Upbound Group, Inc. (UPBD) Q3 2022 Earnings Report, Transcript and Summary

Good day and thank for standing by. Welcome to Rent-A-Center’s third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today’s conference is being recorded. I will now turn the call over to your speaker for today.

Good morning, and thank you all for joining us to discuss Rent-A-Center’s results for the second quarter of 2022. We issued our earnings release after the market closed yesterday. 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; and Fahmi Karam, our CFO. As a reminder, some of the statements provided on this call are forward-looking, and are subject to factors that could cause actual results to differ materially 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 includes references to non-GAAP financial measures. Please refer to our third quarter 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. Good morning to everyone on the call today. This morning, we'll start with a review of takeaways from the quarter and broader trends, then I will provide an update on operating initiatives, fourth quarter guidance, and areas of focus heading into 2023. I'll then hand it out to our new Chief Financial Officer, Fahmi Karam, who officially joined the team a few days ago, to share his thoughts on joining the company, followed by a detailed review of the third quarter results and the fourth quarter outlook. And of course, then we'll take some questions. As was stated in our earnings release after the close yesterday, third quarter revenue was slightly over $1 billion, adjusted EBITDA was $115 million, and adjusted EPS was $0.94. Those results are at or above the midpoint of the updated guidance ranges we provided in late September. The explanation we gave in September for lowering our original third quarter guidance was that weaker economic conditions had affected demand for durable goods and customer payment behavior. Expanding on those comments for some additional perspective, the external environment has been an ongoing headwind for us since late last year after the stimulus program substantially wound down. This has been compounded by severe inflation this year, pressuring discretionary income and savings for many less affluent households who we primarily serve. With respect to our business, this has caused a rise in delinquency in loss rates back to and temporarily above historical levels, as well as a decline in merchant partner volumes that are lapping household durable goods demand pull forward from 2020 and 2021. On top of this, we think the number of non-traditional LTO consumers trading down has been limited thus far because overall employment remains strong, and there's been ample credit access broadly. In summary, this is one of the more complex and challenging environments we've been through in a long time. While it's difficult to call timing, we believe conditions will normalize in our favor. At some point in the cycle, we should benefit from additional trade-down to LTO as we have in the past to get past the effects of stimulus programs, see more normal inflation and more normal payment performance. While we're not satisfied with recent financial results, the company continues to generate considerable adjusted earnings and free cash flow, demonstrating the strong underlying fundamentals of our business, and enabling us to support shareholders through capital distributions. Through the third quarter, we generated about $343 million of adjusted EBITDA, $2.83 of adjusted EPS, $363 million of free cash flow, and paid $1.02 per share of dividends, and repurchased $75 million worth of shares in the third quarter and October. While we continue to face external headwinds, we are committed to optimizing financial performance by focusing on controllable factors like underwriting, commercial execution, and cost management. At the same time, we'll continue to position the company for a long-term success with investments in areas like technology, product, and talent. Shifting to third quarter results. Consolidated revenues, as I mentioned, $1 billion, decreased 13% year-over-year, with Acima down 19%, and the Rent-A-Center business segment down about 5%. The underlying factor behind the decrease was external conditions that led to fewer lease transactions of Acima, and lower overall open leases compared to the prior year period, as well as higher delinquencies in losses. These trends led to lower rental revenues and merchandise sales revenues. Adjusted EBITDA of $115 million, decreased 34.6% year-over-year, primarily due to lower revenues and higher loss rates compared to the prior year period, partially offset by lower costs in the current year period. So, drilling down into our two key segments, Acima topline trends were generally in line with our original third quarter guidance assumptions, with GMV down 23%, and revenue down in the high teens. That decrease in GMV was comping over 19% growth in the prior year, and was attributable to a combination of weaker household durable goods demand from our merchant partners, and tighter underwriting compared to the prior year. The underwriting changes we implemented in the first half of the year are achieving intended results, with delinquency rates and loss rates down sequentially from the second quarter. With underwriting better aligned to the external environment, the team has been increasingly exploring and executing on opportunities to drive incremental GMV with favorable risk and margin profiles. In addition, we're making good progress on the commercial side, and recently launched initiatives that improved our market position compared to the prior year and helped us displace incumbents. We continued to invest in technology and enterprise sales capabilities to improve the experience for both consumers and enterprise-level accounts. The Rent-A-Center business segment continued to show resilient demand, with delivery slightly positive year-over-year. However, this was more than offset by higher returns in charge-offs in the current year, likely stemming from inflationary pressure on discretionary income. The net result was a 1.7% year-over-year decrease in portfolio value at the end of the quarter. Revenues were $474 million, with same-store sales down 5.3% in the current year. However, they're up 7% on a two-year stack basis. Collections continued to negatively impact rental revenues in the quarter, illustrated by a step-up in the 30-day past due rate, from approximately 2.4% in the second quarter, to approximately 3.4% for the third quarter. Those 30-day past dues, as you can see on Slide 5, have leveled off at approximately 3.7% for the past three months, and should start to decline, with additional underwriting changes and collections initiatives that have been implemented. Skip/stolen losses as a percentage of revenue increased to 5.8% in the third quarter, up from 4.2% in the second quarter, and 3.4% last year. Our underwriting approach has been pretty consistent over the past year, which leads us to believe that sequential uptick in loss rates is likely the result of persistent high inflation depleting some customers’ ability to cover expenses. We started tightening underwriting in the Rent-A-Center segment when we saw this delinquency rise in the summer. And to reduce the risk of losses going any higher, we're continuing to adjust our underwriting, and we will continue to refine it. Although we project losses will remain in the high 5% range for the fourth quarter, with the leveling off of the 30-day past due ratio I previously mentioned, and the additional measures we’re taking, we should start to show signs of improvement as we move into fiscal 2023. Looking out over the next few quarters, other top priorities for the Rent-A-Center business include further developing our expended aisle services, improving our customer retention strategies to optimize returns, enhancing our digital customer experience through more personalized offers, and testing smaller tech-enabled store footprints, just to name a few. For Acima, our top priorities are identifying opportunities to drive favorable risk-adjusted growth, such as adjusting the value proposition to improve performance, and pushing further into fast-growing channels and product categories. We'll also continue to advance our enterprise sales pipeline. Over the past few months, Acima signed new regional merchant partners, and continues to have strong pipeline of additional potential new retailers. We remain confident in the company's long-term growth prospects, and continue to invest in our ability to deliver significant profitable growth. When you put the pieces together, we expect our business will generate fourth quarter revenue of between $975 million and $1.025 billion, adjusted EBITDA of $95 million to $110 million, and EPS of $0.65 to $0.85. Fahmi will provide additional guidance commentary here in a few minutes. Looking at the big picture, the underlying fundamentals of the company remain solid, with compelling topline growth opportunities, good profitability, strong free cash generation, and a sound balance sheet. We believe we're on the right track to navigate this challenging environment, and I'd like to thank the entire team for their continued dedication and their strong efforts throughout the quarter. As we announced in late September, the entire Rent-A-Center team and I are extremely excited to have recently brought in Fahmi Karam as the Chief Financial Officer. And Fahmi joins Rent-A-Center with over 20 years of experience in both finance and accounting, most recently as the Chief Financial Officer Of Santander Consumer USA. We think Fahmi's prior experience and experiences and deep understanding of both the non-prime consumer and data-driven lending, will provide valuable insight and help drive growth opportunities for Rent-A-Center moving forward. And with that, I'll turn it over to Fahmi.

Thank you, Mitch, and good morning, everyone. I'll start today with a brief overview of my background and what attracted me to the opportunity of joining Rent-A-Center. Then I'll review third quarter financial performance and fourth quarter guidance, after which we will take your questions. For the past seven years, I've worked at Santander Consumer USA, a wholly-owned subsidiary of Banco Santander, in several different roles. Most recently and for the past three years, I served as the CFO. Santander Consumer USA was a publicly-traded company until January of this year, when Santander acquired the remaining outstanding minority shares. I joined Santander Consumer from JPMorgan, where I spent over a decade in investment banking. And before that, I started my career at Deloitte on the audit side. The decision to join Rent-A-Center was really based on my desire to contribute to the building and evolution of what I believe can be an even stronger company, one that can make a difference in the lives of our customers, and create tremendous value for our shareholders. I believe that addressing the needs of financially underserved consumers is a great mission in a highly compelling market opportunity, with millions of US households in need of these types of alternative financial solutions. With Rent-A-Center’s leading omnichannel lease-to-own business, coupled with a strong margin profile, and a healthy balance sheet, the company is very well positioned to execute on its strategic objectives and grow the business profitably. I feel that my experience and skillset should enable me to have a significant impact on the company's success in capitalizing on these opportunities. Moving on to the financial results. As Mitch discussed earlier, the external environment is the biggest factor that impacted the third quarter results, pressuring demand for consumer durable goods and our customer's ability to make lease payments. Consolidated rental and fees revenues decreased 10.9% year-over-year, which was led by a 17.5% decrease for Acima, compared to a 4.3% decrease in the Rent-A-Center business. Merchandise sales revenue decreased 23.1%, mainly from a 24% decrease for Acima, and a 20% decrease for the Rent-A-Center business. Consolidated adjusted EBITDA of $115 million was down 34.6% year-over-year in the third quarter, with a 33% decrease for the Rent-A-Center business, and a 26% decrease for Acima. Looking at the P&L drivers, the primary contributors to the decrease in adjusted EBITDA were lower revenues and higher loss rates, partially offset by cost control measures. Adjusted EBITDA margin was 11.2% for the third quarter, compared to 14.9% in the prior year period due to the same factors that drove changes in EBITDA. Moving on to the segment results. Acima GMV decreased 23% year-over-year during the third quarter. This was mainly driven by decrease in lease applications compared to the prior year period that resulted from lower durable goods demand at our merchant partners, which was primarily attributable to pressure on consumer discretionary income and cycling over the impact on demand from stimulus programs in 2021. Underwriting changes made in the first half of 2022 also contributed to the decrease in lease applications. Acima segment revenues decreased 19.1% year-over-year, with rental revenues down 17.5%. This was primarily due to lower GMV year-to-date through September, and a higher provision on delinquencies compared to the prior year. Merchandise sales revenue also decreased year-over-year, mainly from the decrease in GMV over the past two quarters, as well as fewer customers electing to use early payoffs due to the previously discussed macroeconomic factors. Skip/stolen losses in the Acima segment increased approximately 30 basis points year-over-year to 9%, but decreased 260 basis points sequentially from the second quarter of 2022, consistent with our forecast. This improvement illustrates Acima’s ability to adjust underwriting to effectively manage risk in a changing environment. Adjusted EBITDA during the third quarter was $63.6 million, with an adjusted EBITDA margin of 12.6%, which decreased 130 basis points year-over-year. The margin decrease is attributable to lower current year revenue, driven by the lower GMV over the past two quarters of 2022. Sequentially, EBITDA margin improved by 260 basis points through the improvement in loss rates from the second quarter, as our underwriting initiatives began to materialize. Moving to the Rent-A-Center segment, revenue decreased 5.4% in the third quarter compared to the prior year period, with same-store sales down 5.3%. The decrease in revenue was primarily due to the rental and fee revenues, which were down 4.3% as a result of lower percentage of lease payments collected. Merchandise sales were also lower compared to the prior year period, reflecting lower use of early payouts by our customers, primarily due to the effects of the winddown of stimulus programs in 2021. Skip/stolen losses increased 240 basis points year-over-year to 5.8%, primarily driven by macroeconomic pressures on our core consumers. Adjusted EBITDA margin decreased 670 basis points year-over-year to 16.2%, primarily due to lower revenue and higher loss rates, both driven by the worsening macroeconomic environment since the prior year period. Below the line, net interest expense was $22.7 million compared to $19.7 million in the prior year. The effective tax rate on a non-GAAP basis was 26% compared to 24% in the prior year. The non-GAAP diluted average share count was $59.6 million in the quarter, compared to $68.2 million in the prior year period. GAAP diluted loss per share was $0.10 in the third quarter, compared to a diluted earnings per share of $0.31 in the prior year period. After adjusting for special items that we believe do not reflect the underlying performance of our business, non-GAAP diluted EPS was $0.94 in the third quarter of 2022, compared to $1.52 in the prior year period. Year-to-date, we have generated $412 million of cash flow from operations, $363 million of free cash flow, and during the third quarter, we paid a quarterly dividend of $0.34 per share. And from the third quarter through October of 2022, we repurchased 3.5 million shares at approximately $21.21 per share. Taking into account the shares purchased through October, the company has approximately $285 million remaining on its current share purchase authorization. In addition, at quarter end, we had a cash balance of $166 million, gross debt of $1.4 billion, net leverage of 2.6 times, and available liquidity of $540 million. Shifting to the financial outlook. I will add some additional details to the fourth quarter financial guidance that Mitch addressed. Note that references to growth or decreases generally refer to year-over-year changes, unless otherwise stated. For Acima, we expect fourth quarter GMV will be down in the mid 20% range year-over-year, as economic conditions continue to pressure demand for durable goods at merchant partners. In addition, underwriting standards are tighter in the current year following the changes we've made in the first half of the year. Revenue should be down low to mid 20% range, reflecting a lower lease portfolio value heading into the fourth quarter and lower current year GMV. We expect adjusted EBITDA margin will be in the low double-digit range, with a loss rate of around 9%. For the Rent-A-Center business segment, we expect portfolio value will finish in the fourth quarter down low to single mid-single digits compared to the prior year, with modest growth in deliveries offset by higher returns, reflecting the pressure on customers’ discretionary income. Revenue and same-store sales should be down mid to high single digits, primarily due to lower rental and fees revenue resulting from a smaller portfolio and lower collection rates. Adjusted EBITDA margin is expected to be between 16% and 17%, with a loss rate to remain in the high 5% range, while our underwriting and collection initiatives take full effect on the portfolio. The Mexico and franchising segments should generate fourth quarter EBITDA similar to the third quarter. Corporate costs are expected to be up low to mid-single digits year-over-year. Below the line, fourth quarter interest expense should increase $3 million to $4 million sequentially from the third quarter. Depreciation and amortization and the effective tax rate should be similar to the third quarter. Regarding capital allocation, the top priorities continue to be dividend payments, debt reduction, and opportunistically repurchase shares, similar to what we did the past few months. Thank you for your time this morning. We will now turn the call over for your questions.

Thank you. [Operator Instructions] The first question will be coming from Jason Haas of Bank of America. Your line is open.

Hey, good morning and thanks for taking my questions. So, maybe to start with somewhat of a high-level one. Over the past several quarters, we've seen the Acima skip/stolens get out above your range, and it seems like those are coming back down now, which is good, but at the same time, we're also seeing the Rent-A-Center business, it looks like those are starting to peak up above your range. So, I'm curious just to hear your thoughts, like what's driving that from a high-level perspective? What's driving the difference in performance between those businesses?

Sure, Jason. This is Mitch. When you look at the slides we provided with the new metrics, like on Page 5, the Rent-A-Center past due rates, you can see that that jumped in July and August, the 30-day rate. So, it was more delayed in Acima from an impact standpoint. Other than - before that, it was pretty normal and before July and then certainly August. It's a different business, so it's not surprising that it would be delayed, a little bit different customer and so forth. Certainly, more need-based customer and those types of things. And the collection is a lot different in Rent-A-Center, with 2,000 stores and local collections and all that versus call center. So, we weren't seeing it until late summer when the inflation really got away from us, I guess you'd say. The good news is you, as you can see on that slide, we’ve been level for three months now. We started tightening in August. We're doing more now. So, we would see that coming back down as we get into next year. It's not going to affect Q4 a lot as far as similar numbers being in the high fives. But when you get into next year, you can see that leveling in the last three months is going to pay dividend, then it's going to come down from there now that it's leveled off. So, it's not still going up. We're making changes to get it back down into more normalized levels, and feel good about the changes we're making. You're right. We fixed Acima when that got out of line, as you can see on that slide. I think that might be Slide 4. But I say fixed. Obviously, in this environment, you're tweaking almost every day and looking at different accounts and eCommerce versus in-store and all that every day. But we'll do the same thing with Rent-A-Center, get it back in line. Good news is, it's been level now for about three months.

That's great. Thank you. And then maybe to focus in on the Rent-A-Center business, if I caught it right, I think you said you're expecting EBITDA margin, I think that was for the full year, of 16% to 17% now. So, I was curious if that's a good run rate to use going forward. And just if there's any risk that could come in as the portfolio, I guess, has started to shrink now.

Hey Jason, just a clarification, the 16% to 17% was for the fourth quarter.

Yes. It'd be higher for the year, but that'd certainly be - the run rate in the fourth quarter, the 16% to 17%, of course, that's what the high - that's high fives loss rate, right? So, when you look at a run rate at the fourth quarter and then if that's 1.5% to 2% higher than the high end of our range, that gives us, if you said, well, can you do 16% to 17% next year? I'd say, well, we’ve got like 2% help going into next year when you think about - maybe 1.5 is better because it'll take a few quarters to normalize at the beginning of the year. But there's some tailwind there when you look at that as a run rate.

That’s great. Thank you for clarifying that.

Thank you. One moment while we prepare for our next question. Our next question will be coming from Kyle Joseph of Jefferies. Your line is open.

Hey good morning, guys. Thanks for having me on and taking my questions, and welcome aboard, Fahmi. Starting on Acima, just hoping to get a sense for the GMV contraction, how much of that is underwriting versus just the macro pressures, and trying to get a sense for the growth rate as we lap the underwriting changes you made at the start of the year.

Yes, I think the - it's hard to tell the exact number between underwriting and retail traffic, but it’s more retail traffic in Acima than it is the underwriting, honestly, especially in the furniture segment, which is a more than two thirds of our business, or at least two thirds of our business there. It's just been way down, the applications from a - and the traffic in retail furniture. So, I think it's more that than the underwriting. We still believe long-term it's a 10% double-digit, I should say, double-digit growth business. Not predicting that for 2023, but I think longer term, it's a double-digit growth model. Obviously, the enterprise accounts have a lot to do with that as we had those. Next year, you you wouldn't expect more than minus 20 when you start comping over minus 20, right? So, I can't tell you - I don't want to get too much into next year yet, but I can't tell you that it's going to be that double-digit growth next year just because we're lapping minus 20. It just depends what happens in the macro, which obviously signs aren't all that great of any change anytime soon. So, more it’s the retail traffic. I know we'll get asked, if not by you, Kyle, in a couple of minutes, about trade-down. Not seeing a lot of trade-down yet, seeing some, a little bit. I think more is coming. I think everybody believes more is coming as credit tightens, as all that credit availability that came out of the pandemic dries up and is drying up. Based on Fed comments yesterday, I think lenders above us in near prime and prime, will tighten - a tightening is coming. It's just a matter of when. It’s been a little slower this time around as compared to other slowdowns just because of unemployment and things like that are still so good. Credit availability was at an all-time high coming out of the pandemic, the pull forward, all those kind of things. But I think the trade-down is coming. We're not predicting anything for next year at this point. We will be counting over low - the minus 20 kind of numbers. But I think long-term as a way to think about that business in the double-digit range.

Yes. No, very fair. And yes, that’s a good transition to my next question, but yes, you mentioned lack of trade-down, but you did highlight at least at RAC, you're seeing kind of improving delivery trends there. So, what's driving that? Is that - are we lapping - are we getting to the point where customer - all the merchandise that consumers acquired in 2020 and 2021, we've gone through that product cycle? Is it kind of a more bargain-savvy customer you're seeing, but what's driving the kind of demand improvement or delivery improvement you mentioned at RAC?

Yes, good question. That's - there was slight delivery improvement quarter-over-quarter. Portfolio is under pressure because people can't pay as well. So, there end up more returns and obviously, there's more charge-offs affecting the portfolio. But still we're - from a demand standpoint, you think about the seven-year same-store, two-year same-store stack, the 7%, and I don't think we said in our prepared comments, but I'll say it now. Our portfolio in Rent-A-Center is down. We talked about it being down year-over-year a little bit, and down by the end of the year. We expect it to be low to mid-single digits against the - September 30 of 2019, the portfolio was up 20%. So, a lot of the focus today is going to be loss rates we've never seen before, 5.8, and certainly, we're not happy with those and we're going to - we're doing something about that and we're a little happy, I say a little happy because we’ve got a lot of work to do, a little happy about that 30-day number on Slide 5 being consistent for three months. But we're not happy with that, but that's where a lot of our focus is too. But we can't forget at the same time a portfolio of 20% going back to Q3 of 2019. The business is still very strong. Jason was asking, is 16%, 17%, what do we think going forward? Even though before you add a more normalized loss rate and projected EBITDA rate. Anyhow, more specifically to your question, I think the difference in Rent-A-Center versus like Acima is, Rent-A-Center depends on their own traffic, whether it's in store traffic or c-com traffic. Acima depends on retail partner traffic. Retail partner traffic's a little more discretionary. Rent-A-Center traffic has always been - and you, Kyle, have done this a long time. Rent-A-Center traffic's always been more need-based than what happens in a retail store. Not that some of that's not need, but almost all of what Rent-A-Center gets is need-based. We see it much higher conversion rates than Acima, things like that. When customers come to Rent-A-Center, there's a need and we fill it. And I think that - the needs come back first before the discretionary. I think that's one short answer to your question, need over discretionary first. I think there wasn't as much pull-forward in Rent-A-Center because a customer couldn't afford as much. The Rent-A-Center customer couldn't afford as much. There wasn't much pull-forward. And now you say, well, but look here, same-store sales, there had to - back then, there had to be a lot of pull-forward. Remember, most of the same-store sales was driven by higher retention and people keeping it a lot longer and paying out rather than returning. So, there wasn't a tremendous pull forward, nothing like in retail. So, I think those are the - sorry I rambled a little bit there. A lot of things go through my mind when you ask those questions, Kyle, but those are the - maybe that last part is my short answer.

No, I appreciate that. That's great color. Thanks for answering my questions.

Thank you. One moment while we prepare for the next question. Our next question will be coming from John Rowan of Janney. Please go ahead. Your line is open.

Good morning, guys. Fahmi, welcome back. So, I want to go - I want to talk a little bit about this notion of trade-down. I'm going to put Fahmi on the spot a little bit here. I wanted you to discuss kind of what triggers it. We're seeing it pretty specifically, I believe at least in subprime auto, right? ABS spreads are really getting wide for really kind of tertiary issuers, and there's a big trade-down into some of the lenders of last resort as things tighten up, specifically driven by the ABS market. So, I'm wondering if you could talk about what triggers the trade-down. Who's above you? How do they fund, or if it's something else. What gets that ball moving toward consumer migration into your typical cohort? Thanks.

Yes. Hey, John, good to speak with you again, and I appreciate the question. The short answer to your question is liquidity. When there's ample liquidity out in the market, you'll see a lot of lenders lean into providing credit. There's still ample liquidity out there, just more expensive than it was in years past. And so, you've seen some of the other lenders talk about it, specifically on the auto lenders. Credit is still strong. Liquidity is still there, and they're still lending. And so, until you start seeing them pull back as credit deteriorates, they're still going to be active. And so, that's why when Mitch says we still haven't seen the trade-down happen yet to the degree you would expect and we've seen in prior cycles, we do expect it to happen at some point, but it just hasn't come through the door here just yet. So, things like unemployment still remaining strong. As unemployment starts to tick up, as we expect over the next several quarters, you'll start seeing some more credit tightening above us. The spreads in the ABS market does shrink some margins for some of the other players, but you don't see them pull back just yet because liquidity is there. Once liquidity starts drying up, you'll start seeing some credit tightening. Unemployment will be impactful for that, and then you'll start seeing the trade-down come our way.

You'd think, Fahmi, that with the - I mean, in underwriting, when everybody even starts to tighten, right, they tighten from the bottom. You don't tighten at the top, right, the prime customers. So, you tighten at the bottom, which is good for us. So, as soon as there's any significant tightening there, if there are any even insignificant tightening, it could be significant to us, right? That's why it usually happens a lot faster than this. But you don't have 3% unemployment numbers usually in a downturn like this either. But when that happens, it comes to us first, right, because they - you don't start - you don't tighten underwriting all through the bins. You start at the bottom.

Yes. And I think for us, looking at others delinquency rates, picking up, they've been normalizing but they haven't hit pre-pandemic levels yet. So, another early indicator for us will be delinquencies on some of those other larger financial institutions.

Yes, especially the near primes and the - which is even more important to us than the big ones, right, the secondaries or even the more important ones to us.

Yes. And I think your point is valid there that they tighten from the bottom. And coincidentally, what obviously we're seeing when we look at the ABS markets, right, especially in auto, which seems to be moving a lot faster here, probably because the collateral values, is that lower tranches of these deals that are going out, the spreads are widening out a lot faster in those tranches. So, I'm just trying to read the tea leaves, if we're looking at other lenders that may be accessing certain forms of liquidity, if we see certain tranches of spreads blowing out a lot faster than others, how that flows through. So, that was just the point of my question, and that's it for me. Thank you.

[Operator instructions]. Our next question is coming from Anthony Chukumba of Loop Capital Markets. Your line is open.

Good morning. It's Anthony Chukumba, actually. So, two questions. First question, Acima, certainly understand the fact that there was this demand pull-forward and so lease applications are down and obviously, you have tightened credit, but was wondering if you can give us any visibility in terms of what's going on with your door count in Acima?

Yes, good question, Anthony. Relatively flat in the third quarter, a little bit of growth, a lot of new - there's always ins and outs in that number, but a little bit of growth in the third quarter. So, a couple of real good regional accounts. We don't usually go by names. We’ve got a couple of good regional accounts coming on board, some that are coming on board as we speak. But a little - there's growth there. The minus 20% GMV kind of numbers are not because we're - the merchant count is down or anything like that. It's really just the traffic in the retail stores.

Got it. That's helpful. And then my second question, and it sort of segues into what the discussion has been, but as you think about what has to happen, and I guess both parts of your business just kind of turn the tides here from this sort of very unusual time period that we're going through, like what would help more? Would it help more if inflation abated or would it help more if the sort of long-awaited credit trade-down was to start to happen?

Good question. I wanted to say yes, but I don’t want to (indiscernible) both, right, is obviously the best - I would say the latter is better for us, honestly. I mean, I'm not an economist, and Fahmi can opine, but I say the latter, the trade-down at this point is maybe more important than even the other, just because the sub-prime customer, our customer has been hit hard for the whole year. And my experience is they tend to adjust and you don't see that in our loss rate, but you can see it in the credit starting to level off. And some of that was us not tightening until recently when the number spiked in July and August. So, our customers tend to adjust. It's not like that business is falling apart with the inflation, like we talked about with the two-year stack and the way the portfolio is. So, I think because the subprime customer has already gotten hit and tends to adjust, that probably the latter is - if I had to pick only one out of the two. What do you think?

Yes, I think if you think about it from where we are today, to your point, that our core customers already kind of have been hit hard by inflation, and hopefully that's most of the way peaked, if not hopefully trending down next year. So, where the growth for us would come is from people coming down and trading down.

More so than like - more so than inflation should come down 1% a quarter or something like that.

So, I agree. I think it probably is the latter, but both would be nice.

Yes. Yes,

That's very helpful. Good luck with the fourth quarter.

Thank you. One moment for the next question. Our next question is coming from Bobby Griffin of Raymond James. Your line is open.

Good morning, everybody. Thanks for taking my questions. I guess, first, I want to kind of maybe ask a little bit more of a high-level question, but as we think about the puts and takes going forward and the earnings power of this business model, it seems like there are some opportunities to get lost ratios back down into more normal ranges, which would be a positive for profits. And then at the same time, the portfolio's going to enter 2023 at a much smaller level in each of your two main businesses. So, just help us calibrate which one of those is a larger deal as we think about tuning up our models. And then the second part of that question, if we look at the back half here of 2022 earnings of the business, is that a good baseline for today's economic environment of what this business can earn without any meaningful trade-down? Or is there anything else there that we should think about?

Did you say the guidance for the fourth quarter? Was that the last part of your question?

Yes, it was just saying, if we look at what this business has implied to earn in the second half year of 2022, is that a good baseline of like the earnings power of this business in today's economic environment without any meaningful trade-down or without any change in the consumer, was the second part of the question?

Yes. I think that's a good question. We don't want to get too far ahead, but I'll just talk long-term, and we don't want to talk too much about 2023, but the run rate in the fourth quarter, certainly the place to start thinking about the long-term without trade-down, if you're not going to plan any trade-down in, the portfolio is what the portfolio is. It's down. There's a little bit of a tailwind to these numbers based on the loss rates, like you said, from an EBITDAs standpoint. But on the same hand, we're forecasting a 20% negative comp in GMV and Acima side for the fourth quarter. So, there is puts and takes there, like you said, but I think the run rate for the fourth quarter is the place to start. Like I said, there's some tailwind in the losses. From an EPS standpoint, there's going to be some tailwind going forward and lower share counts. But yes, without factoring in trade-down, there's nothing else that's going to say, oh, no, don't forget, there's another - that the fourth quarter's being impacted by X. There really isn't anything like that, Bobby. So, that would be the place to start thinking about the long-term.

Yes, there’s a lot of uncertainty in the market, so it’s tough to get too far ahead of ourselves on 2023, but we do expect continued headwinds as we enter into next year. Mitch mentioned some of the GMV comps. Those should improve year-over-year trends next year as we get further and further away from the stimulus quarters in 2021. But revenue could be pressured as demand comes down, especially on the Acima side versus the Rent-A-Center.

And even Fahmi, if those comps are zero because you're comping over the negative 20, that doesn't - zero isn't going to drive the run rate of EPS in the fourth quarter higher.

Right. And so, and then on the EBITDA side, depending on how inflation takes hold and how the recession takes hold, you could see some pressure on losses, even though we expect the Rent-A-Center wants to improve from the third quarter results. And then if you think about interest expense, a lot of our debt is variable cost. And so, if we continue to see rate hikes there, you're going to see a bigger impact in 2023 than you did in 2022. So, definitely some puts and takes and a mixed bag. But 2023, when you compare it to the last couple years, could see some pressure.

Yes. It certainly wouldn't be the way the last couple of years have, more the run rates I wanted to use.

Okay. That was it for my questions, and I appreciate it. That was exactly what I was looking for. Best of luck here in this tough environment

Thank you. One moment while we prepare for the next question. The next question is coming from Carla Casella of JPMorgan.

Hi. I just have a quick question on the same-store sales decelerated from 2Q into 3Q, and we saw some of your peers not see that same deceleration. I'm wondering if it's becoming more promotional out there, or if you think you lost any share in the core business?

No. the - I suppose deceleration is one way to think about it, Carla. I suppose pure numbers being higher than our competitors, or another way to think about - and when I say pure numbers, I'm talking about, well, for the quarter and then there's like a 10% difference in two-year stack comp against our competition. And even the quarter was better. But it’s the - I hadn't looked at the deceleration honestly, that if there was a difference between us and the competition from a deceleration standpoint. I'd say, our same-store sales, when you think about the portfolio being down less than 2% and same-store sales being down 5.3%, a lot of that's the collection rate, because the portfolio would say we should have been closer to minus two rather than minus five. Now, some of that was sales because of the merchandised sales, because there was a lot of payouts in the prior year, but still maybe it should have been three, minus three instead of minus five. So, a lot of it is collections, the payments that drove some of those losses. So, we’ve got a lot of work to do getting our collections back in line. But no, I don’t think we've lost any market share though.

Okay. That's great. And then on the - just your thoughts in terms of capital allocation and debt paydown versus share buybacks, do you set a leverage target? is there a certain level where you expand your share buybacks or versus focusing on paying down debt?

Yes. Look, our long-term average or our long-term target for our net debt ratio is about 1.5 times. We did buy back some shares through the third quarter and the first month of the fourth quarter. We just thought the - where the shares were trading, it was a compelling value for us to go ahead and buy back shares. So, we'll take a balanced approach, obviously keeping in mind the uncertainty in the market that we just mentioned, especially around the share buybacks. But we'll take a balanced approach and we'll be opportunistic. But the priorities haven't changed from a capital allocation.

It's just longer term, like you said.

Okay, great. So, the 1.5 isn’t that you - it's not that you'll halt buy - you'll weigh on buybacks until you get to that level?

No, that's just a long-term target for us to be in that - around that 1.5 times level.

Okay, great. Thank you.

Thank you. One moment while we prepare for the next question. The next question will be coming from Brad Thomas of KeyBanc. Your line is open.

Hi. Thanks. good morning, Mitch. Good morning and welcome, Fahmi. My question was around the outlook for margins in the Rent-A-Center business. It’s obviously got a very long history of having very attractive margins through good times and bad times. But we're coming off of obviously record levels of profitability the last couple of years. You just talk about for one, that question of what you think sort of normalized margins are for Rent-A-Center and maybe how that's changed structurally. And then just what sort of levers you have on the fixed and variable cost side as we think about perhaps some challenges ahead with comps getting a little bit slower there. Thanks.

Sure, Brad. Good morning. Good question. I think we talked about the 16% to 17% range now, and that's with losses in the high five. So, if you - with normalized, you're at that 18% range, maybe a little north, but 18%. Can we - and we get the question a lot, can we get back to 20? I don't know. Certainly, what happens with the - from a portfolio standpoint, has a lot to do with that. The other thing about the 18 is, payments are - if we get back to 18 with those lower loss rates, the - or normalized loss rates, the payments will be better. So, the revenue collected number, the retention is better. So, maybe you can get back there, but I think the run rate with a little tailwind for the loss number coming down, is the right way to think about the long-term of that business. The labor costs over the last 18 months are - have obviously gone up, like they have for everybody in the store. We've been able to offset it with hours. A lot more is coming from eCommerce, which helps us reduce our hours in stores. Technology helps us reduce our hours in the stores as far as how many customers you have to call versus texting and so forth. So, there’s some offsets there. But I think in the long - in the short term, if you thought of the 16 to 17 and add a normalized loss rate, you'd be close to the long-term number. What we can do in the long-term, we are testing some smaller square footages to take some of that overhead out from a real estate standpoint as e-com grows and stores become half fulfillment centers for e-com and half handling the business that comes in the store. So, we're looking at the long-term, what can we do from a real estate standpoint to reduce those costs on real estate? Not necessarily reduce locations, but reduce actual size of locations is a big one. We always are looking at our trucks and are we being efficient with how many trucks we have on the street and so forth, and the labor, as I mentioned. Those are the big ones from a fixed cost standpoint.

Great. Thank you, Mitch.

Thank you. Our final question will be coming from Vincent Caintic of Stephens. Your line is open.

Hi. Thanks for taking my question. Just one, and I appreciate the commentary about the tough environment. I wanted to focus on your cash flow though. Even though the environment's been tough, your cash flows remained resilient, and encouraging to see the share purchases and of course, your dividend is still strong. So, I'm wondering, as things are tough and maybe GMV is not growing as fast, so not putting the free cash flow back towards issuing leases, how you were thinking about the resiliency in that cash flow and if not for growth, what else could you do? And maybe the follow-up on the - your appetite for share purchases or other forms of investing that capital. Thank you.

Sure. Vincent, I'll start. Fahmi can jump in, but yes, cashflow is strong with - even stronger with minus 20% GMV and the large segment of like Acima. The best news for us would be a little less cash flow next year and more - buy more product, right, on the working capital side, because that's the better long-term play. But in the meantime, certainly the capital allocation hasn't changed, what Fahmi talked about. We do have a long-term goal to be down to 1.5 times. We'll be opportunistic on share repurchases as we were the last three months. But going forward, it really hasn't changed from a capital allocation standpoint.

Yes. I mean, I would just reiterate what we said earlier around the uncertainty left in the market. Obviously, we feel good about where we are today from a liquidity standpoint, having about $540 million of available liquidity to us. We've demonstrated that if we feel like the best use of that cash is buying back shares, that we did that. We did a lot of that in the October timeframe. But we are mindful of the environment that we're heading into. So, we'll take a balanced approach. The waterfall is invest in the business, pay down debt, and opportunistically buy back shares and return capital to our shareholders. So, we'll continue to be very thoughtful in our approach around capital allocation and utilize that free cash flow as best as we can.

Okay, great. That's very helpful. Thanks very much.

Thank you. That concludes the Q&A session. I would like to turn the call over to Mitch Fadel for closing remarks.

Thank you, Operator. Thank you everyone for your time this morning. We appreciate it. We appreciate your support. We're working hard in a very uncertain environment, and we'll continue to do that. We'll continue to focus on the things we can control, like our costs and our underwriting and capital allocation we just - that Fahmi was just talking about. And we'll continue to focus on the company and building the team, like bringing people in like Fahmi to build the team to be able to accomplish the great things that we know we can accomplish, still believe we can accomplish. Maybe it's a little bit of a delay with the uncertain environment, but we’ve got a lot of a lot of things left to do and look forward to doing them and accomplishing them over the next number of years for you. Thank you.

This concludes today’s conference call. Thank you all for joining. You all have a great day.