UPBOUND GROUP, INC. (UPBD) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Objective
We report financial operating performance under four operating segments, including our Rent-A-Center Business segment, which represents our company-owned stores and e-commerce platform through rentacenter.com; our Acima business segment, which includes our virtual and staffed business models; and our Mexico and Franchising segments.
The following discussion focuses on recent developments expected to have current and future impacts on the results of our business, trends and uncertainties within our industry and business model that may impact our financial results, our recent results of operations, and discussion of our liquidity and capital resources. You should read the following discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
For similar historical operating and financial data and discussion of our twelve months ended December 31, 2021 results compared to our twelve months ended December 31, 2020 results, refer to Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10 K, for the year ended December 31, 2021, incorporated herein by reference, which was filed with the SEC on February 28, 2022.
Recent Developments
Corporate Name Change. On February 22, 2023, we announced the change of our corporate name to Upbound Group, Inc., which will trade under the ticker “UPBD” beginning February 27, 2023.
Key Management Changes.
•Fahmi Karam joined as Chief Financial Officer, effective October 31, 2022. Mr. Karam has over 20 years of experience in finance and accounting, most recently as the Chief Financial Officer of Santander Consumer USA since September 2019. Mr. Karam previously served as Santander's Head of Pricing and Analytics, and EVP, Strategy and Corporate Development. Prior to his roles at Santander, Mr. Karam spent 12 years at JP Morgan Investment Bank, and he began his career at Deloitte.
•Tyler Montrone has been appointed Executive Vice President of Acima, effective February 20, 2023, and will lead the Acima business segment, reporting to CEO, Mitch Fadel. Mr. Montrone is a long-time Acima executive who most recently served as Acima's Chief Development Officer where he was responsible for Acima's product, engineering and underwriting functions. Aaron Allred, founder and former Executive Vice President of Acima, will continue to work for the Company in an advisory role.
•Sudeep Gautam joined the Company as Chief Technology and Digital Officer, effective January 16, 2023. Mr. Gautam has over 20 years of experience in large-scale digital transformations, including the position of Chief Digital Officer at Pratt & Whitney and several senior executive positions at Hewlett-Packard.
•Mike Bagull joined the Company as Senior Vice President, Business Development and Partnerships, in August 2022. Mr. Bagull has over 20 years of experience in business development and sales management roles, including over 8 years at Synchrony, most recently as Senior Vice President, Business Development and Partnerships.
Dividends. On December 7, 2022, we announced that our board of directors approved quarterly cash dividend of $0.34 per share for the first quarter of 2023. The dividend was paid on January 10, 2023 to our common stockholders of record as of the close of business on December 20, 2022.
Business and Operational Trends
Macroeconomic Conditions. Beginning in the first quarter of 2020, the worldwide spread of COVID-19 caused significant disruptions to the U.S. and world economies. In response to COVID-19, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), providing U.S. citizens and businesses with various stimulus and income tax relief benefits throughout 2020 and early 2021 to help offset immediate negative financial impacts sustained as a result of COVID-19. In addition, we proactively implemented certain response measures, including providing our Rent-A-Center Business and Acima customers with additional electronic payment methods to facilitate contactless transactions. These response measures resulted in improved customer payment behaviors contributing to higher revenues and lower merchandise losses in 2020 and the first half of 2021.
In the third quarter of 2021 we began to experience negative customer behavioral trends, including increases in delinquent payments and merchandise loss activity, resulting in declining revenues and increased operating expenses, respectively. These
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negative trends continued to accelerate in the fourth quarter of 2021, following the expiration of government stimulus and relief programs combined with a significant rise in the US consumer price index, resulting in significant pressure on the discretionary income levels of our consumers. This led us to tighten our underwriting policies in an effort to improve risk management related to the execution of new leases. The continuation of the above trends combined with the tightening of our underwriting policies, which has reduced the number of active leases and corresponding lease revenue, has continued to negatively impact our financial results, including our results of operations and operating cash flows, through 2022.
In addition to the negative trends in customer behavior described above, we have also been impacted by other negative macroeconomic trends, including a condensed labor market, which has contributed to wage inflation, and global supply chain disruptions resulting in reduced product availability and rising product costs. Recent wage inflation trends have increased our labor costs, while supply chain disruptions have partially contributed to declines in our revenue, due to lower product availability, and increased merchandise losses driven by higher product costs.
While the lease-to-own industry has historically remained a resilient business model throughout various economic cycles, providing credit-constrained customers with a viable option to obtain merchandise they may not otherwise be able to obtain, the full extent to which our risk management strategy, consumer spending behavior, or other macro-economic trends, may impact our business in future periods is uncertain. The continuation of these trends may have a material adverse impact on our financial statements, including our results of operations, operating cash flows, liquidity and capital resources.
See “Risk Factors” in Part I, Item 1A for additional discussion of operational impacts to our business and additional risks associated with COVID-19 and other macroeconomic conditions.
Rent-A-Center Business E-commerce revenue. In recent years, e-commerce revenues have continued to increase as a percentage of total revenue in our Rent-A-Center Business segment. For the twelve months ended December 31, 2022 e-commerce revenues represented approximately 25% of total lease-to-own store revenues compared to 24% for 2021. Due to recent trends in consumer shopping behaviors and expectations, we believe e-commerce solutions are an important part of our lease-to-own offering. However, we are unable to quantify the extent to which e-commerce revenues are incremental compared to what our overall revenues would have been in the absence of those e-commerce transactions. In addition, the profitability of e-commerce transactions can be impacted by different merchandise loss factors compared to traditional store-based transactions in the Rent-A-Center Business segment. Therefore, we are unable to determine with certainty whether the continuation of this trend toward increased e-commerce transactions will have a significant impact to our financial statements in future periods or be favorable or unfavorable to our financial results.
Results of Operations
The following discussion focuses on our results of operations and our liquidity and capital resources. You should read this discussion in conjunction with the consolidated financial statements and notes thereto for the twelve months ended December 31, 2022 included in Part II, Item 8 of this Annual Report on Form 10-K.
Key Metrics
Gross Merchandise Volume (GMV): The Company defines Gross Merchandise Volume as the retail value in U.S. dollars of merchandise acquired by the Company that is leased to customers through a transaction that occurs within a defined period, net of cancellations.
Rent-A-Center Business Lease Portfolio Balance: Represents the aggregate dollar value of the expected monthly rental income associated with current active lease agreements from our Rent-A-Center Business stores and ecommerce platform at the end of any given period.
Same Store Sales: Same store sales generally represents revenue earned in stores that were operated by us for 13 months or more and are reported on a constant currency basis as a percentage of total revenue earned in stores of the operating segment during the period. The Company excludes any store that receives a certain level of customer accounts from closed stores or acquisitions from the same store revenue base. The receiving store will be eligible for inclusion in the same store revenue base in the 30th full month following account transfer.
Skip / Stolen Losses: Represents the charge-off of the depreciated value of unrecoverable on-rent merchandise with lease-to-own customers who are past due.
Overview
The following briefly summarizes certain of our financial information for the twelve months ended December 31, 2022 as compared to the twelve months ended December 31, 2021.
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During the twelve months ended December 31, 2022, consolidated revenues decreased approximately $338.1 million, while operating profit decreased approximately $132.0 million, primarily due to a decrease in gross profit of $155.5 million driven by lower revenues and increases in other store expenses of $51.7 million described further below.
Revenues in our Rent-A-Center Business segment decreased approximately $88.0 million for the twelve months ended December 31, 2022, due to a 4.5% decrease in same store sales primarily due to decreases in merchandise sales and rentals and fees revenues of $48.0 million and $38.3 million, respectively, reflecting lower demand for consumer durable goods, mainly due to the effects from the wind-down of stimulus programs in 2021, and decreases in lease payments collected primarily due to inflationary pressures on the discretionary income of our consumers driven by recent increases in the consumer price index. Operating profit decreased approximately $114.4 million for the twelve months ended December 31, 2022, primarily due to lower revenues described above, in addition to higher total merchandise losses of $41.1 million, and increased labor costs of $6.2 million, driven primarily by wage inflation.
The Acima segment revenues decreased approximately $217.8 million for the twelve months ended December 31, 2022, due to a $106.1 million decrease in merchandise sales and $111.8 million decrease in rentals and fees revenues, primarily attributable to inflationary pressures on consumer's discretionary income and the wind-down of the stimulus programs in 2021, in addition to effects of changes in our underwriting policies described above. Operating profit decreased approximately $25.2 million for the twelve months ended December 31, 2022, primarily due to lower revenues described above, partially offset by decreases in cost of merchandise sold and operating expenses of $128.6 million and $71.4 million, respectively.
The Mexico segment revenues increased by 5.7% for the twelve months ended December 31, 2022, contributing to an increase in gross profit of 6.3%, or $2.7 million. Operating profit, however, decreased $1.6 million for the twelve months ended December 31, 2022, primarily due to higher other store expenses and labor costs of $2.8 million and $1.4 million, respectively, partially offset by increased revenues described above .
Revenues for the Franchising segment decreased $35.8 million for the twelve months ended December 31, 2022, primarily due to a decrease in inventory purchases by franchisees. Operating profit decreased $1.2 million for the twelve months ended December 31, 2022 primarily due to the lower revenues described above.
Cash flow from operations was $468.5 million for the twelve months ended December 31, 2022. As of December 31, 2022, we held $144.1 million of cash and cash equivalents and outstanding indebtedness of $1.4 billion.
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The following table is a reference for the discussion that follows.
| Year Ended December 31, | 2022-2021 Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | 2022 | 2021 | $ | % | ||||||||||||
| Revenues | ||||||||||||||||
| Store | ||||||||||||||||
| Rentals and fees | $ | 3,375,453 | $ | 3,522,453 | $ | (147,000) | (4.2) | % | ||||||||
| Merchandise sales | 675,288 | 829,222 | (153,934) | (18.6) | % | |||||||||||
| Installment sales | 72,328 | 73,585 | (1,257) | (1.7) | % | |||||||||||
| Other | 4,975 | 4,148 | 827 | 19.9 | % | |||||||||||
| Total store revenues | 4,128,044 | 4,429,408 | (301,364) | (6.8) | % | |||||||||||
| Franchise | ||||||||||||||||
| Merchandise sales | 91,350 | 126,856 | (35,506) | (28.0) | % | |||||||||||
| Royalty income and fees | 25,998 | 27,187 | (1,189) | (4.4) | % | |||||||||||
| Total revenues | 4,245,392 | 4,583,451 | (338,059) | (7.4) | % | |||||||||||
| Cost of revenues | ||||||||||||||||
| Store | ||||||||||||||||
| Cost of rentals and fees | 1,268,809 | 1,260,434 | 8,375 | 0.7 | % | |||||||||||
| Cost of merchandise sold | 779,789 | 935,765 | (155,976) | (16.7) | % | |||||||||||
| Cost of installment sales | 25,547 | 25,637 | (90) | (0.4) | % | |||||||||||
| Total cost of store revenues | 2,074,145 | 2,221,836 | (147,691) | (6.6) | % | |||||||||||
| Franchise cost of merchandise sold | 91,715 | 126,603 | (34,888) | (27.6) | % | |||||||||||
| Total cost of revenues | 2,165,860 | 2,348,439 | (182,579) | (7.8) | % | |||||||||||
| Gross profit | 2,079,532 | 2,235,012 | (155,480) | (7.0) | % | |||||||||||
| Operating expenses | ||||||||||||||||
| Store expenses | ||||||||||||||||
| Labor | 634,341 | 644,763 | (10,422) | (1.6) | % | |||||||||||
| Other store expenses | 821,821 | 770,073 | 51,748 | 6.7 | % | |||||||||||
| General and administrative expenses | 186,470 | 194,894 | (8,424) | (4.3) | % | |||||||||||
| Depreciation, amortization and write-down of intangibles | 53,079 | 54,830 | (1,751) | (3.2) | % | |||||||||||
| Other charges | 235,283 | 289,913 | (54,630) | (18.8) | % | |||||||||||
| Total operating expenses | 1,930,994 | 1,954,473 | (23,479) | (1.2) | % | |||||||||||
| Operating profit | 148,538 | 280,539 | (132,001) | (47.1) | % | |||||||||||
| Debt refinancing charges | — | 15,582 | (15,582) | (100.0) | % | |||||||||||
| Interest, net | 87,067 | 70,653 | 16,414 | 23.2 | % | |||||||||||
| Earnings before income taxes | 61,471 | 194,304 | (132,833) | (68.4) | % | |||||||||||
| Income tax expense | 49,114 | 59,364 | (10,250) | (17.3) | % | |||||||||||
| Net earnings | $ | 12,357 | $ | 134,940 | $ | (122,583) | (90.8) | % |
Comparison of the Years Ended December 31, 2022 and 2021
Store Revenue. Total store revenue decreased by $301.4 million, or 6.8%, to $4,128.0 million for the year ended December 31, 2022, from $4,429.4 million for 2021. This decrease was primarily due to decreases of approximately $217.8 million and $88.0 million in the Acima and Rent-A-Center Business segments, respectively, as discussed further in the “Segment Performance” section below.
Cost of Rentals and Fees. Cost of rentals and fees consists primarily of depreciation of rental merchandise. Cost of rentals and fees for the year ended December 31, 2022 increased by $8.4 million, or 0.7%, to $1,268.8 million, as compared to $1,260.4 million in 2021. This increase in cost of rentals and fees was primarily attributable to an increase of $7.4 million and $1.0 million in the Acima and Mexico Business segments, respectively. Cost of rentals and fees expressed as a percentage of rentals and fees revenue increased to 37.6% for the year ended December 31, 2022 as compared to 35.8% in 2021.
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Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold decreased by $156.0 million, or 16.7%, to $779.8 million for the year ended December 31, 2022, from $935.8 million in 2021, attributable to decreases of $128.6 million and $27.2 million in the Acima and Rent-A-Center Business segments, respectively. The gross margin percent of merchandise sales decreased to (15.5)% for the year ended December 31, 2022, from (12.8)% in 2021.
Gross Profit. Gross profit decreased by $155.5 million, or 7.0%, to $2,079.5 million for the year ended December 31, 2022, from $2,235.0 million in 2021, due primarily to decreases of $96.6 million and $60.7 million in the Acima and Rent-A-Center Business segments, respectively, as discussed further in the “Segment Performance” section below. Gross profit as a percentage of total revenue increased to 49.0% in 2022, as compared to 48.8% in 2021.
Store Labor. Store labor includes all salaries and wages paid to store operational employees and district managers, together with payroll taxes and benefits. Store labor decreased by $10.5 million, or 1.6%, to $634.3 million for the year ended December 31, 2022, as compared to $644.8 million in 2021, primarily attributable to a decrease of $18.0 million in the Acima segment, partially offset by an increase of $6.2 million in the Rent-A-Center Business segment. Store labor expressed as a percentage of total store revenue was 15.4% for the year ended December 31, 2022, as compared to 14.6% in 2021.
Other Store Expenses. Other store expenses include charge-offs due to customer stolen merchandise and occupancy, delivery, advertising, selling, insurance, travel and other store-level operating expenses. Other store expenses increased by $51.7 million, or 6.7%, to $821.8 million for the year ended December 31, 2022, as compared to $770.1 million in 2021, primarily attributable to an increase of $49.2 million in the Rent-A-Center Business segment driven by higher customer stolen merchandise losses, as described further in the “Segment Performance” section below. Other store expenses expressed as a percentage of total store revenue were 19.9% for the year ended December 31, 2022, compared to 17.4% in 2021.
General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, payroll taxes and benefits, stock-based compensation, occupancy, administrative and other operating expenses, as well as salaries and labor costs for our regional directors, divisional vice presidents and executive vice presidents. General and administrative expenses decreased by $8.4 million, or 4.3%, to $186.5 million for the year ended December 31, 2022, as compared to $194.9 million in 2021. General and administrative expenses expressed as a percentage of total revenue were 4.4% for the year ended December 31, 2022, compared to 4.3% in 2021.
Other charges. Other charges decreased by $54.6 million to $235.3 million in 2022, as compared to $289.9 million in 2021. Other charges for the years ended December 31, 2022 primarily included $143.2 million in stock compensation expense related to the vesting of a portion of the equity consideration issued in connection with the acquisition of Acima Holdings, $80.8 million in depreciation and amortization of acquired software and intangible assets, $6.8 million in asset impairments, $5.0 million in employee severance, $1.2 million in state sales tax assessment reserves, and $1.2 million in Acima retail partner conversion losses. Other charges for the year ended December 31, 2021 primarily included $127.1 million in stock compensation expense related to equity consideration subject to vesting conditions, $115.0 million in depreciation and amortization of acquired software and intangible assets related to the acquisition of Acima Holdings, $28.0 million in one-time transaction and integration costs related to the acquisition of Acima Holdings, and $17.5 million in legal settlement reserves.
Operating Profit. Operating profit decreased $132.0 million, or 47.1%, to $148.5 million for the year ended December 31, 2022, as compared to $280.5 million in 2021, primarily due to decreases in revenue and gross profit, offset by decreases in operating expenses as described above. Operating profit expressed as a percentage of total revenue was 3.5% for the year ended December 31, 2022, compared to 6.1% in 2021. Excluding Other charges, operating profit was $383.8 million, or 9.0% of revenue for the year ended December 31, 2022, compared to $570.5 million or 12.4% of revenue for the comparable period of 2021.
Income Tax Expense. Income tax expense for the twelve months ended December 31, 2022 was $49.1 million, as compared to $59.4 million in 2021. The effective tax rate was 79.9% for the twelve months ended December 31, 2022, compared to 30.6% in 2021. A main driver of the rate difference is significantly lower pre-tax income relative to our other rate-impacting items as well as the impact of Acima stock compensation add-backs related to the acquisition. In addition, the effective tax rate for the twelve months ended December 31, 2021, was further impacted by discrete income tax items related to excess tax benefits from the vesting of our annual restricted stock award grants and stock option exercises. Additionally, we released valuation allowance in 2021, which provided a benefit to the 2021 rate that was not applicable to the 2022 rate.
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Comparison of the Years Ended December 31, 2021 and 2020
For similar operating and financial data and discussion of our year ended December 31, 2021 results compared to our year ended December 31, 2020 results, refer to Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.
Segment Performance
Rent-A-Center Business segment.
| Year Ended December 31, | 2022-2021 Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | 2022 | 2021 | $ | % | ||||||||||||
| Revenues | $ | 1,949,864 | $ | 2,037,849 | $ | (87,985) | (4.3) | % | ||||||||
| Gross profit | 1,372,863 | 1,433,536 | (60,673) | (4.2) | % | |||||||||||
| Operating profit | 334,525 | 448,905 | (114,380) | (25.5) | % | |||||||||||
| Lease portfolio balance(1) | 142,839 | 149,950 | (7,111) | (4.7) | % | |||||||||||
| Change in same store revenue(1) | (4.5) | % | ||||||||||||||
| Stores in same store revenue calculation | 1,761 |
(1) See Key Metrics described above for additional information
Revenues. The decrease in revenue for the year ended December 31, 2022 was primarily due to a decrease in same store sales of 4.5%, driven by decreases in merchandise sales revenue and rentals and fees revenue of $48.0 million and $38.3 million for the twelve months ended December 31, 2022, respectively. Decreases in revenue reflect lower demand for consumer durable goods mainly due to the effects from the wind-down of stimulus programs in 2021, combined with recent increases in the US consumer price index and corresponding pressure on the discretionary income of our customers.
Gross Profit. Gross profit decreased in 2022 driven primarily by the decrease in revenue described above. Gross profit as a percentage of segment revenues increased to 70.4% in 2022 from 70.3% in 2021.
Operating Profit. Operating profit as a percentage of segment revenues was 17.2% for 2022 compared to 22.0% for 2021. The decrease in operating profit for the year ended December 31, 2022 was partially driven by decreases in revenues and gross profit described above, in addition to increases in losses due to customer stolen merchandise of $36.4 million for the twelve months ended December 31, 2022, and increased labor costs of $6.2 million for the twelve months ended December 31, 2022, driven by wage inflation. Charge-offs in our Rent-A-Center Business lease-to-own stores due to skip / stolen losses, expressed as a percentage of Rent-A-Center Business lease-to-own revenues, were approximately 4.9% for the year ended December 31, 2022, compared to 3.1% in 2021. Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims. Charge-offs in our Rent-A-Center Business lease-to-own stores due to other merchandise losses, expressed as a percentage of revenues, were approximately 2.0% for the year ended December 31, 2022, compared to 1.6% in 2021.
Acima segment.
| Year Ended December 31, | 2022-2021 Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | 2022 | 2021 | $ | % | ||||||||||||
| Revenues | $ | 2,110,320 | $ | 2,328,089 | $ | (217,769) | (9.4) | % | ||||||||
| Gross profit | 632,244 | 728,852 | (96,608) | (13.3) | % | |||||||||||
| Operating profit | 151,301 | 176,496 | (25,195) | (14.3) | % | |||||||||||
| Gross merchandise volume(1) | 1,584,362 | 1,912,731 | (328,369) | (17.2) | % |
(1) See Key Metrics described above for additional information
Revenues. The decrease in revenue for the year ended December 31, 2022 compared to 2021 was primarily due to decreases in rentals and fees revenues and merchandise sales revenues of $111.8 million and $106.1 million, respectively. Consistent with our Rent-A-Center Business segment, decreases in revenue reflect lower demand for consumer durable goods mainly due to the effects from the wind-down of stimulus programs in 2021, combined with recent increases in the US consumer price index and corresponding pressure on the discretionary income of our customers. In addition, decreases in revenue were also attributable to the tightening of our underwriting policies, in an effort to improve risk management related to the execution of new leases, as described further in Business and Operational Trends.
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Gross Profit. Gross profit as a percentage of total revenue for the year ended December 31, 2022 decreased to 30.0%, as compared to 31.3% in 2021, primarily due to changes in lease-to-own business volume between our virtual and staffed Acima locations, which utilize different depreciation methods. Please reference Critical Accounting Estimates, Uncertainties or Assessments in Our Financial Statements, included in Part 2, Item 7 of this Annual Report on form 10-K for additional disclosure of our depreciation policies for lease merchandise.
Operating Profit. Operating profit as a percentage of segment revenues decreased to 7.2% for the year ended December 31, 2022, compared to 7.6% in 2021. Operating profit margin decreased for the year ended December 31, 2022, as compared to 2021, partially due to lower revenues described above, partially offset by decreases in cost of merchandise sold and operating expenses of $128.6 million and $71.4 million, respectively. Charge-offs in our Acima locations due to skip / stolen losses, expressed as a percentage of revenues, were approximately 10.6% in 2022 as compared to 9.6% in 2021. Other merchandise losses include unrepairable merchandise and loss/damage waiver claims. Charge-offs in our Acima locations due to other merchandise losses, expressed as a percentage of revenues, were negligible for both 2022 and 2021.
Mexico Segment.
| Year Ended December 31, | 2022-2021 Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | 2022 | 2021 | $ | % | ||||||||||||
| Revenues | $ | 64,880 | $ | 61,403 | $ | 3,477 | 5.7 | % | ||||||||
| Gross profit | 45,812 | 43,117 | 2,695 | 6.3 | % | |||||||||||
| Operating profit | 6,267 | 7,858 | (1,591) | (20.2) | % | |||||||||||
| Change in same store revenue(1) | 3.2 | % | ||||||||||||||
| Stores in same store revenue calculation | 113 |
(1) See Key Metrics described above for additional information
Revenues. Revenues for 2022 were positively impacted by exchange rate fluctuations of approximately $0.3 million, as compared to 2021. On a constant currency basis, revenues for the year ended December 31, 2022 increased approximately $3.1 million.
Gross Profit. Gross profit for the year ended December 31, 2022 was positively impacted by exchange rate fluctuations of approximately $0.2 million, as compared to 2021. On a constant currency basis, gross profit for the year ended December 31, 2022 increased approximately $2.5 million. Gross profit as a percentage of segment revenues increased to 70.6% in 2022, compared to 70.2% in 2021.
Operating Profit. Operating profit for the year ended December 31, 2022 was minimally impacted by exchange rate fluctuations compared to 2021. On a constant currency basis, operating profit for the year ended December 31, 2022 decreased approximately $1.6 million, primarily due to higher other store expenses and labor costs of $2.8 million and $1.4 million, respectively, partially offset by higher revenues and gross profit described above. Operating profit as a percentage of segment revenues decreased to 9.7% in 2022, compared to 12.8% in 2021.
Franchising segment.
| Year Ended December 31, | 2022-2021 Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | 2022 | 2021 | $ | % | ||||||||||||
| Revenues | $ | 120,328 | $ | 156,110 | $ | (35,782) | (22.9) | % | ||||||||
| Gross profit | 28,613 | 29,507 | (894) | (3.0) | % | |||||||||||
| Operating profit | 19,124 | 20,321 | (1,197) | (5.9) | % |
Revenues. Revenues decreased for the year ended December 31, 2022, compared to 2021, primarily due to a decrease of $35.5 million in inventory purchases by franchisees.
Gross Profit. Gross profit as a percentage of segment revenues increased to 23.8% in 2022 from 18.9% in 2021, primarily due to a higher percentage of royalty income and fees included in franchise revenues.
Operating Profit. Operating profit as a percentage of segment revenues increased to 15.9% in 2022 from 13.0% for 2021.
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Liquidity and Capital Resources
Overview. For the year ended December 31, 2022, we generated $468.5 million in operating cash flow. We used cash in the amount of $298.8 million for debt repayments, $79.2 million for dividends, $75.1 million for share repurchases, and $61.4 million for capital expenditures, offset by cash proceeds from indebtedness of $90.0 million. We ended the year with $144.1 million of cash and cash equivalents and outstanding indebtedness of $1.4 billion.
Analysis of Cash Flow. Cash provided by operating activities increased by $76.2 million to $468.5 million in 2022 from $392.3 million in 2021, primarily due to a decrease in inventory purchases, partially offset by a decrease of $122.6 million in net earnings both of which were driven by current macro-environment factors negatively impacting our business operational trends described further above.
Cash used in investing activities decreased to $62.3 million in 2022, compared to $1,336.0 million in 2021, primarily driven by the acquisition of Acima Holdings in February 2021.
Cash (used in) provided by financing activities was $(370.7) million in 2022, compared to $892.8 million in 2021, representing a change of $1.3 billion. The change was primarily due to debt proceeds of $1.8 billion received in the first quarter of 2021 used to fund the acquisition of Acima Holdings in February 2021 and pay outstanding debt at the time of the acquisition, partially offset by debt issuance costs of $47.6 million paid in the first quarter of 2021 in connection with the receipt of debt proceeds, in addition to lower debt repayments of $70.3 million for the twelve months ended December 31, 2022, compared to the same period in 2021.
Liquidity Requirements. Our primary liquidity requirements are for rental merchandise purchases. Other capital requirements include expenditures for property assets, and debt service. Our primary sources of liquidity have been cash provided by operations.
We utilize our ABL Credit Facility for the issuance of letters of credit, as well as to manage normal fluctuations in operational cash flow caused by the timing of cash receipts. In that regard, we may from time to time draw funds under the ABL Credit Facility for general corporate purposes. Amounts are drawn as needed due to the timing of cash flows and are generally paid down as cash is generated by our operating activities. We believe cash flow generated from operations and availability under our ABL Credit Facility, will be sufficient to fund our operations during the next 12 months. At February 20, 2023, we had approximately $105.1 million in cash on hand, and $395.6 million available under our ABL Credit Facility.
Deferred Taxes. Certain federal tax legislation enacted during the period 2009 to 2017 permitted bonus first-year depreciation deductions ranging from 50% to 100% of the adjusted basis of qualified property placed in service during such years. The depreciation benefits associated with these tax acts are now reversing. The Protecting Americans from Tax Hikes Act of 2015 (“PATH”) extended the 50% bonus depreciation to 2015 and through September 26, 2017, when it was updated by the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The Tax Act allows 100% bonus depreciation for certain property placed in service between September 27, 2017 and December 31, 2022, at which point it will begin to phase out. The bonus depreciation provided by the Tax Act resulted in an estimated benefit of $298 million for us in 2022. We estimate the remaining tax deferral associated with bonus depreciation from these Acts is approximately $380 million at December 31, 2022, of which approximately 80%, or $303 million, will reverse in 2023, and the majority of the remainder will reverse between 2024 and 2025.
Merchandise Losses. Merchandise losses consist of the following:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2022 | 2021 | 2020 | |||||||
| Customer stolen merchandise(1) | $ | 336,475 | $ | 298,533 | $ | 174,527 | ||||
| Other merchandise losses(2) | 38,734 | 33,380 | 30,660 | |||||||
| Total merchandise losses | $ | 375,209 | $ | 331,913 | $ | 205,187 |
(1)Increase in customer stolen merchandise losses for the twelve months ended December 31, 2022, compared to the corresponding period in 2021, is primarily due to increases in the US consumer price index and corresponding pressure on the discretionary income of our consumers, as described in the Results of Operations section above. In addition, the increase for the twelve months ended December 31, 2022, is also partly attributable to the timing of the acquisition of Acima Holdings on February 17, 2021, resulting in a partial period of losses for the first quarter of 2021.
(2)Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims.
Capital Expenditures. We make capital expenditures in order to maintain our existing operations, acquire new capital assets in new and acquired stores and invest in information technology. We spent $61.4 million, $62.5 million and $34.5 million on capital expenditures in the years 2022, 2021 and 2020, respectively.
Acquisitions and New Location Openings. During 2022, we acquired five rent-to-own store location and customer accounts for an aggregate purchase price of approximately $1.0 million. Four of the store locations were closed upon acquisition and
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consolidated into existing store operations in our Rent-A-Center Business segment and one remained open as part of our Rent-A-Center Business segment.
The tables below summarize the location activity for the years ended December 31, 2022, 2021 and 2020.
| Twelve Months Ended December 31, 2022 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rent-A-Center Business | Mexico | Franchising | Total | |||||||||||||
| Locations at beginning of period(1) | 1,846 | 123 | 466 | 2,435 | ||||||||||||
| New location openings | 16 | 4 | 1 | 21 | ||||||||||||
| Conversions | 1 | — | (1) | — | ||||||||||||
| Closed locations | ||||||||||||||||
| Merged with existing locations | (12) | (1) | — | (13) | ||||||||||||
| Sold or closed with no surviving location | — | — | (19) | (19) | ||||||||||||
| Locations at end of period(1) | 1,851 | 126 | 447 | 2,424 | ||||||||||||
| Acquired locations closed and accounts merged with existing locations | 4 | — | — | 4 | ||||||||||||
| Total approximate purchase price (in millions) | $ | 1.0 | $ | — | $ | — | $ | 1.0 |
(1) Does not include locations in our Acima segment.
| Twelve Months Ended December 31, 2021 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rent-A-Center Business | Mexico | Franchising | Total | |||||||||||||
| Locations at beginning of period(1) | 1,845 | 121 | 462 | 2,428 | ||||||||||||
| New location openings | 6 | 2 | 8 | 16 | ||||||||||||
| Conversions | 1 | — | (1) | — | ||||||||||||
| Closed locations | ||||||||||||||||
| Merged with existing locations | (6) | — | — | (6) | ||||||||||||
| Sold or closed with no surviving location | — | — | (3) | (3) | ||||||||||||
| Locations at end of period(1) | 1,846 | 123 | 466 | 2,435 | ||||||||||||
| Acquired and remains open | 1 | — | — | 1 | ||||||||||||
| Total approximate purchase price (in millions) | $ | 0.3 | $ | — | $ | — | $ | 0.3 |
(1) Does not include locations in our Acima segment.
| Twelve Months Ended December 31, 2020 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rent-A-Center Business | Mexico | Franchising | Total | |||||||||||||
| Locations at beginning of period(1) | 1,973 | 123 | 372 | 2,468 | ||||||||||||
| Conversions | (99) | — | 99 | — | ||||||||||||
| Closed locations | ||||||||||||||||
| Merged with existing locations | (28) | (2) | — | (30) | ||||||||||||
| Sold or closed with no surviving location | (1) | — | (9) | (10) | ||||||||||||
| Locations at end of period(1) | 1,845 | 121 | 462 | 2,428 | ||||||||||||
| Acquired locations closed and accounts merged with existing locations | 2 | — | — | 2 | ||||||||||||
| Total approximate purchase price (in millions) | $ | 0.7 | $ | — | $ | — | $ | 0.7 |
(1) Does not include locations in our Acima segment.
Senior Debt. On February 17, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and lenders party thereto, that provides for a five-year asset-based revolving credit facility with commitments of $550 million and a letter of credit sublimit of $150 million, which commitments may be increased, at our option and under certain conditions, by up to an additional $125 million in the aggregate (as amended on August 10, 2022, the “ABL Credit Facility”). Under the ABL Credit Facility, we may borrow only up to the lesser of the level of the then-current borrowing base and the aggregate amount of commitments under the ABL Credit Facility. The borrowing base is tied to the amount of eligible
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installment sales accounts, inventory and eligible rental contracts, reduced by certain reserves. The ABL Credit Facility bears interest at a fluctuating rate determined by reference to Term SOFR plus an applicable margin of 1.50% to 2.00%, which, as of February 20, 2023, was 6.818%. A commitment fee equal to 0.250% to 0.375% of the unused portion of the ABL Credit Facility fluctuates dependent upon average utilization for the prior month as defined by a pricing grid included in the documentation governing the ABL Credit Facility. Loans under the ABL Credit Facility may be borrowed, repaid and re-borrowed until February 17, 2026, at which time all amounts borrowed must be repaid.
The obligations under the ABL Credit Facility are guaranteed by us and certain of our wholly owned domestic restricted subsidiaries, subject to certain exceptions. The obligations under the ABL Credit Facility and such guarantees are secured on a first-priority basis by all of our and our subsidiary guarantors’ accounts, inventory, deposit accounts, securities accounts, cash and cash equivalents, rental agreements, general intangibles (other than equity interests in our subsidiaries), chattel paper, instruments, documents, letter of credit rights, commercial tort claims related to the foregoing and other related assets and all proceeds thereof related to the foregoing, subject to permitted liens and certain exceptions (such assets, collectively, the “ABL Priority Collateral”) and a second-priority basis in substantially all other present and future tangible and intangible personal property of ours and the subsidiary guarantors, subject to certain exceptions.
On February 17, 2021, we also entered into a term loan credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and lenders party thereto, that provides for a seven-year $875 million senior secured term loan facility (as amended on September 21, 2021, the “Term Loan Facility”). Subject in each case to certain restrictions and conditions, we may add up to $500 million of incremental term loan facilities to the Term Loan Facility or utilize incremental capacity under the Term Loan Facility at any time by issuing or incurring incremental equivalent term debt. Interest on borrowings under the Term Loan Facility is payable at a fluctuating rate of interest determined by reference to the eurodollar rate plus an applicable margin of 3.25%, subject to a 0.50% LIBOR floor. Borrowings under the Term Loan Facility amortize in equal quarterly installments in an amount equal to 1.000% per annum of the original aggregate principal amount thereof, with the remaining balance due at final maturity. The Term Loan Facility is secured by a first-priority security interest in substantially all of present and future tangible and intangible personal property of us and our subsidiary guarantors, other than the ABL Priority Collateral, and by a second-priority security interest in the ABL Priority Collateral, subject to certain exceptions. The obligations under the Term Loan Facility are guaranteed by us and our material wholly-owned domestic restricted subsidiaries that also guarantee the ABL Credit Facility.
The Term Loan Facility was fully drawn at the closing of the Acima Holdings acquisition to fund a portion of the Aggregate Cash Consideration, repay our outstanding indebtedness under the previous term loan facility, repay all outstanding indebtedness of Acima and its subsidiaries and pay certain fees and expenses incurred in connection with the Acima Holdings acquisition.
At February 20, 2023, we had outstanding borrowings of $859.7 million under the Term Loan Facility and available commitments of $395.6 million under our ABL Credit Facility, net of letters of credit.
See Note K of our consolidated financial statements included in this report for additional information regarding our senior debt.
Senior Notes. On February 17, 2021, we issued $450.0 million in senior unsecured notes due February 15, 2029, at par value, bearing interest at 6.375% (the “Notes”), the proceeds of which were used to fund a portion of the Aggregate Cash Consideration upon closing of the Acima Holdings acquisition. Interest on the Notes is payable in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. We may redeem some or all of the Notes at any time on or after February 15, 2024 for cash at the redemption prices set forth in the indenture governing the Notes, plus accrued and unpaid interest to, but not including, the redemption date. Prior to February 15, 2024, we may redeem up to 40% of the aggregate principal amount of the Notes with the proceeds of certain equity offerings at a redemption price of 106.375% plus accrued and unpaid interest to, but not including, the redemption date. In addition, we may redeem some or all of the Notes prior to February 15, 2024, at a redemption price of 100% of the principal amount of the Notes plus accrued and unpaid interest to, but not including, the redemption date, plus a “make-whole” premium. If we experience specific kinds of change of control, we will be required to offer to purchase the Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest. See Note L of our consolidated financial statements included in this report for additional information regarding our senior notes.
Operating Leases. We lease space for all of our Rent-A-Center Business and Mexico stores under operating leases expiring at various times through 2032. In addition we lease space for certain support facilities under operating leases expiring at various times through 2032. Most of our store leases are five year leases and contain renewal options for additional periods ranging
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from three to five years at rental rates adjusted according to agreed-upon formulas. As of December 31, 2022, our total remaining obligation for existing store lease contracts was approximately $349.0 million.
We lease vehicles for all of our Rent-A-Center Business stores under operating leases with lease terms expiring twelve months after the start date of the lease. We classify these leases as short-term and have elected the short-term lease exemption for our vehicle leases, and have therefore excluded them from our operating lease right-of-use assets within our Consolidated Balance Sheets. As of December 31, 2022, our total remaining minimum obligation for existing Rent-A-Center Business vehicle lease contracts was approximately $1.2 million.
We also lease vehicles for all of our Mexico stores which have terms expiring at various times through 2026 with rental rates adjusted periodically for inflation. As of December 31, 2022, our total remaining obligation for existing Mexico vehicle lease contracts was approximately $2.7 million.
Reference Note G of our consolidated financial statements included in this Annual Report on form 10-K for additional discussion of our store operating leases.
Uncertain Tax Position. As of December 31, 2022, we have recorded $5.1 million in uncertain tax positions. Although these positions represent a potential future cash liability to the Company, the amounts and timing of such payments are uncertain. Because of the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, uncertain tax positions are not reflected in the contractual obligations table.
Seasonality. Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year. Generally, our customers will more frequently exercise the early purchase option on their existing lease purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year, primarily due to the receipt of federal income tax refunds.
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Critical Accounting Estimates, Uncertainties or Assessments in Our Financial Statements
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent losses and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. We believe the following are areas where the degree of judgment and complexity in determining amounts recorded in our consolidated financial statements make the accounting policies critical.
If we make changes to our reserves in accordance with the policies described below, our earnings would be impacted. Increases to our reserves would reduce earnings and, similarly, reductions to our reserves would increase our earnings. A pre-tax change of approximately $2.9 million in our estimates would result in a corresponding $0.01 change in our diluted earnings per common share as of December 31, 2022.
Self-Insurance Liabilities. We have self-insured retentions with respect to losses under our workers' compensation, general liability, vehicle liability and health insurance programs. We establish reserves for our liabilities associated with these losses by obtaining forecasts for the ultimate expected losses and estimating amounts needed to pay losses within our self-insured retentions.
We continually institute procedures to manage our loss exposure and increases in health care costs associated with our insurance claims through our risk management function, including a transitional duty program for injured workers, ongoing safety and accident prevention training, and various other programs designed to minimize losses and improve our loss experience in our store locations. We make assumptions on our liabilities within our self-insured retentions using actuarial loss forecasts, company-specific development factors, general industry loss development factors, and third-party claim administrator loss estimates which are based on known facts surrounding individual claims. These assumptions incorporate expected increases in health care costs. Periodically, we reevaluate our estimate of liability within our self-insured retentions. At that time, we evaluate the adequacy of our reserves by comparing amounts reserved on our balance sheet for anticipated losses to our updated actuarial loss forecasts and third-party claim administrator loss estimates, and make adjustments to our reserves as needed.
As of December 31, 2022, the amount reserved for losses within our self-insured retentions with respect to workers’ compensation, general liability and vehicle liability insurance was $81.2 million, as compared to $82.6 million at December 31, 2021. However, if any of the factors that contribute to the overall cost of insurance claims were to change, the actual amount incurred for our self-insurance liabilities could be more or less than the amounts currently reserved.
Rental Merchandise. Rental merchandise is carried at cost, net of accumulated depreciation. Depreciation for merchandise in Rent-A-Center Business, staffed Acima locations and Mexico stores is depreciated using the income forecasting method, which is intended to match as closely as practicable the recognition of depreciation expense with the consumption of the rental merchandise, and assumes no salvage value. The consumption of rental merchandise occurs during periods of rental and directly coincides with the receipt of rental revenue over the rental purchase agreement period. Under the income forecasting method, merchandise held for rent is not depreciated and merchandise on rent is depreciated in the proportion of rents received to total rents provided in the rental contract, which is an activity-based method similar to the units of production method. Depreciation of merchandise for Acima Holdings, which we acquired in February 2021, is recognized using a straight-line method over the term of the lease contract. Depreciation under the straight-line method is recognized each period over the term of the lease-to-own contract irrespective of receipt of revenue payments from the customer. In addition, merchandise that is held for rent for at least 180 consecutive days is depreciated using the straight-line method over a period generally not to exceed 18 months, and smartphones are also depreciated on a straight-line basis over an 18-month period beginning with the earlier of on rent or 90 consecutive days held for rent.
Rental merchandise that is damaged and inoperable is expensed when such impairment occurs. If a customer does not return the merchandise or make payment, the remaining book value of the rental merchandise associated with delinquent accounts is generally charged off on or before the 90th day following the time the account became past due in the Rent-A-Center Business and Mexico segments, and during the month following the 120th day in our Acima virtual business and 150th day in our Acima staffed locations. Minor repairs made to rental merchandise are expensed at the time of the repair. In addition, we maintain a reserve for these expected losses, which estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based on a combination of historical write-offs and expected future losses. As of December 31, 2022 and 2021, the reserve for merchandise losses was $93.6 million and $98.2 million, respectively.
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Receivables and Allowance for Doubtful Accounts. The installment notes receivable associated with the sale of merchandise at our Get It Now and Home Choice stores generally consists of the sales price of the merchandise purchased and any additional fees for services the customer has chosen, less the customer’s down payment. No interest is accrued and interest income is recognized each time a customer makes a payment, generally on a monthly basis.
We have established an allowance for doubtful accounts for our installment notes receivable. Our policy for determining the allowance is based on historical loss experience, as well as the results of management’s review and analysis of the payment and collection of the installment notes receivable within the previous year. We believe our allowance is adequate to absorb any known or probable losses. Our policy is to charge off installment notes receivable that are 120 days or more past due. Charge-offs are applied as a reduction to the allowance for doubtful accounts and any recoveries of previously charged off balances are applied as an increase to the allowance for doubtful accounts.
Our trade and notes receivables consist primarily of amounts due from our lease-to-own customers for renewal and uncollected rental payments, adjusted for the probability of collection based on our assessment of historical collection rates; amounts owed from our franchisees for inventory purchases, earned royalties and other obligations; and other corporate-related receivables. The majority of our Franchising trade and notes receivables relate to amounts due from franchisees for inventory purchases, earned royalties and other obligations. Credit is extended based on an evaluation of a franchisee’s financial condition and collateral is generally not required. Trade receivables are generally due within 30 days and are reported as amounts due from franchisees, net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. Franchising determines its allowance by considering a number of factors, including the length of time receivables are past due, previous loss history, the franchisee’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. Franchising writes off trade receivables that are 90 or more days past due and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Income Taxes. Our annual tax rate is affected by many factors, including the mix of our earnings, legislation and acquisitions, and is based on our income, statutory tax rates and tax planning opportunities available to us in the jurisdictions in which we operate. Tax laws are complex and subject to differing interpretations between the taxpayer and the taxing authorities. Significant judgment is required in determining our tax expense, evaluating our tax positions and evaluating uncertainties. Deferred income tax assets represent amounts available to reduce income taxes payable in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short- and long-range business forecasts to provide insight and assist us in determining recoverability. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. A number of years may elapse before a particular matter, for which we have recorded a liability, is audited and effectively settled. We review our tax positions quarterly and adjust our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available.
Valuation of Goodwill. We perform an assessment of goodwill for impairment at the reporting unit level annually on October 1, or between annual tests, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors which could necessitate an interim impairment assessment include, but are not limited to, a sustained decline in our market capitalization, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results.
Based on our assessment, if the fair value of the reporting unit exceeds its carrying value, then the goodwill is not deemed impaired. If the carrying value of the reporting unit exceeds fair value, goodwill is deemed impaired and the impairment is measured as the difference between the carrying value and the fair value of the respective reporting unit. As an alternative to performing a quantitative assessment to measure the fair value of the relevant unit, we may perform a qualitative assessment for impairment if we believe it is not more likely than not that the carrying value of the net assets of the reporting unit exceeds its fair value.
Our reporting units are our reportable operating segments identified in Note T to the consolidated financial statements. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions that we believe are reasonable but inherently uncertain, and actual results may differ from those estimates. These estimates and assumptions include, but are not limited to, future cash flows based on revenue growth rates and operating margins, and future economic and market conditions approximated by a discount rate derived from our weighted average cost of capital. Factors that could affect our ability to achieve the expected growth rates or operating margins include, but are not
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limited to, the general strength of the economy and other economic conditions that affect consumer preferences and spending and factors that affect the disposable income of our current and potential customers. Factors that could affect our weighted average cost of capital include changes in interest rates and changes in our effective tax rate.
During the period from our 2021 goodwill impairment assessment through the third quarter 2022, we periodically analyzed whether any indicators of impairment had occurred, including by comparing the estimated fair value of the Company, as determined based on our consolidated stock price, to its net book value. As the estimated fair value of the Company was higher than its net book value during each of these periods, no additional testing was deemed necessary.
We completed a quantitative analysis as of October 1, 2022, concluding the estimated fair values of our reporting units exceeded their respective carrying values, and the related goodwill balances were not impaired. Please reference Note H in the Notes to our Consolidated Financial Statements for additional discussion of our 2022 impairment analysis and conclusions.
At December 31, 2022 and 2021, the amount of goodwill allocated to the Rent-A-Center Business segment was $1.5 million. At December 31, 2022 and 2021, the amount of goodwill allocated to the Acima segment was $288.3 million.
Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe our consolidated financial statements fairly present in all material respects the financial condition, results of operations and cash flows of our company as of, and for, the periods presented in this Annual Report on Form 10-K. However, we do not suggest that other general risk factors, such as those discussed elsewhere in this report as well as changes in our growth objectives or performance of new or acquired locations, could not adversely impact our consolidated financial position, results of operations and cash flows in future periods.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.
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