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Rent-A-Center (NASDAQ:RCII)

Q4 2013 Earnings Call

January 28, 2014 10:45 am ET

Executives

David E. Carpenter - Vice President of Investor Relations

Mark E. Speese - Chairman and Chief Executive Officer

Robert D. Davis - Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Finance, Treasurer and Director

Mitchell E. Fadel - President and Chief Operating Officer

Michael S. Wilding - Senior Vice President of Accounting and Global Controller

Analysts

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Laura A. Champine - Canaccord Genuity, Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

John J. Rowan - Sidoti & Company, LLC

Justin Santa Cruz

Barry George Haimes - Sage Asset Management, LLC

Paul A. Simenauer - JP Morgan Chase & Co, Research Division

Janet Clay

Yujia Zhai

Adam Silver

Thomas McConville

William L. Baldwin - Baldwin Anthony Securities, Inc.

Jordan Hymowitz

Operator

Good morning, and thank you for holding. Welcome to Rent-A-Center's Fourth Quarter and Year-End 2013 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, January 28, 2014.

Your speakers today are Mr. Mark Speese, Chairman and Chief Executive Officer of Rent-A-Center; Mr. Robert Davis, Chief Financial Officer and Chief Executive Officer Designate; Mr. Mike (sic) [Mitchell] Fadel, President and Chief Operating Officer; Mr. Mike Wilding, Senior Vice President, Accounting and Global Controller and Interim Chief Financial Officer; and Mr. David Carpenter, Vice President of Investor Relations.

I would now like to turn conference over to Mr. Carpenter. Please, go ahead, sir.

David E. Carpenter

Thank you, Stephanie. Good morning, everyone, and thank you for joining us. You should have received a copy of the earnings release distributed after the market closed yesterday that outlines our operational and financial results that were made in the fourth quarter. If for some reason you did not receive a copy of the release, you can download it from our website at investor.rentacenter.com.

In addition, certain financial and statistical information that will be discussed during the conference call will also be provided on the same website. Also, in accordance with SEC rules concerning non-GAAP financial measures, a reconciliation of EBITDA is provided in our earnings press release under the statement of Earnings Highlights.

Finally, I must remind you that some of the statements made in this call, such as forecast growth in 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 the earnings release issued yesterday as well as our annual report on Form 10-K for the year ended December 31, 2012, and our 2013 quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements.

I'd now like to turn the conference call over to Mark. Mark?

Mark E. Speese

Thank you, David. Good morning, everyone, and thank you for joining us. While I am deeply disappointed in the conclusion of 2013, I am very optimistic that the future remains bright for our company. We are the largest rent-to-own operator in North America with nearly 4,700 touch points, and we have a well-defined corporate strategy in place to serve us well into the future. New defined strategies that have been beam [ph] developed over the last 6 to 8 months that will act to improve performance in the near term while laying the foundation for consistent and resilient growth in the years to come. You're going to hear some about that today. Well, we're going to provide full, in-depth details during our Investor Day presentation, which will be held in New York City in just 2 weeks, on Wednesday, February 12.

As you know, and as was announced several months ago, my days as CEO will come to a close later this week. Through the years, I've had a passion for wanting to help people more than anything. And it doesn't take much time in our stores to realize that what we do affects people's lives in a very positive and meaningful way. I felt what I was doing was relevant, needed and important, and I began this company, then known as Vista Rent-to-Own, with a desire to do it better than anyone else. Since then and through the years, we have made a difference in the lives of millions of people. To say that the success we've enjoyed has far exceeded my expectation would be an understatement.

While I am excited to continue my role as Chairman of the Board, after 35 years, it is time for me to focus on other important things to me. And as such, I will be passing the CEO baton to Robert Davis, our Chief Financial Officer. I have worked very closely with Robert for the past 20 years and have absolute confidence in his ability to lead the company. He has been instrumental in our success to date and will be an excellent CEO going forward as the company continues to move into an exciting new phase of its development.

While Robert, Mitch and Mike will provide more details on the recent results and provide insights into the future, I hope that I will be able to see all of you at our 2014 Investor Day, again, on Wednesday, February 12 in New York. I want to close by extending my deepest thanks and appreciation to all of our coworkers who comprise the Rent-A-Center family, our customers, vendors, directors and, of course, you, our shareholders.

With that, it is now my pleasure to turn the call over to our CEO-elect, Robert Davis. Robert?

Robert D. Davis

Thank you, Mark, and thank you for your leadership and guidance that has taken this company from one store in New Jersey to over $3 billion in revenues in 3 different countries. We are all extremely grateful we have had an opportunity to be a part of it, and we look forward to continuing your legacy and are committed to furthering the returns that we have provided our shareholders, an average of over 17% per year since going public in 1995.

Now in terms of our fourth quarter. As Mark mentioned, the quarter and year ended well short of our expectations. Mitch and Mike Wilding will provide more detail on our operational and financial results in a few moments, but suffice it to say, we must get better and improve our overall business. As Mark alluded to, during the fourth quarter, we launched a multiyear effort to transform and modernize how we go to market and serve our customers. We will dive deeper into details of this program during our upcoming Investor Day, as Mark mentioned.

We believe in our business model and the value we provide to millions of customers that are a part of our family. It is no secret that companies like Walmart, Sears, Kmart, Big Lots and several others are now trying to provide similar services to the unbanked and underbanked consumer. So it is imperative that we do not take our market-leading position for granted.

As such and as a result of our recent results and trends in the Core U.S. segment and the opportunity for us to deliver profitable long-term growth, we are intensely focused on building new competencies and new capabilities while continuing to support our Acceptance Now and International expansion efforts. We recognize that the competencies and capabilities that have enabled us to arrive through industry consolidation to where we are today as the industry leader must be augmented with new capabilities in order to sustain our market-leading position.

As a result, we will be transforming our end-to-end supply chain, developing a customer-focused, value-based pricing strategy for a multichannel environment, optimizing our store footprint while enhancing our ongoing market-planning capabilities, enhancing our Acceptance Now offerings by launching a virtual capability, overhauling our store labor and operating model, and innovating our digital e-commerce capabilities, all with a primary intent of turning around the recent trends in our business and growing our Core U.S. segment once again.

Of course, we continue to remain very excited about our expansion into new channels and new markets, in particular, Acceptance Now in Mexico. We will continue to support and grow both of these channels in 2014 but deliberately at a slower pace in order to focus on some exciting new innovations and to ensure that every square foot we add is of the highest quality. We are excited to announce that we will soon be launching a virtual Acceptance Now platform, which will combine with our main model to broaden our appeal and expand our growth potential.

We also recently deployed new innovations on our model as we opened our first stores in the highly dense markets of Mexico City. We believe that these innovations provide a foundation for sustained growth for years to come. While net store growth will slow a bit while we focus on these initiatives, this pace will ensure that we're putting our resources towards only the most promising locations.

To support the renewed focus on the Core U.S. segment while supporting our Acceptance Now and International expansion efforts, we recently restructured our executive management team in order to best position the company as we begin to write the next chapter of the RAC success story. Some of the changes include: promoting Jeff [ph] White to EVP of the Core business after he led the explosive growth in the Acceptance Now business; Mark Denman, who's joined us as the lead operator of TRS when we acquired that company in 2010, will now be leading our Acceptance Now division; Joel Mussat is our new omnichannel executive, moving into this important transformational role after leading our growth efforts in Mexico: Ricardo Cordon will now take the baton and lead our growth in Mexico after serving the last several years in our International Governance role; Rita Bargerhuff has been retitled as our Chief Customer Officer and will report directly to me; and we also have a new CIO in Herman Nell, who joined us in the fourth quarter after serving in a similar role at leading retailers. These are just some of the management changes made in our recent restructuring.

These changes, this transformation we are undertaking is focused on our customer and ensuring that everything we do renews their spirit as they compassionately provide for their families to bring dignity and pride into their homes with the quality of products and services from Rent-A-Center. We recognize this is a multiyear effort and will not happen overnight, but the leadership team is excited about the opportunity in front of us and the direction we are headed as the market leader. As a result, we feel really good about where we are heading and the impact it will have on our 2014 performance.

We're deeply excited about what the future holds and how we will serve our customers now and in the future. We do look forward to providing more details and insights on the 12th of February in New York City, and we look forward to delivering results in 2014 that are ahead of what 2013 ultimately delivered. I would like to extend my deepest thanks and gratitude to our hard-working coworkers that have made and will continue to make us the market leader.

I'll now turn the call over to Mitch for an update on our operating results by segment. Mitch?

Mitchell E. Fadel

Thanks, Robert, and good morning, everyone. Starting with our Core segment, we did finish 2013 with more agreements on rent than we finished 2012. As we've previously discussed, the primary reason for the Core segment being down 5.5% on same-store sales for the quarter is our average revenue per agreement or the ticket. The other reason is our revenue from customers exercising the early purchase option was down 25% -- about 25% in the quarter.

While our December agreement growth was well under our expectation, again, we did finish the year with more agreements on rent than the prior year. And our goal in 2014 is to maintain that agreement portfolio, both in prior year, while driving that traffic with more unique high-value offerings that do not drop our revenue per agreement.

On the collection side, it has been a bit harder than previous years as our customer remains under quite a bit of economic pressure. Our customer losses in the Core rent-to-own segment came in within historical ranges, albeit at the high side of those ranges, at 2.9% for the quarter.

Our inventory held for rent in the quarter ended the year at 24.2% of our overall inventory dollars, 30 basis points lower than last year, additional evidence that our problem is not a byproduct of us being unable to rent our inventory. In 2013, it was more about ticket and those early purchase options declining that impacted the revenue.

Regarding Acceptance Now. Overall, we remain [indiscernible] performance in this segment. Although our December agreement growth in this segment was also well under expectation, same-store sale revenue in the quarter grew by 26.4% with operating profits of almost $15 million. Now that would've been about $18 million without an additional on-rent reserve adjustment made in the quarter.

We opened 91 more kiosks in the quarter and 411 for the year, to end the year with 1,325. Our metrics, such as customer keep rate and collections remain on target here as the Acceptance Now result continued to track to our new store economics model for the overall segment. It's really helping us grow the overall U.S. rental market. When you combine the Core and Acceptance Now, you've got a revenue increase in the U.S. of about 1.5% for the quarter. So we are growing our U.S. market share.

In our International segment, which is primarily Mexico at this point, we remain excited about the opportunity. Same-store sales revenue in the quarter grew by almost 26%. We opened an additional 63 stores in Mexico in 2013, and we were still able to improve our profit numbers for the year. Most of you will recall we had a goal of achieving 4-wall breakeven in December. So with the exception of an additional on-rent reserve adjustment in this segment as well, we were 4-wall profitable in December. In fact, one of the divisions in the country, the one with the oldest stores, made a slight profit even after overhead in December. So again, pleased with our performance in Mexico and remain excited about our opportunity in that country.

Overall, challenges remain in our Core segment. But thanks to ending the year with more agreements than last year in the Core and our strong Acceptance Now performance, we are growing market share in the U.S., and we remain excited about our Mexico expansion. So all is not lost. We need to continue to drive traffic into the Core stores, but do so with more unique, high-value offerings that do not drop our revenue per agreement. I'd also like to thank our 20,000-plus coworkers for their dedication and hard work to improve the quality of life of our customers in these challenging times.

I'd now like to turn the call over to Mike.

Michael S. Wilding

Thanks, Mitch. I'll walk through our financial results for the quarter and review our 2014 annual guidance, after which we'll open the call for questions.

As highlighted in the press release, our total revenues were $769.6 million during the fourth quarter of 2013, an increase of $11.2 million or 1.5% as compared to the fourth quarter of last year. Our net earnings in the quarter were $13.1 million while diluted earnings per share equated to $0.25, a decrease of approximately $0.55 quarter-over-quarter. These results include dilution related to our international growth initiatives of approximately $0.09 per share.

Let me take a few minutes to give more detail in several areas where we missed against our expectations. I'll start with gross profit. As a result of lower revenue than expected, gross profit was off our expectations $0.17 or approximately 30% of the mix, the Core U.S. segment contributing $0.13 and Acceptance Now contributing $0.04.

As it relates to the unexpected expenses, I'll mention the impact of the most significant items: $0.08 due to an increase in claims paid under our self-funded health insurance program, the primary driver being an increase in large claims; a $0.03 impact due to severance for former executives of the company. Robert talked about the very strategic management changes earlier; a $0.10 impact due to the increase in on-rent merchandise reserves and losses; a $0.04 impact on our effective tax rate -- due to our effective tax rate. The effective tax rate was higher in the quarter primarily due to nondeductible goodwill being disposed of when we sold stores to franchisees as part of our ColorTyme rebranding initiative. As a result of these items, consolidated operating and EBITDA margins declined in the quarter. Our fourth quarter EBITDA margin declined 470 basis points to 8.2%.

While we had net uses of operating cash flow of approximately $39 million during the fourth quarter, year-to-date, we generated approximately $134.3 million in operating cash flow. We continued to invest in new stores, new channels and new markets. In fact, our overall location count has increased approximately 9% from the prior year and by 56 locations since September 30. Dividends continue to play a vital role in our total shareholder return, and we did make our 15th consecutive quarterly cash dividend payment last week. We believe we have taken a fair and balanced approach to our shareholder return. We ended the quarter with over $42 million in cash on hand.

As noted in the press release, certain balance sheet line items as well as the 2012 statement of earnings for the 3- and 12-month periods ended December 31, 2012, have been revised to correct immaterial errors from prior years. The comparisons I gave earlier contemplates revised 2012 numbers.

In terms of guidance, for 2014, we currently expect total revenues to increase between 4.5% and 7.5%. We expect our same-store sales for 2014 to range between a positive 3% to 5.5%. Overall diluted earnings per share for 2014 are expected to be in the range of $2.30 and $2.50, which includes an approximate $0.25 drag on EPS related to our international growth initiatives. In terms of EBITDA and free cash flow, the company EBITDA will approximate $325 million to $345 million, free cash flow will approximate a negative $65 million, largely due to the reversal of our deferred tax liability. The 2014 guidance does not include the potential impact of any repurchases of common stock of the company -- that the company may make, changes to future dividends, material changes to outstanding indebtedness or the potential impact of acquisitions or dispositions that may be completed or occur after the date of the press release.

You may recall that we provide some data points on our website regarding the historical spread of our annual results by quarter. This is meant to be a guide and not a predictor. However, based on the year-end position of our Core U.S. portfolio, we estimate our first quarter 2014 EPS as a percentage of the full year EPS guidance will fall below any previous first quarter results from 2009 to 2013.

With that, Stephanie, will you please now open the call for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brad Thomas with KeyBanc Capital Markets.

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

This is Jason. Just wanted to give my congratulations to Mark on his retirement and Robert on his new position. I guess you guys had just walked through a couple of the line items: The gross margin and the expenses. Particularly with the expenses, I wonder if you can kind of go and expand on which of those are kind of ongoing, we may see them into the first quarter or first half of next year, and which of those are just kind of contained within the fourth quarter itself.

Robert D. Davis

Well, so Mike walked you through 4 of the items, $0.08 being a byproduct of the self-insurance claims. We did see a large increase in the number of large claims in the fourth quarter relative to prior quarters. That also required a bump-up in our reserve given the trends that we were seeing in the fourth quarter. We were not expecting that run rate of claims to sustain that level. But the reserves, we do anticipate staying at the level they're at. So I would classify that one as primarily onetime in nature. Obviously, the severance costs are onetime in nature. The effective tax rate is onetime in nature, given the sale of stores to franchisees. And then the on-rent reserves, although they are onetime in nature in terms of topping up the reserve levels, we do anticipate there being a slight increase throughout the balance of next year, albeit a small amount. The majority of that $0.10 is onetime, but there's some additional expectations of that continuing into next year, but in large part, driven by the increase in business associated with RAC Acceptance. As the portfolio grows, you've got to increase the reserve as well, and so that's what I'm referring to about the impact for 2014.

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Okay. And then you guys have talked a lot about the macro. I mean, have you kind of looked at how much you think is macro versus how much was, say, competition or loosening credit or weather related?

Mitchell E. Fadel

Yes, Jason, this is Mitch. I think it's -- the majority of it is certainly the consumer because we can look at different areas relative to competition. And it wasn't like we saw much of a difference at all in our numbers relative to where the competition is and whether that competition's 1 mile, 2 miles and so forth. We can cut the numbers a lot of different ways. And the -- where the competition is, it doesn't pop off the page. So I think it's more about the headwinds, the consumer spacing. Weather has been a problem more in January than it was back in December. So no, I don't think it was weather either when we think about the fourth quarter. I think it's that, that, certainly, the headwinds are the customer.

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

And then lastly, you guys have talked about next year trying to drive more of the high-value offering. Can you kind of go into a little bit more detail on what you consider higher value and how you plan to kind of drive a higher mix of those products?

Mitchell E. Fadel

Sure, Jason. And let me start by saying -- just so you have the scope of it when we talk about December being bad and how that rolls into next year relative to our guidance for next year. You know what? December was off. Roughly, our portfolio, from an expectation standpoint, was off about $3 million versus what we normally and in the past and what we expected it to grow in December. Well, that $3 million of portfolio business rolls all the way through next year, unless we make it up at some point and we don't have that factored into our model. That would be upside if were able to make up that $3 million of income in December. So if -- then that $3 million rolls each month. So $36 million for the year minus some depreciation costs and you've got close to a $0.30 number dropping into the guidance -- negative into the guidance next year just off of that one month. So that's how much one month, either up or down, can affect the business. So that rolls into 2014. And when -- and so as we think about the guidance that's out there now with that $3 million shortfall, and again, we don't have it -- it's not like it's calculated in there to make it up. Otherwise, our guidance wouldn't have been as low as it is for 2014. When we think about how we're going to maintain the agreement portfolio above 2012's level, and even with a bad December, we're still above 2012's levels. How do we -- your question was how do we do that. What do we mean by high-value offerings? So certainly, it -- a lot of it has to do with packaging and putting items together to make them a tremendous value for the consumer, but at -- to get the ticket back to where it was or, at least, to maintain it where it is, rather than another large drop in 2014 like we had in 2013. So it's combining items. It's larger -- carrying more of the larger screen sizes on televisions, even stereos, larger stereos, even the furniture mix. You can carry more on the higher end but make it a high value for the customer. But I guess the short answer is the 2 main things are screen sizes from a television standpoint, it's going to be technology -- more smart TVs versus non-smart TVs on the television side and a whole lot of emphasis on packaging products together.

Robert D. Davis

And I would just add on, Mitch, that we were very deliberate last year in trying to recapture our portfolio that we fell behind on early in the year. And by that, we were encouraged talking about being very promotional. And that promotional activity drove our ticket down. This year, '14, we're going to have less of it into some being [ph] as promotional due to what we experienced with the ticket. So it's a combination of not just the emphasis that Mitch mentioned on new products and packaging but also being deliberate about not being as promotional.

Operator

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

Laura A. Champine - Canaccord Genuity, Research Division

My question is more on the -- and I know you'll talk more about this in a couple of weeks, but on the potential to go online with Acceptance Now, how would that work in terms of sourcing the products? Because we felt one of the reasons that the kiosk business works is because it's also beneficial to a retailer. How do you maintain that value proposition for your retailer partners if you go online?

Mitchell E. Fadel

It would still -- it would be the same. It would still benefit the retailers because it would be going -- do it -- automating the process within the store where the customer is already. We just wouldn't be doing it manually or with our -- in that -- under that scenario, with our coworkers in the store. Laura, it really helps us get in to stores that are -- of too low of a volume for us to have a manned kiosk. It certainly helps us -- speed the market sooner. You can roll out so many more [indiscernible], but still in the retail store so it still benefits the partner. Now there may be -- there may also be an opportunity to use the same software outside the store. But as far as the Acceptance Now business, it would still be inside the store and still benefit the retailer.

Robert D. Davis

So, Laura, just to provide some additional insight on that, I mentioned in my prepared comments, Sears, Kmart, Big Lots having services of similar ilk to our unbanked or underbanked consumer, and they're doing that through a virtual platform. There are small companies out there, one that least [ph] that you saw the press release for Sears and Kmart and -- with Big Lots have progressed [ph]. So there are other competitors in this virtual space. We felt there's some demand opportunity, given the demand we saw in our pipeline. But now we also are going to be able to offer this virtual platform. It just broadens our appeal to a much larger group of retailers. And so that's what we're referring to. It's not a virtual platform that people can enter into if they're home. It's actually still inside the retail location.

Operator

Your next question comes from the line of John Baugh with Stifel.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Best wishes to you, Mark, in retirement. I definitely wanted to start out with the building blocks on the comp. You've guided 3% to 5.5%. Could you walk me through the 3 pieces, how you think about that? And -- just that as a starter.

Michael S. Wilding

Yes, the guidance for next year -- obviously, as Acceptance Now becomes a larger component of the overall revenue base, as they throw off larger comps, that has a more meaningful impact to the mix. The Core U.S. business, given how December ended and how Mitch mentioned how that rolls through all of next year, we're not anticipating the Core business being positive next year. It'll be down slightly. When you think about Acceptance Now and International, both of those will be significantly positive, similar to some of the numbers that we threw out in terms of this most recent quarter, International perhaps being a little bit higher than that, just given, again, the size of the store base. So it's really -- that positive guidance that we gave is really being driven by our growth initiatives with the Core business being down slightly.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

And then how do -- International, Mexico specifically, the loss was greater this year than last year. And I know you talked about some incremental costs going into Mexico City. But if we were to try to isolated the, I don't know, growth cost particularly in Mexico, from what you have done previously, what kind of rate of lower losses or profit improvement did we see in 2013?

Michael S. Wilding

Well, if you look at the segment data in the press release, International lost $28 million operating profit in '13 compared to $31 million last year, so lost less in 2013. Our guidance for 2014, we alluded to the fact that we expect $0.25 dilution. That implies an improvement over the $28 million of several pennies, $0.06, $0.07, something in that range. And that's how we would think about going forward beyond next year, too, that, that losses continue to shrink and we'll be net accretive year-over-year going forward.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

I guess my question is though is that loss shrinking because you pulled back on the amount of -- if you were a new store drag or are they -- is it the operations improving as well?

Robert D. Davis

It's a combination of both. That's a fair question. We are opening 35 stores next year as opposed to a larger number, like this past year, and that depends on the timing of those locations throughout the course of the 12-month period. But it's fair to say that the less loss is a combination of improvement in the operations as those stores continue to ramp, as well as fewer new stores. Mitch mentioned -- I don't know if it was emphasized enough or heard the emphasis on it that our first division in Mexico in December, which is -- how many stores?

Mitchell E. Fadel

Half the country.

Robert D. Davis

Half the country; 70-plus stores. Our first division made a net-net profit in December fully loaded after overhead. And that is obviously what provides us the comfort and confidence to continue to invest and build out that country.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And lastly, could you update us on the covenants, where you sit currently with the key covenants? I know there's several that tie to the bank line and capital expending, stock buybacks. Don't know if it relates to dividends or not. But could you update us on that?

Michael S. Wilding

Certainly. The leverage covenants, I think most people know, is 3.25 turns. Our leverage at the end of the year was around 2.6, and so we're still quite a ways away from that 3.25 covenant. In terms of the revolver and debt capacity, we've got about $235 million of it -- of availability under the revolver at year end. And then in terms of share repurchase baskets, the board authorized an amount that's around $0.25 billion, $250 million. Given the leverage ratio at year end, we do anticipate having to address that in the near term. As a reminder, the share repurchases, as long as senior leverage is 2.5 or less, you are not restricted. We're now over 2.5, so we need to address that in the near term.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

And is there anything on the dividend and CapEx, any restriction there as well?

Michael S. Wilding

Those -- the dividends would be similar to share repurchases. And so, as I said, it needs to be addressed.

Operator

Your next question comes from the line of John Rowan with Sidoti & Company.

John J. Rowan - Sidoti & Company, LLC

Just talk about Accept Now for a second. When you look at the store-by-store or the partner-by-partner results, do you see a distinct difference between partners that were heavily promotional through the holiday period versus the ones that were not, specifically in the electronics retailers?

Mitchell E. Fadel

John, I don't have it by partner-by-partner in front of me. We probably wouldn't address that anyhow as far as how we're doing within each partner because that's really between you and the partner on -- as far as how they did business in the quarter. So we would just talk overall and not give up that information partner-by-partner, anyhow.

John J. Rowan - Sidoti & Company, LLC

Well, what I'm trying to get that, obviously, is some of your partners reported huge declines in same-store sales because of -- they weren't promotional with some of the electronics items. I'm just trying to figure out how closely your Accept Now business tracks with those particular partners and not one specifically but just in general.

Mitchell E. Fadel

Yes, I don't have in front of me which ones were more promotional than others to even comment on that, John.

John J. Rowan - Sidoti & Company, LLC

Okay. And then as far as the virtual platform, obviously, there's been -- I don't want to say concern -- but the kind of hole in the competitor's platform has always been the retail distribution of used items. How is your platform going to differ from what's already out there?

Mitchell E. Fadel

Well, I think the fact that we can still -- there's still room to put used product in our Core business, to rerent them, is a tremendous advantage over the -- over our competitors in the virtual space. Also, having the infrastructure of the -- that we already have out there for Acceptance Now or the manned kiosk is a big advantage. It won't just be an IT play for us. It will -- it'll have the support of the whole Acceptance Now team on it as well as the support of the close to 3,000 Core stores behind it from a -- not only taking used products, but helping in collections and things like that. So it'd be a tremendous and distinct advantage over what's currently out there for virtual.

Operator

Your next question comes from the line of Budd Bugatch with Raymond James.

Justin Santa Cruz

This is Justin Santa Cruz on the line for Budd. I know the historical mix of new versus used merchandise is about 25% to 75%. I'm curious as to what the percent of the used merchandise is that came from Acceptance Now.

Mitchell E. Fadel

The -- our used percentage is a little higher than we'd like it right now, not so much because of Acceptance Now, Justin. Products coming in from Acceptance Now and our Core business, as we track that, it rents at very -- at a very similar pace to what we, ourselves, put in the Core business. It doesn't fall behind that. So that's really not the problem. But when you have a soft quarter or a soft month, primarily December, we ended up with a little higher mix of used product than we'd like in the store. I wouldn't blame it on Acceptance Now. I'd blame it on business being soft. It's probably 3 or 4 percentage points higher on the used or lower on the new, however you want to say it, off of what we'd like to be. So we're working hard on that to get that back where we want it, because it's a -- that's a key metric for us.

Justin Santa Cruz

Okay. And has the -- the kind of 25% return rate for Acceptance Now, has that changed at all?

Mitchell E. Fadel

No. It's running between 20% and 25%. That metric hasn't changed at all.

Justin Santa Cruz

Okay. And I was just wondering if you could explain a little bit better for myself what exactly the on-rent reserve is?

Robert D. Davis

Given -- in our business, we don't really have receivables, i.e., we -- the revenue we record is over the life of the contract as opposed to being all booked upfront like traditionals, retail sale, if you will. The losses that we incur is the book value of the product that we write off when we can't collect on the merchandise or the customer doesn't return it to us. So we have to reserve what those potential losses will be going forward and maintain that on our balance sheet. So we did have to increase the amount of that reserve during the quarter.

Justin Santa Cruz

Okay. And you said that was about $0.10 worth in this quarter?

Robert D. Davis

That's correct.

Justin Santa Cruz

And so do you think that could be a couple of cents going forward? I know you mentioned it would be smaller but...

Robert D. Davis

Yes, I think we've got $0.04 or $0.05 in next year's forecast for that. And again, that's largely driven by the growth of Acceptance Now. As the portfolio builds and the number of contracts go up, you have to have a corresponding increase to the reserves to accommodate for that growth.

Operator

Your next question comes from the line of Barry Haimes with Sage Asset Management.

Barry George Haimes - Sage Asset Management, LLC

I appreciate all the things you outlined in terms of trying to improve the business from here, but I had a question or 2 kind of going back to the Core customer. And what do you think is driving the recent weakness? Because we're pretty far away from things like the payroll tax increase and the Washington, D.C., angst that maybe were issues earlier in 2013. And secondly, when you're trying to gauge when you might see a turn, are there any macroeconomic indicators or other things you look at to kind of keep the pulse on your Core customer? And then third and last point on this is you alluded to the fact that the Core business comp would be slightly down in 2014. And will that look relatively even as we go through the year, or does it start out weaker and it needs to reflect better at some point in the year? And if so, when might that be? I appreciate that.

Robert D. Davis

No, you raised a fair point in regards to the Core customer in that I think that's a question that many people are struggling with. They're -- I'm not trying to associate us with other folks that struggled in the fourth quarter as well. We've got our own challenges. But I think that whatever we would speculate about December would be just that, speculation in terms of customer. We are far away from the federal tax increase. We are far away from the delayed income tax refunds. And so I would just be speculating. And I don't think that's what we need to do. We laid out for you what we think we need to do to improve our business, and that's what we're going to be focused on. At the end of the day, putting the customer at the forefront of everything we do and trying to serve them from a world-class perspective and so to talk to specifically about what occurred in December within our customer's behavior and pinpoint that on the macro environment, it would be pure speculation. And I don't think that's a worthwhile [ph] exercise. In terms of the comps, there is some expectation with that ramps during the course of the year. Given where we ended the quarter, I think the comp in the Core business was down 5.5% or something in the quarter. So that's where we're starting from. And to be down slightly implies that through the balance of the year, there'd be improvement to that run rate over the course of 2014.

Mitchell E. Fadel

And I'd add to that, Barry, as far as gauges, you also asked about gauges going forward. Again, without trying to assign exactly what happened to the customer in December, well, there are a few things we know will help us when they happen. Lower employment certainly helps us; consumer confidence. And I'm not talking about overall consumer confidence trends that are built sometimes by the housing market or the stock market. I'm talking about consumer confidence with the lower-middle income consumer that we do business with. So those are 2 of the best gauges for us: consumer confidence, lower unemployment, certainly some wage growth along the way, but that kind of comes with lower employment.

Operator

Your next question comes from the line of Carla Casella with JPMorgan.

Paul A. Simenauer - JP Morgan Chase & Co, Research Division

This is Paul Simenauer on the line for Carla Casella. I just have one question for you guys. Have you talked to the rating agencies at all? And do you think they -- you guys could be downgraded?

Robert D. Davis

We have not talked to the rating agencies and wouldn't speculate on how they would view our current results.

Operator

Your next question comes from the line of Janet Clay with Liberty Mutual.

Janet Clay

You mentioned that you're going to need to address that leverage test. What did you -- what do you have in mind doing for that?

Robert D. Davis

Well, obviously, we've got to address our ability to continue to pay dividends on an ongoing basis, given senior leverage is over 2.5x. And then what that looks like in terms of how we would propose to restructure the balance sheet is being evaluated. It could take on more than several different forms, and we don't have a final response to that at this point in time.

Operator

Your next question comes from the line of Yujia Zhai with Voyant Advisors.

Yujia Zhai

Can you guys just talk about, give some color on the restatement that you guys made for fiscal '12 and how that occurred? Is it more internal controls issue, accounting related? And how that overstated your on-rent merchandise?

Michael S. Wilding

Yes, I'll walk through that. This is Mike. As we went through the 2013 audit process with our external auditors, we determined that our reserves for the skip seller merchandise Robert explained earlier that -- it was not at the appropriate level now or in prior years. So with actual data and with the benefit of hindsight, we went back several years and compared actual write-offs of merchandise against the reserves that we had on the books at the time. We reset the reserves and then marched that forward -- rolled that forward to the end of 2013. So we did footnote in the press release, as you mentioned, that the impact for the 3 and 12 months, end of 2012, was noted there in the press release. And then at there's a top off in reserve we talked about for '13 is also an impact of that adjustment, rolling -- the impact of rolling that reserve forward.

Yujia Zhai

Okay, great. And then one more question if I could. Your average inventory on rent has been increasing over the past several quarters by material now and then, but your average appreciation rate has been declining, and now I would think of your merchandise on rent and held for rent -- both held for rent, have also been increasing. How come the [indiscernible] isn't tracking the inventory trend?

Mitchell E. Fadel

Well, remember, we grew -- we have more agreements on rent at the end of 2013 than the end of 2012, so that's why there's more inventory on rent. It's been -- as me and Robert have both pointed out, it's heavily promotional to get those on rent. So the revenue didn't come with it, but the inventory shows the fact that we've got more on -- -- rent. We just -- we're so heavy getting it out there and gaining market share through promotions that it didn't translate to revenue. In fact, it's certainly at a high-enough level. It certainly translated to a lot of revenue, just not enough.

Yujia Zhai

Got it. And then you guys are guiding for depreciation to increase in fiscal '14?

Robert D. Davis

Are you referring to rate or dollars? And that's -- I'm not sure if you're looking at segment data or consolidated data. And I only mention that because on-rent is also going up pretty dramatically given Acceptance Now. And Acceptance Now carries no inventory given the fact that the sales come through the retailers -- as their inventory in the retail location. So on-rent, on a consolidated basis, is going to look distorted compared to prior year as Acceptance Now grows. The rate of depreciation percent, if you're looking at gross profit dollars and putting a percentage to that, there are some changes that we made to our pricing relative to our EPOs and cash sales. We are seeing a benefit of that during the course of 2013. So as we look at -- look to 2014, we would expect depreciation percent or cost of goods sold, if you will, to be slightly flat to moderately down given the continuation of increase in RAC Acceptance or Acceptance Now. There's a lower margin of gross profit in Acceptance Now.

Operator

Your next question comes from the line of Adam Silver with Babson Capital Management.

Adam Silver

Two quick questions here. First, I think you've said 2013 operating cash flow is $135 million, and for 2014 guidance, you said it'd be negative $65 million, largely predicated on taxes. I was wondering if you could walk through that a little bit more. And then have you guys seen any evidence that the pool of underbanked has shrunk as the economy has improved and there's more banking options made available to them?

Robert D. Davis

So I'll take the cash flow one first. In regards to the guidance that we gave, negative $65 million, I think it was, that Mike mentioned, there is a -- an additional tax obligation in this year's forecast. It's about $85 million. Just -- without that, we'd be cash flow positive, roughly $20 million. That's obviously down from our historical run rates in large part due to EBITDA being down. So our focus is turning that tide and turning that trend around, increasing the EBITDA and the cash flow will then follow suit. But 2014's forecast being down would be positive if it weren't for the turnaround of that tax liability.

Mitchell E. Fadel

On the -- Adam, on the -- your question about the pool of underbanked consumers, no, we're not seeing any evidence of that shrinking based on the economy getting better overall or maybe getting better at the higher end, at least. And I say that -- keep in mind, we have -- we did rent -- we did more deliveries in 2013 than 2012 in the Core business. And at the end of the year, we have more agreements on rent than we did at the end of 2012, and our store count stayed very similar. So we've got more on-rent. The deflation in the electronics and our own promotional schedule is what drove the revenue down as well as the lower early purchase options exercises by the consumers. So consumer-wise, deliveries for the year and the agreements at the end of the year are higher than 2012. So no, we're not seeing that shrink.

Operator

Your next question comes from the line of T.J. McConville with Becker Capital.

Thomas McConville

Before I get into the questions, let me add my congratulations to you, Mark, on retirement. I have a couple of questions about, first, the charges in the quarter. Mike, you outlined the after-tax amounts. If I look at those numbers and then I back out that big amortization charge in the quarter, I get somewhere in the neighborhood of $30 million pretax that is sort of onetime in nature. Is that a fair enough number?

Mitchell E. Fadel

Yes. Trying to get the math here, T.J. Because we said about 30% -- Mike said about 30% was gross profit. And then if you -- and then that 70% is primarily made out of things that are similar to onetime charges. That would be about $0.35. So yes, I think we've talked about the majority of it, and then there's a penny here, a penny there that we're not getting to that -- down to that detail. But yes, I think that's about right.

Robert D. Davis

Yes. [indiscernible] when you said amortization, what were you referring to? Because it...

Thomas McConville

Well, there's the amortization of write-down -- the write-down when you sold the stores to the...

Robert D. Davis

[indiscernible]. Okay, okay. Yes.

Thomas McConville

So is there any way that you might be able to allocate that by segment just so we can get a sense for the profitability here. Because to your point, Mitch, direct profitability, excluding that, would have been up year-over-year, but we're seeing it as down year-over-year. So any help you could offer maybe on that reserve line would be helpful.

Mitchell E. Fadel

You're [ph] talking about -- on the Acceptance Now on the segment, well, it's still up -- certainly up year-over-year even for the quarter. That $15 million -- roughly $15 million in the fourth quarter would've been about $18 million without that top off in the reserve versus $10 million in 2012. And then for the year, it's up by over $40 million even with that top off. So -- but I could tell you this, that when we talked about -- Mike talked about 30% of the problem [ph] or so being gross profit and that $0.17 and about 80% of that was Core and about 20% Acceptance Now, as Mike said, $0.13 on the core and $0.04 Acceptance Now. Most of the insurance claims were on the Core, but it would be probably 2:1 Core to Acceptance. Most of the on-rent merchandise reserves were in Acceptance. Now that was about half and half also. And when you think about actual losses for the quarter, it run at the high end of our historical norms for losses. Mike called that half and half. Severance was probably all in the Core. So does that help, T.J., that kind of breakdown?

Thomas McConville

Yes, that's great, Mitch. I just -- just trying to get a sense for the individual segment profitability and how close to target you are. The second question I have goes more to the guidance. I'm having a hard time kind of getting to the lower end of the range, which would've kind of implied down earnings with revenues up 4.5% to 7.5% with what ought to be an improving revenue mix with the contribution of Acceptance Now getting bigger and less drag in the International business. So can you talk about what's built into that earnings guidance that could get you, actually, down earnings next year on that kind of sales increase?

Mitchell E. Fadel

Well, the -- we still have that Core forecasted to be down, not the 5% or 6% it was down this year but slightly down. So when the revenue growth is coming from the new businesses, the -- it takes a while for those new businesses to outrun their expenses. There's also new stores in there, 100 Acceptance Now and 30 or so stores in Mexico. So when the growth coming from the new initiatives, it's not as good a revenue growth as if the mature business puts on revenue growth and you get 40% or 50% flow-through. So I think the short answer is, of course, they're being down slightly in 2014 is what you have to keep in mind to tie it to the earnings guidance.

Robert D. Davis

And that's the largest portion of the revenue base. So the largest portion is negative. It's going to have a large impact on the expected outcome overall.

Thomas McConville

Okay, understood. And the last one for me then is sort of to that point and to your point, Mitch, a minute ago about deliveries being up and on-rent being up. This is the first quarter since last year's fourth quarter that the on-rent merchandise number in the Core business is up sequentially. And coming into this year, we don't have the same comp issue that you had last year's first quarter. So I'm just trying to get a sense for the expectation of down for the full year even though you've got those earning assets out there at a higher level than previously.

Mitchell E. Fadel

Well, there -- the actual -- the assets are out there at a higher level. Ticket is down 4% or 5% year-over-year. So the fact that we got those assets out there being heavily promotional as well as deflation in the electronics side, TVs and computers, we've got it -- we'll be fine, like we've said, as long as 2014 we don't -- we can keep that agreement portfolio above last year's level without dropping the ticket anymore by promoting differently, packaging better and addressing our offerings a little bit and what we offer to customers.

Operator

Your next question comes from the line of Bill Baldwin from Baldwin Anthony Securities.

William L. Baldwin - Baldwin Anthony Securities, Inc.

Just kind of a housekeeping item here. When you look at your write-down by divisions, I was just looking here at the Core division, when you actually calculate your gross profit margins here in the fourth quarter versus a year ago, they're showing a slight actual increase on a percentage basis. So when you indicated shortfall in gross profit, are you just talking gross profit dollars? Is that what you're referring to?

Robert D. Davis

No, Bill. I was talking about consolidated gross profit percent. As Acceptance Now increases, it has an impact on our consolidated gross profit percent. But you're right, the Core is up. And what I was alluding to earlier in terms of how we change some of our pricing on our EPOs and merchandise sales, that has had a positive impact on our margins in the Core segment. And we would...

William L. Baldwin - Baldwin Anthony Securities, Inc.

Okay, that's right. Okay, I hear you. Yes, your merchandise sales are included in that divisional breakdown.

Robert D. Davis

That's correct.

Operator

Your next question comes from the line of Jordan Hymowitz with Philadelphia Financial.

Jordan Hymowitz

Mark, congratulations on doing a very good job there. People forget you came back and took the company from near disaster that we -- developing a lot when you came back as CEO, so good job there. Question, can you break out the 2.9% charge-off number between the RAC Acceptance and the Core business?

Mitchell E. Fadel

Well, when I said 2.9%, Jordan, I was only referring to the Core. So that is the Core business.

Jordan Hymowitz

Okay, what is the number then on the RAC Acceptance?

Mitchell E. Fadel

I don't have that in front of me. It will be in the Q. I could tell you that our losses in Acceptance and in the Core business, from a customer standpoint, a ratio of -- accounts that are write-off relative to the accounts we have on-rent is right on -- they run right on top of each other month after month. When we do report the percentage of losses in Acceptance Now versus Core, it'll be a little higher because we paid more for the merchandise. So when you take the value of the merchandise relative to monthly income, not overall income, but we take the value of the merchandise relative to monthly income, the percentage runs a little higher in Acceptance Now because we paid more for the product. But as far as the actual customer behavior, they run right on top of each other.

Jordan Hymowitz

So you're saying, from a frequency point of view, they have the same incidents of loss but the severity is higher?

Mitchell E. Fadel

Well, severity's higher, yes, because we paid more for the product. That's correct.

Robert D. Davis

And paying retail versus wholesale, but...

Jordan Hymowitz

And then so -- if you were to approximate, if the 2.9% would equate to what approximately that if the severity is higher, would it be 3.2%, 3.3%?

Mitchell E. Fadel

I -- again, I don't have those in front of me. They'll be in the Q, and I don't have that in front of me. I think it's a little higher than that because we're paying more like 50% more for the product by paying retail. So I think it's higher than the low 3s when you look at it that way. Again, but frequency runs very consistent between the Core and Acceptance Now.

Operator

I'm showing no further questions in the queue at this time. I'll turn the call back over to Mr. Speese.

Mark E. Speese

Ladies and gentlemen, thank you again for joining us this morning. I'll conclude, I suppose, my opening comments, first, expressing our disappointment with the final month, quarter and the year itself, clearly disappointed.

At the same time, as I hope you heard and as we're very excited to share with you in 2 weeks in New York, we believe we've got some very well-defined strategies, initiatives in place that are going to address not just the near term but continue to provide tremendous opportunities for the company in the long term. And we're excited to be able to spend the afternoon or the better part of the day with you in 2 weeks and go through those in depth, providing color as to the things that we'll be working on and the opportunities that are available for the company to continue to move forward.

The same time, I want to tell you it's been an honor and privilege. I appreciate all the support that you've all given me over the years. It's been a humbling experience. Again, I'm excited to stay involved. I am still a large shareholder in the line [ph] and will continue to play a role simply from a different perch. But I've got a tremendous amount of confidence in the management team that's here and their ability to continue to move the company forward for the benefit of all of us. And again, we look forward to sharing that with you again in a couple of weeks.

So as always, we appreciate your support. We appreciate your interest. We look forward to seeing you in a couple of weeks and reporting back to you next quarter. Thanks again. Have a great day.

Operator

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

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