Upbound Group Inc (UPBD) 2002 Q3 法說會逐字稿

Good morning.

Thank you for holding.

Welcome to Rent-A-Center's 3rd quarter 2002 earnings release conference call.

At this time, all participants are in a listen-only mode.

Following today's presentation, we will conduct a question-and-answer session.

If you have a question, you will need to press star 1 on your push button phone.

As a reminder, this conference is being recorded.

Tuesday, October the 29th, 2002.

Your speakers today are Mark Speese, Chairman and Chief Executive Officer of Rent-A-Center, Mr. Mitch Fadel, President, Mr. Robert Davis, Chief Financial Officer, and Mr. David Carpenter, Director of Investor Relations.

I would now like to turn the conference over to Mr. Carpenter.

Please go ahead,sir.

Thank you.

Good morning, everyone and thank you for joining us.

You should have received a copy of the earnings release distributed last night that outlines the significant operational and financial achievements that we made in the 3rd quarter.

If for some reason you did not receive a copy of the release you can download it from our website at www.rentacenter.com.

Finally I must remind you that some of the statements made in this call, such as forecast growth and revenues, earnings, operating margins, cash flow and profitability, and other business or trend information, are forward-looking statements.

These matters are, of course, subject to many factors that could cause actual results to differ materially from our expectations, reflected in the forward-looking statements.

These factors are described in our most recent 10Q for the quarterly period and the June 30th, 2002, as filed with the S.E.C.

Rent-A-Center, Inc. undertakes no obligation to publicly update or revise any forward-looking statements.

I would now like to turn the call over to Mark.

Thank you, David.

Good morning.

As always, we appreciate everyone's time and interest in joining us this morning.

I would like to spend a few minutes, share a couple of comments or observations with you, and then I want to turn the call over to Mitch and Robert and they will provide you with more detailed operating and financial highlights.

First, I have to start by saying how very, very pleased I am with the operating results and improvements that the management team has made over the past 12 months.

You will recall it was a year ago I rejoined the company, and at that time we had laid out for you our action plans and goals for fiscal 2002.

Well, I am pleased to report to date, we have met or exceeded every key measurement that we have established, from our topline revenue growth, the cost containment initiatives that we set, the new store openings and acquisition objectives, as well as our overall earnings, cash flow, and balance sheet.

And we have done that in an environment that is negatively impacting most retailers.

More importantly, I also believe that we are positioning ourselves to see continued growth in the future.

The demand for our products and services remains strong, and we continue to invest in the people, systems, products, and store fronts to capitalize on that demand.

The fact is, even in this soft economy, the flexibility and ease of our services continues to attract customers.

These strong operating results has led to significant cash flow which has also allowed us to further strengthen our company.

Since January, we had paid down over $180 million in debt, repurchased over $60 million of our common stock, spent approximately $48 million on new stores and acquisitions, and still have approximately $80 million of cash on hand.

That is not to say that it has come easy, but because of the hard work, the dedication and support of our over 12,000 plus co-workers, we have been able to achieve these results.

The bottom line is, we have the necessary resources and I believe that position ourselves to continue growing our business into the future.

With that I am going to turn it over to Mitch and let him take some time to give you further operational highlights.

Mitch.

Thank you, Mark.

It was a very good quarter in many ways.

As most of you know, the summer months seasonably are our weakest, yet we came out of it very well.

Business demand, as Mark said, remains very strong.

The 6.9% comp is pretty much unheard of these days.

Yet, we were able to do it, again demonstrating our resistance to any recession effect.

Let me break down the comp for you and explain how it ties to our pricing and terming changes we've made.

At the beginning of the year, we estimated that comps for 2002 would be 3 to 5%.

About half customer growth, with the other half being from higher revenue per agreement.

We estimated that higher revenue per agreement would come from new, higher-end products as well as the pricing strategy we implemented, which was to shorten the ownership term while raising the monthly rates.

While we are pleased to report the customer growth is within our estimated range at about 1.5% for the quarter, and the growth in the average revenue per agreement has well exceeded our expectation to drive the comp to a 6.9% rate.

The price in rental term changes are helping to drive the comp a little higher than we expected, yet we still have the customer growth in our expected range.

Pretty good combination.

The other thing the shortened terms have done is depreciate the merchandise sooner.

Because our depreciation is tied to the rental term, when we shorten them that speeds up the depreciation.

You will notice on our balance sheet that our merchandise value is lower than it was at the end of 2001, even with all of our growth, due to that faster depreciation.

But we have maintained our margins with the offsetting price increases.

So everything is working in concert.

The higher prices helped drive the comp above the anticipated 3 to 5%.

The shorter terms keep us competitive, and reduces of the cost of the merchandise faster, all while our customer growth numbers, of about 1.5% in this economy, puts us in an enviable position relative to almost all other retailers.

I would also add, the 4th quarter is off to a fine start with October running slightly ahead of expectation.

Collections continue to stay in line.

You will recall our weekly goal is to close out with 6.5% or less of all of our customers past due, even if it is only one day past due.

We continue to run below 6.5%, week in and week out.

In fact, this past Saturday we were at 5.9%.

As far as new stores go, they continue to perform very well.

In fact, ahead of expectations.

As our press release said, we have opened 153 new stores over the last 24 months. 107 of those 153 were opened between the fall of 2000 and through the end of '01and are an average of about 18 months in our system.

Some of you may recall seeing that these stores mature, and as they mature and grow we expect a 10% operating margin for the second year, if they stairstep up to that 20 to 25%once they are about four years old.

I'm please to tell you that those original 107, that are now on average, only halfway through the second year, are already running higher than that 10% second-year model.

We are pleased with the new store results and extremely excited about adding another 80 to 120 next year and for many years after that.

Let me give you a brief legal update.

As most of you know, the court has approved the gender litigation settlement.

We are very pleased with that development.

We anticipate funding that $47 million settlement in the 4th quarter out of our current cash on hand.

And I'll remind you that all expenses associated with settling those issues were taken in 2001.

I am also pleased to tell you that our internal initiatives headed by our new human resources VP, Jennifer Wisdom, are progressing very well as we continue to put things in place to minimize future exposure on the HR side.

The only other legal area to update you on is in Wisconsin.

I will remind you that Wisconsin is one of only three states where we do not have favorable legislation to operate under.

We have been in conflict with the Attorney General's office for many years.

We are very close to settling that litigation with the AG, putting many years of conflict behind us and in an amount that we have adequately reserved for.

In terms of our business going forward in Wisconsin, we have already changed our transaction to a financed retail transaction under the brand name "Get It Now."

We did that October 1.

It is only 23 stores, so it's not a real material event, but it has also turned into a second concept test for us, and one we will report on as we get further into it.

To summarize, business demand remains strong, collections remain strong and consistent, our new store growth was good this year and will be accelerated next year, and our cash flows are fabulously strong, allowing us to do all of that, as well as pay down huge chunks of debt, buy stock, et cetera.

So in short, things are going great at Rent-A-Center, Inc. and we only expect them to get better.

With that I will turn it over to Robert for a financial update.

Yeah, thanks Mitch, very much.

Again, I'd like to just add a few more comments to update and highlight some of the detailed financial information that we released to the earnings release last evening.

Again, for the quarter, total revenues increased 47.5 million, or 10.6%, to around 495 million for the 3rd quarter of 2002, when compared to 2001.

This revenue growth was driven by the same store sales of 6.9% which Mitch broke down for you earlier.

Now, as a result of this increase in revenues, as well as the ongoing benefits of our strict cost control programs, and just a quick example, the salaries and other as a percent of total revenue declined 460 basis points from the 3rd quarter of 2001 as compared to 2002.

And again, this has resulted in a comparable basis diluted earnings per share increase of over 70% when compared to the 3rd quarter of last year.

EBITDA margins in the 3rd quarter were about 19.3%, an increase of 460 basis points from the 3rd quarter of 2001, and in line with our expectations.

As we've mentioned before, from a cash flow perspective, the company has generated 265.7 million in cash flow from operations, for the first nine months of this year, and approximately 195 million in free cash flow during the same exact period.

The benefits of such strong cash flow are far reaching, as Mark alluded to earlier.

We have the flexibility and liquidity to manage our daily operations and business demands, self-fund our growth objectives, and continue to strengthen our overall balance sheet, which as a result will continue to further enhance the overall flexibility and liquidity of the company.

To recap, our cash flow this year has allowed us to open 46 locations thus far, acquire 167 stores, of which 74 we have kept open.

Reduced debt by approximately 180.8 million, or 26% of the total debt outstanding on January 1st of this year.

We repurchased over $60 million in our common stock.

We have spent about 27.5 million of cash on capital expenditures, 10.8 million in the 3rd quarter of 2002, while still maintaining the significant amount of cash on hand.

As a result of the reduction in our debt, our consolidated leverage ratio now stands at 1.4 times.

That is down from the 1.6 times in the 2nd quarter of this year, while interest coverage has increased to 6.1 times.

In terms of earnings guidance, the company expects diluted earnings per share of $1.23 to $1.26 for the 4th quarter of 2002, with total revenue between 500 and 505 million.

And a comp of 2 to 4%, which will allow us to be within expectations for the full year.

For 2003, we expect diluted earnings per share between 530 and 545, with total revenue between 2.085 billion and 2.093 billion.

With that quick update and highlight, I would like to now turn it back to Mark for some closing comments before we take questions.

Thank you, Robert.

Well again, we are very pleased with our overall operating results, the accomplishments that we have made to date.

And again, how we are positioned as we go into the future.

There is obviously still a lot of work to be done, as Mitch alluded to, the 4th quarter has started very positively and we are very excited as we approach the year 2003.

With that, we are now happy to go ahead and open it up for questions.

At this time I would like to remind everyone, if you would like to ask a question, press star, then the number 1 on your telephone keypad.

We will pause for a moment to compile the Q&A roster.

Do you have our first question?

Your first question comes from Arvin Mattea SWS Securities.

Good morning, guys.

Good morning, Arvin.

First, on same store sales, Mark, previously I think, you guys have been talking about 3 to 5% kind of comps, and for next year now you are talking about 2 to 4%.

Is there a reason for that or are you trying to more conservative?

And my second question is regarding new store openings.

Given the performance of new stores and the fact that they are running ahead of plan, your previous guidance was 100 to 120 million -- or 120 stores for next year and your new guidance is 80 to a hundred stores.

I am just wondering what the thinking there is as well.

A couple of things.

First of all, with regards to the comps, as it speaks to next year, I don't think we have put anything out prior to this.

The 3 to 5% was the guidance we gave for this year.

And I will remind you, when we put that guidance out for this year, it was 3 to 5% for the year, 4 to 6% in the 1st quarter.

And I say that, that obviously would lead, that as you get into the latter part of the year that that comp would come down.

In that context, it is certainly within the range that we gave.

Part of it is obviously driven by the law of big numbers.

As the stores continue to grow, and realizing there are more and more of those mature stores in that comp base, you would expect it to normalize a little bit.

By way of example, the 4the quarter of this year we are coming off of a 10% comp in the 4th quarter of last year.

I think the other thing that is important, when we look at next year and that comp rate, obviously we have had some benefit, as Mitch alluded to, with some of the pricing initiatives that we put in place last year, the 4th quarter, this time, in fact.

And the point there is, the pricing increase we will get next year will be driven more by inflation, not anything that we will do in terms of the product line-up and reducing terms further and increasing rates more, like we did last year.

We have been able to do than and not affect the demand for the products, but I don't see us being able to do it again as we sit here today.

So, you know, that's kind of how we came up to that comp rate.

You know, is it conservative?

I am very comfortable with it.

So, you know, I guess you can decide how you take it from there, but I am very comfortable with the number.

The new store comment, the guidance we gave was 80 to 120.

You had alluded -- we had originally were saying a hundred to 120, we are now saying 80 to 120.

Part of that is being fueled by, really, there's a couple of things going on there.

This year we said 60 to 80.

We will probably end up somewhere around 65, would be my guess, at this point, based on what is in the pipeline for this quarter.

And obviously a lot of that is influenced by the rate of acquisitions.

And when I say that, as we go into these markets and we look at expanding, I think you have heard us say before, one of the first things we will do is look at the competitive landscape.

Is there a possibility of entering that market through an acquisition?

And to the extent there is, and it can be priced favorably ,and so forth, we would rather do it that way.

That certainly was the case this year.

There were several markets that we had slated as new stores and instead we ended up doing an acquisition, and hence, we are at the lower end, 60 or 65, whatever number that will be this year.

I think there is some consideration for that as we look at next year, if acquisitions continue to play that heavily into it that, some of those scheduled openings, they won't be new stores, we will enter that market vis-a-vis an acquisition.

So we are trying to allow for that.

One of the things that won't happen is, the total square footage growth of 5 to 10% will be consistent with what we have said before, but again the mix may change as a result of acquisitions.

Yes.

Is that already in the guidance of 5 to 10% square footage growth?

Yes.

Just the new stores.

The new stores are in the model.

They are in there.

To the extent acquisitions were placed in the store openings, then they replace it.

The new stores are in there.

But as you know, we don't ever project the acquisitions.

That 80 to 120, Arvin, we view as the notable new store openings.

Right.

Again, something, I am not a hundred percent sure, because, you know, the way I look at it, and I agree with you, typically in the past we have not included any acquisitions.

What I am asking you now is, if you say 80 to a 100 stores, and you have given guidance of $5.30 to 5.45.

That doesn't include any acquisitions, and so if you were to make any acquisitions, you know, that would be -- you know, that should be typically accretive.

Some of that dilutive.

Worst case it is break even by and large.

As I think you know, new stores are very dilutive initially, unlike a typical retailer.

We put all the costs in as we put units on rent, we start with a very low revenue stream.

It takes six to nine months before you are doing enough monthly revenue to begin turning a monthly profit.

An acquisition, typically, you will start off break even, if not accretive.

So to the extent there are more acquisitions and fewer openings, i.e. if we were at the low end of the opening next year, 80, and had 70 acquisitions on top of it, I would view that, making this conservative.

Okay.

And Robert, a quick question on the tax rate.

Obviously that is coming down for next year.

What is the reasoning behind that?

If you can explain that.

Part of it, Arvin, is, you know, as we have higher net earnings, our effective tax rate is lowered.

We are, at the same time, you know, trying to minimize our tax exposure.

One of the things that President Bush did, in terms of the tax benefit to most companies with the tax rate laws that he implemented, there is some effect in that as well.

In terms of your -- you get a deduction for tax purposes, but not necessarily -- you know, it is a deferred tax issue.

It defers the tax out to future years.

That was what he passed in the event of the 9/11 events to stimulate the economy.

Right.

If you were to guesstimate, would you say that that would be the rate that was used for the future years as well?

Yes.

Okay.

Great, that's all I have for right now.

Thanks.

Thank you.

Your next question comes from Dennis Spenzelfden (phonetic) with Sun Trust Robinson Humphrey.

Good morning, everyone.

I am trying to -- we heard a lot lately about how the lower end customer may be having some problems in paying off their car loans and credit cards and things like that.

I was wondering, has the ability of your customers to either rent something and/or pay for it once they have rented it, deteriorated in any way?

Can you measure that?

We measure it, Dennis, it terms of our collections, on a weekly -- actually a daily basis.

We have seen no impact there.

Obviously the customer growth is up over last year.

So we are not seeing that effect.

The collections numbers, the loss numbers are very consistent, as I mentioned earlier, and we are not seeing any negative there at all.

About your beginning delinquency rate, has that stayed steady as well?

Yes, it has.

On a -- I think what you are referring to is what we call our Monday morning open, based on the people that didn't pay the prior week, and that has been very consistent this year as compared to past years.

We are not seeing any impact.

That's great.

Just a follow-up here, in terms of acquisitions, what are you paying now for stores and what are you paying just for accounts?

For stores, probably in the -- anywhere from, you know, 7 to -- 8 to 10 times, and for accounts, we usually pay less, in the six to eight range.

For stores 8-10 times monthly revenue and for accounts 6-8 times monthly revenue is the average.

Okay.

Are you still seeing a lot of deals?

Yes.

We have bought ten stores already just in October, plus nine other stores we bought the accounts, we bought 19 stores already just this month.

The pipeline still has deals in there.

They are obviously small deals, one here, three there, whatnot.

But it is pretty active.

That's fair to say.

Okay, thanks, everyone.

Thank you.

Your next question comes from Allen Allarefkin (phonetic) with Lehman Brothers.

Thank you.

It is actually Scott Nessan on Allen's behalf.

A couple questions, I am wondering if there's any other factors you could point to aside from the pricing and the successful promotions, that are driving the above planned trends at the new stores?

And also, if you could maybe delineate on some of the factors that would drive the higher end of the comp guidance for the 4th quarters and for next year?

Yes, I think with regards to the new store trends, what is -- you may recall, when the campaign was started, I guess two years ago now, it was really focused in three principal areas -- New York, Chicago and L.A., specifically.

And the point there is, a lot of stores put into a small area put an awful lot of pressure on the operators that we had there.

What we have done over the last year is spread that growth out throughout the country, whereas opposed to one individual or a handful of individuals trying to put in multiple locations, it is being shared throughout the country, so, you know, they are focusing on the core business, not being tied down with a multiple number of stores.

I think it is fair to say, we are spending a little bit more time evaluating those actual locations and signing off on them, if you will.

That it is the right location, the physical facility, and the town that it is going into, et cetera, I think has certainly has had a play in it.

I would add to Mark's comment, the -- and I think as Arvin brought up a minute ago, this year we took 60 to 80.

We will be on the low end of that.

That is really tying to the results.

They really tie together the fact that we are very picky about where they are go, and we are not just opening them to open them.

We are just not settling for C locations and therefore, when we do open them, they are doing -- they are doing much better than the plan.

You had about 467 basis points of improvement on the salaries line this quarter, how much of that was from the geographic pay scale and what are the opportunities going forward on that?

As we mentioned previously, you know, we expect to be on a run rate by the end of this year to realize an annual savings of $10 million as a result of the geographic pay.

Right now, we are -- if we were to take a snapshot right now we are right at $8 million.

There is some benefit from that in the 3rd quarter.

Approximately, you know, 1.5 to $2 million.

Now, you did see the overall salaries in other go up, in terms of pure dollars.

That was mainly driven by a few things, one being the fact that we had a number of new stores and acquisitions that accounted for about $4 million worth.

And you see, you know, another million or so from utilities in the 3rd quarter, were generally higher than the second because of the summer months.

And a few other increases that we expected in terms of our insurance policies.

About a million dollars, as well.

So you see about a $2 million benefit, million and a half to $2 million benefit in the 3rd quarter, as it relates to the geographical pay.

Okay, great.

Congratulations.

Thank you.

Scott, he may or may not still be on.

Let me answer the one question I don't think we answered on.

Part of your first question was how would we get to the higher end of the comp?

What drives getting it to the 4% versus the 2?

A few things factor into that, what drives getting a 4% or even higher.

Obviously, we continue to work on our advertising plans to try to drive more traffic.

Obviously if we can go higher than 1.5% traffic side that will drive the comp higher.

That is related to a lot of different aspects, operations, executing properly, advertising, and all those things that we work on every day.

And the other thing that would get us to the high side, is some new product coming in, digital television, high-definition televisions.

We will continue -- we have started carrying them.

They will become a bigger part of our mix, and that will help us get to the high side versus the low side.

The digital TVs which will rent for more than the analog televisions.

Your next question comes from Joe Feldman with Bear Stearns.

Hi, guys.

Congratulations on the quarter.

Thanks, Joe.

I wanted to ask you a couple questions about the debt, and making some really good improvements there, and just kind of wondering, you know, if there is a targeted, either debt level or debt-to-cap ratio you guys are looking for, because it has really improved dramatically.

I am wondering if -- you are probably getting close to our optimal level.

Any comments there?

Yeah, this is Mark.

I know last quarter, when we fell below 2% and we talked, or two times, excuse me, I had mentioned that anything -- under two times I was very, very comfortable with.

And obviously, we have been able to go even further below that.

You know, where we are today I guess as we evaluate our cash and the best uses, and so forth, again, as I have alluded to before, first and foremost, it would be reinvesting in the business.

I say that in the context of new store openings and/or acquisitions.

And then from there, you know, as we look at the capital structure, the debt structure and so forth, is it further debt paydown, repurchase of stock, you know, there is value in all of those things.

And in some of those you just kind of have to evaluate them, where you are at that point in time when the opportunity presents itself.

Of course, you know, a couple of things that, you know, in terms of next year, and I have said of before, we will share it again, of the current bank debt 275 million is the bonds, they are at 11%.

249.5.

About 249, 250 million in term debt.

We did do swaps on that term debt a couple of years ago, half of that expired or matures, if you will, in August.

The other half in September of this year coming.

I say that only in the context, and we are under water, frankly, on those swaps.

So there are some opportunities as we get into the latter part of next year, also in terms of our capital structure and financing that, you know, could obviously -- there are some other opportunities there to make that even more attractive for us and do other things with it.

You know, if acquisitions presented themselves and we could open the high end number of stores and put all thar cash to work on than front, I would be ecstatic to do it.

I don't have any problems with where we are right now.

Okay.

Just one follow-up on a separate issue.

If you could give us an update on the legislation front, in the government.

Joe, as you know, it has been three or four weeks now, a bill that we support passed the house, HR 1701 passed the House of Representatives.

We are continuing to work on the Senate side, and of course they are not in session right now with the elections coming up.

They are going back after the elections for what they call a lame-duck session.

We continue to -- our government relations people continue to work on the Senate, as well as some year-end possibilities with different laws that they pass towards the end of the year, and we remain cautiously optimistic that we will get the whole thing done this year.

Okay, thanks, guys.

Thank you.

Your next question comes from Dennis Kelsrow (phonetic) with Stephens Incorporated.

Good morning, great quarter to say the least.

A couple quick ones.

Just on the pay plan, you talked a little bit about the benefits.

But year-over-year next year, I guess will benefit in the first half a little bit; is that correct?

On sort of a comp basis?

Yeah, because the benefit that we are realizing this year has been gradually increasing.

The $10 million run rate bit the end of the year is expected to be equally spread, you know, 2.5 million a quarter.

If we, as an example, you know, we are realizing a million and a half to 2 million now in this quarter.

We'll only realize half a million to a million in the 3rd quarter of next year, but it will be greater in the earlier part of the year and less-to-flat by the end of the year.

Okay.

And, Mark or Robert, back to your comment about the 275 million, 11% bonds.

Are those refinanceable next year, late in the year?

There is a call option at 105.5 in August of 03.

And obviously, as Mark alluded to earlier, you know, we will continue to evaluate our capital structure and the best alternatives to the company as that day approaches.

Okay.

And lastly, with regard to advertising program, any updates as to, you know, are we still saving money year-over-year, or other thoughts there?

Yeah, we have gotten some efficiencies there.

As we said before, we didn't want to go too fast there, because I mean, it is a half -- you try to find that balance of getting some efficiencies.

As we add more stores to the same market we can get some efficiencies in advertising.

But without taking too much out, because, obviously, we want to drive the business.

We look at that every month, and we have gotten some efficiencies, we are running, certainly on a percentage basis more than last year.

Certainly, on a percentage basis, lower than last year, overall dollars, not necessarily, because of the more stores, but on a percentage basis, we have got some efficiencies and we continue to look for them.

Although, obviously as you continue to look for the efficiencies you have to drive the business.

So we look at that virtually weekly.

We actually have in literal sense saved a few dollars over the last year.

We're not dollar for dollar.

I think we have the right balance right now in terms of what we are doing.

We are evaluating '03 next year in terms of some possible new things we are looking at putting in place to reach some different customers.

And one example, you know, the Hispanic community, we are looking at adding some additional things on that front that we think will help enhance that market segment as well, so I think we have got some pretty good things in the works.

We are excited about it.

Thank you very much.

Your next question comes from John Emerick with (indiscernible) Capital.

Great quarter.

Can you revisit for me, please, the -- kind of the status of the last press release about share repurchases?

There were a couple of numbers, you had capacity for X but you could only do Y until you either issued a press release or filed a 10Q?

I am wondering if I could get some clarification on that as it stands today?

Yeah, we had an original board authorization to real purchase up to 25 million of common stock.

We were bumping up against that and got further authorization with the weakness in the stock price, so that now stands at 50 million in total dollars that we can spend in share repurchase.

Of the 60 million that we repurchased year-to-date, I will remind you that 35 million of that was early in the year, from the former CEO of the company.

So about 25 million is where we are in terms of the share repurchase program that has been authorized by the board.

So we have about another 24 or 25 million to continue to utilize on a go-forward basis.

Now that is somewhat real restricted because of the bank covenants.

We -- you may want to add that.

Further color, what Mark is referring to is the bank covenants currently allow us to utilize 25% of each quarterly net earnings amount as a restricted payments basket.

So right now, we have a basket for this current quarter that we are in of approximately 25 million, which we have utilized some of that -- or excuse me, approximately 10.5 million, of which we utilized some of that, have a remaining amount around 8.5 million.

We will be able to utilize that over the next quarter, the 4th quarter, and early part of next year, before the 4th quarter results replenish that basket once again.

Right.

So you -- during the 3rd quarter, you had a basket, you consumed that.

You have basically been out of the market for the last couple of weeks, I guess.

Now, you have a new basket that, starting tomorrow or after this call, you are allowed to go back in again?

Correct.

Super.

Based on the current earnings estimates for this year, just round numbers, what will that imply in terms of, looking for two numbers, cash flow from operations and then cap ex before acquisitions?

Cash flow from operations for this year, we expect to be about 250, which is down from where we are at the end of the 3rd quarter.

And the primary reason for that is our intent to fund the litigation settlement in the 4th quarter of this year.

How much is that?

$47 million.

Yeah, but that is nonrecurring.

I don't want that.

Right.

Okay.

So if you add that back, you are about 300 million.

300, right.

In -- from operations.

If you could for me, John, just repeat your second question again?

Oh, the cap ex before acquisitions.

The cap ex before acquisitions was 10.8 for the 3rd quarter.

We expect a similar number in the 4th quarter, maybe slightly higher, because there will be more new stores coming on.

For the year we will be around 38 to $41 million.

Okay.

So 300 -- 41.

So at the current stock price, if all you did was buy back stock, you could take the company private in about 6.5 years. [ laughter ] Did I say that aloud?

I am sorry, I was just thinking it.

All right, thank you guys.

Thank you.

Your next question comes from John Baug with Wachovia Securities.

Dittos on the congratulations for the quarter.

The guidance for '03 and revenues total, I think is 5%, the comp guidance is 2 to 4.

So if I take the midpoint of that at 3, it implies new store growth at 2%.

Does that -- does that work with say, the mid-point of opening a hundred stores?

Is that the only number you are including or would a hundred stores contribute more than 2%?

That works with the midpoint of a hundred stores.

Okay.

So you have got nothing in there for a potential acquisitions or buying accounts?

That is correct.

Okay.

Only because the timing and quantity all of that is difficult to project.

And I understand that.

Having said that, is there anything you look at on the horizon in terms of, you touched on October, I think you have opened or acquired or bought accounts for something like 19 stores, is there anything, as you look into '03, that tells you that that pool of potential is shrinking or just not there?

No, nothing tells us that.

Last year, in 2001, between new store purchase and account buys, where we just bought accounts or whether we kept the store opened and combined, was about 190 stores.

This year, so far, it's about 170 with two months to go.

And nothing tells us any slowdown in that, although again it is not in the -- it is hard to predict.

I understand.

But nothing tells us to change all that.

And the last question, just how many shares did you buy in the 3rd quarter and what was the average price?

We bought approximately, in the 3rd quarter, 240 --250,000 shares at a weighted average price of around $48, $50.

So far, during the 4th quarter, we have repurchased an additional about 290,000 shares.

Let me back up for you just to make sure I am clear.

Early in the yearly, as part of the $60 million total amount, 35 million went to the former CEO.

We have repurchased about 25 million to date.

That $25 million that we have done, outside of the former CEO, we bought about 540,000 shares. 240, 220, and 78,000.

Yeah, about 538,000 shares.

Under the $50 million share repurchase basket.

Okay.

So it was 250,000, though, in the 3rd quarter, and around 48.

In the 4th quarter you bought another 200 -- what did you say, 290,000?

290, 300,000 shares.

In this quarter, great, thank you very much.

Thank you.

Your next question comes from Mark Yurisari (phonetic) with Morgan Stanley.

Oh, hey guys.

This is Mark Yurisari (phonetic) calling for Rob Hills (phonetic).

Great quarter.

On Wisconsin, the Attorney General issue, can you just give a little more color on what the potential timing is there?

Is he leaving office, and is that going to create less of a problem for you guys?

And then also, if you could talk about the concept tests that you are doing there and what the intentions are there, thanks.

Well, the -- the Attorney General, of Wisconsin -- first of all the timing should be very soon.

We are in the final stages of that negotiation.

We expect that to happen in the next week or two.

We expect that to happen before he leaves office.

The Attorney General Doyle is running for governor in Wisconsin.

So, you know, it is hard to predict what the legal environment will be afterwards.

We are not overly concerned with it because we have switched the concept to finance rebuild transaction.

And so it doesn't matter a whole lot what happens after that.

Obviously, federal legislation also could open things up for us again in Wisconsin from a rent-to-own standpoint.

On the retail side we just started at the beginning of the month.

Initial indications are good.

And, you know, obviously as we get more into it, we will add more color to it.

But the transaction right now is a retail transaction with in-house financing, we are doing our own financing of the retail transaction.

I think again with regards to settlement, we are adequately reserved.

And we are still obviously, working the legislative front out there.

And, you know, the prospects get better, you know, it is hard to say.

But, you know, I think first and foremost, we are resolving this issue, we think, on a permanent basis.

I say that, it is not the first time, any of you that have been with us for a period of time know this is not the first time we had these issues.

Certainly, the transaction we are going to, would stop anything in the future.

But is not to say that we won't continue to work the legislative front up there.

To the extent, be it on the federal side and/or the state individually, you know, at that point we will go back and put rent Rent-A-Centers in.

And it's not to say that we'll stop the new business, at that point, we will have had a chance to evaluate it and, as Mitch said, maybe there is something new that comes out of this.

But yeah, hopefully the next week or two we will be able to update you on that in its final form.

All right.

And then just quickly, a housekeeping question.

Skips and stolens, percent of sales, how has that been tracking recently?

It has not changed.

It remains very -- -- really, pretty damn consistent, as it has for the last several years.

There is about 2.5% of our revenues, the skip/stolens themselves, so it remains in line with the historical.

And as Mitch said, our collections, even to date, be it the opens, as somebody asked, and/or the weekly closes, under 6.5%.

Great, thanks.

Okay, thank you.

Your next question comes from Richard Diamond with Inwood Capital Partner.

Yes, good morning.

Given the troubles in the subprime credit market, and the continued decline in credit available to subprime borrowers, are you seeing any pickup in new consumers choosing the rent-to-own channel?

Well, we certainly think that is helping us.

You know, it is -- it is a tougher thing to analyze, you know, who is coming in and so forth.

But we certainly think that is helping us.

The nice part about our business is that in a tough economy, like we are in now, if we lose some business, on the lower end, let's call it, we always pick it up on the top end.

You know, people fall into our transaction, so -- and then as the economy improves, some people might move out of it but still, you know, the 15 million households with the -- that don't have a bank relationship or have bad credit right now, they don't automatically have good credit just because the economy improves, so the customers moves a little bit.

That is the beauty of our model, it moves within any economic cycle and plenty of business in any economic cycle.

And the other thing that, I guess, we can throw out, one of the other measurements we look at is obviously we track the number of transactions that we do daily, weekly, et cetera.

And on that front, we are actually still running ahead of this time last year in terms of the number of deliveries we are making.

So yeah, we got -- continue to have more people come into the transaction.

Thank you very much.

Okay.

Your next question comes from Amanda Bridgeman with Cove Asset Management (phonetic ].

Good morning.

My first question regards the Wisconsin settlement.

Could you give us some color as to should we start seeing customer receivables and delinquencies, if you are planning on financing those?

Actually, that's a good question.

What this transaction is a little bit different in the past, as you know, on our current balance sheet, the receivables that we have on the Q that will be issued later this next week or so, are only related to at this point, the receivables from the franchisees towards ColorTyme, our subsidiary.

However, going forward, we are -- we will have receivables on the balance sheet as it relates to Wisconsin.

We feel like we will be adequately reserving for delinquencies, and again, you know, at this point, we feel like there will be no impact in terms of earnings or earnings per share, as it relates to the new business model.

Obviously it will just kind of need to have some time and experience before we really know where it is trending.

It is a new operation to us, and, you know, we feel like the demand thus far has been very good.

And where that ultimately turns out, we don't know.

The bottom line is this transaction and this change that we are doing will be kind of neutral in terms of any impact positively or negatively from what we are already doing in Wisconsin.

There will be receivables on the balance sheet with it.

Although, Amanda, with it only being 23 stores, that is still going to be -- it is going to look very small on our balance sheet with it only be 23 stores.

Of course.

What are your plans for financing that endeavor?

We are doing it internally.

The -- keep in mind that all the rental contracts that have -- that were in place in Wisconsin when we switched October 1, are paying out, or, you know, obviously they have an alternative return in the merchandise, but there is a run-off period of the rental contracts that is really funding the new business.

Okay.

And a couple of questions regarding your last quarter, a couple of the things that took place then.

First of all, what were the results of your free till and your scratch and win promotions?

Well, there were free till promotion worked well to maintain the business in the summer, which is why we do it in the summertime.

Heavy promotion.

It is free until a particular date which can be as much as 19 days of free time for the consumer.

So it is a little heavier than we normally do.

We have done it now three summers in a row and it worked very well again to maintain the customer base for the summer months, rather than going backward.

Because it is our weakest quarter.

So that worked well.

The scratch and win, though that was a new promotion, was not much different than -- it is really a new way of getting the customer to come in and give us a try.

They scratched off a card, got a week's free rent.

There was some prizes they could win.

But a lot of times we will give a free week for somebody to try it when they pay a week.

And all the scratch and win was, was really, the same promotion with a different spin on it, come in and scratch the card.

That worked about the way our other -- our promotions work when we do one week free, if you pay a week and so forth.

So that worked about the way the other ones did.

It was just a different spin.

It was a successful summer promotion.

Did you see an increase in your traffic to the stores or the items on rent as a result of those?

It -- the free till promotion really just helps us maintain in the summer.

I wouldn't say an increase, but it helps us maintain.

If we weren't doing something like that in the summer, there is a very good chance we would go backwards in the summer from a sequential standpoint.

So, that helps us stay even.

Good enough.

Finally, are you still repairing the prelease merchandise for rental and how does that affect your margins and your depreciation?

We are continuing to emphasize that.

It interesting, Amanda, as we shorten the terms on the products, which depreciates them faster, and as I mentioned earlier, has less of a value on the balance sheet on that rental merchandise because they are depreciating faster they are not leaving the system any faster.

And part of that is because only, as we said before, about 80% of the time when we rent something it comes back.

Only about 20% of our contracts, when we write them, stay out and the customer takes ownership and the other part is what you just talked about, we are doing a much better job than we were a year ago investing in the product and keeping it around longer and being able to rerent it.

So that's helping us.

Even though we shortened the terms on the initial contracts, we have -- actually the product is staying in the system longer than it was a year ago and that is because of the high level of returns we get any how at 80% not paying out as well the as the refurbishment focus we put on our products.

Okay, thanks so much.

Your next question comes from Marcel Odesio Willow Creek Capital [ phonetic ].

Hi.

Good morning.

What are your collection costs doing?

Your delinquencies were for your past due numbers were -- looked like they were okay, but your collection costs, you tracked those and how are those?

Well, Mark, all of our collections is done internally by the -- by our store staffs internally, so they haven't changed the costs.

The -- our employees at each store do their own collections.

They -- the same people deliver the product and then collect on it from there forward.

They are called account managers.

It is done internally so we don't have any external cost of collections.

Internally, it's not like we've had to add any labor or anything to hit these numbers.

We haven't had to increase the staff levels at the store or anything to handle that aspect of the job.

And as Robert alluded to, you know, the benefit of the regional pay, obviously, part of it.

But the fact is, the salaries setting that aside haven't gone up because of that.

I mean, is it -- as you talk to the managers, is it getting tougher to collect for them?

Is it taking them three or four hours relative to one hour or --?

No, on an overall basis we don't see -- again, the nature of this business, whether -- you know, whether the economy is good or bad and what is going on, we are dealing essentially with the same people and the same issues and we offer the lifetime reinstatement which is a key point.

When they get into a position where something comes up, a crisis and they can't pay and they return that product, they can come back in two weeks later or two months later and get that or a similar product back and we give them credit for what they paid on the first one and that helps cement that relationship as well, and that process.

But in terms of the investment of time, or effort, or cost to manage that aspect of the business, no, it frankly is -- it has been very consistent, kind of like the overall delinquencies and losses themselves.

Okay.

And quickly, can you just walk through, if you can, the way you depreciate for your inventory that is on rent, and the difference between that and your merchandise that is held for rent?

Yeah, sure.

In this industry, the depreciation of rental merchandise is under what is called an income forecasting method, similar to a units of productions method in a lot of other industries, just a different name, whereby the cost associated with that of appreciation is taken in line with the revenues collected in the stores.

As you recall, no revenues are realized or recognized until the cash is received.

And in turn with that, depreciation or cost is taken.

While the unit is on rent.

When the unit comes off of rent, and sitting idle in the show room floor, no depreciation is being taken at that point in time.

Now, one key measurement that you can look at to ensure that we are being conservative in our depreciation methodology, and kind of give some credibility to that issue, because some people do have questions about that, when we sell merchandise, which is generally at the ends of its useful life, it is used product, it has been rented two or three times, that product is sold at a profit margin of 20 to 25%.

You know, which, you know, obviously leads to the fact that the cost associated with that product, when it is -- when it is sold is, you know, at a fair market value at that point in time.

Marcel, the only thing I would add to what Robert said is, on that depreciation method as he just described it, the only exception to what he just said is computers.

Computers, if they are 21 months old or more, not necessarily been in idle, they could have been on rent the majority of the time, if they are 21 months old or more, and they are in idle, we do depreciate them in idle over the following six months.

So if they are an older computer and they are in idle, we start to depreciate them.

That is the only exception to what Robert said.

Thanks.

Your next question comes from Dan Conners with Conrose Capital Partners.

Good quarter, guys.

Thank you.

You know, you have mentioned repeatedly on this call that acquisitions are a priority.

And there is a competitor out there that has quite a few stores, over a thousand, that obviously has been -- gone through some very difficult times.

Would you consider doing an acquisition that large or are you going to stick to your goal of staying below 200 a year?

Well, you know, you don't ever say never to anything.

You know, we have done acquisitions larger than that.

Obviously Thorn Americas (phonetic) was about 1400 stores.

We were in a different situation then, in that we only had 700 and the 1400, there was a lot of new markets and areas and so forth.

I say that in the context when you look at this other company, there is a lot of overlap.

It doesn't mean it doesn't work, it doesn't mean it couldn't be valuable.

You just have to look at it and value it a little bit differently.

If it or anything like it presented itself, and it was at what we felt could be the right price and it fit in with our business model we would certainly entertain it.

You know, we will look at any acquisition that presents itself, whether it is one store or 1,000 stores.

And so, you know, that is -- I wouldn't say no to anything, I guess, without looking at it.

Thank you.

Your next question comes from Carla Costello (phonetic) with JP Morgan.

I know you had made some progress on Workers' Comp before, can you just say where your Workers' Comp stands?

Can you still take costs out of that or is that likely to go up?

Just to update you on that front, we did -- if you will recall last 3rd quarter, you know, we did have a significant increase in our overall insurance, that being work comp, auto and general liability, increased about 45%.

That started in July and August of '01.

We renewed the policy in August of this year.

We did have an increase, as we would have expected, which is in the model in the forecast, not nearly to the extreme that we had in the previous year, mainly as a result of what we did internally, whereby we formed and hired individuals to implement a risk management department, as well as introduced a transitional duty program or light duty program.

That has had a significant impact in terms of the average cost per claim, as well as the average length of time that an employee is off work.

As an example, the average cost per claim is now running about 50 to 60% of what the average cost was in previous years.

The only thing that we are battling with now is just the sheer number of claims themselves.

So we are continuing to look at and evaluate alternative lost control or lost prevention programs to continue to implement and benefit that program.

The increase we had in this 3rd quarter, was very minimal in terms of the scope of the company.

But in terms of opportunities to reduce that in future years, it just takes time, because, you know, the average life of a work comp claim is generally five to seven years.

We think there is opportunity there.

We had not factored any cost reduction in that in our guidance going forward.

But we feel like there is some opportunity but it will come in small chunks and it will take time.

Thanks.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answer.

Speakers, do you have any closing remarks?

Again, we certainly appreciate everyone's time and interest this morning.

As always, we are always available for follow-up questions if there are any.

Again, we appreciate your support and we look forward to reporting back to you again at the end of this quarter, and as we get into 2003.

Thank you very much.

Thank you.

Thank you for participating in today's call.

You may now all disconnect.