Rent-A-Center (RCII): New Short Idea. This is another name with peak margins on peak demand and peak earnings. From a high level view, looking post stimulus and the pandemic goods consumption boom, we're not sure there is a category that has as much forward consumption risk as durables for the mid to low end consumer. That's the core RCII business. The case for continued demand in this segment might be elevated wages and savings, but we highlighted in our recent deck breaking down consumer income how the benefit on the low end was far below the average as savings and wage dollar boosts were concentrated on the high end. RCII of course uses "lease to own" (LTO) or de facto financing to a low credit quality consumer to drive durables purchases in its stores. The bull case is perhaps it will try to capitalize on small changes in wage trends to drive growth into newly "qualifying" individuals. We think the risk is greater that we are at peak consumer credit quality, and the lack of stimulus and child tax credit payments will be a real strain on low end consumer spending power. Our Financials team has highlighted that consumer credit quality has been at unprecedented levels for an extended period of time while card issuers have recently given some early modest signs of deterioration in credit quality at the consumer level noting Q4 delinquencies stepping up greater than the normal seasonal amount. RCII is also facing big and steepening growth and margin compares in the coming quarters. We think there is revenue and margin risk as the category weakens and consumer credit quality deteriorates. Meanwhile the company levered up a year ago adding $1.1bn in debt and tapping equity to buy Acima, an app/online based lease to own finance provider. This is being touted as a growth driver in a category that is going more and more digital. The issue is the space is highly competitive for BNPL and other short term finance solutions are a risk to the core value proposition for RCII and Acima. That rising competition means lenders getting more and more aggressive on the acceptance of leases which is a building blow-up risk for the space with credit quality at all time highs. Management has a 2023 goal of $6bn in revenue at a sustained new peak mid teens EBITDA margin for ~$900mm in EBITDA. We think we are more likely to see EBITDA reversion into the $450 to $550mm range and given the current leverage, that means a stock likely in the $20 to $30 range, or roughly 50% downside. Lastly, both unsecured Consumer Finance and Consumer Discretionary do not like Quad4 historically, this is levered play in both of those. We also like that ‘only’ 8.8% of the float is short the stock, given that it’s historically been as high as 60%.
Groupon (GRPN): Gaining conviction long-side – taking higher on position monitor. News of potential value for SumUp suggests GRPN could be ~$42/sh with the Groupon operations valued at zero. We’re still buyers here. On 1/17 we went Long of GRPN with part of our bull thesis being the company’s stake in the European payments company SumUp. Last week, it was reported that SumUp was pursuing a 20bn Euro valuation in its latest funding round. That would be $22.5bn. We don’t know GRPN’s exact stake. What we do know is that a) the original stake was 10.3%, b) the company participated in some future funding rounds likely to offset dilution, c) then in January 2020 is sold half of its position, and therefore d) GRPN’s stake is likely in the 5% range today. The SumUp valuation headline at a 5% stake, combined with net cash at the end of the quarter would suggest at GRPN stock price of $41.71 vs Friday’s closing price of $27.11. This is a targeted valuation for the funding round and a value for a GRPN liquidity event might be lower, but even still we’re probably looking at a valuation that implies the actual Groupon operations are valued at zero or negative, and we think there is bull case on the core operations as well. On this news we’re taking GRPN higher on our Long list, despite last week’s 20% rip in the stock. For more details on our GRPN thesis, see our note (GRPN | Big SumUp-Side).
