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Upbound Group Inc
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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 4, 2021.
I would now like to turn the conference over to Mr. Metrano. Please go ahead, sir.
Thank you all for joining the Rent-A-Center team this morning to discuss our results for the third quarter of 2021. We issued our earnings release after the market closed yesterday, and hopefully you've had a chance to review it. The release and all related materials, including a link to the live webcast, are available on our website at investor.rentacenter.com.
On the call today from Rent-A-Center, we have Mitch Fadel, our CEO; Jason Hogg, Executive Vice President of Acima; Anthony Blasquez, Executive Vice President of the Rent-A-Center Business segment; and Maureen Short, CFO.
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 and adversely from our expectations. These factors are described in our earnings release as well as in the company's SEC filings. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law.
This call also will include references to non-GAAP financial measures. Please refer to our third quarter earnings release, which can be found on our website for a description of the non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures.
With that, I'll turn the call over to Mitch.
Thank you, Brendan, and good morning to all of you who have joined us today to discuss our third quarter results. We certainly appreciate your interest and are pleased to have the opportunity to update you on the developments in our company as we continue to be among the leaders in the advancement of leasing as an alternative solution for consumers in today's rapidly evolving commerce and payments landscape.
Over my career, I can't think of another period of such innovation and disruption as we're seeing today with the range of developments, things like digital wallets and cryptocurrency and super apps and buy-now-pay-later and most importantly, new lease-to-own options, which we often refer to as LTO. And with our leadership position in consumer leasing solutions, we are in a great position to benefit from this environment.
Take, for example, the current proliferation of buy-now-pay-later. We get asked a lot if it's a threat. But we believe it's actually the opposite. Lease-to-own is very complementary to buy-now-pay-later because we see little customer segment overlap, and LTO can drive incremental sales in the buy-now-pay-later waterfall. In fact, we're seeing this benefit first-hand in our business today with growing interest in our virtual LTO offering from potential merchant partners who realize they're leaving money on the table with customers that don't qualify for buy-now-pay-later.
Similarly, consumers are seeking payment services that work for them rather than for the benefit of an established system that is perceived to take advantage of and exclude consumers. In contrast, LTO is one of the most inclusive payment options serving even unbanked consumers and is highly flexible, and getting approved doesn't require hard credit inquiry that can impact credit scores. Because LTO solutions include returnable consumer durable products like furniture, appliances and electronics, transactions typically have a higher average ticket size and longer average payment horizon and other payment solutions like buy-now-pay-later.
So you can understand why we're really optimistic about our future following the Acima transaction earlier this year, which made us a leading LTO player and the only one with our span of omnichannel capabilities across our segments. The integration is going well, and we're on pace to achieve our synergy targets. On top of that, you can factor in the Acima Ecosystem which is targeted to be up and running in early next year, and we believe can revolutionize LTO, potentially doubling our addressable market to around $100 billion.
As LTO continues to gain momentum, we think our scale and omnichannel capabilities provide us with a competitive advantage because processing more applications and managing more customer relationships will enable us to hone those capabilities even further. This should translate to even more consumers and merchant partners. This data and technology aspect of our business is underappreciated and we're investing meaningfully to capitalize on it.
And by mid next year, we'll have migrated the enterprise data warehouse to a cloud-based environment and will be employing state of the art tools like Snowflake and Databricks, which will further enhance our predictive analysis and AI machine learning capabilities. These initiatives will drive savings from data center costs and productivity gains and processing activities, and they can benefit our commercial activities by reducing time for solution launches.
When you put those pieces together, strong category momentum, a favorable competitive position and dynamic growth agenda should translate to compelling financial performance. We continue to believe that in 2023, the company will generate at least $6 billion of revenue in the mid-teens adjusted EBITDA margin. Factoring our strong free cash flow generation, already solid financial position and focus on deploying capital to drive shareholder value, we believe that EPS should increase significantly over the next few years.
Now turning then to the third quarter. The team has continued to execute very well. The store-based business advanced a number of initiatives focused on e-commerce and the in-store experience, which Anthony will update you on. At Acima, we continued adding new merchant partners, including an exclusive strategic account, P.C. Richard & Son, one of the largest appliance retailers in the U.S. That was a competitive win for us, and we think it demonstrates the value proposition other strategic partners will find in our differentiated capabilities. We also saw positive developments with the Acima Ecosystem, and Jason will elaborate more on that shortly.
Our third quarter revenue of $1.2 billion grew 66% year-over-year on a reported basis and 13% on a pro forma basis, in other words as if we owned Acima in the prior year period, and we had good organic growth across all segments. Acima generated pro forma year-over-year GMV growth of 19% and the Rent-A-Center business portfolio was up 14% year-over-year at the end of September.
Typically, the third quarter is a slow season for the lease-to-own industry because with the vacations in back-to-school calendar, people tend to be less focused on household durable goods. So we're pleased to see the top line trends remain favorable even with stimulus and even with other programs supporting consumers winding down. With our strong lease portfolio momentum heading into the last few months of the year, we believe we are very well positioned for the fourth quarter and for early 2022.
Adjusted EBITDA margin for the third quarter of 14.4% was down sequentially from the second quarter, which was consistent with our remarks on the second quarter earnings call in August. We had expected seasonality and less favorable customer payment activity related to stimulus winding down would result in some margin contraction. Non-GAAP earnings per share was $1.52 in the quarter compared to pro forma non-GAAP earnings per share of $1.04 in the prior year.
Now looking forward, we have updated our full year 2021 guidance, primarily reflecting changes in the timing of normalization and customer payment activity due to stimulus winding down as well as some impact on merchant partners from global supply chain disruption, primarily impacting the Acima business. We expect that customer payment activity to normalize in the back half of the year and quite frankly, they normalize faster than we expected. We had called a little short on our collection labor and had to play catch up. We have since staffed up and taken steps to stabilize payment activity trends for Acima, in fact we expected them to normalize. The supply chain headwinds at our retail partners, as I mentioned, are also affecting Acima's growth and the combined impact of those 2 things is lower fourth quarter revenue and margin for Acima than we had previously forecasted.
Even with this timing related issue, our 2021 outlook for consolidated revenue and non-GAAP EPS is still within the range we provided with our second quarter results in August when we increased our full year 2021 guidance. So we increased in August, and we're still within that range now. And Maureen will provide additional discussion on guidance here in a few minutes.
So in closing, I want to thank all the members of the Rent-A-Center team for their continued effort and dedication. It's been quite a journey over the past few years, and I'm really thrilled with the progress we made in 2021 and the tremendous opportunity I see in the future. With that, I'll turn the call over to Jason to update us on the Acima business.
Thanks, Mitch. Picking up on your comments about the market opportunity, it really is amazing to see how people are changing the way they think about paying for products and services, meeting other financial needs and even the lifestyle which people aspire. Consumers today increasingly value services that are flexible, personal and inclusive over traditional services that are rigid, uniform and exclusionary. This is disrupting the competitive landscape and benefiting innovative business models like buy-now-pay-later and other alternative payment solutions like Acima. As we're witnessing this play out, it validates the Acima acquisition, our strategy and the tremendous opportunity that we have for the company's future.
These same trends drove us to develop a product suite over a year ago that we eventually reframed as the Acima Ecosystem, including the Acima app, Acima browser extension, Acima MarketPlace and the Acima LeasePay Card. We discussed the ecosystem at some lengths on our second quarter call in conjunction with an announced soft launch in early August. So before getting into a discussion of broader performance for the quarter, I'll share some insights from our preliminary findings.
Keeping in mind that the primary focus for the launch at this stage has been testing and learning, we've seen encouraging early results to reinforce our belief in the transformative potential of the ecosystem. The Acima app, which is essentially mission control for the ecosystem, already has over 220,000 active users at the end of 3 months. The users are largely comprised of existing customers that are either unconverted or had unused approval amounts.
Looking forward, we believe we are on pace to reach the 1 million user threshold during the second quarter of 2022. To put this in perspective, it took Facebook and Twitter 12 and 24 months, respectively, to hit that milestone. Some of today's leading fintech companies like Klarna and Afterpay reached the 1 million download milestone in around 6 to 12 months, right in line with our projection for Acima.
Among these active users, we are seeing some compelling conversion rates. For instance, mobile app users averaged 2.07 leases per customer, significantly higher than the portfolio average. While we believe this is reflective of the exuberance of early adopters, we expect this improved ease of access to increase the lifetime ratio of leases per customer. As we are seeing greater customer engagement via the mobile app and ecosystem, average ticket size remains similar to the portfolio average.
Since the launch of the ecosystem, we have seen conversion rates grow 20% over the last 2 months as customers get more acquainted with the expanded choices. To date, the ecosystem has generated transactions with over 2,200 different merchant locations, including more than 40 merchants who aren't even integrated with Acima like Best Buy. This demonstrates Acima's ability to use patent-pending technology to allow customers to utilize LTO payment options with brands or merchants that do not have a relationship with Acima without the heavy investments in complicated integrations.
Customer feedback suggests the value proposition is resonating across relevant decision factors like delivering "a wonderful experience", providing "easy access and helpful information" and "working with customers".
Switching to the merchant side. These transactions are illustrating the significant potential value Acima can provide compared to other partners by driving inner amount of sales from lease-to-own customers who otherwise may not have been able to transact with those retailers. Rather than just offering another form of payment to existing customers, Acima can bring incremental customers and revenue to the retailer. The early ecosystem activity is also providing important data and insights that we are incorporating back into our offerings to improve them in preparation for the ramp-up to a full rollout planned for early 2022.
For example, the Acima app just had its fourth release, and we are continuing to iterate and refine the product. To date, enhancements include a streamlined customer application process, embedding the mobile app into our in-store text-to-apply process, expanding the mobile marketplace, adding store location functionality and adding the ability to create and execute a lease in the app. Most importantly, we can now use our presence on the customer's mobile device to drive reengagement and return to shop opportunities for our retailers.
We've experienced consistent customer acquisition costs well under $100 per lease and see those CACs continuing to decrease as the number of leases per customer grows. Moreover, our lease volumes increase will apply learnings from transactions to further improve marketing efficiencies and conversions as we ramp our efforts through 2022. So the preliminary data is really encouraging, but it's premature to confidently project the timing of the material P&L impact. It's probably easier to conceptualize the scale of the opportunity over the next 3 to 5 years.
Consider that we have a target consumer database of approximately 15 million consumers who fit the profile of an Acima customer. The Acima LeasePay Card will effectively increase the Acima network from 30,000 merchants to over 2 million Mastercard merchants where durable goods are sold. In terms of next steps, the virtual Acima LeasePay Card is already available, and we are on track to pilot the physical card by the end of the year.
Shifting to broader performance, we made significant progress on the Acima integration, getting the right organizational structure in place and enhancing operational capabilities. At the same time, we continue to execute well commercially, adding over 2,700 new retail partners during the quarter. In addition, we took back more than 750 retailers from competitors, including P.C. Richard & Son and Sonic Electronix, by leveraging our enhanced value proposition, the ability to acquire our own customers, the digital ecosystem and enhance retailer engagement through the mobile app. We also signed an exclusive partnership with Whirlpool, which is an e-commerce relationship and demonstrates our ability to win in the e-comm channel. All of these factors equate to incremental sales for our retail partners, which as we're seeing, is preferable to the rebates our competitors are offering.
Acima integration continues to be a high priority for the third quarter. It's generally gone according to plan, and we continue to expect to realize $25 million in synergies in 2021 and ultimately $40 million to $70 million of run rate synergies. Another top initiative this quarter was converting staffed and former preferred lease locations to virtual Acima locations. This was a major undertaking and included converting cons and Ashley Corporate Stores, among others. The conversions often are not only profit enhancing, but also should ultimately translate to better experience for merchant partners and consumers because Acima offers a more flexible and seamless experience.
We essentially finalized the organization structure, aligning key related activities under one leader to facilitate better coordination of support and market-facing activities. So our sales and operations organization report to one leader, Ron Schoolcraft. Digital product development and product management reports to Tom Abel, and technology and data services report to Chris Uriarte, who recently joined the company. I worked with Chris at Aon and at American Express. He's a talented technology leader and will be a huge asset for Acima as we continue down the path of becoming a digital oriented fintech business. I believe we have the right pieces in place to successfully execute on our strategy.
Moving on to third quarter financial results. My comments will reflect pro forma performance as this Acima was included the prior year. The retail partner business revenues grew 17.1%, led by 19% GMV growth in the face of retail supply chain headwinds and changing consumer behavior as government financial support winded down. E-commerce continued to gain momentum and accounted for 14% of lease transaction volume, including the Wayfair partnership.
Adjusted EBITDA margin was 13.9% in the quarter versus 16.5%. Adjusted skip/stolen losses were 8.7%, up approximately 30 basis points year-over-year on a pro forma basis. As Mitch noted in his comments, we had anticipated that during the third quarter, customer behavior would start to revert to more normal trends for customer payment activity and losses, which would negatively impact margins on a sequential basis.
Our expectations were directionally right, though we under-anticipated the extent of sequential margin decline due to the factors Mitch discussed earlier. Looking forward over the rest of the year, our top objective is to ensure the business is well positioned for a strong start to 2022.
With that, I'll turn it over to Anthony.
Thanks, Jay. Staying with the topic of the changing environment that consumers in our business are experiencing today, it may be surprising to some people just how well the Rent-A-Center business segment has been performing. But for those of us close to the business, we know just how solid the underlying fundamentals are and how much opportunity there is to generate consistent growth over the long term.
This was illustrated again in the third quarter with revenue growth of 5.6%, including 12.3% same-store sales growth, and that was comping against 8.6% revenue growth and 13% same-store sales growth in the prior year period. That makes it 15 consecutive quarters that we have generated positive same-store growth and 5 consecutive quarters of double-digit same-store growth, which is a testament to the unique value proposition we offer customers: high-quality products, flexible lease-to-own solutions to fit everyone and a great experience.
Importantly, we continue to evolve with the consumer and are meeting their preferences with a growing omnichannel platform that has played a key role in our performance over the past 1.5 years. In the third quarter, our e-commerce revenue grew 9% as it lapped 71% growth in the prior year. E-commerce accounted for 21% of revenue, a substantial increase relative to just 13% in the third quarter of 2019. Importantly, we believe we remain in the early innings of capturing the long-term opportunity in the e-commerce channel.
The team's strong execution, including sourcing product, marketing, merchandising and collections, translated to 14% year-over-year growth in the portfolio for the third quarter. So we feel we're in great position heading into the home stretch this year and for a solid start to 2022. Profitability also remained solid in the third quarter, with adjusted EBITDA margins of 22.9%, up 60 basis points year-over-year, despite loss rate expansion of 140 basis points due to the normalization of trends following the wind down of government stimulus.
We still believe that over the long term, our loss rates should be around 3%, given the improvements we're making in collections and decisioning. Longer term, I think the business is well positioned to capitalize on expanding consumer interest in flexible and affordable payment options. We have a relatively large core consumer base to whom we provide a specialized service that makes a difference in people's lives every day. We still have considerable opportunities to expand our retail business in our existing footprint through surgical openings, new store concepts and expanding into new product categories.
In addition, we have tremendous e-commerce opportunity that leverages our differentiated omnichannel capabilities. While e-commerce will play a critical role in our future, we feel the brick-and-mortar business is just as important because many of our consumers today, especially lease-to-own customers, still prefer an in-store experience. Moreover, brick-and-mortar allows us to participate in transactions holistically, including sourcing product, purchasing at wholesale cost, having the ability to establish competitive pricing for customers and to provide the last-mile logistics for our e-commerce channel.
Looking out over the next few months and into 2022, we feel good about the business environment and believe the set of initiatives we're focused on such as e-com enhancements, customer engagement and support, and employing continuous improvement tactics should set us up very well for next year. I'll now turn the call over to Maureen.
Thanks, Anthony. As Mitch noted earlier, we delivered solid results in the third quarter despite some anticipated headwinds that we called out on the second quarter call, including some typical third quarter seasonality and a reversion to more normal ranges for customer payment activity, loss rates and early payouts.
Reported revenues of $1.2 billion increased 66% year-over-year and consolidated adjusted EBITDA of $170 million almost doubled. Much of that growth is attributable to the Acima acquisition that closed in mid-February. On a pro forma basis, consolidated revenues grew 13.3% and adjusted EBITDA grew 4.1%. This translated to a margin of 14.4% in the third quarter compared to 15.7% for the prior year period.
The year-over-year contraction in margins was primarily attributable to normalization and customer payment activity for delinquencies, and loss rates from the wind down of government stimulus as well as the mix shift to the high-growth Acima business. Margins for the Rent-A-Center business segment, Mexico segment and corporate costs were all favorable year-over-year while the franchise segment margins were down 135 basis points.
Below the line, net interest expense was $19.7 million, reflecting the debt financing from the Acima acquisition. The effective tax rate on a non-GAAP basis was 24% compared to 23.3% in the prior year period, and diluted share count was 68.2 million. GAAP EPS was $0.31 in the third quarter compared to $1.15 in the prior year period and included onetime costs related to the Acima transaction and integration.
After adjusting for special items that we believe do not reflect the underlying performance of our business, non-GAAP EPS was $1.52 in the third quarter of 2021 compared to $1.04 in the prior year period. We generated $55 million of free cash flow in the third quarter and returned $38 million to shareholders through a $0.31 quarterly dividend and share repurchases.
Year-to-date through October, the company has repurchased $80 million of common stock at an average price of $56 per share. At the end of October, the company had approximately $170 million of remaining on its current share repurchase authorization. At quarter end, we had a cash balance of $159 million, gross debt of $1.3 billion, net leverage of 1.7x and available liquidity of over $600 million.
Regarding our financial outlook for the full year of 2021, we are lowering the high end of our previous guidance ranges for consolidated revenue and non-GAAP EPS. We now expect consolidated revenues of $4.55 billion to $4.64 billion and non-GAAP EPS of $5.90 to $6.15. Guidance for adjusted EBITDA is now expected to be between $645 million to $675 million, and free cash flow within the range of $280 million to $320 million.
For the Acima segment, we expect revenues of $2.32 billion to $2.38 billion and adjusted EBITDA of $300 million to $320 million. This outlook reflects the continuing supply chain headwinds our retail partners are facing and a more rapid shift back to pre-pandemic trends than we had anticipated for customer payment activity and loss reserves due to the wind down of government programs that had supported consumer spending during the pandemic.
We had previously incorporated a more gradual reversion of those factors, which impact both top line and margin over the next couple of quarters in our forecast. Even with supply chain headwinds and more normalized lease performance metrics, we still expect Acima to generate 20% to 25% annual GMV growth in 2021 and approximately 14% EBITDA margins in Q4. Looking beyond the fourth quarter, the business should largely be past this set of internal and external adjustments. And as Mitch mentioned, we remain confident in our longer term targets for the company.
For the Rent-A-Center Business segment, we are not adjusting prior guidance. Revenues are still expected to be between $2.02 billion and $2.06 billion. And same-store sales growth in Q4 is expected to again be in low double digits. Adjusted EBITDA is still expected to be between $480 million and $500 million, and the midpoint of our guidance implies an EBITDA margin of approximately 23% in Q4, higher than last year and flat sequentially despite recent wage increases and adding headcount.
Turning to capital allocation. Our priorities are unchanged. The top priority is appropriately funding our business and investing in value-enhancing growth. Next we will opportunistically look at M&A that can generate favorable returns. After satisfying investment needs, we returned capital to shareholders through a combination of dividends and share repurchases, with share repurchases employed opportunistically. We remain committed to a sound financial structure that supports our growth strategy and total shareholder return objectives.
To conclude my comments, our third quarter efforts were a successful piece of the huge undertaking the company has been engaged in over the past 10 months. We have completed the largest acquisition in the company's history, integrated 2 organizations without letting up on execution, and we developed and are launching a new fintech payments ecosystem.
Looking forward, I think we are well positioned for this next stage in our evolution and the highly compelling opportunities to create shareholder value should become more evident. I'm also very excited to announce we are planning an Investor Day for late Q1 next year, and of course more details to come. We will post detailed income statements by segment to our website and file our 10-Q later today.
Thank you for your time this morning. I'll now turn the call over for your questions.
[Operator Instructions] Your first question comes from Bobby Griffin with Raymond James.
Hope everybody is doing well. First, I just wanted to talk about maybe just a month-by-month basis. I know that typically you don't get into that type of color, but just now that things are starting to normalize, it would be helpful. How did kind of payment activity, and skips and stolens trend during the quarter? And then did it kind of level out in October, and that's what you're assuming carries forward in the fourth quarter? Or are you assuming it continues to build back up a little bit in November and December.
Yes. Good question, Bobby. The -- it deteriorated as the quarter went on as we got farther away from stimulus. But the good news is that as we got in October, especially as we ramped up from a staffing standpoint, it got caught up from a staffing standpoint in the collection center, we've seen really good trends in October. So that gives us the confidence going forward that we've certainly normalized faster than we thought. But October gives us a good feeling going forward and confidence going forward that it was a short-term blip.
Okay. That's helpful. And secondly, is more just longer term inside the Acima business. Obviously, we got an outlook for really good revenue growth. Maybe just help us unpack where you see some margin opportunities after that business within the P&L as I know gross margin can move around a lot based on what the customers are and stuff. So just maybe as we think 2, 3 years out, where there could be upside on the margins and what some of those moving parts are?
Thanks, Bobby. When you look at some of the things that I was talking about earlier, we've got some key differentiators that are out there and particularly when you look at the ecosystem. So having declining customer acquisition costs while simultaneously having increases with regard to the number of leases per customer when the average ticket is holding, enables us to get margin expansion in that regard. And so having this ongoing relationship is critical.
Also as we continue to bring on more partners like how I'd mentioned P.C. Richard and we have Whirlpool and Sonic Electronix, you're getting sort of a coattail effect that's taking place there as well because we not only have the ability to originate through the traditional locations, but now originating our own customers and drive them towards optimized retail origination experiences.
The other thing -- I'm sorry, Bob, the other thing I'd add to that, when we think down the road is in our legacy business, the staff legacy business, we've got about half of those stores converted and would do the other half early next year. And with the Acima decisioning and so forth and what you've seen in the numbers, we'd expected in the long term the losses to be lower in our legacy business as we convert over to Acima. And as well as it's a faster platform and can it reduce labor a little bit in those stores that are -- that we haven't converted yet. So I think as we go forward, the staff business has some opportunity. That's part of the long-term synergies we expect anyhow. So I think we -- overall, in the business, you'd see lower losses as well.
Yes. And we're going to continue optimizing by channel using, as Mitch was talking about our machine learning and AI, so that every partnership, every channel, every product continues to get crisper from an underwriting perspective.
Okay. That's very helpful. That was actually my follow-up, was just the labor opportunity. So I'll go ahead and jump back in the queue because you answered it, but I appreciate the time and best of luck here in the fourth quarter.
Your next question comes from John Rowan with Janney.
Can you guys remind me what is included and not included out of your current objectives in the guidance for 2023? Just run through because I believe there was a lot that was basically excluded from that number that you're currently undertaking.
So the guidance excludes any share repurchases, and so -- but really, that's the only stipulation when it comes to our guidance.
We're really talking EBITDA margins. When we say $6 billion, we expect to be at least $6 billion of mid-teens EBITDA margin. From an EPS standpoint, it certainly would not include that if you try to back in the EPS numbers. But it's got 20% to 25% GMV growth over those couple of years to get there. It's got us achieving the synergies that we're on track to achieve. It's got the Rent-A-Center business, John, running mid-single-digit growth next year because there's quite a tail coming into the year with that portfolio, as Anthony mentioned. It's still up 14% year-over-year and then in 2023, you'd look at low to mid-single-digit growth in that business. So those are the base assumptions that we've talked about.
But what about big retail partner wins and/or additional growth spurred by the omnichannel fintech platform.
Yes. I think that's a really good follow-up question. What we don't know is -- we know -- as Jay was pointing out, we know how big the total addressable market is with the Acima Ecosystem and LeasePay Card and the marketplace and so forth, and we're already seeing some great results as he mentioned, doing transactions in stores that we're not even integrated in. It's really exciting. It's transformational. But we don't have that figured in. I mean that's -- you could -- it's hard to make those assumptions.
And will it be worth $200 million in revenue next year or $500 million or in 2023, at this point we're trying not to build that in. I think it's certainly that number, the 20%, 25% is going to take continuing to add on good strategic accounts for sure. But as far as the Acima Ecosystem, it's -- there's certainly upside when you think about it that way.
Your next question comes from Vincent Caintic with Stephens.
So first, just kind of trying to think about the run rate maybe going into 2022, and I understand you're not giving '22 guidance yet, but when I think about the fourth quarter guidance, is there any sort of one-timers or anything that might change as we run rate into next year? Because it seems like when I look at fourth quarter guidance, you are having EBITDA margin expand quarter-over-quarter. And then maybe the credit normalization in the third quarter, maybe the -- I guess, the reserving maybe is taking upfront. So I'm just kind of wondering if there's anything when we think about the fourth quarter that we should be thinking about if we're modeling onto next year.
Go ahead, Maureen.
I was just going to mention, there are some reserve adjustments that were made, both in the Rent-A-Center business as well as the Acima business, that is meant to predict based on customer payment activity and loss trends, what we think should be reserved for -- into the future. So there were some onetime adjustments made for that normalization. As we mentioned in our prepared comments, we expected that normalization to happen over a couple of quarters, maybe even slightly into '22. So there were some adjustments made this year that should set us up better for '22 since we've taken some of those reserves that we likely would have taken a couple of quarters from now.
Okay. That's helpful. And I guess was there -- is there anything else in the fourth quarter just kind of when we're thinking about it going into '22 or is the fourth quarter kind of a good proxy for how we should be thinking about the going forward?
Well, I think you're talking about a growing business. And as you go into the future, still 19% GMV growth last quarter. And as we think about the year, we're starting to comp over a big account like Wayfair added last year at this time of year. So that can decelerate the GMV a little bit like the 19%. But we -- converting the staff stores to the Acima system, you got some short-term drop in when you think about any time you're doing a conversion, and it takes -- you take 1 step back to take 2 steps forward. But then you got the new accounts coming in like Jay was mentioning, and that's what continues to drive it. And would you say, Jay, 2,700 new accounts in the last quarter.
So there's a lot of ins and outs comping over a large addition. Obviously, you're not going to comp over it unless you have other large additions and we feel real good about the large retailer in the northeast, P.C. Richard, that we just signed an exclusive with and we're kicking off here in November. For those who don't know it, they're one of the top 10 appliance retailers in the country. And so that's when you're growing the way we're growing, even though the third quarter the margins went down because of all the stuff we talked about, stimulus and winding down normalization faster, caught a little bit light on staffing as that happened, supply chain, obviously and you can guess on when that gets better. But when you have a growing business, even it might be lumpy a quarter here or a quarter there like we just went through, Vincent, but overall, you got those 20% to 25% growth rates. It would give or take a quarter of some kind of lumpiness like the stimulus ending but overall, I mean, think about the stores we added, not even talking about the Acima Ecosystem, but 2,700 new stores, Jay, and so forth.
To answer your point, I mean, it's a step function, but what we're seeing is the lead indicators are the competitive wins, the new products hitting marketplace like Mitch's saying, then there's a ramp that gets associated with them. So you start to see an acceleration once they get to their sort of exit velocity, right, when they normalize out.
There's also additional synergies that we're assuming will take place in '22 that we haven't seen yet. We haven't finished the full integration yet. Some of those synergies were masked in the back half of this year because of some of the changes that we've seen with the normalization. But the good news is we're seeing strong growth, and we're seeing those synergies play out. It's just some of that normalization that occurred that made it a little choppy. But '22, we should be at a normalized rate.
Yes. Nothing that has changed our long-term outlook.
Okay. Perfect. That's really helpful. And then a follow-up question on Acima. So a lot of really exciting data. I saw the ecosystem video on your website that was really interesting as well as the marketplace, and it's really interesting to see that marketplace with you've got Best Buy, Home Depot, overstock.com. You've got a bunch of merchants in there and I was wondering if you can maybe talk about kind of your pipeline, how you're seeing that? You kind of answered it a little bit, but if you could talk about the pipeline there. And even partnerships such as you kind of touched on these buy-now-pay-later partnerships and they're taking an interest in lease-to-own and in Acima. So maybe if you could talk about the pipeline, both in terms of the merchant side as well as partnership sides and what's the, I guess, the time frame look like for that?
Yes. Thank you. So I'll sort of take that in reverse order. The -- when you look at the partnerships, the interesting thing, what we've been sort of saying for a couple of quarters now is we see this as a complementary set. As people become more used to buy-now-pay-later as a solution, it addresses a different segment than we address and so for us, it's actually having the effect of getting people more accustomed to these alternative solutions and so that's been feeding very nicely into our ecosystem, like you talked about.
With regard to the ecosystem itself, we are a test-and-learn type of environment reiterating. So we rolled out the mobile app, like I talked about, with over 220,000 active users. Now that we've started to get all of our metrics there in line and we've tested it out, we're continuing to add to the marketplace. We're seeing fantastic volume going through the -- some of the merchants that you just mentioned, despite not having the integration. And what you'll start to see is that we're accelerating then our efforts from a consumer standpoint.
One very important thing, and as Mitch mentioned, that with the 2,700 wins in other areas where we're succeeding, it gives our merchants the opportunity to take other bites at the apple because we are embedding our native mobile app whereas before customers walk in, have a very friction-free experience in the store, but then they leave. And now we have the ability to execute and what we're going to be launching is executing on the mobile app and now having a stacking effect of customers so that when they do leave, we can continue to allow our merchants to continue to market to them and more importantly, transact on their phones now versus having to come back into the store. And so the effect of that is that, that will have a sort of a forced multiplier effect.
So -- and then the last thing I would say to which Mitch was talking about, and I mentioned briefly also, the LeasePay Mastercard, as we build a larger and larger base of consumers on our platform, we have more opportunities to allow them. So -- in on our direct-to-consumer plays, we not only have the ability for them to make purchases at the merchants that you just described, but once we move the physical piece of plastic into that consumer base, their ability to start going to 2.2 million locations makes it a ubiquitous solution that is very similar.
And why that's important is when we're having discussions with large national retailers, it helps us with integration. It helps us with not having to have a heavy integration. It also has completely changed the dynamic on how those retail partners view our solution as just another means like a debit card or a credit card or any other means for their customers to spend in the retail location.
Your next question comes from Anthony Chukumba with Loop Capital Markets.
Just one quick point of clarification first. You said you keep using the word accounts and then you also said stores. I'm assuming the 2,700, that's 2,700 doors, right? That's just 2,700 stores, not like 2,700 completely disparate retailers, right?
That's correct. It's 2,700 doors.
Okay. So since -- given the fact that you mentioned that 2,700 number, I guess my question is so what's the total number of doors for Acima at this point? Can you disclose that?
No. I mean, we don't talk about that other than we've made previous statements as to the size and like I said in my comments, we say over 30,000 right now, so that's growing at a pretty significant rate still.
Okay. Fair enough. And then, okay, just one last follow-up. So I just wanted to get back to the sort of the normalization of the collection activity. So I just want to make sure I understand it. So basically, it sounds like the effect from the stimi checks started to wear off and maybe you guys haven't been as aggressive or didn't feel the need to be as aggressive with collections because everyone had stimi checks and was making their payments and doing early buyouts. And so it sounds like you hired more people to now the collection -- or customer payment activities normalizing to go after that? Or do you allocate more hours or a combination of those? I'm just trying to understand exactly what that means.
Yes. I'll start out on the Acima side and then pass it to Anthony for the Rent-A-Center side. So when Mitch was talking about being caught a little bit short, what we're talking about is we were converting over our operations and in doing so, that's when we started to see the normalization accelerate. So what we've seen now is our staffing ratios come back in line with regard to our account loads from a delinquent account load. And so the key is that our exit velocity for '22 will be back in line with the guidance that we've provided.
And you're talking call center, the centralized call centers.
That's correct. And then the other thing is we've brought other -- one of the nice benefits is the Acima platform has a number of other streams that are automated that enable us to enhance not just having to have collectors, and we were able to then bring those online with the general portfolio.
For the Rent-A-Center business, historically, the third quarter is softer from a payment perspective. So we know that yearly going in, the third quarter is going to wind down a bit as people go ahead and get prepared for school and vacations right before the school year begins. So you're right, the people had stimulus checks in their pocket, but we knew that those were winding down. We knew that enhanced unemployment was ultimately going to end as well. So we took a proactive measure throughout the quarter to go ahead and get staffed back up. Actually, headcount year-over-year is up 7%. So that not only benefited the opportunity when the normalization occurred to go ahead and react, it also sets us up for the fourth quarter from a demand perspective.
But that one sort of unique situation that occurs is, you're right, the customers were more flush with cash in their pocket, and it's almost like a wait and see, like when is the period that this normalization occurred. It occurs quickly. We, in turn, go ahead and respond, but there's also that balancing act to make sure that we don't overcorrect because we don't want to go ahead and harm the portfolio as well. So we went ahead, we normalized and what we're seeing now in our leading indicators, we feel very confident that the historical trends for the fourth quarter will continue. And the loss rates, like I said, around 3% going forward, we feel confident about that.
Your next question comes from Brad Thomas with KeyBanc.
Just to follow-up on that last line of questioning. So on the Rent-A-Center side, as we look out to 2022, you think that annual losses can still be in the 3% range and just any level of detail you go into on your confidence and that would be great.
Yes, I do expect that that's going to occur. First off, the normalization happening and what we're seeing right now from a customer payment perspective, we do feel confident and when you think about normalization, the way that I look at it in the Rent-A-Center business is, I'm not expecting that we're going to go back to pre-pandemic numbers. And the reason that I can feel confident about that is because now we have centralized decisioning that's available inside of all of our stores. In addition to that, as a byproduct of the pandemic, customer communication tactics and the initiatives that we employed there and then the ramping up of digital payments. So when you put those things together, that's what makes me confident in the go-forward of 3%, around 3% being the range for RAC.
Yes, almost 60% of payments are now happening outside the store now.
Yes. Yes, approaching 60%. So we feel good about that.
That's really helpful. And maybe a similar question for Jay on the Acima side. I mean, the theme of this call and I think others in the sector for this quarter has been normalization happening faster than expected. Yet the Acima side we're still seeing the losses down partially from having Acima within the mix. Can you just talk a little bit more, Jay, about your line of sight to '22 and how you make sure you don't get overly confident in the algorithms and miss what perhaps would be a more violent move back to normal trends on consumer spend?
Yes. When you look at our 2022 loss projection, we're looking at somewhere around a normalization rate of 6% to 8% within the virtual book. The key thing is how we don't end up getting kind of overconfident to your point with regard to the underwriting, is this ability to break it down by channel, by product, by partner. So there's not just one monolithic decision engine, but our machine learning and our AI is constantly running optimization and looking for exploiting the good portion of the population while minimizing the riskier portion of the population along that lines. And we're able to track that in real-time and we need on it on a regular basis.
Really helpful. And Maureen, I apologize if I missed it, but can you just give us an update on where we stand year-to-date on synergies? How much do you think we'll get in the fourth quarter and your current plan for 2022?
We believe by the end of the year, we'll achieve the $25 million that we talked about. There were a number of different initiatives, part of which we've deployed, others still extend within '22, which is why we talked about a longer term run rate of $40 million to $70 million. Most of what we had anticipated rolling out in 2021 has already occurred, but we are expecting some of those benefits to show through within the fourth quarter. So like I mentioned earlier, we're on track with achieving those synergies. There's been some offset with the timing of the normalization, but we still feel very confident that integrating the preferred lease business with Acima, bringing those 2 companies together, will make us a better company, will get us to mid-teens EBITDA margins over the next year or 2.
Yes. I think the other thing, Brad, when you think about the future and a lot of questions, obviously, this morning about the future as compared to the lumpiness of where we are today, remember the normalization of payments, what comes with that is a tighter credit environment. You're talking -- Jay is talking about the -- our own decisioning and certainly by vertical and even by retailer, and same in Anthony's business by vertical, how do we decision and there's a tightening going on out there without stimulus. We just -- one needs to remember that tighter credit environments are beneficial to us in the long run, even if in the short term they're not. But in the long run, lease-to-own business benefits from tighter credit out there above us.
So and we're already seeing some of that in our vintages, in the -- in our, what we call vantage scores as people come into our portfolio, we're seeing a slight uptick in that customer, the creditworthiness, I guess, you'd call it or vantage score, you call it a lot of different things. But we're seeing a better customer already and we would expect that to accelerate. And everybody just needs to remember, a tighter credit environment, even though in the short term, we get -- it has impacted us in the third quarter and as we go into our fourth quarter in the guidance we gave, but in the long run, this is something that benefits LTO.
Your next question comes from Kyle Joseph with Jefferies.
Not to beat a dead horse, but on the credit side, obviously it's normalizing. Can you just give us a sense for are there any potential offsets in the credit normalizing environment and then kind of remind us how the Rent-A-Center business did in a negative economic scenario like the GFC and then how you envision the Acima business performing in an environment like that?
Yes. I think they both outperform in an environment like that as we go and think about 2022 and 2023 as credit tightens. We've certainly seen that over the years with Rent-A-Center. If you go back to one of the worst recessions in the history of the company -- in the country in 2008, and we had good growth rates, certainly outperformed just about everybody when it comes to not only revenue, but our losses didn't go up and so forth. And Acima should be very, very similar, Kyle. I mean it's the same business. It's through retail partners of course, the Acima ecosystem stands -- can stand on its own. But it's still the same business. It's still leasing where they can return the product and we can re-rent those products through Rent-A-Center.
So the recession resiliency store, I'm sure, in 2022 and 2023, not that would necessarily be in a recession of the country, but the impact will be there from a credit tightening standpoint and credit tightening is good in the long run. Rent-A-Center, when you look at not having to where we reduce the guidance on -- the annual guidance on Acima in that Rent-A-Center, keep in mind, I mean, Rent-A-Center -- a couple of thousand Rent-A-Centers out there have collectors in each store on the street. If people aren't paying, they can react much faster to a technological collections of a centralized call center through virtual payments and so forth. So the impact is going to be much less on Rent-A-Center than Acima when this happens in the third quarter when the normalization was faster. But overall, in the long term, both should benefit from the tighter credit environment.
Yes. That makes sense. And then a quick follow-up from me. Obviously, you talked about the supply chain impacting Acima, but just walk us through the Rent-A-Center side of the business. Any impacts from the supply chain, how your inventories position heading into the holiday season there?
Yes, Kyle. We're in a strong position from all the major categories. Good inventory levels actually ended the quarter with held-for-rent up 24% versus the prior year. So the merchants and the vendor partners have done a good job of sourcing inventory. And we've said it before, just remember in the Rent-A-Center business, we're able to go ahead and source for fewer skews, but buy deeper in them, so that we have the stable items for the customers that are available.
We're still seeing good expansion in categories like tools and tires and handbags and e-bikes, et cetera. And we're looking for opportunities to expand the assortment that's available on the website as well strategically though because we want to make sure that whatever we're showcasing to our customers online that from a customer experience perspective, there are things that we can get. So we'll ramp those up as time goes on as the supply chain loosens up but overall, to meet the demand of the fourth quarter, we feel confident, especially with that held-for-rent being up 24% year-over-year.
Your next question comes from Tim Vierengel with Northcoast Research.
It seems like most of my actually questions were already answered, but I do have one bigger picture question for Anthony and Mitch. It seems like consolidation is happening in most fragmented industries in the U.S. with all these supply chain issues and kind of really limited capital of these smaller operators. I was wondering if we should expect something similar in the legacy brick-and-mortar business and if you guys have seen any kind of easing competitive environment recently?
Yes, Tim, this is Mitch. There's -- besides us and the obvious one other public competitor, Aaron’s, there's not near as much competition in the Rent-A-Center, either e-com or brick-and-mortar business as there is in the virtual environment. So it's not like competition has grown. We're growing. We're opening some stores here. We'll open stores next year. We're about the only ones growing stores. Our competitors shutting down stores. On the regional side, we're not seeing any real growth there. So we're the only ones growing.
I think honestly, I think there'll be some opportunities for us to do some acquisitions here and there. There'll be small ones. There's only one large competitor anyhow. So there'll be small ones, probably not all that material. Again, a few million dollars of EBITDA here or there. But I think the -- certainly, there are probably some of them, but they'll be pretty small in that side of the business. I think when you think about M&A, the -- and using our great balance sheet for M&A or share repurchases and the capital allocation stuff that Maureen was talking about, I think the opportunities are probably more on the Acima side and other business verticals like that in the payments world than it is on the Rent-A-Center side. We'll do up on the Rent-A-Center side, but they're going to be pretty small.
Yes. It's not so much the M&A activity. Understood. And you guys have been outperforming by, I'm going to say, high single digits for almost 24 months now. So I was just trying to gauge how sustainable that is. Can you maybe remind us, I have a number in my head that 45% of the store doors in the industry are run by independents. Is that number much smaller now? Am I thinking a number that's maybe 5 years old?
I'd say it's -- you're not that far off. It's between 35% and 45%.
Your next question comes from Carla Casella with JPMorgan.
Just 2 quick ones here. One on the labor cost front, it sounds like you pre hired labor in third quarter. But I'm wondering, are you expecting -- are you still hiring in through fourth, are you fully staffed and how comfortable are you with the labor cost levels?
I'd say we caught up in the third quarter and into October. There's still hiring going on. There always is because, unfortunately, we have turnover as well. So I'd say we -- by the end of October, we're in pretty darn good shape and it's kind of normal going forward, the number of people we need to hire, but the third -- late third quarter and then in October was more of a catch-up.
Okay. Great. And then just as you mentioned a few times a, we will return to more normal pattern sooner than you expected. As you see that, are you seeing any kind of uptick or change in the way you have to compete for either on the Acima side, retail partners or customers there or on the Rent-A-Center side for your traditional customers like are you changing any of the terms or do you see any change in the average length of the contracts or anything unusual as you return to normal?
No. The good news in our business is that as credit tightens, as people get tighter on money, it certainly impacts our payments, as we've been talking about this morning. But then -- but from a demand standpoint, it actually pushes more demand as credit tightens above us, if you will, in the funnel. So I think overall, from a -- and I think Jay mentioned this on the Acima side, the proliferation of the buy-now-pay-later space where -- we really don't compete for that same customer, but there's a lot of turndowns in that space with our retail partners and we're hearing from retail partners, say, what we need to talk to you about those -- the turndowns we're seeing. So it's more people add more prime and near prime payment options for their customers, they start to see more and more customers they can't do business with as they add those options, and that just benefits us and actually, I don't want to call it easy, but it makes it easier to get their attention that they need the LTO option in the store.
I will now turn the conference over to Mitch Fadel for closing remarks.
Well, thank you, operator, and thank you, everyone, for your interest this morning. Appreciate your time. It's an interesting time. It's been a heck of a year so far. We got to finish strong. And a heck of a year, when you start off the year with an acquisition like Acima and I just -- we had some lumpiness in the third quarter, things normalize a little faster, we talked about the supply chain. Overall, if we either go back to our guidance at the beginning of the year as we close Acima, but we'd be delighted to be where we are today from an EPS standpoint at a midpoint range in the $6. So that's a lot higher than where we were when we -- where we thought we'd be when [indiscernible] thing. So some lumpiness in quarters, but big picture, keep that in mind and just keep in mind and our outlook for the long-term has not changed and in fact, a tighter credit environment is a benefit to lease-to-own over the next couple of years so we're really excited and with that, we'll let you get back to your -- probably have another call coming anyhow, and we'll get back to work. Thank you, everyone.
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