Underwriting Pressure And Margin Constraints Will Challenge Operations Yet Leave Upside Potential

Catalysts

About Upbound Group

Upbound Group provides lease to own solutions and financial wellness products for consumers through its Acima, Rent A Center and Brigit brands.

What are the underlying business or industry changes driving this perspective?

• Although Acima is adding merchants and expanding its direct to consumer marketplace, tighter underwriting and a higher mix of lower margin jewelry leases can restrict GMV growth and keep segment EBITDA margins under pressure if loss rates stay near the top of the targeted range. This could cap consolidated earnings.
• While Brigit is seeing strong subscriber and ARPU trends as more consumers look for liquidity tools and cash advance products, sustained higher acquisition spend and testing into new customer segments can raise advance loss rates and marketing costs. This may limit the contribution to group net margins even if revenue rises.
• Although Upbound is investing in AI driven decisioning and digital tools to refine credit and customer experience, the need to maintain a conservative risk posture for a cash constrained customer base can lead to consistently lower approval rates at Acima and Rent A Center. This may hold back top line growth and earnings expansion.
• While Rent A Center is improving deliveries and upgrading its digital platform to capture more demand for low weekly payments, ongoing macro pressure on lower income customers and modest inventory cost increases from suppliers can force careful pricing decisions that prioritize affordability over margin expansion. This can limit improvement in segment EBITDA margins.
• Although the group benefits from scale, over 1.4 million Brigit subscribers and more than 100,000 Acima merchant locations, the focus on deleveraging and cautious capital deployment in light of a stressed consumer could slow the pace of growth investments. This may moderate revenue growth and delay meaningful uplift in free cash flow after interest costs.

Assumptions

This narrative explores a more pessimistic perspective on Upbound Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Upbound Group's revenue will grow by 6.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.8% today to 6.2% in 3 years time.
• The bearish analysts expect earnings to reach $339.2 million (and earnings per share of $5.93) by about January 2029, up from $84.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.0x on those 2029 earnings, down from 11.9x today. This future PE is lower than the current PE for the US Specialty Retail industry at 19.8x.
• The bearish analysts expect the number of shares outstanding to grow by 0.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Acima is already operating with lease charge off rates slightly above its 9.5% target ceiling, and management expects losses to peak in the 10% area. If macro pressure on non prime consumers persists, further tightening of underwriting could be needed, which would weigh on GMV growth, revenue and segment EBITDA.
• The shift in Acima's mix toward jewelry, which tends to see more customers using early purchase options, structurally carries lower gross margins than furniture. If furniture demand does not normalize beyond 2026 and jewelry remains a larger share of GMV, this could hold back long run gross margin and earnings expansion.
• Rent A Center is guiding to low to mid single digit top line declines in the near term and is still working back from underwriting cuts and a product exit. If trade down from higher income customers is weaker than expected or macro pressure on lower income households intensifies, same store sales could stay weak and limit segment revenue and EBITDA.
• Brigit is ramping marketing spend, testing new products and entering new customer segments, which is already pushing its cash advance loss rate higher. If credit performance in these cohorts deteriorates or customer acquisition costs keep rising, Brigit's ability to sustain both 40% revenue growth and mid teens EBITDA margins could come under pressure at the consolidated net margin level.
• Management is signaling a conservative stance on capital deployment while net leverage sits near 2.9x. If credit conditions tighten or funding costs rise, the group may prioritize deleveraging over growth investments, which could slow revenue growth across Acima, Brigit and Rent A Center and cap earnings and free cash flow growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Upbound Group is $24.0, which represents up to two standard deviations below the consensus price target of $31.38. This valuation is based on what can be assumed as the expectations of Upbound Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $46.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $5.5 billion, earnings will come to $339.2 million, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of $17.35, the analyst price target of $24.0 is 27.7% 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.