Upbound Group Inc

NASDAQ:UPBD

Earnings Call Transcript 2019-Q3

[Operator]

Good morning and thank you for holding. Welcome to Rent-A-Center's third quarter earnings conference call. As a reminder, this conference is being recorded, Thursday, November 7, 2019.

Your speakers today are Mr. Mitch Fadel, Chief Executive Officer of Rent-A-Center; Maureen Short, Chief Financial Officer; and Daniel O’Rourke, Senior Vice President of Finance.

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

[Daniel O’Rourke, executive]

Thank you, Latania. And good morning, everyone, and thank you for joining us. Our earnings release was distributed after market close yesterday, which outlines our operational and financial results for the third quarter of 2019. All related materials, including a link to the live webcast are available on our website at investor.rentacenter.com.

As a reminder, some of the statements provided on this call are forward-looking statements, which are subject to many factors that could cause actual results to differ materially from our expectations. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements. These factors are described in our earnings release issued yesterday as well as in the company's SEC filings.

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

[Mitchell E. Fadel, executive]

Thank you, Daniel, and good morning, everyone. Thank you for joining us. We will be providing a voiceover to the presentation shown on the webcast. If you're unable to view the webcast, the presentation can also be found at investor.rentacenter.com.

Overall, we had a strong quarter with numbers in line with our internal expectations, and I'll provide an overview of those quarterly results and an update on our strategy, and then turn the call over to Maureen. Solid fundamentals and execution resulted in another good quarter, with progress on both the top and bottom lines. Third quarter consolidated same-store sales increased 4.5%. And adjusted EBITDA was $56.6 million, an increase of $7 million versus last year. 2-year consolidated same-store sales increased 10.2%, which speaks to the stabilization of our business. And third quarter adjusted EBITDA was up 14.8% over last year while EBITDA margins expanded more than 100 basis points. This solid performance is a result of executing on our strategy of turning around the business with cost savings and a more compelling value proposition.

So looking forward to the core U.S., driven by the value proposition changes and our e-commerce growth, core same-store sales increased 3.7%, in line with our expectations. And our 2-year same-store sales increased 8.9%, which is impressive for any retailer. Overall, revenues were down 3.3% year-over-year largely due to refranchising and store rationalization. In fact, when you exclude the impact of refranchising, our revenues were 1.1% higher than last year.

Our portfolio on a same-store basis finished the third quarter approximately 3% higher than last year, a good leading indicator of future same-store sales expectations. Online traffic increased approximately 22% year-over-year, continuing the trend we've seen all year.

Web orders represented about 14% of all lease-to-own agreements originated in the quarter, which will equate to approximately 17% of our revenue. Over 80% of our web-attributed agreements are coming from new customers, giving us confidence in our ability to continue to grow our stores and our e-commerce business. And you can see on the chart, in the bottom right of Slide #3, we're at historical highs for customers per store.

As a result of that positive momentum, adjusted EBITDA improved $8 million or 15.2% above the same period last year.

Lastly, on the core business. These days, we get asked a lot about tariff any -- any tariff impact on our product purchases. And I'm pleased to report based on who and where we get our products from, to date, we have seen virtually no impact from tariffs nor based on the tariffs that have been announced do we foresee any future impact from these tariffs.

So moving on to our Acceptance Now business, which does include the results of Merchants Preferred and the segment that we sometimes also refer to as our retail partner business. Our enhancements to the value proposition and the acquisition of Merchants Preferred drove invoice volume of $129 million for the quarter, 19% higher than last year. Same-store sales increased 6.2% for the quarter, and 2-year same-store sales increased an impressive 12.8%. Our skip/stolen losses in Acceptance Now improved sequentially for the third consecutive quarter to 8.9% of revenues, 70 basis points lower than last quarter.

Though it's early in the progress of integrating, Merchants Preferred has so far exceeded our expectations. As of today, we've integrated the sales team, much of the call center, identified and have started to realize $3 million to $5 million in annualized synergies, all while investing in additional sales talent to support invoice volume growth.

Revenues from Merchants Preferred are on pace to achieve approximately $80 million annually as previously disclosed. And even with the initial focus on integration, we still managed to open about 200 Merchants Preferred locations since the acquisition, which just closed in mid-August.

Top priorities for the virtual business are to position our sales team to capture the white space opportunity and show how our platform adds superior value relative to industry competitors. We'll also continue to refine the technology in order to meet the needs of our retail partners, whether that be integrating into a point-of-sale system, launching a mobile app or the hybrid solution. And the hybrid solution, you've heard us talk about it before. And when we talk about it, what we're talking about there is the combination of the staffed and virtual models, which can flex or staff during peak periods and transition to our virtual or unstaffed model during low sales volume periods. The hybrid model is unique to Rent-A-Center and something we view as a key differentiator for us in the industry.

We also have the goal of landing additional national retail partnerships. With our unique hybrid offering, we believe we'll be an attractive partner for both large and small retailers. I'm very excited about the virtual and hybrid growth opportunity. I'm confident that we'll quickly become even more of a leader in the space.

With the virtual platform becoming a larger part of our business, we're exploring additional metrics to analyze the business and evaluating the best way to illustrate performance. In future quarters, we'll focus more on invoice volume and disclose active locations for this business. We will also likely discontinue reporting same-store sales in Acceptance Now -- in the Acceptance Now segment next year as that's not as strong of an indicator of performance in a virtual e-com world.

So before moving to our financial highlights and guidance, I want to spend a few minutes to discuss where we are as a company, how we fit within the industry and some enhancements to our strategic plan. As most of you know, over the past 2 years, we've been able to turn the business around following a period of underperformance. I'm very pleased with what we've accomplished and where the company is today as we are a stronger, more stable company. We are operationally sound with solid fundamentals, and we understand the large customer base served by the dynamic lease-to-own market.

With over 2,400 brick-and-mortar locations, Rent-A-Center has the largest physical footprint in the industry. We have a competitive advantage by serving banked and unbanked customers in both our core stores and Acceptance Now businesses.

We also have significant growth potential through our virtual and hybrid initiative as well as e-commerce. Our advantaged business model generates recurring revenue streams and significant cash flow. We've got a proven track record of optimizing costs and our conservative balance sheet enables us to both invest in growth opportunities and provide shareholders with value through dividends and potential share repurchase.

And by investing in Merchants Preferred, we are again transforming our company to meet the needs of today's consumer. We are investing in a virtual platform and will provide a hybrid staffing model for our retail partners, which is a key differentiator for Rent-A-Center relative to industry competitors.

Calling attention on Slide 7 in our presentation. Over the past 20 years, the lease-to-own industry has grown by approximately 4% on a compounded annual growth rate. There is significant white space in the market through virtual and e-commerce platforms and additional opportunity to expand into multiple new product verticals.

In addition, the industry has demonstrated resilience through macroeconomic cycles, including recessions. And you can see on the slide specifically, performance of Rent-A-Center did not falter during the Great Recession of 2008 and, in fact, remained quite stable. With our conservative balance sheet and strong cash flow, we're making the necessary investments to capitalize on this growth opportunity and become a more formidable competitor in the virtual lease-to-own market.

As I mentioned earlier, the industry is continuously evolving to keep up with today's consumer. Historically, we serve the customer in our brick-and-mortar stores with on-payment -- with on-site payment transactions and a personal employee-customer relationship. As the industry evolved, so did we. Acceptance Now was born almost 15 years ago to fill a need at one of our retail partner locations. This increased our customer base and enabled us to meet a new and underserved market. Today we're a multichannel lease-to-own provider serving the customer with our e-commerce platform at rentacenter.com, and we're once again expanding our presence in the virtual market with the acquisition of Merchants Preferred. Virtual gives us the technology platform to continue serving an over $25 billion market.

And with the turnaround behind us, our strategy going forward will focus on growing our retail partner business within the Acceptance Now segment, continuing to strengthen the domestic brick-and-mortar business through advancements in technology, growing e-commerce and maintaining a flexible capital allocation model that will maximize the value for our stockholders.

Our primary focus is on the growth of our retail partner business. Acquiring Merchants Preferred accelerated our virtual strategy. In its first few months the integration process -- progress has exceeded our internal time lines. We have ample capital to grow the virtual business. And by providing our retail partners with the option of a staffed, a virtual or a mixed model, as I said earlier the hybrid model, we differentiate from the competition because of our ability to serve a broader spectrum of customers, including unbanked customers.

Additionally, we are well positioned to grow national accounts and e-commerce retailers with this platform, and we'll aggressively pursue this largely untapped market.

Within our stores and e-commerce business, we're focused on growing the top line and improving the customer experience. We're taking measures to further optimize the brick-and-mortar footprint by testing some smaller technology-enabled concept stores, and we'll continue to implement cost savings. Expanding into new product verticals, such as jewelry and tires at our stores, is also expected to tap into a new customer base.

Additionally, we'll continue to invest in our e-commerce platform with online and mobile enhancements that improve the customer experience. Over the past year, we've seen substantial growth from online consumers with higher traffic growing penetration and improved conversion trends.

Online has been our fastest-growing channel and represents a significant long-term opportunity. Our focus is to serve the lease-to-own customer across multiple channels seamlessly through technology.

As you can probably tell, we're extremely excited about the future. And speaking of being excited, Page 10 reiterates what we've previously said, we believe we can grow our Acceptance Now retail business channel over the next 3 years. Again, by 2022, we expect to grow Acceptance Now and Merchants Preferred revenues to over $1.2 billion, an annual growth rate of approximately 15% and an increase of approximately $400 million versus the current pro forma combined businesses.

We believe our goals will be achievable given our improved capital position and ability to aggressively sell through our respective pipelines. As we move forward, we will leverage the hybrid model, expand into new product verticals and, as I mentioned earlier, put ourselves in position to partner with more large national retailers. Very, very exciting.

And with that, I will now turn the call over to Maureen for highlights on our financial results.

[Maureen Short, executive]

Thanks, Mitch. Good morning, everyone. I'll cover some financial highlights for the third quarter, provide an overview of our capital allocation framework and close with our guidance for 2019 before opening up the call for questions.

During the third quarter, consolidated total revenues were approximately $649 million, 0.7% higher versus the same period last year primarily driven by a consolidated same-store sales increase of 4.5% partially offset by refranchising and rationalization of our store base. Adjusted EBITDA was $56.6 million in the quarter, and EBITDA margin was 8.7%, up 110 basis points over the same period last year. Non-GAAP diluted EPS was $0.47, up 48.7% over last year.

The special items in the third quarter totaled a credit of $5 million, which included a GAAP tax benefit related to reversal of tax reserves for uncertain tax positions, partially offset by debt refinancing charges, closure of certain core U.S. stores and transaction costs associated with the acquisition of Merchants Preferred.

In our core segment, total revenues in the third quarter decreased 3.3% versus the same period last year primarily due to refranchising efforts and rationalization of the core U.S. store base, partially offset by the same-store sales increase of 3.7%. Store labor and other store expenses decreased by $13.3 million over the same period last year primarily driven by lower store count and cost savings initiatives. Skip/stolen losses in the Core were 4.1% of revenue, which was 60 basis points higher than last year. Adjusted EBITDA in the Core was approximately $59 million and EBITDA margin was 13.6%, up 220 basis points versus the prior year.

Now turning to the Acceptance Now segment. Total revenues in the third quarter increased 6.4% primarily driven by the acquisition of Merchants Preferred and a same-store sale increase of 6.2%. Store labor and other store expenses increased by $3.9 million over the same period last year primarily due to higher skip/stolen losses, which were 8.9% of revenue and in line with our expectations. Adjusted EBITDA in the Acceptance Now segment was $22.3 million, and EBITDA margin was 12.1%.

Mexico increased revenues by 4.6% in the third quarter and generated $1.3 million in adjusted EBITDA.

In the franchise segment, revenue was $15 million, and adjusted EBITDA was $1.1 million.

Corporate expenses in the third quarter decreased by approximately $4.2 million versus prior year primarily due to the realization of cost savings initiatives.

Moving on to the balance sheet and cash flow highlights. Cash generated from operating activities was $228 million for the 9 months ended September 30, 2019. We ended the quarter with $74 million in cash on the balance sheet and $260 million in debt, which was down $20 million since closing on the new credit facility during the quarter.

Our net debt-to-adjusted EBITDA continued to improve and ended the quarter at 0.8x. Even with the significant reduction in debt with the refinancing, we have been able to maintain strong liquidity, which was $222 million at the end of the third quarter. These results are illustrated in the liquidity and net debt-to-adjusted EBITDA metric shown in the graph.

In addition, the company recently reached an agreement in principle to sell its corporate headquarters after running a competitive sale process. Due to restructuring efforts over the past 2 years, a significant portion of the building was not being utilized, presenting the company with an opportunity to realize material value by selling the building and leasing back a smaller footprint. Net proceeds after taxes and fees are expected to be approximately $35 million and will be utilized to advance the company's stated capital allocation priorities of funding growth initiatives in the retail partner business and returning capital to shareholders.

Slide 14 lays out our capital allocation framework. Our first priority is to continue to invest in the business with a focus on growing the virtual channel. We are committed to maintaining a conservative balance sheet, and we'll take advantage of strategic opportunities as they arise.

Through refinancing and our improved financial performance, we returned value to our shareholders through the introduction of a quarterly dividend of $0.25 per share, with the first declared in the third quarter and paid out in early October. As previously communicated, we continue to maintain the flexibility to buy back shares.

Regarding our guidance, the company is reiterating and narrowing our annual earning guidance and increasing our revenue guidance for 2019. I'd also note, our guidance does not include the proceeds on the sale of the corporate headquarters. As always, detailed income statements by segment are posted on our company website, and the 10-Q for the third quarter will be filed by tomorrow. Thank you for your time today. Now I'll turn the call over for your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Budd Bugatch with Raymond James.

[Budd Bugatch, analyst]

Congratulations on a solid quarter. I have a few questions, if I could. Just -- let's just start at the Core with the skips and stolen, which were a little elevated from what I expected. I know that you usually get higher skips and stolen in the second half of the year, but the 4.1%, I think, was higher than I thought about. Is there anything going on there that consumers are -- I mean investors should know?

[Mitchell E. Fadel, executive]

No, Budd. This is Mitch. I don't think there is. Our range, we want to be in the 3s, 3% to 4%. I mean years and years ago, as you see in our recession resistance slide, it was in the 2s. But for the last -- for this decade, at least, 3 to 4 has been our range. And so 4.1%, slightly above that. We're -- I can't say we're pleased with being at 4.1% because it's outside that 3% to 4% range. But no, there's nothing there. We can execute better is really what we're focused on with the operations team. It's just slightly outside of our range at 4.1%. But no, there's really nothing going on there other than we could execute a little better, certain outlying markets, things like that, that are kind of normal running good business. So we just need to execute better. But there's nothing going on with the consumer that I'd highlight.

[Budd Bugatch, analyst]

Okay. And getting into the detail in Acceptance Now. I noticed that the cost of rental and fees had increased about 300 basis points over the second quarter and 600 basis points year-to-date to like 41.7%. And the pricing multiple has actually come down [ 2.4 ]. Can you give us an understanding what's going to -- and what that looks forward to going forward? And is there something going on in that area?

[Mitchell E. Fadel, executive]

I think it's the changes to the value proposition we made last year being fully in place. The marketplace was necessary from a value proposition standpoint, the way we look at it. But where we -- when I came back last year and we cut a lot of overhead out of the business is -- we took a lot of overhead out so we could improve the value proposition on both ends of the business. Of course, there's charges in between the companies on when the inventory comes back and all that stuff. So there's some stuff in between the Core and Acceptance Now. But we focus more on the overall EBITDA margin. And when we could cut our overhead, people not serving the customers and some projects we didn't need to do with the cuts we've made over the last 18 months, improve the value proposition, drive more customers, have the same-store sales we're having, and still overall have an EBITDA growth. That's really where we're focused on versus one line or the other. And when we can add 110 basis points to the EBITDA margin overall, we feel good about that. It doesn't mean we're not trying to get losses a little lower in each segment, things like that, or can we tweak the value proposition and get another 10 or 20 basis points here and there. We're always looking to do that. But again overall, we took costs out of the business so we can improve the value proposition, so we can get more customers, and it's working. And overall, we're real pleased with the 110 basis point improvement on EBITDA.

Having said all that, I don't think they get any worse going forward in the virtual business. Merchants Preferred with more virtual business, you end up with a little lower gross margin, but ultimately, you get higher EBITDA because there's no labor in the stores. So we don't get too hung up on one line. Like I said, virtual is even lower gross margin -- more, but it's going to raise EBITDA margins over time, overall EBITDA margin. So we're really focused more on the bottom-bottom.

[Budd Bugatch, analyst]

I understand that. I just was curious of whether that's kind of a forward way for us to kind of model that particular line item because we do model it. And I was also curious if you could maybe share what the 90-day penetration in Acceptance Now and the retail partner program is right now, what's the percentage of 90-day?

[Mitchell E. Fadel, executive]

The people that execute it?

[Budd Bugatch, analyst]

Yes, that execute the 90-day options.

[Mitchell E. Fadel, executive]

Yes, it's about 1/3. It's about 1/3 of all of our rentals end up paying out within -- it's 90 or 100 days depending on the retail partner.

[Budd Bugatch, analyst]

Okay. And last for me on the balance sheet. Is there a goal now to think about the level of debt-to-EBITDA, how to think about the leverage that you're comfortable with? Obviously, the balance sheet has a lot stronger character now than it's had in, God only knows when. But I'm just curious of how to think about that going forward.

[Maureen Short, executive]

Budd, this is Maureen. The way we're thinking about the balance sheet is we want to keep the leverage ratio below 1.5x. And as you can see, we've been below that for the last couple of quarters. So that -- we think of that 1.5 as somewhat of a max of what we would go to given the existing business and after -- post-refinancing.

[Budd Bugatch, analyst]

So we're well below that. So you don't feel any pressure now to reduce debt anymore? You should -- we should not just do that. Is that the way you're looking at it?

[Maureen Short, executive]

Well, our priority is to continue to invest in the business. We believe the virtual opportunity will require some investment. And given the return on that investment that we're expecting, that's our #1 priority. If we have excess cash from there, then we're potentially paying down debt further just to save on the interest. As you know, the interest -- the lower interest from the lower debt balance will be $15 million to $20 million lower going forward. And then we're returning capital to shareholders through our dividend. So those are our capital allocation priorities.

[Budd Bugatch, analyst]

Congratulations again. Good luck on the balance of the year and into next year.

[Operator]

Your next question comes from the line of Kyle Joseph with Jefferies.

[Kyle Joseph, analyst]

First, just to step back on the Core. I'm not looking for any 2020 guidance or anything, but just from a longer-term perspective, how you view the growth opportunity there given where you are in terms of store optimization, the refranchising and the overall performance of the business, kind of your long-term outlook for that side of the business.

[Mitchell E. Fadel, executive]

Sure, Kyle. We are -- our big growth vehicle certainly is virtual and the Acceptance Now or the retail partner channel. But we are also very excited about the opportunities we have in brick-and-mortar, the way the e-com piece of that is growing. We use our stores as the final mile, if you will, the couple thousand stores is the final mile for e-commerce. It's growing -- as we talked about earlier depending which specific metric you want to look at, it's growing in the 20% range. We ended the quarter, as I mentioned, the portfolio up about 3% year-over-year, which is a great indicator of what same-store sales is going forward.

But we -- with the way the e-com is, we see it in low to mid-single-digit growth moving forward for a number of years. We think there's that opportunity to keep it where it is, again in that low to mid-single-digit same-store sales. There may be a little more refranchising as we talked about before, Kyle. And as you know, we're really using that now very opportunistically. The stores have turned around, so we're not just not -- not just any stores are for sale, things like that. It's more opportunistic. And we're going to -- as I mentioned, we're going to test a few in 2020, test it -- some smaller footprint stores because e-com is such a bigger part of our business. Technology is a bigger part of our business. Can we, can -- as leases turn over, can we prove to ourselves in a test that we can rent a little less space and improve margins that way? It's kind of a long-term view, but you got to start somewhere. We only have 5-year leases. So if that works and we can shrink square footage, it's a 5-year plan that can add basis points every year to the model.

We're -- the way e-com is going and the way the web orders continue to grow, we're adding some verticals as I mentioned, like jewelry and tires, testing right now, jewelries and tires in our brick-and-mortar stores, as well as added verticals on retail partner -- in the retail partner channel. So that's a long answer. I guess the short answer is we continue to believe low to mid-single-digit same-store sales in the Core business is doable for a number of years.

[Kyle Joseph, analyst]

No, I appreciate that. That's great color. And just from a longer-term perspective, also thinking about credit performance at Core, obviously, you referenced loss rates used to be in the 2s, but that was more than a decade ago. Now they're kind of the 3% to 4%. How does e-commerce impact the overall loss rates of the Core?

[Mitchell E. Fadel, executive]

We're -- we've looked at that a few times, and it's very slight, the difference between the e-com customer and the brick-and-mortar. It is slightly higher. We don't -- it's still a matter of executing better the way we approve the orders and so forth and tweaking the way we approve the orders and so forth. So we're not going to, I don't know what the word is, let more e-commerce business raise that number. We just have to execute better. It is slightly higher, but not enough to say we can expect higher losses going forward. We just need to tweak some of our processes and get them back down under 4%.

[Kyle Joseph, analyst]

Got it. That's very helpful. And then 2 for Maureen, if you don't mind. Just Maureen, looking through the press release, I just wanted to make sure I didn't miss anything. But can you talk about -- so we had about half a quarter of Merchants Preferred contribution in the quarter. So just based on the $80 million of rev, call it, is it fair to say that it contributed around $10 million to the Acceptance Now segment in the quarter?

[Maureen Short, executive]

Merchants Preferred contributed to the higher revenue within the third quarter for the Acceptance Now channel. We're happy with the performance of Merchants Preferred, and that's definitely helping with the revenue growth within Acceptance Now.

[Kyle Joseph, analyst]

Got it. And then I know you guys talked about sort of the evolution of disclosures from that side of the business. But I just wanted to be -- it's pretty clear, but none of the Acceptance Now -- or sorry, none of the Merchants Preferred locations were reflected in the Acceptance Now store counts in the quarter, right?

[Maureen Short, executive]

That's correct. Yes, both in the store counts or same-store sales, Merchants Preferred is not included in those numbers. And as Mitch mentioned -- sorry, Kyle. As Mitch mentioned, we'll start tracking things like invoice volume growth, active store count, some of those more virtual type of metrics going forward.

[Mitchell E. Fadel, executive]

And Kyle, let me just add to that. As we -- as I mentioned, we added a couple of hundred doors just in the couple of months we've had them. And as you -- as it shows on the slide, about 75 of those were Acceptance -- low volume Acceptance Now locations. And what those really were, you will recall, we were running parallel as we're negotiating the acquisition, and we had put our own virtual process out there. And we just put it in a few stores kind of -- and remember we talked about we are testing our own as well. Those were out there in stores not doing any volume yet because we really hadn't put much meat behind it once we bought Merchants Preferred. We didn't have a team out there trying to sell. So we converted -- 75 of those 200 are the Merchants Preferred. We converted over to Merchants Preferred where they have the team out there going back in the stores and keeping the doors active and things like that. So those 75 were pretty much dormant in Acceptance Now because we'd just rolled them out in there. It was just kind of sitting there. So that was part -- those 75 were part of that 200 growth. But overall, we're focused on integration, yet the pipeline is so full that we're still able to get those 200 new locations just in a couple of months since we closed, which when you close a deal like that, it's not like that's your priority day 1. It's oh, we got open doors, you -- of course, you're always trying to grow, but you're putting your plan together to grow and integrating and so forth. And that's just an indication of the opportunity there, I believe.

[Kyle Joseph, analyst]

Great. That's very helpful. One last one for me. Maureen, apologies if I missed it. But any timing on the sale/leaseback of the headquarters and the proceeds you referenced there?

[Maureen Short, executive]

I'm sorry, what was...

[Mitchell E. Fadel, executive]

Sale/leaseback timing.

[Maureen Short, executive]

The timing, I'm sorry. The timing will be the end of 2019 or early 2020.

[Operator]

Your next question comes from the line of John Rowan with Janney.

[John Rowan, analyst]

I just want to go back into capital allocation a little bit. With the -- where the debt stands now, and looking at even just the free cash flow generated through the first 9 months of this year, I mean you're effectively in shooting distance of largely ridding your balance sheet of debt in next year if you chose to funnel free cash flow to debt repurchase. I just want to understand something. So given kind of that dynamic, where is the tolerance for repurchasing stock? I'm trying to figure out where we start modeling in because I think you said you have 255 million authorized. I just want to know where that stands in the stack. Next year, if you have $290 million of free cash flow, you pay out $60 million of dividends. How much debt do you pay down? How much can you pay down? How much of that debt is the term loan versus revolving? Just walk me through what that looks like next year.

[Mitchell E. Fadel, executive]

Yes, I'll start, John, and then let Maureen get into some of the detail about how the debt split up. But our focus is certainly, with the capital to grow the business. And as -- we bought Merchants Preferred to grow it, the virtual business, hybrid business as well as still some staff growth. And it depends. We need to make sure we have room for, especially, big partners, big national partners. It will take up some cash, some investment, right, so -- as you grow the business. So growth is first. And certainly, we're committed to the dividend. We have already started that. And share repurchases are on the board. We're not going to tell you the number we'd start buying stock at. But it certainly presents an opportunity depending where the stock is in any particular point in time. As far as how much debt we can pay down and so forth, the split is, on the $260 million, it's $200, $60 -- but I'll let you go through that.

[Maureen Short, executive]

Right. So we've got a revolver of $300 million, and we've borrowed $60 million on that revolver, so we have a lot of flexibility there. And then $200 million on the term loan. And we have a lot of liquidity. And like Mitch mentioned, the purpose of that or the reason for having that liquidity is really to try to grow that business. But in the near term, if there's opportunities to pay down debt, we'll take advantage of those opportunities to lower the interest rate. But as Mitch said, there's definitely the opportunity to repurchase shares going forward if we choose to do so.

[John Rowan, analyst]

Okay. Maureen, what is the blended cost of debt going forward? Obviously, this quarter was the big reduction in the overall debt. I don't want to interpret a rate off of this quarter because it might be off. So what's the ongoing run rate fully baked in, cost of your debt with all of the commitment fees and everything and -- rolled up?

[Maureen Short, executive]

It's around 6%.

[John Rowan, analyst]

Okay. And Mitch, you opened the door, so I'm going to walk through it. You talked about large retail partners, large national retail partners. Anything we should know on that front? What does the pipeline look like?

[Mitchell E. Fadel, executive]

I think we're gearing up for it after buying Merchants Preferred as far as putting the sales team together, specific people just for the large retail partners. And we're just getting started on that. We think there's a great opportunity and a lot of large retail partners out there, and a lot of them that don't have the lease-to-own option yet. And we've got a very unique offering with the virtual and through their POS, however they want to do it. We've got the resources to do it however the retailer wants to do it. We'll also staff certain stores, all stores, depending on their volume, staff them just on weekends, things like that. So we got the most unique offering in the space, and we're optimistic that we're going to be able to sign big, large national retailers.

[John Rowan, analyst]

Okay. And just last question. Mitch, you talked about the skips and stolens in Acceptance Now. And then you made a point about it being better sequentially, but obviously it's higher year-over-year. I obviously got the conversation on -- in the in-store number. But is that the right way to look at it? I mean should we be looking at skips/stolens in Acceptance Now on a sequential basis or a year-over-year basis? Because I mean, obviously, year-over-year, the number's still up. Can you remind me again why it may have shifted up to just a higher number at some point over the past year?

[Mitchell E. Fadel, executive]

Yes, I think normally year-over-year -- I mean we look at both anyhow, but year-over-year is certainly a real important metric. We only are pointing out the sequential side of it because last year was the outlier. It was just really low due to the recoveries we had coming off the Conn's and hhgregg exit. It was just lower than we would normally run. It was on the low side of our 8% to 10% range. In fact, I think there was a quarter or 2 where we were under 8%. So just because last year was so low coming off recoveries that we -- because we had booked a big reserve on closing Conn's and hhgregg and then we had some recoveries. So last year was low, and that's why we're talking about sequentially. But certainly we don't hide the fact -- that 60 points higher than last year. It's just last year was the outlier. That's why we point out the sequential side.

[Operator]

Your next question comes from the line of Bradley Thomas with KeyBanc Capital Markets.

[Andrew Efimoff, analyst]

This is Andrew on for Brad. We were encouraged by the 3.7% comp in the Core segment. I was wondering if you could talk about the components of this and how ticket traffic and collections are trending?

[Mitchell E. Fadel, executive]

Yes, good question, Andrew. We don't get too specific on that, but it's traffic. It's e-commerce traffic primarily, but it's traffic growing. It's not -- it's -- ticket's stable, but it's not like it's all-in pricing where we're just getting a lot more on pricing. Certainly, the deflation of electronics makes it hard to get a lot out of ticket. You can get a little more out of furniture. And so overall, it's traffic, to answer your question. From a collection standpoint, actually it probably could have been slightly better, but we were within our range where we wanted to be from a collections standpoint. So it's pretty much all traffic on the positive side.

[Andrew Efimoff, analyst]

Great. Understood. And then for the upcoming fourth quarter, could you talk a little bit about how you're thinking about promotions? If you could remind us what you're up against last year and how you might go to the market differently this holiday season?

[Mitchell E. Fadel, executive]

Well, we obviously, for competitive reasons, wouldn't want to get too detailed. But generally speaking, similar to last year, nothing -- no need to worry about us having any deep promotions that are really going to drive the revenue down or anything. We don't -- again, there's promotions. And of course, you have Black Friday week and things like that as a retailer. But generally, our promotions are different than last year. But from a -- what you would worry about and how much we're collecting, how much we're giving away and things like that, pretty much on top of last year.

[Andrew Efimoff, analyst]

Okay. Understood. And then I -- my last question is on Merchants Preferred. I was wondering as you talk about the next steps, what are the areas that have been integrated? And what areas do you have more work to do?

[Mitchell E. Fadel, executive]

Good question, Andrew. The sales teams have been integrated, but we have more work to do to add to them, which we're in the process of doing, getting a lot of good people hired out there to add to the sales team, the Merchants Preferred. Joe Corona running Merchants Preferred, done a good job adding the sales team, that's after we integrated it. The call center is about -- we had a smaller call center here. That's about half integrated with the one at Merchants Preferred. A few more back-office synergies will happen into next year. But it's really the call center and back office is the big integration as far as synergies. But on the sales team, basically more people to hire to hit those growth numbers. We're off and running obviously as we've already talked about, but we have more salespeople to hire, we're more -- a person or 2 just focused on large accounts, things like that. So when I said earlier exceeded our time line, just we didn't think we'd get the sales team and the call centers as integrated quite as fast as we have. And it's gone well. The operating team in Merchants Preferred, Mike Dinehart runs that call center down there, and they've done a great job with the integration. So we just need to hire, we're in process of adding more to the team.

[Operator]

Your next question comes from the line of Vincent Caintic with Stephens.

[Vincent Caintic, analyst]

Another question on Merchants Preferred. So glad to hear that the rollout is going well. And I'm kind of curious, so in terms of the development of the, I guess, the combined product offering, how that's going? And in any of the rollouts you've had, of that offering to the existing Acceptance Now retailers, sort of how has that gone? Has there -- is there any way to measure, say the lift that you've had by having the combined offering?

[Mitchell E. Fadel, executive]

Well, I would say the combined offering lift comes next year as we roll it out to some of our current partners and a lot of new partners. So the combined offering really is something that kicks off early next year, pretty much in January, Vincent. And the 200 doors that have opened so far already since we bought Merchants Preferred, have been solely virtual. There's a few staffed, fully staffed models opening because of the volume of those stores. But the mix, the hybrid, the differentiator, if you will, really starts in January.

[Vincent Caintic, analyst]

Okay. Got it. That's helpful. And then so you've highlighted what you've integrated so far for sales, call center and so forth. At what point do you think you'll have all that ready? And I guess the fundamental part of the question, and a lot of investors have been asking this. At what point, particularly because it seems like retailer appetite is strong, at what point are you ready to be able to operationally have the national retailer trial going on?

[Mitchell E. Fadel, executive]

We'll be ready in the next 60 days. We'll be ready for the national retail trial the first of the year.

[Vincent Caintic, analyst]

Okay. Great. Separate question, but kind of related to the fourth quarter question. Just wondering as we're getting into the holiday sale season, is there anything different for this year? In particular, just trying to get a sense of how you're seeing the consumer if it's -- the consumer as strong as they were last year, if there's any nuances on what they're particularly looking for as we're going into the holiday sale season?

[Mitchell E. Fadel, executive]

Yes, good question. We're seeing it just as strong. I'm sure we'll hear about the comps being a little lower than last year, but that's really a measure what we're comping over last year versus what we're comping over this year. That's why we talk about the 2-year number in both the Core and the retail partner channel, the Acceptance Now segment, if you will. And when you look at the 2 year, whether you look at the Core or the ANow segment, it just continues to perform. So the customers, they're strong. Nuances as far as what they're looking for, no, we haven't -- more are putting their order in online every day versus coming into the store. I think it's just the way people shop. And we're there for them wherever they want to shop. They don't have to come into a store to do business with us. They can do it all from the comfort of their home. And like I said earlier, we use our couple thousand brick-and-mortar locations as the final mile on the Core side, but they don't have to come in. And more people are doing that and letting us take care of them in their home versus coming in the store. But other than that, there's really no trend to speak of.

[Operator]

Your next question comes from the line of Anthony Chukumba with Loop Capital Markets.

[Anthony Chukumba, analyst]

Just in terms of the 125, I guess, doors that you rolled out in Merchants Preferred, excluding the 75 that were conversions from Acceptance Now doors. Could you give us any color just in terms of those doors, like any particular vertical or verticals? Or is that sort of one chain or a few chains? I was just wondering if we can get any color on that.

[Mitchell E. Fadel, executive]

Yes, good question. It was primarily still in the furniture business. As we think about newer verticals like jewelry and tires, and we're looking at those in both the Core business and the virtual business as well as some others that we aren't testing yet, it's pretty much been furniture so far. No big retailers in there, just a lot of local regional players building that out. But the -- Merchants Preferred had a bit of a pipeline to begin with and -- without the capital to really take advantage of it. So a lot of that is just the time to, hey, go sign the people up that have already -- you didn't have the capital to sign up before. So pretty much still on the furniture space for now, Anthony, to answer your question.

[Anthony Chukumba, analyst]

Got it. And then just one follow-up question. Could you just remind us, how does Merchants Preferred currently handle, I guess, returned merchandise? And do you see that changing at all going forward?

[Mitchell E. Fadel, executive]

Yes, they have a few different ways on returned merchandise to get rid of it through -- online methods of getting rid of it some -- primarily that, selling it online and things like that. We're certainly with our brick-and-mortar footprint, we'll be able to improve on that, and be able to not only help the collection side of things but help maximize the value of some of those returns through our brick-and-mortar stores like we do on the Acceptance Now side.

[Operator]

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

[John Baugh, analyst]

Congrats on the solid results here. I'll jump right in. You -- to an earlier question, Maureen, didn't seem to want to go into the Merchants Preferred P&L impact on Q3 in terms of either revenue or maybe the expense side and EBIT impact. But should we then look at Q2 and then compare it to Q3 and sort of make interpolations that way? Or is there any kind of help there?

[Maureen Short, executive]

Yes, we're trying not to differentiate Now between the segment with Merchants Preferred and Acceptance Now. We see it in one segment going forward. We talked about the annual revenue expectation for Merchants Preferred being in that $80 million range. So that hasn't changed based on what we're seeing. The door count, I think, growth reflects around a little bit higher than we expected. So hopefully that provides enough color to be able to model the Merchants Preferred impact.

[John Baugh, analyst]

Okay. And then, Mitch, I may be mistaken or my memory may be off. But I thought last time we talked about Merchants Preferred and the sort of opportunity, which I think you identified as $400 million pro forma, that it would be more local regional. There's a lot of talk on this call about national accounts. So maybe you can start there. Has something changed? Or would the expectation be we're going to win a lot of that $400 million, at least in the initial years, is going to be the smaller regional local guys?

[Mitchell E. Fadel, executive]

No, I think you remember it right, John. The $400 million, the $800 million of revenue going up to 1.2 over the next 3 years is not dependent on a large national retailer. Now that would be actually additive to that. We think we can do that with regional players, obviously some larger regional players and a lot of regional players in general obviously for that kind of growth. But there's not a national player in there. It's just another avenue of growth, but that growth we've laid out for the next 3 years is not dependent. It's not like if we don't get one of the big guys, we're not going to hit those numbers. So I think your memory is accurate in that the large retail partner opportunity is just in addition to what we've already talked about.

[John Baugh, analyst]

Okay. And then you commented on the 90-day being around 1/3. Is that trending up in what's been a pretty good economy here? Do you see that number in general moving higher?

[Mitchell E. Fadel, executive]

No. It's been pretty flat. It's been pretty flat.

[John Baugh, analyst]

Okay. And the terms, the pricing, are we still in the 2.1x range on sort of the ANow side of the world? Is there any terms with discounts or pricing approval rates, et cetera, that you're promising retailers? Is any of that moving in one direction or the other?

[Mitchell E. Fadel, executive]

No, not really. It's still in the low 2s, the 2.1 range, like you said. The -- they'd be more competitive out there, and you do end up having to -- impacting margins through the deal you make with a retail partner, and so forth. But I wouldn't say it's trending any differently than it has last year or 2. It's been competitive out there, and that has some impact on margins and how you pay the retailer and so forth. But no, nothing in the last quarter or anything like that that's changing.

[Operator]

There are no further questions. Mr. Fadel, you may proceed with any closing remarks.

[Mitchell E. Fadel, executive]

Thank you very much. And thank you, everyone, for your time this morning. On behalf of all of us, the whole leadership team and everybody here at Rent-A-Center, I want to thank all of you, all of our coworkers, our retail partners and our franchisees, we thank all of you. And we look forward to executing our growth plan and building on our solid foundation. Thanks again, everyone.

[Operator]

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