Rent-A-Center (RCII) Q4 2019 Earnings Call Transcript

Rent-A-Center (RCII 0.38%)
Q4 2019 Earnings Call
Feb 25, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and thank you for holding. Welcome to Rent-A-Center's fourth-quarter earnings conference call. As a reminder, this conference is being recorded, Tuesday, February 25, 2020. Your speakers today are Mr.

Mitch Fadel, chief executive officer of Rent-A-Center; Maureen Short, chief financial officer; and Daniel O'Rourke, senior vice president of finance. I would now like to turn the conference over to Mr. O'Rourke. Please go ahead, sir.

Daniel O'Rourke -- Senior Vice President of Finance

Thank you, Lisa. Good morning, everyone, and thank you for joining us. Our earnings release was distributed after market closed yesterday, and it outlines our operational and financial results for the fourth quarter and full-year 2019. All related materials, including a link to the live webcast, are available on our website at investor.rentacenter.com.

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 from our expectations. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements. These factors are described in our earnings release issued yesterday, as well as in the company's SEC filings. I'd now like to turn the call over to Mitch.

Mitch Fadel -- Chief Executive Officer

Thank you, Daniel, and good morning, everyone. Thank you for joining us. We will be providing a voiceover to the presentation shown on the webcast, and it can also be found on investor.rentacenter.com. 2019 marked a milestone year for Rent-A-Center, and as you can see on Slide 3, we significantly improved profitability and cash flow.

Performance was driven by revenue growth and efficiency initiatives. We made strategic investments that are taking our retail partner segment to the next level, and we profitably grew the Rent-A-Center business as well. Comparable store sales were positive in all operating segments, fueled by continued enhancements in our value proposition and in e-commerce. We strengthened our balance sheet to a significant reduction in debt and used excess cash to invest in our growth strategy while simultaneously initiating a 16% increase in our quarterly dividend.

We feel great about the business and believe we're well on the path of sustainable earnings growth. We have a business that generates significant cash in channels we intend to continue to evolve and optimize to capture growth. I'm extremely proud of our teams and confident in our strategy. Now turning to the fourth quarter on Slide 4.

While consolidated same-store sales were up 1.6% over the fourth quarter last year, they've increased over 10% on a two-year basis. We ended the quarter with a record number of average customers per store. Operating earnings rose approximately 50%, and the adjusted EBITDA margin improved 210 basis points versus the same quarter last year, helped by favorable lease performance and efficiency initiatives. Revenue growth in our retail partner channel accelerated in the quarter with invoice volume up 35%, driven by organic expansion and strong performance in virtual.

We believe we are well-positioned to build on these trends in 2020, and our forecast for the year includes double-digit growth for invoice volume and positive comparable store sales in our Rent-A-Center business. Now Maureen will go over more specifics in a moment. So I want to focus for a few minutes -- focus my comments on how we're thinking about the next several years, including our earnings goals and strategic priorities. As we outline on Slide 5, the lease-to-own market remains dynamic and resilient and e-commerce and virtual open up sizable markets, and we think the opportunity is north of $25 billion with ample runway ahead.

As you saw in the earnings release, we renamed our segment reporting to align with our priorities around virtual and omnichannel. We launched an integrated retail partner solution under the preferred lease brand to start 2020 and preferred lease includes our virtual, our staffed and hybrid offerings and is the evolution of a decade of experience serving retail partners. It offers our partners a flexible model serving banked and unbanked consumers for meaningful incremental revenue potential. The model has momentum with revenues in the quarter, driven by organic expansion and virtual growth.

The Rent-A-Center business segment includes our stores and e-commerce platform. That segment is benefiting from our work to create a true omnichannel experience that serves customers where and how they want to shop. E-commerce ended 2019 at 15% of revenues, up from approximately 10% last year. This channel leverages our stores to provide a highly effective distribution network that drives attractive unit economics with low acquisition costs and higher ticket.

We think that's a unique advantage to drive synergies from both the Rent-A-Center business and preferred lease. So turning to Slide 6. We believe our strategy to grow preferred lease and the Rent-A-Center business can drive significant shareholder returns. We believe the combination can result in consistent mid-single-digit revenue growth.

This includes our goal for over $1.2 billion in revenue via preferred lease by 2022 and low single-digit same-store sales via the Rent-A-Center business. We think the combination can drive an 11% to 13% adjusted EBITDA margin over the long term, with profitability expected to benefit as preferred lease achieves scale. So let's turn to the catalysts for our financial goals, starting with preferred lease on Slide 7. We currently operate in five out of the top six conventional furniture retailers.

Invoice volume is growing in both staffed and virtual offerings, and we're focused on increasing revenues with new and existing partners to achieve our three-year goal of over $1.2 billion in revenues. And I should point out that $1.2 billion goal does not even assume a large national retail partner. Turning to Slide 8. The key driver -- and I'm not sure this is fully appreciated either as our differentiated model.

Partners do ask how will this work for us, and our answer is the lease-to-own solution can be purely virtual and can integrate with a credit application process or operate on a stand-alone basis. Preferred lease can be a fully staffed option, or it can be accepted on weekends or during heavy traffic periods, whatever best addresses our partners' desire for flexibility and control on consumer transparency. We think it's a very effective -- highly effective model. We also serve banked and unbanked consumers with decades of experience in both, and we're going to make sure we address the full spectrum of credit-constrained consumers rather than just a subset of it.

It's a powerful combination, proven by the fact that our revenue per location is over seven times higher than competitors for retail partners, given the benefits of the model I just described. We have no leadership to drive growth, and we're making investments to improve the e-commerce experience for both traditional and pure-play partners. These include a streamlined application process and integrated checkout on e-commerce -- on e-commerce sites, I should say. To say the least, we're very excited about our pipeline and our prospects to grow preferred lease.

Turning to the Rent-A-Center business on Slide 9. We're extremely pleased with the performance in that segment as well. Solid growth in the portfolio in 2019 supports our plan to achieve low single-digit comparable sales growth in 2020, and we're building on the merchandising improvements we've made over the last two years. For example, in 2019, we expanded assortments into jewelry, tools, handbags and tires, and we're continuing to shift our mix to higher-margin products and aspirational merchandise.

This is offsetting performance of some consumer electronics categories. Turning to Slide 10. We're also achieving record levels of e-commerce traffic that's resulting in continued growth in comparable store sales. E-commerce sales are expanding our customer base with a new, younger demographic.

These transactions are accretive relative to traditional in-store agreements. They have lower customer acquisition costs and higher-end products and stronger lease performance helps offset a slightly higher skip/stolen loss rate on e-com. We're rolling out additional site improvements in 2020 to improve the application process and reduce that risk. We're also excited about the new mobile-first platform for rentacenter.com, which went live just last month.

This platform has enhanced payment functionality, increases speed to market for site improvements and updates. Our focus is to utilize technology to serve the lease-to-own customers across multiple channels. Our store base provides a highly effective network to address the final-mile delivery, and we're leveraging it for same-day delivery and for collections. I want to stress, though, while we're excited about the potential growth opportunities, we intend to achieve our objectives in a methodical, disciplined way.

We've done a tremendous amount of work to improve the organization and to support growth, and we'll manage the businesses and our investments to ensure we're not sacrificing returns for revenues. Now before I turn it over to Maureen, I want to mention, as you may have read in the press release, we entered in an agreement with the Federal Trade Commission, subject to a 30-day comment period, resolving the civil investigative demand related to the purchase and sale of customer lease agreements in the Rent-A-Center business that we received from the FTC in April of last year. And there are no fines, no penalties, no admission of wrongdoings, fault or liability on the part of the company. The settlement permits us to continue purchasing and selling consumer lease agreements.

This inquiry is entirely unrelated to the large settlement with the FTC announced last week by Aaron's in regards to their progressive segment. We have not received additional inquiries from the FTC, and we have a long history of working with the FTC, as well as other regulatory bodies to ensure customers clearly understand the key distinctions in our transaction that provide flexibility and added value, and we'll continue to do so. We have no additional inquiries from the FTC at this time. I'll now turn it over to Maureen to discuss the financials and our 2020 guidance.

Maureen Short -- Chief Financial Officer

Thanks, Mitch. Good morning, everyone. I'll cover our financial highlights for the fourth quarter and review our guidance for 2020. Starting with Slide 11.

Consolidated total revenues were approximately $668 million in the fourth quarter, an increase of 0.9% versus the same period last year. The gain was driven by a consolidated same-store sales increase of 1.6%, partially offset by refranchising and rationalizing our store base. Adjusted EBITDA was $63.7 million in the quarter, and EBITDA margin was 9.5%, up 210 basis points over the same period last year. Non-GAAP diluted EPS was $0.58, up 66% over last year.

Turning to segment results, which incorporates the changes noted in release. Preferred lease total revenues increased 10.8% in the fourth quarter versus the same quarter last year. The performance reflects a 35% increase in invoice volume, driven by organic expansion, and strong performance in the retail partners channel. Same-store sales were up 2.1% in the SaaS model versus the same quarter last year.

We are encouraged by the results and optimistic about prospects to achieve invoice volume growth in each quarter of 2020. This will be the final quarter we will report same-store sales for the preferred lease segment as we believe invoice volume is a more useful metric as we move forward with our hybrid model and newly launched virtual offering. Adjusted EBITDA for preferred lease was $17.6 million or 9.2% of revenues. The year-over-year change in EBITDA as a percent of sales was driven by investments in people and cost to integrate technology to support future growth.

The margin delta was also impacted by the mix shift to virtual locations, which have higher skip/stolen losses than SaaS locations. In total, skip/stolen losses were 14.2% of sales for the preferred lease segment in the fourth quarter. Lease performance was in line with our expectations for the quarter, and we believe profitability can improve as we scale the virtual offering. Turning to our Rent-A-Center business, which includes corporate-owned U.S.

stores and rentacenter.com. Revenues were $438.8 million in the fourth quarter and benefited from a 1.2% increase in same-store sales. Adjusted EBITDA for the Rent-A-Center business was $72.1 million, up 520 basis points as a percentage of revenue versus the same quarter last year. The performance was driven by lower supply chain expenses and an increase in vendor marketing contributions as we continue to streamline the business.

As a percent of revenues, skip/stolen losses were 4.1%, flat sequentially with the third quarter of 2019. Finally, in the corporate segment, fourth-quarter adjusted EBITDA increased $1.6 million and as a percentage of revenue, increased 20 basis points versus the prior year, driven by performance-based compensation. Moving on to the balance sheet and cash flow highlights. Cash generated from operating activities was $215 million for the year ended 12/31/19.

The company ended the fourth quarter with $70.5 million of cash and cash equivalents and outstanding indebtedness of $240 million, down $20 million from the end of the third quarter. In 2019, we paid down over $300 million in debt. The company's net debt-to-adjusted EBITDA ratio ended the fourth quarter at 0.7 times, compared to 2.1 times at the end of the fourth-quarter 2018. Turning to our guidance for 2020 and our capital priorities on Slide 12.

On a consolidated basis, we're projecting revenues of $2.755 billion to $2.875 billion, adjusted EBITDA of $255 million to $285 million and non-GAAP diluted earnings per share in the range of $2.45 to $2.85. To summarize, the midpoint of the ranges equates to mid-single-digit revenue and adjusted EBITDA growth, modest EBITDA margin expansion and double-digit EPS growth. The guidance includes investments to support growth in both preferred lease and the Rent-A-Center business. We're also providing revenue and EBITDA guidance for preferred lease and the Rent-A-Center business.

For the full-year 2020, we expect preferred lease revenues of $860 million to $910 million and adjusted EBITDA of $95 million to $105 million. We expect revenue growth across the preferred lease segment with organic expansion in the SaaS model, the addition of virtual and hybrid doors and growth in our retail partners' e-commerce channel. Our 2020 estimate assumes roughly 20% organic invoice volume growth. We expect EBITDA growth and margin improvement for preferred lease to be influenced by mix shift, and additional investments to support growth.

We expect to maintain a low double-digit adjusted EBITDA margin for preferred lease. A higher mix of virtual will result in a lower gross profit, offset by reduced operating expenses. The mix change will also impact skip/stolen losses. We expect the metric to be 100 to 200 basis points higher in 2020, to an average of approximately 12% for the year in the preferred lease segment.

For the Rent-A-Center business, we're projecting 2020 revenues of $1.755 billion to $1.825 billion. As a reminder, the guidance does not include the impact of any new franchising transactions. We're projecting adjusted EBITDA of $265 million to $285 million for the segment. Our revenue projection assumes low single-digit increase in same-store sales for the year as we benefit from growth in the portfolio and e-commerce expansion, offset by a lower store count.

We expect EBITDA performance to benefit from an additional $10 million to $15 million in cost initiatives, which we believe should more than offset slightly higher skip/stolen losses from growth in e-commerce. We're projecting the skip/stolen losses of approximately 4% for 2020 in the Rent-A-Center business. As you look to model the full year, there are a couple of additional items I'd like to point out. First is share count, which ended the quarter at 56.6 million diluted shares, up versus last year due to higher employee stock compensation and shares issued in connection with the merchants preferred acquisition.

As is our practice, our 2020 projection does not incorporate any additional share repurchase activity and assumes approximately 57 million diluted shares outstanding. The second is the cadence of earnings. As compared to 2019, we expect to grow earnings in each quarter of 2020. Looking at the first half, we expect mid-single-digit EPS growth in the first quarter, as we invest in preferred lease and expect growth to accelerate in Q2, driven by cost savings initiatives.

The second half should have a traditional seasonal pattern with stronger growth in the fourth quarter versus the third quarter. I'll close with a brief outline of our capital allocation framework on Slide 13. As Mitch mentioned, we've made a great deal of progress to rejuvenate cash generation and profitability, and we're focused on growing the business in a disciplined way. Our priorities for cash are to invest in our business, followed by potentially taking advantage of M&A opportunities and returning cash to shareholders.

2019 reflected these priorities as we invested in the business, purchased merchants preferred, paid down debt and increased our dividend, which currently has a yield about 4%. We expect to generate free cash flow in the range of $105 million to $135 million in 2020, which is a decrease relative to 2019. As you recall, the settlement related to the Vintage merger termination in 2019 resulted in a $65 million onetime benefit for free cash flow. Additionally, growth in EBITDA and lower interest costs will combine for a $30 million benefit year over year, which we expect to be offset by higher cash taxes and investments to fund our growth initiatives.

We plan to increase capital expenditures to $40 million to $45 million for the year, to invest in technology and analytics in order to grow digital channels in support of the retail partner business and our e-commerce platform. Free cash flow guidance also includes investments in working capital to fund invoice volume. We believe these investments will generate a high rate of return and support profitability and cash flow. We also believe we can maintain our conservative balance sheet as we execute on our long-term financial and operational goals.

Our net debt to adjusted EBITDA was 0.7 times, and we had total liquidity of over $235 million at the end of the year. It has been our practice, as has been our practice historically, we intend to return excess cash to shareholders. We increased our quarterly dividend by 16% to start 2020, repurchased 59,000 shares in the fourth quarter, and we currently have a share repurchase authorization of over $220 million. We've returned nearly $800 million to shareholders in the form of share repurchases and dividends over the last 10 years, and we will continue to opportunistically allocate capital to augment returns.

As always, detailed income statements by segment are posted to our website, and the 10-K will be filed by Friday, February 28. Thank you for your time today. I'll now turn the call over for your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question today comes from the line of Brad Thomas from KeyBanc Capital. Your line is open.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Hi, good morning, Mitch and Maureen, and congratulations on a strong fourth quarter and a strong year.

Maureen Short -- Chief Financial Officer

Thanks, Brad.

Mitch Fadel -- Chief Executive Officer

Good morning, Brad. Thank you.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Let's see. I wanted to just first start off with the new preferred lease business and the integration of merchants preferred and, I guess, just follow up on where we are in that integration and where we stand today from a position of your ability to go out and market and pitch the new offering and potentially be landing some new, more sizable accounts.

Mitch Fadel -- Chief Executive Officer

Yes, good question, Brad. We're there. I mean, we're integrated. We're ready to go.

We made some enhancements, as Maureen mentioned, to the technology. Of course, that's an ongoing issue, right? We're always going to be enhancing it, especially in this day and age. So it's always being enhanced, but we're ready. We're out selling.

We've added a number of people, a sales team, probably almost tripled the sales team. Since we bought merchants preferred, we added a specific person for large national accounts as you saw a press release maybe about 10 days ago. So we added to the sales team, added to the technology. We're integrated, and we've added a national account person solely to focus on the bigger accounts.

So we're up and running.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Great. And on the Rent-A-Center side of the business, it would seem that the industry has faced some headwinds from things like deflation in consumer electronics and potentially that shorter selling season over the holiday period. What did you all see in the fourth quarter? And how are you feeling about the health of the portfolio? I mean, clearly, the guidance would imply that you feel good about momentum, but just curious if you've experienced any of those dynamics yourself.

Mitch Fadel -- Chief Executive Officer

We do feel good about it. We felt good about the fourth quarter. We had a really, really tough comp. As you know, whatever the Rent-A-Center business segment was, 9% or something last year, we comped over that, so now we're in the like the mid-10s on a two-year comp.

So we're very, very happy with the way it turned out. We haven't adjusted our plans. I mean, you can see the one week less from a shopping period standpoint that was on the calendar for a long time. So we knew it was there, and yes, we started our Black Friday sale a week earlier than we had the year before, things like that.

So you just have to adjust, and we feel good about it. As I mentioned, we've added a few new product lines. Yes, the deflation's been an issue. I'm not even going to say it, Brad, you know how long I've done this.

I've done this for a number of years. So we've been through quite a few cycles in the electronics category of having to adjust, bringing newer technology, try to, like these days, ramp more of the Samsung QLED than we ramp of the regular UHD TV, is more of the premium technology and so forth. So it's a headwind we're used to. You have to change your value proposition, adjust your pricing, adjust your screen sizes, adjust what kind of technology to carry with.

We've been through this a number of times. I want to say it's not a bit of a headwind, but it's one we certainly have overcome, and we'll continue to overcome not only with the way we handle the electronics today but with other new product categories.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Very helpful. Thanks so much, Mitch.

Mitch Fadel -- Chief Executive Officer

Thanks, Brad.

Operator

Our next question comes from the line of Kyle Joseph from Jefferies. Your line is open.

Kyle Joseph -- Jefferies -- Analyst

Hey, good morning guys. And I'll echo Brad's statements about the solid quarter and a sold end to the year. I'd just like to get your sense on the preferred lease business. You gave us plenty of color about the margins in 2020.

But as we step back and look at that from a longer-term perspective, can you give us a sense for where you think that overall EBITDA margin shakes out? And maybe just for some context, just compare how it eventually looks versus the Rent-A-Center side of the business.

Maureen Short -- Chief Financial Officer

Sure. Thanks, Kyle. So thinking about the EBITDA margins within the preferred lease segment, we expect low double-digit guidance for 2020 for that segment, similar to the EBITDA performance we had this year. We continue to invest in the business, and so that negatively impacts EBITDA margin, but as we scale up the business, we've made some investments, we've purchased merchants preferred, which had a lower EBITDA margin.

And as we integrated that within the business with a full-quarter performance in Q4 that was slightly dilutive to EBITDA margins. But as we scale up that business and recoup the return on our investment early in the year, that should start to build over time. So we expect an ongoing EBITDA rate of low double digits relative to the Rent-A-Center business, which is around 15%. As you know, we've had significant cost savings initiatives within that business segment and even expect another $10 million to $15 million this year.

Kyle Joseph -- Jefferies -- Analyst

Got it. That's really helpful. I appreciate that. And I know we just integrated the business.

But can you give us a sense for the pipeline of retailers there, describe some of the -- are they nationwide? Are they more regional players? And then in terms of merchandise, are you guys looking to diversify the merchandise that you guys are partnered with there?

Mitch Fadel -- Chief Executive Officer

Yes. Good morning, Kyle. Yes, I'd say yes to all of those, actually. The pipeline looks really good.

The pipeline for national players is starting to define itself. Again, we hired a national accounts person three weeks ago, but he hits the ground running because he's done this for -- he was doing this for TD Bank before we hired Paul Hamilton, so not that we weren't working on before that either. So yes, the pipeline is good in all accounts, both in local, regional and national accounts, so we're pretty excited. And again, I remind you, the forecast doesn't necessitate a national player to hit the kind of numbers we've talked about over the next couple of years, just need to keep going on the regional players.

So we don't even have to have one, but I feel really, really good that we will get some national accounts over the next year or two.

Kyle Joseph -- Jefferies -- Analyst

Got it. And then one last one for me, a little bit on semantics here, but the capex on the preferred lease segment was low in 4Q. Are the investments in that business is not quantified as capex in the fourth quarter? I'm just trying to reconcile that with your capex outlook for '20?

Maureen Short -- Chief Financial Officer

Yes. So most of the investments we've made so far with the integration of merchants preferred have been to grow the sales team. There's been some technology investments, a lot of which will continue to grow in 2020, but some of that is operating expenses. Some of that is capex, but a lot of what we've seen so far have been related to people with our operating expenses.

Mitch Fadel -- Chief Executive Officer

Yes. And enhancing the technology isn't always capex, right? A lot of it is operating expense when you're enhancing something that already exists.

Kyle Joseph -- Jefferies -- Analyst

Yes. No, that makes perfect sense. That's it from me. Thanks very much for the time and answering my questions.

Mitch Fadel -- Chief Executive Officer

Thanks, Kyle.

Maureen Short -- Chief Financial Officer

Thanks, Kyle.

Operator

Our next question comes from the line of John Baugh from Stifel. Your line is open.

John Baugh -- Stifel Financial Corp. -- Analyst

Thank you. Good morning, and congrats on the fourth quarter and year. I'll jump right into it. Could you just tell us where in the store business the CE percentage is right now, Mitch, and maybe how that changed in '19 versus '18?

Mitch Fadel -- Chief Executive Officer

It's about 15% of the revenue, and at the end of 2018, it was running about 10%. So I'm not very good at math, but that's what -- about 50% growth in that segment when it went from 15% to 10% -- from 10% to 15%, excuse me. So continues to grow. We talked about it a little bit last quarter how the number of orders that come in off the web are kind of a leading indicator.

And when we look at the web orders in the fourth quarter, which was about 17% of all of our lease-to-own agreements, that translates and is heading toward being 20% of the revenue in the future. So 15% of the revenue in the fourth quarter, but the agreements we roll were 17% of the agreement. So it just continues to build. The credit agreement, obviously, is more of a forward-looking indicator toward higher than 15% of revenue going forward.

So it looks to me like that will be 20% pretty soon.

John Baugh -- Stifel Financial Corp. -- Analyst

OK. So I'm sorry, that was the e-commerce you're talking about there. I was asking about the mix of products sold, furniture, appliances versus consumer electronics in the store business '19 versus '18?

Mitch Fadel -- Chief Executive Officer

Sorry about that, I guess I heard that wrong.

John Baugh -- Stifel Financial Corp. -- Analyst

That's OK. That's OK.

Mitch Fadel -- Chief Executive Officer

I have been watching so many of these politicians. I just answered the question I wanted to answer rather than looking to that. Sorry, it was about CE. So you're talking about the headwinds in consumer electronics?

John Baugh -- Stifel Financial Corp. -- Analyst

Yes.

Mitch Fadel -- Chief Executive Officer

Yes. We're down a little bit in that category. But again, and you know, John, we've done this together for a long time, you followed us a long time. You stop carrying the 32-inch TVs and start carrying 40-inch TVs and just get bigger.

When those TVs become $200 at stores like Best Buy, you don't carry them anymore. You just move up the screen size. You start to mix in the QLED from Samsung, the NanoCell from LG and that kind of stuff and minimize the disruption of the deflation. And you're still at the 25% range in consumer electronics.

So we've done it before, when you have to adjust from -- I had to adjust from two TVs when those went out of style back in the '80s and early '90s. So we've done this a few times. We know how to do it. It doesn't mean it's not a bit of a headwind.

You can make up for the headwind with your value proposition, your mix, and then we're getting into other categories, testing a lot of categories, as I mentioned, like tires and handbags and so forth. But it's running about -- and maybe the short answer to your question is around about 25% of our revenue.

John Baugh -- Stifel Financial Corp. -- Analyst

Great. Thank you for that. And then, Maureen, I think you mentioned something about a 20% invoice growth in preferred lease in '20. Did I hear that right? And is that comparing like the old merchants preferred organically or help me define that number?

Maureen Short -- Chief Financial Officer

Yes. The 20% is the organic growth expected in 2020 in that business. As you know, we bought merchants preferred in August and will also benefit next year from a full year of merchants preferred, so we wanted to isolate the impact of just the organic growth. But just to help you, we ended the year with about $750 million in revenue in preferred lease.

If we would have had merchants preferred a full year, it would have equated to another $50 million of revenue. So starting the year at $800 million, it's about a 20% organic invoice volume growth. So the total growth overall for that segment will be higher than 20% because we'll also have the full-year benefit of merchants preferred but organically, we expect 20% invoice volume growth.

John Baugh -- Stifel Financial Corp. -- Analyst

Got it. So the staffed model will grow, you said, maybe low single digits and then to get to that guidance you gave, preferred lease. The rest is sort of the combination of picking up pro forma, what you didn't own for merchants preferred, as well as the organic growth there.

Maureen Short -- Chief Financial Officer

The SaaS business is actually expected to grow double digits as well, slightly below merchants preferred. But overall, it's also growing double digits. We're benefiting in the staffed business from adding additional functionality, technology, integrating with their POS systems and other application, portals, as well as growing the e-commerce business for our retail partners.

Mitch Fadel -- Chief Executive Officer

It grew 15% in the fourth quarter, the staffed model, John.

John Baugh -- Stifel Financial Corp. -- Analyst

OK, that's interesting. OK. And then you mentioned Paul coming on board. Were there other leadership changes that occurred within merchants preferred or preferred lease? And any specifics of actions taken to help us think about the new tools in your tool bag in that side of the business?

Mitch Fadel -- Chief Executive Officer

Well, certainly, we added a lot of people. Through an integration, a lot of people get added, some people leave and so forth, like any integration. The other thing I'd add is we added a board member, the same press release we said on about Paul Hamilton joining us. We added a board member here recently that has a lot of experience in the retail business, retail partner business, payment solution business.

Glenn Marino was with Synchrony for a number of years, a top executive at Synchrony. So he just joined our board. So we're just adding a lot of people to help us in that part of the business and then a lot of salespeople as well.

John Baugh -- Stifel Financial Corp. -- Analyst

Great, thank you. Good luck.

Mitch Fadel -- Chief Executive Officer

Thanks, John.

Operator

Our next question comes from the line of Bobby Griffin from Raymond James. Your line is open.

Bobby Griffin -- Raymond James -- Analyst

Good morning, everybody. Thank you for taking my questions and let me add my congrats to a solid all-around year for you guys.

Mitch Fadel -- Chief Executive Officer

Thanks, Bobby.

Bobby Griffin -- Raymond James -- Analyst

So I guess, first, I want to talk on the lease preferred. Can you maybe talk a little bit about what some of your legacy Acceptance Now customers are doing? Are you seeing some of them switch to the virtual and hybrid model when they used to be staffed or they are kind of integrating the two? Any commentary there would be great.

Mitch Fadel -- Chief Executive Officer

There's a few conversions, mostly in the lower volume staff stores, where it might be better for everybody to go more hybrid like just weekend labor or totally virtual. Our largest customers, like I mentioned that we're in five out of the six largest conventional furniture retailers, they're pretty much the same because the volume is such that we need to stay staffed pretty much bell to bell where there are open companies that you saw on the slide like Bob's and Rooms To Go and Value City and so forth and Ashley. Those are staffed bell to bell and will continue to be. Now some of the technology enhancements make us more efficient.

Some of the e-com enhancements can grow the business more from the customers going on their website. So there's enhancements being made there, but those will stay staffed. They just do a lot of volume per location.

Bobby Griffin -- Raymond James -- Analyst

OK. That's helpful. And Maureen, on the additional cost savings, I might have missed it in your prepared remarks. But additional cost savings in the Rent-A-Center business, can you maybe give a little color on what areas of operations you guys have identified for the incremental 15% this year?

Maureen Short -- Chief Financial Officer

Sure. The large piece of our cost savings initiative is optimizing the number of vehicles we have in our Rent-A-Center stores. We're also investing capital in new, more modern technologies to streamline the store network, which will increase the speed and functionality for our coworkers, serving our customers, as well as the decrease cost over time from a lower monthly spend. So those are the -- mainly, it's reducing the fleet or the vehicles and reducing the network costs in our stores.

Bobby Griffin -- Raymond James -- Analyst

OK. That's helpful. And then lastly, just a quick modeling question for me. Can you provide the store count across the business units as of the end of 12/31/19 for us to tune up our models?

Maureen Short -- Chief Financial Officer

Sure. In the Rent-A-Center business, we ended the year with 1,973 corporate U.S. stores, 998 preferred lease staff locations, 123 Mexico locations, and 372 franchise locations.

Bobby Griffin -- Raymond James -- Analyst

Perfect. Well, thank you for the detail. Best of luck in 2020.

Maureen Short -- Chief Financial Officer

Thanks a lot, Bobby.

Mitch Fadel -- Chief Executive Officer

Thanks, Bobby. I'd also add to that before we get to the next question that Maureen had mentioned in our prepared comments. You're asking about the store count, Bobby, but she's added the share count number in our prepared comments, and we need to make sure people heard that so that -- as you noticed, the EBITDA numbers relative to consensus estimates were higher and not so much the EPS higher in 2020 compared to the street because the share count number being used by a lot of the analysts is not updated. And if we use the right share count with our profit, our EPS guidance is higher than where the street is.

So make sure we get the right share count, which was what again, Maureen?

Maureen Short -- Chief Financial Officer

We ended the quarter at 56.6 million, and we're expecting it to be 57 million diluted shares outstanding in 2020.

Mitch Fadel -- Chief Executive Officer

Yes. If you don't use the last, then the EPS was -- even though we guided higher profit, the EPS came out about the same as the street was because the number was too low. In some cases -- and that's mostly just stock performance a little bit on the merchants preferred stock we gave, but as the stock goes up, there's more shares to be counted based on the employee incentives and what we do with merchants preferred. So just a little reminder there besides the store count, Bobby.

Bobby Griffin -- Raymond James -- Analyst

Absolutely. Thank you. Thank you for that, Mitch, and best of luck going forward.

Mitch Fadel -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of John Rowan from Janney. Your line is open.

John Rowan -- Janney Montgomery Scott -- Analyst

Good morning, guys.

Mitch Fadel -- Chief Executive Officer

Good morning, John.

John Rowan -- Janney Montgomery Scott -- Analyst

Mitch, I was going to give you an opportunity to talk about the share count. Can you remind me --in the deck, it shows $220 million of repurchase authorization. Can you remind me where that comes from? Is that the accelerated buyback program? What are the covenants around utilizing it? I had some repurchases in my model as well, and I just wanted to make sure that we're bracketing how we look at those correctly versus how the program functions and what the covenant restrictions are.

Maureen Short -- Chief Financial Officer

OK. So, the $220 million was authorized by the board several years ago. We did do an accelerated share repurchase plan several years ago. Don't anticipate that at this point, but it was a decision that was made several years ago.

We have plenty of capacity in our debt facility, and that's something that the board has opined on and believes that share repurchases could be a part of our capital allocation strategy. We actually did repurchase a few shares in the fourth quarter and are open to that in 2020. But as a reminder, our guidance does not include any share repurchase activity for '20.

John Rowan -- Janney Montgomery Scott -- Analyst

But the accelerated purchase program wouldn't preclude you from going into the market at opportune times. It doesn't require like a block purchase or anything, correct?

Maureen Short -- Chief Financial Officer

No. There's really no stipulation around share repurchases that were under at this time. The accelerated share repurchase plan was something we did a onetime thing several years ago, so it has nothing to do with our go-forward strategy of potentially buying back shares opportunistically.

John Rowan -- Janney Montgomery Scott -- Analyst

OK. And then as we look at cash flow in 2020, right, so we can balance out the possibility of repurchases and the share count issue. The one was at $1.05, remember the free cash flow guidance. That does not include the $35 million for the sale leaseback, correct? I can't remember.

Was that closed at the very end of this last quarter, or was that closed in January of this year?

Maureen Short -- Chief Financial Officer

It was closed in the fourth quarter. So by the end of the...

John Rowan -- Janney Montgomery Scott -- Analyst

OK. So it wouldn't be in guidance for next year. OK. Tax season, some indications are that refunds are a little slow.

It's probably too early to draw a conclusion. I did see something on the IRS website, stating that some of the earned income tax credits and Affordable Child Care tax credits might get pushed out into the very beginning of March, which is a little bit of a delay versus last year. I just want to make sure that that type of delay doesn't push refunds out past the early payout options for your lease contracts.

Mitch Fadel -- Chief Executive Officer

Yes. Good question, John. It does appear like it's going to be a little slower, maybe a week lower than last year, but it doesn't appear that it's going to cause any issue relative to how we perform in the quarter, how the customers perform. So I wouldn't see that as -- it is a little bit slower, but I don't think it's going to be an issue based on the way it normally works.

And here we are later in February, I can tell you that even through January, I mean, business remains solid, and we're on our plan.

John Rowan -- Janney Montgomery Scott -- Analyst

OK.

Maureen Short -- Chief Financial Officer

And John, since we have a longer payment cash period now relative to others and versus even a year or two ago, we're not up against that period where people sign up for agreements over Black Friday and then you come close to not being able to exercise if there is a delay in tax refund. That's not an issue for us.

John Rowan -- Janney Montgomery Scott -- Analyst

That's right. Did you extend that last year or it was even the year before where you changed? Or is it moving from like 90 days to maybe 120 or something like that?

Mitch Fadel -- Chief Executive Officer

Yes. In early 2018, when I came back, we went from 90 to either 120 or 180, depending on the product. It varies. So yes, Maureen made a great point.

It really wouldn't matter a week here or there. And this will be our second tax season under that. We're two full years into that. That's working.

Obviously, the value proposition is working pretty well.

John Rowan -- Janney Montgomery Scott -- Analyst

OKI. And just last housekeeping question. What's the correct blended rate to use on debt?

Maureen Short -- Chief Financial Officer

It's around 6%.

John Rowan -- Janney Montgomery Scott -- Analyst

OK. And actually, one more question. One more housekeeping. The tax rate for 2020?

Maureen Short -- Chief Financial Officer

The tax rate will be similar to this year, around 24% to 25%.

John Rowan -- Janney Montgomery Scott -- Analyst

All right. Thank you very much.

Mitch Fadel -- Chief Executive Officer

Thanks, John.

Maureen Short -- Chief Financial Officer

Thank you, John.

Operator

Our next question comes from the line of Anthony Chukumba from Loop Capital Markets. Your line is open.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Good morning and thanks for taking my questions. So first question, you mentioned some of these new product categories and specifically, you mentioned that jewelry, handbags, tires. I think there was a fourth one I'm forgetting. Just two questions on that.

First, I guess the fourth one was tools. Two questions on that. First off, is that in all stores at this point? And then second off, if you can just give some early color in terms of what you're seeing there in terms of customer acceptance and any sort of marked differences in terms of like skip/stolen on those products.

Mitch Fadel -- Chief Executive Officer

Sure, Anthony. I'll answer part of your question, and the rest, I'll be careful not to give our competition too much information. Handbags and tools that have been rolled out nationwide, tools, generators, handbags, they're nationwide. After we did a test, they were all nationwide.

Tires and jewelry are still in test, the recent tests that we just started. As far as any other data around how they're specifically performing, like I said, I think I'll keep that in my pocket.

Anthony Chukumba -- Loop Capital Markets -- Analyst

OK, fair enough. And then I guess my second question, is there any particular reason that you didn't have the store counts in your press release? Because typically, you have those in your press release.

Maureen Short -- Chief Financial Officer

Yes. We decided just to include them in our 10-K and 10-Q going forward. With the addition of virtual and the complexity of hybrid locations that could potentially even shift between a virtual location to a SaaS at any given point within a quarter, it just complicates the numbers. We'll continue to show the staffed locations, the Rent-A-Center stores, franchising and Mexico going forward.

It's just a less relevant number for us. When it comes to the preferred lease segment, we use the metric of invoice volume to really understand what the business is doing rather than location count.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Got it. OK. Thank you.

Maureen Short -- Chief Financial Officer

Thank you, Anthony.

Mitch Fadel -- Chief Executive Officer

Thanks, Anthony.

Operator

Our final question today comes from the line of Vincent Caintic from Stephens. Your line is open.

Vincent Caintic -- Stephens Inc. -- Analyst

Hi, thanks. Good morning. First, on preferred lease. So it was great to see the good guide for 2020, up 18% year over year at the midpoint.

Just two questions. First, is there a cadence over the course of 2018 that we should expect it to ramp up, or is it kind of an even 18% throughout the year? And then secondly, it was great that you've highlighted that you already have national account all in furniture. However, I'm just wondering, is it a big lift to go from national furniture retailers to becoming -- to going for a broader set of retailer categories?

Mitch Fadel -- Chief Executive Officer

I'll start with that and then let Maureen talk about the cadence. No, I don't see it as a big lift, Vincent, to get into other verticals on the preferred lease side. We've done really well with the bigger furniture accounts. But no, I don't see it as a big lift.

Vincent, I'm sure you're familiar. The biggest change when you get into a different vertical is just going to be your decision engine, your risk engine, and you might tighten it in one category versus another. That's all, but it's not a big lift other than -- presumably, you have to tighten it a little more in one category versus another.

Maureen Short -- Chief Financial Officer

Just to add on to that, I mean, we've got one thing that national accounts are looking for is a public company with a strong balance sheet to be able to fund future growth, and we absolutely have that. So it should be, like Mitch said, not too big of a stretch to go into someone that is fairly similar in size to some of these other large retail partners that we currently do business with. And then to answer your question about preferred lease and how the cadence of growth will show through 2020, it does build throughout the year. It's a portfolio business.

So as we add additional retail partners, it will compound so that the second half of the year is higher growth than the first half of the year.

Vincent Caintic -- Stephens Inc. -- Analyst

OK. That's very helpful. One more question. So on the Rent-A-Center core business stores, just seeing the revenue and EBITDA guide is kind of flattish for 2020.

Is that entirely from refranchising efforts? And if so, just kind of wondering what you're thinking about refranchising and if you could remind us kind of the EBITDA lift that comes from refranchising.

Mitch Fadel -- Chief Executive Officer

Yes. Vincent, I think that is the difference. We refranchised about 100 stores last year. So if you think about that, it's almost 5% of our store base got refranchised when you think about the revenue impact of that.

And going forward, as we've said, very opportunistically -- a couple of years ago, we were talking about franchising more. Certainly, the company was in a different position. As the position we're in now, it's going to be used very opportunistically. Certain markets, if we think a franchisee can do better or for whatever reasons, but just opportunistically.

So I don't see it -- it's not a big part of our strategy going forward, but it does remain part of our strategy from an opportunistic standpoint. As far as EBITDA going forward, there hasn't been much impact. The EBITDA is down a little bit because of refranchising that would have some negative impact. And I talked about the revenue.

But if you refranchise opportunistically the low profit stores, you don't give up that much EBITDA. Our royalty rates run between 5% and 6%. So if you're selling the fourth quartile stores, you're not going to be that far off from an EBITDA standpoint. It's mostly revenue, some EBITDA, but you get your returns somewhere else because you got cash for the stores and then you get a return based on what you do with that money, right? But overall, it's more of a revenue impact, I'd say, more even than the EBITDA impact, when you just look at the Rent-A-Center business segment.

Maureen Short -- Chief Financial Officer

Right.

Vincent Caintic -- Stephens Inc. -- Analyst

Great, very helpful. Thanks so much. Thanks.

Mitch Fadel -- Chief Executive Officer

Thanks, Vincent.

Operator

We have no further questions. I'll turn the call back to Mitch Fadel for closing remarks.

Mitch Fadel -- Chief Executive Officer

Thank you, Lisa, and thank you, everyone, for joining us this morning. We're glad to deliver very positive results for 2019 and for the fourth quarter, specifically. And I want to thank all the entire team, the 14,000 or so coworkers out there in the stores and in the kiosks here in the field support center. There was a great effort last year by many, many people, and we will work just as hard in 2020 to do it again.

Thank you, everybody.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Daniel O'Rourke -- Senior Vice President of Finance

Mitch Fadel -- Chief Executive Officer

Maureen Short -- Chief Financial Officer

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Kyle Joseph -- Jefferies -- Analyst

John Baugh -- Stifel Financial Corp. -- Analyst

Bobby Griffin -- Raymond James -- Analyst

John Rowan -- Janney Montgomery Scott -- Analyst

Anthony Chukumba -- Loop Capital Markets -- Analyst

Vincent Caintic -- Stephens Inc. -- Analyst

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