Upbound Group, Inc. (UPBD) Q4 2011 Earnings Report, Transcript and Summary

Good morning, and thank you for holding. Welcome to Rent-A-Center's Fourth Quarter and Year-end 2011 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, January 31, 2012. Your speakers today are Mr. Mark Speese, Chairman and Chief Executive Officer of Rent-A-Center; Mr. Mitch Fadel, President and Chief Operating Officer; Mr. Robert Davis, Chief Financial Officer; and Mr. David Carpenter, Vice President of Investor Relations. I'd now like to turn the conference over to Mr. Carpenter. Please go ahead, sir.

Thank you, Matthew. Good morning, everyone, and thank you for joining us. You should’ve received a copy of the earnings release distributed after the market closed yesterday that outlines our operational and financial results that were made in the fourth quarter. For some reason you did not receive a copy of the release, you can download it from our website at investor.rentacenter.com. In addition, certain financial and statistical information that will be discussed during the conference call will also be provided on the same website. Also in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of EBITDA is provided in our earnings press release under the statement of earnings highlights. Finally, I must remind you that some of the statements made in this call, such as forecast growth in revenues, earnings, operating margins, cash flow and profitability and other business or trend information are forward-looking statements. These matters are, of course, subject to many factors that could cause actual results to differ materially from our expectations reflected in the forward-looking statements. These factors are described in the earnings release issued yesterday, as well as our most recent quarterly report on Form 10-Q for the quarter ended September 30, 2011. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements. And now, I’d now like to turn the conference call over to Mark. Mark?

Thank you, David. And Good morning, everyone. And again, thank you for joining us for our fourth quarter 2011 report. Let me start by saying that I am generally pleased with our results for the quarter and our overall performance for the year as a whole. Now while we did fall a little short of our expectation for the quarter regarding our core rent-to-own revenue, the demand remains strong within the core, as our number of agreements ended the year within our expectations. And Mitch will go into some further detail with you, but the short of it is that we have seen some customers trading down, as well as a slowdown in packaging or add-ons taken by the customer. This has led to a slightly lower average monthly agreement amount, which led to the lower-than-expected revenues. With regard to our growth initiatives, I remain very excited. In our RAC Acceptance business, we opened 445 locations in 2011, well above our original forecast for the year of 275 to 325, ending the year with 750 locations and performing within our expectations. Regarding the international initiatives, I'm pleased to report that our results there are also very well. I just recently visited Mexico and a couple of our new markets, and I returned excited and optimistic about the long term potential. Certainly, we have much to do yet, but the foundation is laid. The transaction, or the business proposition, is being well received by consumers and our operating results again have generally been in line with all of our expectations. We're also seeing similar results in Canada in comparison to our model. So I believe we are very well positioned as we begin 2012 to have yet another good year. While the last several years have been turbulent for the country as a whole and we have faced various headwinds, we have and continue to perform well, executing our plan in growing our business. For 2012, our total revenue growth expectations are up or a positive plus 7% to plus 10%, and our EPS growth is projected to be up 3% to 10%. Again, I'll remind everyone, that includes approximately $0.20 of earnings drag from our international initiatives. And again, Robert will provide more detail on our guidance here shortly also. I do want to thank all of our co-workers across the various business lines for all that they do day in and day out, helping us to achieve our results. And as always, we appreciate your support as well. With that, let me turn the call over to Mitch and ask him to provide more detail on the operating results specifically.

Thanks, Mark, and good morning, everyone. As Mark mentioned, overall, we are generally pleased with our earnings for the fourth quarter and for the year. We did fall just short of our revenue for the quarter, not because of demand but because of mix. Our deliveries per store for the quarter were about what we expected them to be and they topped the prior year by about 2%. Our number of units rented per agreement, a metric that had been trending up for over a year, backed up a little on us. So we had a slight revenue shortfall due to tickets. Again, demand was good and where we expected it to be. In fact, our 2.7% same-store sales number was our best in any fourth quarter since 2002. A little more than half of that came from our core domestic rent-to-own business and the rest came from the results of the impact of approximately 100 RAC Acceptance stores coming into the count. We believe the tight consumer credit market continues to drive customers our way, as an increasing number of consumers needing or wanting high-quality, brand-name merchandise are attracted to our value proposition. Our core business performed well in this very challenging economic environment. Our collections remain solid on a weekly basis and our customer losses in our core business came in at just 2.5% for the quarter and for the year. Our inventory Held for Rent came in at just 19.6% as that metric continues to be driven down by the RAC Acceptance business model that holds the line. And speaking of RAC Acceptance, that business contributed over $190 million in revenue for the year and is already almost 7% of our total revenue. And as you saw in our 2012 guidance, we're expecting over $300 million out of that business segment in 2012. On the international front, we ended the year with over 50 stores in Mexico and expect to add approximately 60 more there in 2012. Our in-country field support center will be opening late in the first quarter in Monterey, and that should help us further drive results by having the infrastructure and resources on the ground in country. In Canada, we ended the year with 28 stores and also expect our growth to continue there in 2012 with approximately 10 more. So our performance in our international unit is good, and we believe it will provide significant growth for us for many years to come. Overall, all of our business units continue to perform well. Our demand is good. Our collections are consistent. Our inventory's in great shape, and I'd like to thank our close to 20,000 co-workers for their solid performance, their commitment to our growth plan and for all they do for our great company every day. And with that, I'll now turn the call over to Robert.

Thank you, Mitch. And we'll spend just a few moments updating everyone on our financial highlights during the quarter and provide updated annual guidance for 2012. And after my comments, we'll then open the call to questions. As always, I'd like to mention that much of the information that I'll provide, whether it's historical results or forecasted results, will be presented on a recurring and comparable basis. So as outlined in the press release, total revenues were $737.5 million during the fourth quarter of 2011, an increase of over $60 million or approximately 9% as compared to the fourth quarter of last year. This increase was primarily the result of an increase in revenue from our RAC Acceptance initiative, offset by a reduction in revenue from the divestiture of our Financial Services business. The net revenue increase helped us to post a positive same-store sales increase of 2.7%. Net earnings were $50.5 million, while diluted earnings per share equated to $0.85, which includes approximately $0.08 in dilution from our growth initiatives. Our fourth quarter EBITDA came in at $101.9 million, which equated to a margin of 13.8% in the period. We generated over $20 million in operating cash during the fourth quarter, and we ended the year with over $286 million in operating cash flow generation. A fifth [ph] end of the prior year, we repurchased approximately 5.9 million shares of our common stock for roughly $164 million. We made dividend payments in excess of $26 million and all the while having maintained our leverage ratio well below 2x, while ending the period at 12/31 with over $88 million of cash on hand. In fact, at year-end, our leverage ratio was 1.7x, whereas our covenant requirement is less -- is to be less than 3.25x. So we believe we currently…

[Operator Instructions] Your first question comes from the line of David Burtzlaff with Stephens.

First, guys, on the comp in the fourth quarter, I think, Mitch, you said it was about half from core and the other half from RAC Acceptance. How did that come in relative to what your original expectations were? I mean, was it all kind of a little bit lower from the core and RAC Acceptance performed as you thought? Or a little lower on RAC Acceptance, too?

That was all in the in the core. The core did end up a little more than half of that 2.7. But it was still lower than we expected, when we originally gave guidance for the quarter. So it's all in the core RAC Acceptance. Revenue was where we thought it would be. And as I mentioned, David, it was a -- we did end up with lower agreements on rent that we anticipated but it was just in a lower ticket, which flows into next year. Our portfolio of agreements has a certain value to it and that lower ticket that we ended the year with flows into next year. Even though we have the agreements, that flows into the next year and brought next year's revenue down slightly also.

Okay. So the guidance for 2012, lowering it by 1%, is all the core and the makeup of the portfolio?

Correct.

Okay. And then, Robert, on the -- just looking at the gross margin on merchandise sales, it looks like it came in at about 11%, just on the specific line item. Is that -- can you give any sort of color on what's causing that? Is that RAC Acceptance? And are there early payouts on RAC Acceptance that flow through in there?

David, this is Mitch. There are early payouts on the RAC Acceptance business. And that's been part of it, that overall number going up. But also in the core business, it's the gross profit margins are down a little compared to what we thought they'd be from -- basically from being more promotional over the course of the year than we anticipated being. And driving more business, we ended up at a little bit lower profit percent there just by -- if we give the customer a better deal when they pay out, it affects that margin on the payout side more than anywhere. So that's more the core business being more promotional than anything else.

Okay. And then on the RAC Acceptance, are the losses -- the loss rates any different than the core business has been in that 2% to 3%?

That's a good question. No, they won't end up any different. They actually -- when they have a new business, they'll sometimes -- because when you do lose an account, everything's pretty new and you’ll run a little higher percentage on the front end of a business, whether it's a rent-to-own or a RAC Acceptance store or an international store. It doesn't matter. The early on -- because the revenue's low and you still -- if you lose 1 or 2 pieces, you're going to have a higher percentage. But once they hit maturity, they'll run the same percent as the core business.

Okay, but you haven't had any problems with getting items from customers then?

No.

That are behind in payments?

I mean, certainly, there's been some, but nothing that we wouldn't expect.

Okay. And then finally, Robert, I mean, I know you're not giving quarterly guidance anymore, but can you kind of give maybe some just expectations on how you may think the quarter shape up in terms of spread? I mean, is it going to be more back-end loaded than front-end loaded in terms of the earnings growth? Or is it kind of even throughout the year?

Yes, David, thanks for the question and I kind of alluded to it. Although it's not 100% clear in my opening comments, that in addition to the segment reporting, as well as other information we're going to provide on our Investor Relations portion of our website, we'll provide some additional transparency. We are going to be posting on our website just the way we have performed over the last several years by quarter, so that investors and others can get a sense of how earnings generally break down quarter-to-quarter. And we don't see there being that big of a disparity going forward and how we will expect earnings to come in, in the future. And I think it's already on there, Robert.

It's posted on the website.

Your next question comes from the line of Budd Bugatch with Raymond James.

This TJ McConville filling in for Budd. Thanks for all the detail on the comp, Mitch. How about the $0.08 drag from the growth initiatives, Robert? Is that a net number? Can you break that apart between what the contribution of RAC Acceptance was versus what the drag of the international players were?

In the quarter, as you know, Mexico is still net negative, just given the relative newness in the quarter or in the overall results. They're about a $0.04 drag in the fourth quarter. Canada and RAC Acceptance were both a couple pinions [ph] each. RAC Acceptance, specifically because of TRS, there was some contribution from TRS in the quarter. So it's not 100% diluted in the quarter. But I don't have the specific number in front of me, but we can get that and then follow up with you on that, TJ.

Okay, that's fair enough. I just wanted to see what the keys were. And then on the tax rate in the quarter, pretty noticeably lower than we might have been expecting or than you might of guided to. Any items in there you want to call out? Or any reason for that lower rate there?

No, I just -- suffice to say, taxes are very complicated with us going more international there. It creates a little bit -- additional things to take into consideration. Our -- the primary result was our view in long-term profitability in Mexico. Mitch alluded to the fact that we are opening a field support center in Monterey in the first quarter. So in the fourth quarter, the determination was made that the net operating losses that we were seeing in Mexico, that we will be able to recover those in time and ultimately, realize a deferred tax asset. So it's really a reversal of valuation allowance posted against our deferred tax assets that, given the progress we've made in Mexico, we view that as recoverable in the future and that valuation allowance is no longer necessary.

Okay. So in the $3 to $3.20 that the new guidance isn't normalized, is the 37% or so rate assumed?

That's correct.

Okay. And then if I could -- maybe back to the core business, Mitch, I know last year we had the issues with the marketing schedule in the first quarter on the -- with the elimination of the refund anticipation loans. Has that been addressed this year? Are we expecting a more normal pace of business in the core business in the first quarter?

Well, we -- the flow of the first quarter is going to be similar to last year because those refund anticipation loans are still not there so the payouts come a little later in the quarter. The early purchase options come a little later in the quarter, because the money's coming a little later from the IRS when you can't get those refund anticipation loans. So I think the flow of purchased options will be the same as last year. We feel like we have a much better plan this year in offsetting those with new business. We worked hard. We know the first quarter was a real Achilles' heel for us last year, especially February. We ended up talking about it all year, what February did to us. So we got a plan together that really kicked off yesterday from a promotional standpoint to not have that happen to us again.

That's helpful. Last one for me, guys, is a bigger -- a little bigger picture question. We've gotten now a couple of months of at least a little better economic data. Wondering if you're seeing any change in customer behavior. I know we talked about the pullback and the number of units rented. But did that change throughout the quarter as it's getting better? Or are any of the customers feeling a little better and maybe starting to give you an inkling that they're willing to open back up? Or is it just been steady state throughout?

Well, we certainly, TJ, have some mixed signals there. One, the demand being strong with a 2% more deliveries than we did the year before. So we're happy with that. But the trade down factor inside the store when they came in, whether it's trade down on the initial unit or not doing as many add-ons, that was down for the whole quarter. So we didn't -- it's not like by December, they went back up. So we got mixed signals. There's more traffic than a year ago but the trade down factor is there. So I have to call it mixed as far as how the consumers rate [ph].

And the only follow-on to that is we -- I think we've shared -- we track customer demographics, if you will, and we have not seen any change to speak of at all in the demographic profile, if you will, of our customer really over the last couple of years. We saw a little bit of a shift, 3-plus years ago, when the economy first went upside down. And that went on for several quarters but it has been somewhat flatlined, if you will, since then. And that is true with the information we've got on our most recent update a couple of weeks ago, if you will.

Your next question comes from the line of Arvind Bhatia with Sterne Agee.

A few questions for me. First one, guys, is on the salaries and other expense line. It came in below where we were modeling. Was there anything going on there from a cost saving standpoint? Or is it just mainly a function of slightly lower revenue? And then second question is on the RAC Acceptance side of things. Can you talk to us about maybe any new partnerships that you might be looking at? Anything that you can -- whether on the electronics side or otherwise, that you can mention?

Yes. Arvind, this is Robert. I'll take the first one. The salaries and other, generally speaking, seasonally adjusted for some items. For example, the summertime is a little hotter, more electricity in the summer. In the winter, not the case. Gas prices were slightly down in the quarter from where it was running earlier in the year. So there was some impact from that. But generally speaking, there's some variable costs. But across the board, no specific initiatives. As you know, we're always driving costs out of the business when and where we can. And suffice it to say that effort continues and is ongoing and will continue in the future. So it's more seasonally adjusted than anything else, specifically in the quarter.

I think on the RAC Acceptance partnerships, Arvind, no -- nothing really major to talk about. We did have a bankruptcy of a furniture company. So we ended up closing a few of those locations, which really can also speak back to the beauty of the business model, closing the location, taking the accounts and either putting them in the RAC Acceptance location nearby, or Rent-A-Center store if there's not a RAC Acceptance location nearby. And having very little, I think it's like $10,000 or something our CapEx requirements going in. Very little cost to leave a location if our partner is either closing or in a bankruptcy, when they're not getting any new merchandise. If they're not getting the traffic, we're not getting any traffic linked to it. We move out of there. So there was one of those -- and of course on some of the other partnerships, we're testing with a few of them, but nothing new to report on those.

Again, then I want to go back to the $0.20 drag from the new initiatives in 2012. Is that a change at all, from where you were guiding before? Is that exactly what you had contemplated in your last guidance? That's one. And second, I wanted to understand the trajectory of that by quarter. Is it fair to assume that it will be higher losses in the first half and then things will improve as you generate more revenue internationally? So if you can provide some color on the $0.20 drag in 2012.

Yes, Arvind. That $0.20 drag that we're projecting is similar to what we projected last quarter. And as we mentioned last quarter, I believe, it's spread evenly throughout the year as well. So it's not heavily weighted on the front end or the back end. It's generally spread evenly, $0.05 or so a quarter throughout the entire year. And it's all international. RAC Acceptance is net positive next year, but it's all international. And yes, more revenue’s being generated in Mexico, but we ended the year with 50 stores. We'll open 60 next year and they're spread out evenly over the year, as far as opening. So that's why the dilution will be pretty well spread out [ph]. If we open all 60 in the first quarter, it'd be different, but we're projecting to open those 60 throughout the course of the year.

Same with Canada, those tend to spread out, pretty much throughout the year.

And then 2 questions on the core business. One is on the ticket side. Can you tell us what a ticket is right now versus maybe what it was a quarter or 2 ago? And then also, in terms of categories, was there any particular category that caused less demand? Was it -- or also lower ticket? Was it electronics in any way responsible for this? If you can talk to that please.

Sure. Interesting question on ticket. I don't have the exact numbers in front of me, Arvind. But they're -- it was higher in the fourth quarter than last couple of quarters, just not as high as we had forecasted. So when we say we missed our -- that's how you can end up with missing revenue guidance, but also saying at the same time as our best same-store sales numbers since 2002. So those obviously are -- can be conflicting with one another if you don't understand the detail of it, which is ticket is up over -- was up over the year, it just -- in the fourth quarter, we didn't get the growth we anticipated. So we missed our own guidance, basically. But it is up over the year.

I'm sorry, Mitch, I think it's important to note your comment you'd made earlier. The packaging had been going up every quarter and we expected that to continue in the fourth and it didn't. So even though the APU was up, less than our expectation because we didn't get the packaging that we thought we were going to get.

And that leaves your next question, Arvind, on category. The biggest drops we saw in the fourth quarter without getting bad on agreements were in some of the electronics, the games and home theater systems that get added to TVs. I think probably the games were affected a little bit this year, and maybe we didn't anticipate it well enough or affected this year by there not being any new technology compared to last year, where the PS3 and the Xbox were brand new with Kinect and the Move with the PS3. So they were -- there was no new technology on hardware this year. And that was the biggest drop as far as adding on the agreements as well as the home theater in a box. So it's those add-ons. But not in the core units where there's televisions, furniture appliances or computers. They were pretty consistent.

And the final question is on the Consumer Financial Protection Bureau. Mark, you addressed that, I think, in the past. Any updates there from your standpoint, now that they have a director?

No. Nothing has really changed at this point. We continue to monitor, if you will. And albeit the Director’s been appointed, really doesn't have any authority still at this point. And nothing has changed in terms of the context of the bill or anything specifically as it relates to us. And just as a reminder, in its current draft form, I think one of the things that gives us comfort, again, the parenthetical -- that stage that if the initial leases were less than 90 days, this shall not apply, which clearly, we are. And so, again, not to say that, that couldn't but that's our starting point and nothing has developed or changed from when we spoke last.

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

I think most of my questions have been answered. But just a follow-up on RAC Acceptance. Seems like the results for the quarter came in pretty much in line with what you were looking for. We’re was just wondering if there was any update to how you're looking at the unit economics and any opportunity for growth as you close the books here on 2011.

In terms of unit level economics, there've been no changes in our expectations since we updated it last time, which I think was last quarter. So no changes based on the last 90 days of operations or results and as we look back, it's obviously been a successful year for us. We opened a lot of stores, well above our expectation, 445 stores. So a significant year of growth. We're forecasting to not open as many this year. That's not because of demand. The pipeline is there. It's just because we want to make sure that we can pause and operate as -- up to our expectations and our results that we're forecasting.

Great. As you look at some of the customers that you're getting through RAC Acceptance, are you buying anything new versus what you're seeing out of your core Rent-A-Center customers? And any new overlap or customer switch-over than what you had talked [ph] before?

We're still not seeing much overlap at all. It is a higher demographic customer, both in credit score and income levels. I'm seeing very, very little overlap, Brad.

And then just lastly, in terms of your decision to no longer give quarterly guidance, I mean, you've clearly pointed to the growth initiatives. Is it really just around that aspect of the changing dynamics of your business? Or is it there anything within the core business that's maybe making it less easy to forecast or less predictable?

No. In fact, the core business, we've been in for 20-plus years, 25 years. It's pretty easy to predict, I would say. I think it’s the complications, when you go international and have several different initiatives going on at one time in terms of predicting, timing, number of openings and opportunities, RAC Acceptance, we could have a partner approach us and we make the decision to either grow faster or not go faster. So there's a lot of dynamics to go on within the guidance process, and the core business is steady as she goes, so to speak. And it’s just from our perspective, we want to make sure that we're looking out longer term, managing the business the right way for the long-term prospects of the shareholder and to get caught up in a 90-day window, we just don't feel like it's judicious as we think about managing for the long haul.

Your next question comes from the line of Laura Champine with Collins Stewart.

My question is also a follow-up on the kiosk business. Could you comment on your losses there? I mean, the charge-offs overall at 2.5 percentage rate, but how is that metric tracking in RAC Acceptance? And is that hitting your expectations?

It is hitting our expectations, Laura. As I mentioned earlier, with the stores being new, the percentage is going to run a little higher until the stores hit 2 years old because they have less revenue and then the cost of the product is really high when you lose one on the front end. So that's going to be a little higher. Probably, overall, when we add in RAC Acceptance, it will be in the k -- we'll be in the higher 2s as far as overall. And it's 2.5 in the core business. It will be under 3 but it will be in the higher 2s once we have RAC Acceptance. And international is factored in because the same happens there. The newer the store, the higher the percentage is going to be until they mature.

Kind of grow down to 2.5%. They don't grow up to it.

But certainly not seeing anything outside of our expectations.

Okay. And then just to clarify, I think you've been pretty clear on this one already. But the guide down, it looks like the comp, it comes all from the core business. On the expense side, is it all on the core business too? Or is the profitability different than you had originally expected in RAC Acceptance?

It's really -- Laura, you hit on it in the first part of your question. The 1% guide down in the revenue does translate down to earnings. And it is all from the quarter, as Mitch alluded to and described, that it was the average ticket and the mix of the categories that were in the portfolios. We ended the year to close [ph] through all next year. And as I said earlier, it did go up in the fourth quarter. It just didn't go up as high as we thought, which is one of the problems with given our annual guidance for 2012 back in October, before we had our -- like any retailer, the biggest quarter of the year as far as adding on a lot of new agreements and you got to guess at what the rate per agreement is going to be. And had we not giving guidance for 8% to 11% growth back in October, 7% to 10% today would sound a lot better than...

And that's really the unfortunate part and another factor in consideration of how we change guidance and going back to being a, for lack of a better phrase, a mono-line business where we had the RTO core is pretty predictable and we could forecast very, very easily. However, with international and RAC Acceptance in the fourth quarter calendar, we really realized that we need to start giving guidance after the fourth quarter, the most important time of the year. And had we done that, we wouldn't be lowering guidance because this will be the first time you have seen guidance.

But just as a follow-on to the units per agreement issue that we've been expecting to bottom out and improve for a while now and it's not doing so. I heard your comments on the technology didn't help. But is there a change in the macro environment or in feedback you're getting from customers that's preventing them from bundling up on contracts?

I don't think so. I think the -- no, we haven't heard anything like that. And our units per agreement had trended up for the last year, up until September and October was the first month that we saw it trend down. So we have been going pretty good there, and then we had a little bit of a drop in the fourth quarter and we anticipate it to continued to go up. So that's where you get off the hook by 1%.

We had a little drop yet we're anticipating it to continue to trend up and it didn't.

Your next question comes from the line of John Rowan with Sidoti & Company.

Just one quick question on Mexico. Is it kind of trending as you had anticipated? I know some of the other or some credit providers, at least along in the Northern Mexico border, have said that there's some pressure in those markets due to violence. Just want to know how your experience has been in Mexico so far and it's tracking relative to your expectations?

John, this is Mark. And I would say, overall, it is very much in line with our expectations. Certainly, we've got stores along the border and in some isolated cases, there have been some instances that are disruptive for 1 day or 2. But we're well in country now, well beyond the border. I think we're in 6, or actually 7 different markets now, including Monterey and we'll be going into Guadalajara here shortly. And in those cases, I mean, it may vary a little bit store by store. But no, the overall performance, whether it's along the border or even in-country, again, is generally been in line with all of our expectations. And the most encouraging part for me is, as I said in my visit just down there, the transaction is being understood and well received, if you will, by the consumer. The delinquencies are in line with our expectations. The product mix, no big surprises. We've been able to flow the products successfully into the stores through the channels that we have and that we've been able to recruit successfully. So all in all, again, long term, I feel good about where we are and what the outlook is for the future.

[Operator Instructions] Your next question comes from the line of DeForest Hinman with Walthausen & Co.

I have a couple of questions. I found it interesting, the commentary regarding the operating margins for 2012 going down. When I think about your store level economics slides that you had given, you talked about the kind of the drag in the initial year and then it improves. And then taking a step back, the RAC Acceptance business -- I think you're trying to say in these slides, has a higher operating profit margin as those stores mature. So it's a little bit surprising that you're guiding operating margins down as we're getting some more of those stores maturing. So first, can you explain that? And then beyond that, can you talk about how you think operating margins performed beyond that even?

Yes, great question, DeForest, and this is really a byproduct of segment reporting. And there's going to be some alterations as to how operating profit looks on our income statement. You probably saw it in the press release, the operating profit is now, after general administrative expenses and other costs, which is after overhead, which would include multi-unit management as well as the corporate office. Whereas the unit-level economics in the slides on our investor presentation, store operating income or operating profit is before those costs. And so we probably need to sync those up more appropriately as we get into this segment reporting that we're going to be adopting here at the end of February. But suffice it to say that before allocations, the unit-level economics have not changed. When I'm describing gross profit being down or operating profit being down, it's really taking into consideration all costs of EBIT, if you will, before taxes and the interest. So that's part of the explanation and then the other explanation is just the fact that we're still opening and growing. That's going to have a drag on margins.

Yes. And all the stores in RAC Acceptance, they're not coming into the year at maturity even though we've got 750 of them. Most of them are still in that period, where they're not making the margin that you make once they mature. So it's really where we are in the growth cycle. So to the latter part of your question, DeForest , you would anticipate, as the stores mature, for that to get better and come back up.

So I mean, should we be thinking about 2012 is kind more of a trough year, in terms of the operating margins. And then beyond that, we should be looking for some amount of operating margin improvement?

Assuming the forward years have similar or less new store growth, the answer is yes. Correct.

Okay, that's helpful. And you talked about your cash flow expectations for 2012, which is helpful. And I know we're getting a little bit of a drag from the tax end of things and we're also investing on the international business. But how -- has the outlook for share repurchases changed at all?

The couple of parts to that question, the cash flow expectation, as I mentioned in my opening comments, are expected to be $80 million to $100 million in 2012. That's consistent with last quarter's guidance, as well for the year. And there is a turn in deferred taxes as you mentioned, or at least we benefited this year from not having the cash tax obligation that we're going to have next year. So $80 million to $100 million in free cash flow and as you think about the share repurchases, right now or this past year, we purchased 6 million shares. Our back gets [ph] between the board and our adventure are roughly equal around $80 million. Our view is with cash and where the stock is trading, that's always taken into consideration. You look back on our history and how things are managed going forward is really, as I've mentioned in my opening comments, investing for the long term first, be it RAC Acceptance or Mexico. So to the extent we have opportunity to grow faster than we've already talked about, that will be the first utilization of cash. We have also got a dividend that we're going to pay. And this past year, that was $26 million or so. We expect to have that continue as well. So that will be a factor out of the $80 million to $100 million of free cash.

Is there any buyback authorization remaining at this time?

Yes, about $80 million.

There are no further questions at this time. I would now like to turn the call over to Mr. Mark Speese.

Ladies and gentlemen, thank you again very much for joining us today. As always, we appreciate your interest and support of the company. Again, as I stated in my opening comments, I'm pleased with our overall performance for 2011, and I'm excited about our outlook in 2012. Again, I believe the company is well positioned and we always appreciate your support in helping us achieve that. We look forward to talking to you next quarter. Hope you have a great day.

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