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Executives

David Carpenter - VP, IR

Mark Speese - CEO

Mitch Fadel - President & COO

Robert Davis - CFO

Analysts

David Burtzlaff

TJ McConville

Laura Champine

Arvind Bhatia

John Rowan

Mike Grondahl

John Baugh

Jon Bratz

[Chuck Rusk]

Rent-A-Center (RCII) Q3 2010 Earnings Call October 26, 2010 10:45 AM ET

Operator

Good morning and thank you for holding. Welcome to Rent-A-Center's Third Quarter 2010 Earnings Release Conference Call. (Operator Instructions). As a reminder, this conference is being recorded on Tuesday, October 26, 2010.

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

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

David Carpenter

Thank you, Shan. 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 third 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, the reconciliation of EBITDA is provided in our earnings press release under the statement of earnings highlight.

Finally, I must remind you that some of the statements made in this call, such as forecasts, 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 most recent quarterly report on Form 10-Q for the quarter ended June 30th, 2010. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements.

And now I would like to turn the conference call over to Mark. Mark?

Mark Speese

Well thank you David and good morning everyone and thank you for joining us this morning. I must say I am quite pleased not only with our recent results but also how we are positioned as we go into the fourth quarter and as we prepare for 2011.

As you read in the earnings release the company had another strong quarter as both our revenues and earnings exceeded our expectations. We are also pleased to have returned value to our shareholders both with the repurchase of 1.9 billion shares of our common stock as well as the declaration of our second quarterly dividend.

The demand for our products and services remained strong during the quarter. Our total deliveries continued to outperform the comparable period in 2009 and our returns were lower than the previous year as well.

At the same time we continue our work in controlling costs and have improved our operating profit margin by 80 basis points from a year ago. Robert will expand on that and provide some additional financial metrics in a few moments but sufficed to say we are quite pleased with those results.

Also provided in the press release is our 2011 financial guidance for which we are optimistic, the revenue guidance at the mid-point of the range equates to approximately 4% growth while the EPS at the mid-point equates to 6%.

Now as you know we have an investor day scheduled to be held on Wednesday November 10 in New York City where we will spend considerable time sharing with you our detailed plans of our growth initiatives, including financial projections and assumptions of the various initiatives as well as our capital allocation policy and means of returning and enhancing shareholder value.

With regard to the different business initiatives, first let me say how exited I am with the grand opening of our first store in Mexico two weeks go in Reynosa. As you know we have spent the better part of this year working on and preparing to enter this new and exiting market and while we are in the early stages, we are very exited about what we are seeing and the feedback we are getting from customers and prospects alike.

We expect to open another three our four stores before year end and as noted in the release, we expect to open between 25 and 75 stores next year in Mexico. We also anticipate adding another 10 to 20 stores in Canada next year as well and of course the stores that are scheduled to open in the U.S. market.

The RAC Acceptance business, this is the key auction site of the retailers. We continue to expand quickly and perform well there also. We ended the quarter with 151 locations, expect to end the year with approximately 220 and expect to add an additional 100 to 150 locations next year and while our financial service business continues to perform well, having grown both revenues and profits in the quarter, in light of our available growth initiatives, we are evaluating strategic alternatives with respect to that business.

We have a number of exiting opportunities and we're weighing the value of each of those. Again, we'll go into greater detail during our investor day in two weeks in New York City. For those of you that will not be able to attend in person, we will provide a video webcast and a link will be provided on our Investor Relations website for that.

So again, a strong third quarter and well positioned for the fourth quarter in 2011. We have a number of exiting opportunities taking place and all the while we maintain a strong balance sheet and cash flows that allow us to continue executing our plan. My thanks to all of our co-workers for their hardworking commitment and in making the third quarter another successful one for Rent-A-Center.

With that, let me now turn the call over to Mitch for with some operational highlights.

Mitch Fadel

Thanks Mark. Good morning everyone. We are pleased with our third quarter results as we see in both our revenue and earnings guidance. Our same store sales were a positive 0.3%, our second quarter in a row of positive same store stales and we expect that to continue in the fourth quarter.

Customer demand remained strong in the third quarter as our deliveries outperformed the comparable 2009. Additionally our number of units per agreement increased in the quarter, in that all important ticket metric if you will is now going in a positive direction. In the quarter we saw a slight increase in the income level of our new customers which we believe is a result of tightened consumer credit, the situation that serves our value proposition very well.

We are continuing our targeted marketing and advertising focusing on strong values for all consumers as well as a strong focus on the overall customer experience to Rent-A-Center, all being accomplished the strong and improving margins.

With regard to collections, our weekly delinquency average was a bit higher in the quarter but not unusual from a seasonal perspective. Our operations steam continue to keep our losses in line as our customer losses came in at 2.6% of revenue, our second lowest third quarter in the last six years.

We continue to successfully refine our centralized inventory purchasing system and our inventory health rank came down 26.5% at the end of the second quarter to 24.1% at the end of the third quarter, suffice to say we are very happy with our merchandise mix and our inventory levels.

So, summary demand is good and we will continue driving customer traffic to our value proposition by purchasing high quality product at good price points and targeting our marketing and advertising accordingly.

Our merchandise mix and levels are in solid shape as we go into the fourth quarter and our collections and loss management remain the strength of ours. I would also like to thank our 18,000 co-workers for their excellent execution and with that I will turn it over to Robert.

Robert Davis

Thank you Mitch I am going to spend just a few moments updating everyone on our financial highlights during the quarter and also provide guidance for the fourth quarter of this year as well as our initial guidance for 2011 after which we will open the call for questions. I would like to mention, that much of the information I provide, whether it is historical results or forecasted results, will be presented on a reoccurring and comparable basis.

So, with that on the press release, total revenues were 664.6 million during the third quarter of 2010, it's down 6.7 million as compared to the third quarter of last year. This decrease was the result of a divesture in November of 2009 on a subsidiary that contributed 14.6 million in revenues in the third quarter last year otherwise revenue actually increased to 7.9 million on a pro forma basis.

This revenue increase help drive our positive same store sales comp of 0.3% as compared to our guidance on the flat comp for the quarter. Our operating profit margins improved quarter-over-quarter by 80 basis points to 10.4%. Net came in at 40.5 million with diluted earnings per share coming in at $0.62 and an increase of 12.7%.

Our third quarter EBITDA came in at 85.6 million and an increase from the prior year of 5.6% while the EBITDA margin increased 80 basis points in the period and 12.9%. Cash flow generation remained strong. In fact, their operating cash flow was over 104 million during the third quarter and we estimate approximately 193 million year-to-date through September 30.

As a result we have been able to reduce our outstanding indebtedness by approximately 115 million this year with over 26 million coming during the quarter all of that primarily related to mandatory amortization payments.

As noted in the press release also during the quarter we purchased approximately 1.9 million shares and common stock for up to $40 million. While ending the period with over $80 million in cash on hand, so as a result of the reduction our debt level and our improvement in EBITDA our leverage ratio at the end of the quarter was 1.42 times well below the floor on our covenant requirement of 3.25.

We believe our balance sheet is in great shape and with leverage currently where it is we believe we are well positioned on this continuing period of economic uncertainty to manage the business for the long term.

So we intend to continue to utilize our cash prudently, we feel comfortable with where we are today in regards to the leverage and liquidity and cash flow all of which will allow us to continue to return value shareholders who are investing in future profitable growth initiatives, future dividend and opportunistic share repurchases.

Turning to guidance for a movement, for the fourth quarter we anticipate total revenues to range between 666 million and 681 million with same store sales expected to range between flat and a positive 1% and diluted earnings per share in the quarter to come in a range of $0.64 to $0.70. And with this release we are now initiating our annual 2011 guidance for the first time and as such we currently expect total revenues to be within a range of $2.806 billion and $2.866 billion.

We currently expect our same store sales for 2011 to be in a range between a positive 1% and a positive 2%. Overall diluted earnings per share for 2011, they're expected to be in the range of 285 and 395 which includes an approximate $0.07 to $0.08 drag related to our growth initiatives.

In terms of EBITDA and free cash flow; the company expects EBITDA to range between $390 million and $410 million with free cash flow expected to be in a range between $155 million and $175 million. As always, this current guidance excludes any potential benefits associated with potential stock repurchases, future dividends, changing in outstanding indebtedness or acquisitions or depositions completed after the date of this release.

With that financial update, we'd now like to open the call to questions. Operators.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of David Burtzlaff. Your line is now open.

David Burtzlaff

Morning guys and great quarter.

Mark Speese

Good morning David. Thank you.

David Burtzlaff

A couple of questions. Mark I know you're probably not going to go into too much but to explore the strategic initiatives for the financial services, is it -- what -- is this just an allocation of resources because you've been exited about this product for a long time now. What's kind of changed I guess in your opinion maybe other than regulatory.

Mark Speese

Well as you said David, I'm not inclined to go into much detail at this point. As I said and as noted in the press release, we obviously have a number of other initiatives that we are looking at and going into and in light of that we are simply evaluating the strategic alternatives with regards to that business. Now what that may mean at the end of the day I don't know at this point and frankly I'm not inclined or intend to disclose developments unless and until a final decision is made.

David Burtzlaff

Okay. Was that business profitable this quarter?

Mark Speese

Yes it was. As I said, both revenue and profit increased during the quarter. So it does continue to perform fairly well for us and certainly relative to where it was.

Mitch Fadel

David, it was a little over $1 million for the quarter on the financial services, a profit.

David Burtzlaff

Okay. All right. And then finally, I don't know if you guys know or have any or can tell this but did you see backend in June when unemployment benefits stopped or were halted for a short -- for the month. Did you see an impact in that -- in your business at that time and considering that employment benefits have to be revisited come November again?

Robert Davis

David, not so much an impact on the demand side. We saw a little bit of an impact on delinquency where we'd have to carry some people. So to speak longer until they got their check, it was pretty slight. Again not at all on the demand side and a little bit on the delinquency side we did see and hear that from our store folks out there.

David Burtzlaff

Okay and you don't have an idea of how many of your customers are on unemployment benefits. Once they -- if they were employed when they got the product, your not asking them if their status is changed in between right?

Mark Speese

We do update status pretty consistently and continually although I don't have that number or I would estimate it that is pretty small.

David Burtzlaff

Okay. All right. Well thank you very much.

Mark Speese

Thank you, David.

Operator

Your next question comes from the line of Budd Bugatch. Your line is now open.

TJ McConville

Good morning Mark. Good morning Mitch, Robert, David. This is TJ McConville filling in for Budd, congratulations on the quarter gentlemen.

Mark Speese

Thank you, TJ. Good morning.

TJ McConville

Good Morning, a couple of quick ones for you guys. Mark, not to spoil the upcoming analyst day or anything like that but on the RAC Acceptance kiosk, can you talk a little bit about whether or not you are seeing increased willingness from new retail partners or maybe get into that side of the business with you maybe from just different retailers or different lines of business outside of just furniture.

Mark Speese

I will say that there appears to be a fair amount of interest from third party and follow on your last part of your comment there is we said in the past, at this point everything is within the furniture retailers. We have had some early discussions with others to be beyond the furniture be it appliance or electronics and have not done anything at this point but there are being explores we seek and there is a fair amount of interest across all of those channels.

TJ McConville

Okay let's look forward to hearing any further updates as they come available and then Mitch last quarter we spent a ton of time trying to figure out what the right percent of vital inventory should be. It looks like the improvements are pretty pronounced this quarter. Was that a change you made in the system or was it demand picking back up, any further changes we should expect on that line item?

Mitch Fadel

Well demand certainly does help that number TJ, although demand was insignificantly higher than we anticipated, it was good. We anticipated it to be pretty solid. We were at the high end of our revenue but it's not like we are way above our revenue than that's there was so much more demand that we anticipated.

It was more of a matter tweaking a brand new system and making sure that we get the right products and the right storage when we need them but too many and that really all it is. We brought in couple of experts to help us with that system, people have done that all their life and they have done a great job working with me and the operations team and make to try the right product but not too much of it.

So it's really just the short story TJ is that it's a matter of tweaking a new system and getting that right and we're, I don't know I will ever say it's perfect or it will ever stop tweaking but it's darn close and the folks we have brought in have done a great job with that.

TJ McConville

Okay, great. Those were my questions guys again congratulations and best of luck on the quarter and next year.

Mark Speese

Thank you TJ.

Operator

Your next question comes from the line of Laura Champine. Your line is now open.

Laura Champine

Good morning, I was wondering if you could talk a little about your opportunities in Mexico. I know that something you are excited about but do you have to change operations, ramp up security, or is there anything special in the job right in border towns that you need to do is different from the way you normally operate in the U.S?

Mitch Fadel

No Laura, it does present great opportunity for us and soon we will be talking more about that on the Investor Day but as far as the operational we are operating just – we have only opened one store and as Mark said three or four more to open here in the next sixty days. Not operating differently here certainly not anything materially different than here than the operations are generally the same as what we are doing here and the first store as Mark alluded to are pretty excited about how that is working out and three or four more will be opened over the next weeks. Not interpreting just like your.

Laura Champine

What the competitive landscape like down there? Do they have Mom and Pop similar to the U.S.?

Mark Speese

To our knowledge there is no one doing the rent-to-own proposition down there. There is some buy here-pay here places where they'll finance the transaction which would be indirect competition but nobody doing the rent-to-own transactions that we're doing.

Laura Champine

And then on the RAC Acceptance program, are you just in furniture stores or are there some consumer electronic stores and what does your -- I don't know if you want to name specific partners but what does that store base look like and how might that change?

Robert Davis

It is all furniture stores at this point. The 150 or so that we have is all furniture. As Mark mentioned we have had some conversations with some electronics and appliance folks. We think we can expand it into that business. The forecast right now like the 70 for the quarter again up to 220 will be furniture stores but we do see a working in appliance and electronic stores down the road.

Mark Speese

And then I don't want to get too specific on the companies but a lot of the Ashley licenses, Ashley Furniture licensees and those type of stores. But really it's a mix.

Robert Davis

Its probably regional players which is more typical in that furniture space anyways.

Laura Champine

Great, thank you.

Operator

Your next question comes from the line of Arvind Bhatia. Your line is now open.

Arvind Bhatia

Thank you and my congratulations gentlemen. A couple of things here. One, how should we think about product deflation here? Is that a positive or is that negative for you guys in the coming quarters. And then second on RAC Acceptance, is that starting to contribute meaningfully at all to comps? Did we see any of that benefit this quarter?

Mitch Fadel

I'll take the first one on the deflation. We get that question a lot, is that good or bad for us and the answer is it's a little of both. The deflation on the higher end products, when a 60 inch plasma TV and 73 inch DLP TV gets down to the prices that we can buy them for today, that helps. We can rent those today whereas a year ago -- two years ago for sure we couldn't rent 60 inch plasmas. Our customer kind of would not have been able to afford them. So the deflation helps there.

As far as what we can carry, where it can hurt you is on the ticket, the average price coming down although we, as you know Arvind,, we've always done a pretty good job and we are still doing it today. Where we drop the term and not so much the rate and that leaves our revenue per agreement per month up there. As I mentioned in my prepared comments actually it's training up in the last quarter.

So even with the price deflation, we primarily reduced the term the customer has to keep its ownership and not the rate which keeps the revenue up there. So and its helped margins. Its part of our margin enhancements because when the prices come down, you don't necessarily have to put all of that into our weekly or monthly pricing, right. So there is a little margin enhancement there too. So overall I'd say a good thing from that standpoint. There are some negatives if you don't manage it right where it can hurt your ticket if you were to take all in price rather all in term.

Mark Speese

Well on the comp question, no RAC Acceptance is not benefiting the comp currently as we sit here today and even next year the 1% or 2% positive comps that we're giving guidance to is not impacted by RAC Acceptance either. Given the stores that are opening throughout 2010 they will not be in for the whole year or in annual comp basis until 2012. So, at this point RAC Acceptance is not the driver behind our comp guidance.

Mark Speese

They will help down the road.

Arvind Bhatia

Another one free cash flow question for you, you said 150 to 175 million I know you have done more than that in the past. Assume that this is essentially saying your CapEx sold the slightly higher given all the new initiatives you guys are talking about or will talk about in the investor day.

Mark Speese

Yeah it's really without trying to get too complicated and by product of just in the last 30 or 45 days, the president signed another extension of a tax seamless act that puts us essentially in a overpaid position for 2010. So, our cash taxes are little higher this year and then what we need to pay which will impact paying a little bit more that back next year. So, if you reconcile from EBITDA the guidance that I gave was 3/09 to 4/10, interest expense guidance were given 25 million. CapEx was expected to be about 75 million.

Working capital, net investment of about 10 million and then cash taxes of a 125 million. That's a little higher than what we were originally projecting and so free cash flow this year or for 2011 it was 155 to 175 that 125 for next year is probably 25 or 30 million higher or otherwise you get back up in that $180 million - $200 million range that we have been talking about as status quo.

Arvind Bhatia

Great. That's helpful. Thanks guys.

Mark Speese

Thanks Arvind.

Operator

Your next question comes from the line of John Rowan. Your line is now open.

John Rowan

Good morning.

Mark Speese

Hello John.

John Rowan

One quick question on Mexico, when you look at the business obviously expanding 2011, do you see any difference in the way the which customers will complete the rental purchase transaction or do you think that could be potentially higher in Mexico than in the U.S?

Mark Speese

We think it could be. We certainly don't know yet but we certainly think it could be one of the enhanced benefits of Mexico.

John Rowan

Okay, all right. Thank you.

Mark Speese

Operator

Your next question comes from the line of Mike Grondahl. Your line is now open.

Mike Grondahl

Yeah thanks guys for taking my questions. The first one Mark, can you kind of help us kind of update us on the new product pipeline kind of some of the things you are looking at there to put out in the stores and maybe secondly from a high level can you talk about the profitability you expect maybe in Mexico, in Canada in RAC acceptance and how that kind of compares to your domestic stores?

Mark Speese

Maybe I will take your second one first and then I will pass the first one on to Mitch on the new products. The profit once again, we are early into all those initiatives but as we have the model based on our learning and expectations and so forth I will tell you at the end of the day we don't expect them to be.

Let me start with Mexico first, our expectation is that profit margins will be pretty similar to what we are seeing in the U.S. Rent-To-Own Business. Now we may get there a little bit different way and let me explain that, of course.

Household income is very low in Mexico and so when you think about their ability to spend and how does that affect pricing. We are actually have a lower margin on the products there. Our gross profit margin is down a little bit because rather than being $25 a week, it maybe $15 a week. So we've got a lower cost structure gross profit margin but we make that up on the labor line for the exact reason that we had to lower the rate, we're now picking it back up on the labor line.

And so all in, you end up at the same place. You just get them down two different paths and so that's our expectation with regard to Mexico. Canada, not too dissimilar to the U.S. margin. It will be a little bit lower. The pricing is essentially the same. Our cost of doing business; we've got some inherent cost. It's a little bit higher. The labor is generally the same but our expectation is all in. It will be pretty comparable to what we do in the U.S. otherwise.

RAC Acceptance, the expectation is that margin will be maybe a little bit better than what we're seeing in the RTO stores. We have a little bit different business model, a little bit lower gross margin line in how we're pricing the product but really don't have -- hardly any of the cost.

We've got labor and depreciation of the products and then you've got some back office cost and some support cost but there is no occupancy, there is no advertising, things of that nature. And so all in, that is actually expected to be a little bit better.

Now again these are examples of things that in two weeks we're going to go into much more detail and provide the underlying assumptions with all of those. So we'll get pretty granular if you will in 2 weeks but that will give you a pretty high level sense I hope today.

Mike Grondahl

Yeah, no that helps Mark.

Mark Speese

Good. And then Mitch, why don't you talk a little bit about what you see on the product side?

Mitch Fadel

Yeah, on the products, some of the core products like furniture and appliances you just always update models and during the newest look from a furniture standpoint in that appliances, the latest technology on washing the driers and so forth. Probably the two biggest things as we go into the forth quarter are larger screen size of the TVs with the deflation in pricing now going in to the 60 inch side on flat panels and the 73 inch side on DLP technology. So bigger screen sizes, and then of course the two new -- a little bit aligned in the fourth quarter to -- with the game systems, the two new game systems that probably a lot of you have seen advertised just recently. In fact this past weekend quite a bit of advertising by Sony and the new PS3 system with the Move feature and then there is the new Xbox that's coming out that also has a Move feature called Kinect.

So those two games that are state of the art games with the features, the Move features-- instead of using a controller you use your body basically to play the game on the screen and those will be of course -- here in the fourth quarter I think they will be hard to retail and we've got plenty of those secured for the fourth quarter. That's probably the hottest new product but again the larger screen sizes also.

Mike Grondahl

Okay. Great. And then maybe two follow-ups. Did I hear correctly that the new initiatives were just a $0.07 to $0.08 drag in 2011?

Mark Speese

That is correct.

Mike Grondahl

Okay. So it's not costing you that much at all, those initiatives?

Mark Speese

Obviously that's based on kind of the range of the guidance we gave in the press release in terms of number of stores to the extent we're more successful and like what we're seeing -- to the extent we ramp it up. That impact could be marginally higher but I wouldn't suspect so.

Mike Grondahl

Got you. And then interest expense was a little bit higher. Any reason for that?

Mark Speese

No it's kind of consistent and flat with where we're going to end this year and I would say that let just think about mandatory debt payments next year that would be the only driver. We do have some expectation that LIBOR could increase when you look at the forward one month and three month LIBOR curves but otherwise no real big driver behind that. Mike would you prefer answering the third quarter of last year when you said it was a little higher.

Mitch Fadel

Sequentially.

Mike Grondahl

I don't have just want to be I just wrote it down.

Mark Speese

The only reason why I asked is sequentially I don't think it is, year-over-year it maybe but I will remind you in the fourth quarter of last year we did the amendment extend that and in doing that it increased the rate on the portion that we extended and so if you are looking year-over-year that's the answer.

Mike Grondahl

Got you. That makes sense. Can you pay down so much debt? I wanted to know.

Mark Speese

Exactly.

Mike Grondahl

Okay and then one last quick question a high level one on Mexico, ball park what does it cost to open a store and how long do you think the break even is?

Mark Speese

Not materially different again than the U.S. model, so by comparison it's a $0.5 million investment and it's about 200,000 day one or 250,000 and then you make and add investments throughout the year by additional inventories as you are putting it on rent.

We expect breakeven at the unit level between month nine and twelve, accumulatively breakeven in around 124.

Mike Grondahl

Great. Well again congratulations around on the quarter and I look forward to seeing you guys on November 10.

Mark Speese

Thanks I look forward to seeing you as well.

Operator

Your next question comes from the line of John Baugh. Your line is now open.

John Baugh

Thank you and my congratulations as well. Do you have a store opening plan for the U.S. or will it still be 20,30 odd stores and do you plan to close stores in the U.S. let's more or less offset that?

Mark Speese

We have 25 and expected for next year in the guidance and we might close a handful John but not very many, we have gone through that rationalization process. It will be net world to step foot in the U.S. also next year.

John Baugh

And this decision that came down in New York or they tweaked the rules. We are having a impressionable change in your profitability of your stores in New York?

Mark Speese

We don't believe it will material John, it certainly will be I mean it will lower the margins for the stores in the New York when we take that little bit of margin deterioration in New York and drop in the corporate numbers and doesn't have any material on that.

John Baugh

And all of these stores you are talking about those are corporate not franchises is that correct?

Mark Speese

Yeah correct.

John Baugh

Okay and then with this, the president with the handout here. That will cause right 2010 free cash flow is going to be higher than what you would originally stated because you hadn't expected that.

Robert Davis

For 2010?

John Baugh

Yes.

Robert Davis

Yeah for 2010 we are 20 million paid, right now as it relates our cash taxes. So, free cash flow for the year for 2010 is going to be closer than 200 million run rate. Some of that take it away from next year but that 180 million to $200 million range is kind of our free cash flow status quo and to some extent we are going to benefit this year and we are going to be down next year about 20 million or so.

John Baugh

And my last question is on payday lending and I am very happy to see you looking at options. Can you remind us again what your invested capital is in that business?

Mark Speese

Yeah. I think we mentioned last quarter that we currently have an outstanding receivable or loan balance around $25 million. That has not changed materially since the last time we gave you that number. And from a book value you will fixed assets -- we're talking in the $10 million to $12 million range. That's the asset value as it stands today.

John Baugh

Great. Thank you. See you in a few weeks

Robert Davis

Thanks John.

Operator

Your next question comes from the line of Jon Bratz. Your line is now open.

Jon Bratz

Good morning gentlemen. A couple of questions. You talked a little bit about the growth initiatives costing you $0.07 to $0.08 in 2011. What might that cost have been in 2010 and as you look forward to 2012, could you see that ratcheting up more obviously depending on the success but how would you look at that maybe going forward?

David Carpenter

2010, the impact is minimal, particularly when we think about Canada and Mexico, it was rarely related to RAC Acceptance and its probably costing us a penny or two this year. So not material.

Jon Bratz

Okay.

David Carpenter

And then as you think about -- the question about next year, obviously that will depend on how things are going -- how our performance although if you want to take that question Mark.

Mark Speese

Well again that's one of those -- I think in two weeks when we do the investor presentation and give you the specifics of each of these initiatives from a business model standpoint and we then theorize as to how many are going to put into forward periods but much of this John is really driven by the accelerating growth rate, growth rate. So to the extent, by way of example, next year if its 25 to 75 in Mexico just as an example -- if it's a similar number the following year -- you would expect it to be maybe a couple of pennies more knowing that you're a year or two on this first group of stores but you've got all the first year loss in the second group.

To the extent we ramp that up even further because of the results or success it would be something even greater. When you get all three years or so, that's when you would start to expect it to go from being dilutive to break even and then probably the year after that is when it starts to ramp up from an increasing standpoint because of the earlier stores offsetting anything.

Jon Bratz

Okay, okay. So we have a couple of years or three years maybe to see it moving to break even.

Mark Speese

I think a couple of years and again probably two years based on an average growth rate assumption within that, yup.

Jon Bratz

Okay. And your guidance for next year, you talked a little bit about same store sales improvements of I think 1% to 2%. At those levels, can you begin leveraging your cost or what does it take to -- on a same store basis to leverage some of your operating expenses.

Mark Speese

Yeah we've obviously expanded our margins quite a bit this year with confidence that estimate it to be flat roughly for the year and so with the 1% to 2% same store sales guidance next year, you would expect on a steady state basis for that margin to continue to expand and that's the way the guidance is currently incorporated. The offset however is in the new initiative. So when you think about margins and the EBITDA margins we're currently forecasting for this year, we would expect those to be essentially flat slightly and up from where we are right but had we -- without the initiatives that same store sales guidance would in fact allow the margin to expand further.

Jon Bratz

Yes. Okay. I assume you are probably going to talk in more detail about this in New York but in terms of capital allocation, obviously you are generating a great deal of cash flow. How do you look at using that cash flow in terms of maybe additional share repurchases versus non-mandatory debt repayments versus maybe even increasing the dividend more so.

Mark Speese

Well as Robert said we are very comfortable with our balance sheet today and the debt levels 1.4 times. Obviously we were pretty big supporters this past quarter as we have done historically in the past. We are comfortable with the balance sheet and we do have mandatory payments coming up but beyond that I think we would expect first and foremost always invest in the business and so this growth initiatives will be where we were going to first spend our time in resources but even said that we are still going to allow lead access and I think our past behaviors what you are going to expect in the future and again we have been a pretty big supporters of our stock generally speaking nonetheless two years we focused on the balance sheet given the market conditions and the fact that we did leverage vis-à-vis the acquisition of Rent Way a couple of years earlier but given where we are today I think you are going expect something a little more similar to what we have done historically.

Jon Bratz

Okay. Thank you very much.

Mark Speese

Your next question comes from the line of [Chuck Rusk]. Your line is now open.

[Chuck Rusk]

Hi, thanks. Just continuing that, have you considered issuing some long term debt in order to extend your maturities and then giving a lot more aggressive on the share repurchase?

Mark Speese

Well we again, most recently we did the amendment extend last year late last fall and really to put us in a position where we felt very comfortable with the mandatory obligations and given us the little bit more flexibility and how to manage our cash going forward and so couple of and based on that and where we are today and we feel pretty comfortable and now we are always considering where the company is positioned, what are the initiatives we are working on and how do we think about the cost of debt or debt levels and that will drive those decisions.

It's suffice to say as we sit here today we are comfortable with where we are at the moment.

[Chuck Rusk]

Right now is all your debt floating?

Robert Davis

Yes it is. It's all senior term debt and it is floating currently.

[Chuck Rusk]

Okay. I guess the question is have you being considering fixing some of the by issuing some long term debt? I am talking about like 10 year bonds or something like that.

Robert Davis

I think it's fair to say that if you look at our history over the past several years and even what we did last fall we are always evaluating the market and what the environment is and our alternatives.

[Chuck Rusk]

Okay. Very good quarter, I certainly applaud the share repurchase and thank you for taking my questions.

Mark Speese

Thank you, Chuck.

Operator

There are no further questions on the phone lines at this time. As such I would now like to turn the call over to Mark Speese.

Mark Speese

Well ladies and gentlemen, thank you again to all of you for joining us this morning and thank you for your continued support and interest in the company. We look forward to seeing many of you at the Investor Day in a couple of weeks and providing you with more detail about the future of the company. So, again thank you for all your support and have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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