Expanding Financial Access And Innovating In E-Commerce Fuels Growth And Efficiency

Key Takeaways

• Expansion through new Acima Credit products and merchant partnerships is set to widen customer base and increase revenue.
  
• Technology investments and operational streamlining aimed at enhancing customer experience and efficiency may boost profitability.
  
• Legal and economic challenges, along with competitive pressures and reliance on merchant partnerships, could impact revenue growth and operational costs.

Catalysts

Upbound Group, Inc. leases household durable goods to customers on a lease-to-own basis in the United States, Puerto Rico, and Mexico.

• The introduction of the Acima Classic Credit General-Purpose Mastercard and the Acima Private Label Credit Cards, through the partnership with Concora, is expected to expand offerings and financial access for customers, potentially driving increased revenue and customer base expansion.
  
• Persistent focus on merchant growth, especially with the 10% increase in merchant partners and the addition of notable partners such as Purple mattress and iFIT, is likely to fuel GMV growth impacting revenue positively.
  
• The integration of the Acceptance Now business into Acima's decision engine is aimed at improving underwriting capabilities, potentially leading to lower lease charge-off rates, impacting net margins positively.
  
• Investments in technology and digital channels, highlighted by the launch of RecPad and the new e-commerce platform, are expected to enhance customer experience and operational efficiency, potentially boosting revenue and reducing operational costs.
  
• Rent-A-Center's store optimization and consolidation efforts, including the closure of underperforming stores and enhancement of digital channels, are intended to optimize scale and productivity, thereby potentially improving adjusted EBITDA margins.

Assumptions

• Analysts are assuming Upbound Group's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 6.0% in 3 years time.
• Analysts expect earnings to reach $280.0 million (and earnings per share of $5.09) by about October 2027, up from $54.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2027 earnings, down from 26.7x today. This future PE is lower than the current PE for the US Specialty Retail industry at 14.5x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.11%, as per the Simply Wall St company report.

Risks

• The ongoing lawsuit filed by Acima leasing against the CFPB could present regulatory and legal challenges, potentially impacting operational flexibility and increasing legal costs.
  
• A rise in unemployment or deterioration in economic conditions could lead to higher lease charge-offs and delinquencies in both the Acima and Rent-A-Center segments, affecting net margins.
  
• The competitive landscape may intensify, especially in the e-commerce channel, putting pressure on growth rates and possibly affecting revenue.
  
• The company's reliance on continued merchant partnership growth for Acima's GMV increases might be at risk if macroeconomic conditions worsen or if competition becomes fiercer, potentially impacting revenue growth.
  
• Operational challenges in integrating newly acquired stores or partners, particularly relating to optimizing underwriting and account management, could result in increased operational costs and affect net margins.

Valuation

• The analysts have a consensus price target of $42.0 for Upbound Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.7 billion, earnings will come to $280.0 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 9.1%.
• Given the current share price of $26.73, the analyst's price target of $42.0 is 36.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.