This week, Durig Capital revisits a rent-to-own operator making outstanding progress in addressing a growing economic segment of the purchasing population, last reviewed in “Rac Up 7.62% Yield..”. Rent-A-Center (NASDAQ:RCII) is the largest rent-to-own operator in North America. Just shy of releasing their Q1 2018 results, RCII released an update.
- Preliminary same store growth in the company’s core US segment of 0.3% over a year ago.
- March same store sales grew by 1.6%, showing the company’s initiatives to improve its topline are beginning to take hold.
- Acceptance Now same store sales grew by 3.3% year over year.
- Since December 31, 2017, RCII has reduced its debt by $75 million.
RCII’s new management is targeting cost savings and debt reduction and has identified up to $85 million in cost savings. RCII’s B rated, 29 month bonds provide income investors with diversification into the retail sector with a market leader. These 2020 bonds are currently selling at a discount, offering a yield to maturity of over 8.0%. In light of these factors, Durig Capital has marked these bonds for addition to its Fixed Income 2 (FX2) high-yield managed income portfolio.
Strategic Alternatives
Last year, RCII announced it was evaluating strategic alternatives for shareholders, and recently announced that its board of directors were actively engaged with groups interested in acquisition, expecting to reach a decision in Q2, 2018. It appears that RCII is tracking towards a company sale, which, if realized, existing bonds will likely be cashed out and / or refinanced.
Improving Balance Sheet
RCII identified up to $85 million in annualized cost savings and anticipates realizing two-thirds of these in 2018. In March, the company announced it was reducing headcount by 250 positions, representing 25% of its Plano, Texas corporate office workforce, driving $28 million in annualized cost savings alone. Another issuer that is doing more with less is Jones Energy (NYSE:JONE). Over 2017, RCII reduced debt by $52.5 million although it saw a year-over-year decrease in cash flow from operations. In addition, since December 31, 2017, RCII has reduced debt by another $75 million due to a stronger topline.
Interest Coverage and Liquidity
As of year-end 2017, RCII had operating income (without the effects of non-cash depreciation and amortization) of $70.8 million and interest expense of $45.2 million for a coverage ratio of 1.6x. According to their recent update, RCII has adequate liquidity levels to meet short-term cash needs, with $60.3 million in cash and another $175 million available on revolving credit.
Risks
Risks for bondholders are twofold—will RCII be acquired, and if not, can they continue to grow revenues, reduce debt, and address debt that is coming due. RCII is in talks with groups interested in acquisition, but the board of directors will only make an announcement when and if a deal is reached. Even if RCII is not acquired, they appear to be improving the topline while realizing significant cost savings, bettering their financials notwithstanding the possibility of acquisition.
Conclusion
Mitchell Fadel, RCII’s new CEO, explained his plan is not dependent on customer growth, but on identifying cost savings and efficiencies. RCII reduced debt significantly over the past 15 months and continues to evaluate strategic alternatives which may include a company sale. RCII’s short term bonds, currently selling at a discount and a yield to maturity of over 8.0% provide sound diversification for income seeking investors.
Issuer: Rent-A-Center, Inc.
Ticker: (NASDAQ:RCII)
CUSIP: 76009NAH3
Coupon: 6.625%
Maturity: 11/15/2020
Rating: B3/CCC
Pays: Semiannually
Price: 96.0
Yield to Maturity: ~8.4%
Disclosure: Durig Capital and certain clients may hold positions in RCII’s 2020 Bonds.