it, like I said, whether it's an inactive customer or a current customer, very de minimis the overlap. Obviously, there's some opportunity cost that you can't track where someone may have left that retailer in the past and gone to a Rent-A-Center store but when we look at customers that have actually done business with Rent-A-Center in the past overlap to RAC Acceptance, it's very di minimus. So then you can guess on opportunity cost being a little bit but I'll tell you, it's surprisingly low, the overlap in the numbers of customers when we look at the actual overlap that we can track.

Your next question comes from the line of Laura Champine from Canaccord.

This is Jason on for Laura today. I just wanted to touch upon, you discussed hhgregg a little bit and I just wanted to touch upon, do you guys have a better sense as to what the opportunity will be on the consumer electronic side as far as RAC goes?

Well, we -- that's something that continues to be developed. We keep working with other electronics suppliers, electronics and appliance suppliers. The pipeline, like I said, is very full for this year for hitting that 350 net growth in RAC Acceptance. But beyond that, like I said, we're talking to anybody who sells electronics and appliances, whether it's a regional player, whether it's Sears or Wal-Mart or any of the bigger ones even. So Lowe's, Home Depot, so we've talked to all of them and it takes some time to get them to agree to test it in their stores. Just about everyone we've ever tested with, we've ended up rolling out, so we'll just keeping work on it. But I can't give you a number. We said 3 years ago, Jason, when we -- well back in November 2010, I think, when we did our Investor Day and really rolled out this concept in earnest, that we thought we could do 1,000 stores and furniture stores and here we are, we're going to end this year in the 1,300 range. So it's bigger than we thought at the beginning and probably, on the electronics side, it's bigger than the number I'd give you right now and if I can give you a number right now and then if you end up doing business with one of those big, big ones I have already mentioned, the numbers quadruple, right? So we continue to see it as a tremendous opportunity but to give a specific number on opportunity would be almost impossible at this point.

Sure. So -- and then if I could just follow up, within the Core business, can you give us some color as to the trends with tickets in the quarter?

Been pretty flat. It was pretty flat in the quarter. There's been -- of course, there's some deflation in electronics. We really made up for that, Jason, in the units per agreement. We've talked in the past about how those have trended up, and they continue to trend up. We've been aggressive in pricing for packages for our customer to -- for our second unit within the agreement, adding a sound system, TV and so forth, we've been aggressive on our pricing from that standpoint. So though there's been some deflation in electronics, we've really made up for it by being aggressive on the -- with add-on rates and our number of accounts per agreement has grown to the point where it's made the overall ticket pretty flat.

Your next question comes from the line of John Baugh from Stifel Nicolaus. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: I just wanted to be clear, Mitch, you commented that there really wasn't much of an impact on gross margin on the Core business from RAC. Presumably, there's some impact, if you're bringing that product in at a retail cost or am I wrong?

No, you're right. I was commenting on almost no impact on overlap of customers hurting the revenue there. On the product, it does bring down the gross profit margin in the Core a little bit. I think it's been on the 20 to 30 basis point range in -- It's grown over time but it's still pretty small, like I said, probably around 30 basis points as we look at it. So not a huge amount there and it's in our forecast. The question earlier on the margins was about how come they weren't a whole lot better with less payouts and they were better in the first quarter because of less payouts but I think the question was about how come they weren't a whole lot better than that. RAC Acceptance's inventory coming back impacts the margins a little bit and that we know and that we bake in. So the question earlier, John, was about customer overlap, which has been very, very di minimis. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: And could you comment on, maybe go all the way back to inception with RAC, how the keep rate has changed, if at all, has it been very constant, roughly where is it? Is there any recent trend on that? And also, the pricing metric, my recollection was you were aiming for roughly 2.2 turn, any commentary around that figure?

The keep rate metric has stayed very consistent in that 70% to 75% range. We've been thrilled with that. It'd be nice if we can get them even higher, but the keep rates there, at 70% to 75%, have been about what we expected. Collections metrics have been what we expected. And the rest of your question was on... John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Pricing.

We're not -- when a product leaves the system, we're not up to 2.2 yet, because of the maturity of the stores, but we'll get there as the stores mature. We're always playing around with the pricing a little bit and testing different things because we have an overall rent-to-own turn and now we have the early purchase option, so even though the transactional run in the higher 2s on a rent-to-own basis, because of early purchase options, it will be down in the low 2s. And we're climbing every quarter when we look at that, John, as the stores mature and we'll get to 2.2. It's climbing towards that. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: And then on the Core business, any color, is the -- going into the second quarter, is the balance of portfolios down similarly to the end of the calendar year, down a little worse given the tough first quarter?

Similar, similar. We anticipated being able to make up some ground in the first quarter relative to the year before and then didn't. But no, we're not in worse shape than we were. We're just not in better shape than we thought we could come out of the first quarter in.

The other way that we look at that, John, is the balance sheet, the own-for-rent inventory in March of '12 was $592 million. And as you recall, we were fighting to get back out of the hole at the end of the first quarter last year. We ended December of 2012 at $597 million, so we actually ended up from an unwritten inventory standpoint which is essentially the portfolio, if you will. Ended the first quarter of '13 at $590 million, so slightly below where we ended the year and a little bit below when we ended the first quarter of last year.

And that's with deflation in the purchase amount. So we just didn't make up anything in the first quarter that we intended to, John. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Got it. And you mentioned in advertising, are you increasing ad spend as a percentage of rent? I mean, your revenues are coming down, so if you just held it flat on a dollar basis, it would go up or are you increasing in on an absolute dollar basis or are you changing message or increasing promotions? Any color there?

Good question. Right now, the percentage will be up because our forecast in revenue is down. Mostly, right now, with our CMO, I mentioned last quarter on the call, our new Chief Marketing Officer that started at the end of 2012, mostly, we're looking at moving some things around. We will invest some in spend if we see their ROI there, so there may be a little of that going forward not material from a standpoint of having to worry about them in our expense numbers. But there may be a little more investment there but it's mostly changing message and possibly moving some of the advertising money around. But certainly, it will come out a little higher percentage because we're not going to cut the dollar amount for sure.

Your next question comes from the line of John Rowan from Sidoti & Company. John J. Rowan - Sidoti & Company, LLC: Just 1 quick question. Obviously, you guys talk about sales being part of the impact here in the quarter being below your expectation. Obviously, that's early payout option related. I'm just curious if you were to look at kind of the first half as a whole, are you getting early payouts, more early payouts in the second quarter than you normally would have, and if you look at again the first half of the year in whole, are you kind of on track for what early payout revenue you would expect?

No. John, if that early payout money was coming in April, we wouldn't have to probably lower our guidance as much as we did. But no, it's -- there was less payouts than we anticipated and in April, we're running similar levels to last year. So no, even though the money is in the economy, most of it is in the economy, now with income tax returns, I think, to the fact that they got out there late, John, changed the way people use them. It must have, because the payouts are down and they're not higher in April than historical numbers.

And your next question comes from the line of DeForest Hinman from Walthausen & Co. DeForest R. Hinman - Walthausen & Co., LLC: Probably just to build off that last question and maybe help everyone's understanding. Can you kind of talk about how the months progress in the first quarter because it sounded like, at least initially, on the fourth quarter call, that we were somewhat concerned with some of the trends in the first part of the month but at some point obviously, they started to really deteriorate in February and March. So can you kind of help us walk us through what happened?

Sure, I'd be glad to, Deforest. January was about what we expected it to be and February was the month that we're way behind our plan. Maybe into the first week or 2 of March and then we leveled off and now, for several weeks, maybe the last week of March and the first 3 of April or something like that have been better than the year before. So really, February was the month where -- because if you remember, the income tax money for our customer historically comes out right around the 1st of February, by the 1st of February, we're seeing that money come through the door, even the last few days of January, that money comes through the door in earnest. And it was February that fell through the floor, if you will. And as March progress, what we started to see was business getting better from a demand standpoint but even though, sales still weren't coming in. Again, it appears that because the money was 3 or 4 weeks later on average, the people used the money differently than they had historically. Not all of them, we still had more payouts than we -- in a normal quarter but relative to the past, to the year before in the first quarter and relative to our expectations, they were much lower and it does appear that people did something different with the money when it came in later. Of course, their situation 30 days after when they were expecting the money was probably different than it was 30 days for us.

90 days in...

And a lot of them missed 90 days, same as cash from what they rented in the fall. So the money didn't come in. But by -- as March progressed, we got back to -- demand started topping last year's level as we get later in March and so far in April. DeForest R. Hinman - Walthausen & Co., LLC: And I mean, it's interesting, it almost seems like the sales opportunity is gone, to some extent, for the second quarter but does it also have an impact on, I guess, customers that do a payout and then they've been thinking about getting another unit on rent and then we kind of lost that transaction as well? How many people that do kind of the early payouts turnaround and just do a rerun?

That's a great point, of course. We run about 50% on the spot rerenting something. Our repeat business overall is between 75% and 80%, so we'll get 75% to 80% back over time but within the day or few days of when they payout, we're close to 50% on conversions. So yes, that's a great observation there. That was part of the demand launch was not having the payout, so it became a double whammy, and then just traffic, in general, people not having that money. So maybe that's a triple whammy, I don't know how many whammies. DeForest R. Hinman - Walthausen & Co., LLC: So I mean, when you spoke with advertising, I mean, how do we -- what's the plan to kind of engage the customer and get that back in because I mean, it seems like that's really going to be a big -- and it's probably the reason behind the guidance reduction. How do you reengage the customer in trying to get them back in the store?

Well, it's a combination of things. Having the right promotion going on, not just all about putting things on sale but strategically putting the right things on sale, at the right times, having -- getting the message across by having what we've got, we're working on new creative, as well as how do you reach the customer, different avenues of reaching the customer, TV, direct mail. How do you split that up and do you spend more on one than the other based on what we've been spending. How much more do you put towards Hispanic advertising versus none and so forth. So it's a matter of moving the money around plus changing the creative and then strategically putting the right promotions out there.. DeForest R. Hinman - Walthausen & Co., LLC: And then if we have -- how should we be thinking about video games going into this year? I would -- is it safe to say those have really been reduced in terms of how much they've been historically and how should we think about those going into the holidays? I mean, is that a substantial opportunity this year? How are you guys thinking about that?

It has gone down a little bit recently with the lack of new hardware out there. But really excited about new hardware coming out later in the year for that to present an opportunity for us. Going back the other way, hasn't gone that much. It's still a good category for us but we would anticipate some lift at least as the year goes on, later in the year when the new couple of new game hardwares come out. DeForest R. Hinman - Walthausen & Co., LLC: And do we have any delay on those or are we kind of -- can we get those at first launch days, can we have those?

Good question. Still working on that. I don't have an answer yet from our merchandising team but still working on that. I wouldn't anticipate a delay, but I can't say that for sure at this point.

Your next question comes from the line of James Ellman from Ascend Capital.

First, it would seem from your comments you just made that you really only had 1 month that was really weak, is that fair?

Yes, the early -- the first part of March was also a little weak, but yes, February was the big problem.

All right. And then you've had some recovery since then?

Correct.

So I guess I'm just trying to understand, if you had basically a 30-day period of weakness, why reduce your guidance by a full 10% from that?

Well, you're talking about a lot of sales income coming out of the business. It's not coming back in the second quarter. And it's a matter of where the portfolio is. It doesn't matter whether it happens in 1 month or 2 months, it's where's the portfolio relative to where we had anticipated it being at the end of March. And when that's down, plus the revenue already lost in the first quarter, that's what the numbers come out to.

Okay. And on your comments earlier, you mentioned that the returns from RAC being resold at Core is causing some cannibalization of the economics of the Core business, how is that impact going to ramp up at Core as you ramp up the number of RAC locations?

Well, like I talked about, it's not a big number yet if you think about that 30 basis point range, and we've already got over 1,000 of them. So it's pretty ramped up RAC Acceptance. It may go a little higher. We certainly need to look at things that can help offset that.

[indiscernible] dollars or [indiscernible]

But overall, gross profit dollars go up and if the percentage comes down, that doesn't bother us a whole lot as long as gross profit dollar goes up.

Okay. But if you had 1 quarter where as RAC gets larger, if you had 1 quarter where the keep rate were to come down and you had more returns, that would likely cause some inventory difficulties at core, is that fair?

That amount works really well right now with the keep rate being in that 70% to 75% range. That's correct.

Okay. And last question I have is just do you have any significant agreements coming up for renewal with some of your partners in RAC? And do you expect any changes in pricing when that takes place?

No. We don't anticipate any changes with our current partners in RAC Acceptance.

Okay. And do you have any major clients that are -- or any major partners where the agreements are coming up for renewal. If you could just give us an idea of the schedule for that?

No, the agreements aren't long. They're not like they're 5-year agreements anyhow. They have their agreements that, I think, have like 6 months out clauses and things like that. And the bottom line for us, James, once we're in a retailer and driving traffic in that our customers, about half our customers come back into that store to pay every month in the RAC Acceptance model, we don't have partners deciding not -- given a 6 month notice firstly, we have closed some but that's primarily because the retailer closed or there wasn't enough volume for us in those stores. But once you're in there and you're driving the traffic and you're driving a repeat business because those customers come in to make a payment, the practical side is nobody's ever not renewed the agreement with us. Again, on a per store basis, if there's not enough volume but not on an overall basis.

We have no further questions at this time. I'll turn the call back over to Mr. Mark Speese.

Well, thank you. Robert, Mitch, thank you for your comments and thank you to all of you for joining us this morning. As we stated, clearly disappointed with our operating results in the first quarter. Having said that, we like what's going on with all of our growth initiatives. We believe the trends that we're seeing of late, support what our theory or thesis is as it relates to the first quarter's impact. Having said that, we realized we've got a fair amount of work to do within the Core business and hopefully, you've heard there are a number of things going on that we believe will drive the desired results and allow us to get back ahead from a portfolio standpoint where we were previously and we do feel confident of our ability to be able to do that. So again, as always, we appreciate your interest and support of the company and we look forward to reporting back to you next quarter, with results that will further support that we've got it on the right track again. So thank you very much and we'll talk to you next quarter.

And this concludes today's conference call. You may now disconnect.