PROG Holdings, Inc. (NYSE:PRG) Q1 2024 Earnings Call Transcript

PROG Holdings, Inc. (NYSE:PRG) Q1 2024 Earnings Call Transcript April 24, 2024

PROG Holdings, Inc. misses on earnings expectations. Reported EPS is $0.4933 EPS, expectations were $0.83. PRG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the PROG Holdings First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, John Baugh, please go ahead.

John Baugh: Thank you, and good morning, everyone. Welcome to the PROG Holdings first quarter 2024 earnings call. Joining me this morning are Steve Michaels, PROG Holdings’ President and Chief Executive Officer; and Brian Garner, our Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website, investor.progholdings.com. During this call, certain statements we make will be forward-looking, including comments regarding a revised 2024 full year outlook and our outlook for the second quarter of 2024; the health of our portfolio; our capital allocation priorities, including our ability to continue paying a quarterly cash dividend and repurchase shares of our stock in future periods and our expectations regarding GMV for the second quarter and full year 2024.

Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, and we undertake no obligation to update any such statements. On today’s call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company’s operational performance and cash flows, and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company’s ongoing operational performance.

With that, I would like to turn the call over to Steve Michaels, PROG Holdings’ President and Chief Executive Officer. Steve?

Steve Michaels: Thank you, John, and good morning, everyone. I appreciate you joining us as we report our first quarter results, which exceeded the high-end of our outlook range we provided in February. Today, I’ll provide insights into how our first quarter unfolded, along with a few key points on Q2. As a reminder, when we issued our outlook in late February, we were emerging from a slow start to the year for retail, with limited visibility into the tax refund season, and given the macro headwinds, we anticipated Q1 GMV to be down low single digits. However, we were optimistic about our strategic direction, growth initiatives, and the health of our portfolio. For Q1, our revenue and earnings beat the high-end of our outlook range.

I’m proud of the performance of our teams throughout the company, as they helped us deliver a strong start to the year. Q1 GMV rebounded from a soft start to 2024, ending flat year-over-year for the quarter. We gained balance of share with our key partners amidst a challenging retail environment in which sales and key verticals experienced negative comps, some in the high single digits. We navigated these Q1 demand headwinds through strong execution across several sales, marketing, and technology initiatives under our strategic pillars of grow, enhance, and expand, while continuing to actively manage portfolio performance. Brian will address the portfolio in more detail, but I want to call out that our Q1 portfolio yield for the progressive leasing segment was slightly better than expected.

Consolidated adjusted EBITDA of $72.6 million, which was 11.3% of revenue, exceeded the high-end of our outlook, driven by GMV growth in the second half of the quarter, strong portfolio performance, and disciplined spending. Now I’d like to update you on our strategic pillars of grow, enhance, and expand. Regarding our grow pillar, which focuses on business development efforts with new and existing retail partnerships, I want to emphasize that we remain keenly focused on our strategy to onboard new retailers to our platform in both the regional and national space. In the quarter, we achieved deeper integrations with existing partners, some of whom have been on our platform for many years. We believe improved productivity, driven by increases in active locations, and the number of leases per location with existing retailers, as well as expected pipeline conversions, will enable us to deliver GMV growth in the near and long term.

Also under our grow pillar, our efforts are focused on the Prague Marketplace and direct-to-consumer marketing. As a reminder, Prague Marketplace allows new and repeat customers to shop when and where they want through our mobile app, allowing us to drive incremental traffic and sales to our network of retail partners. We also have affiliate partnerships with other leading retailers through our marketplace, which gives our customers more choice. This channel drove significant growth in 2023, and we anticipate doubling our GMV from the Prague Marketplace in 2024. In terms of direct-to-consumer marketing, key areas include the customer lifecycle and personalization, which make it easy for consumers to understand and utilize the full spectrum of our products.

As it relates to personalization specifically, we are investing in segmentation and automation capabilities to improve the customer experience. Our direct-to-consumer motion complements our retail partner channel GMV and deepens our relationship with new and existing retailers as we drive incremental traffic to them. Under our enhanced pillar, we continue to invest in technology initiatives, which will make customer and retailer experiences as seamless as possible. For example, with direct-to-consumer shopping, we are enhancing the application experience to make on-boarding more efficient and increasing shopability through better browse, search, and checkout features on the web, as well as the mobile app. During Q1, we launched a refresh of our consumer-facing progressive leasing website.

This new improved site provides a robust platform to increase content and resources to help educate shoppers about our products and to highlight and benefit our retail partners. In Q1, the Prague Labs R&D Group piloted generative AI initiatives across several consumer-facing areas to seamlessly verify consumer ID, provide multilingual support, and analyze customer feedback. For instance, by leveraging generative AI for customer feedback, we can consume and analyze that information and identify actionable improvements to our offerings, which allows us to incorporate significantly more feedback into our product development cycle much faster than before. We believe these initiatives at scale will dramatically improve the customer experience and conversion rates and increase internal productivity to lower our cost to serve and drive operational efficiencies.

Under our expand pillar, we are focused on our omni-channel marketing strategy to automate cross-promotional consumer journeys. This allows us to further personalize offers at a customer segment level by featuring products in the Prague portfolio that are relevant to each customer’s needs. We drove incremental progressive leasing GMV in Q1 through customer acquisition and cross-marketing efforts with our other operations, which include Four Technologies and Build. We expect this GMV to ramp-up throughout the year as we make strides to remove friction from our processes and optimize our funnel conversion. To summarize our strong first quarter, I’d like to highlight that we collaborated with existing retail partners on technical integrations and marketing, which helped us gain balance of share.

We also made significant progress on direct consumer initiatives, maintained a healthy lease portfolio, and remained disciplined with spend. While Brian will provide more detail on our revised full-year outlook for 2024, I’d like to provide some high-level thoughts. In terms of the remainder of the year, we expect retail headwinds in the majority of our leasable categories to persist. However, we are making significant progress across our strategic initiatives under grow, enhance, and expand, and we remain optimistic about Q2 GMV growth in the low single digits, despite these macroeconomic challenges. Our updated full-year revenue outlook reflects the GMV outperformance in the first half of the year. We also expect our portfolio performance to remain within our targeted annual range of 6% to 8% as we continue to balance profitability with GMV growth.

Finally, on the topic of capital allocation, we paid a quarterly cash dividend of $0.12 per share on March 28. Additionally, we repurchased approximately 781,000 shares during the quarter. In Q1, we generated $136 million in cash flow from operations and expect to generate meaningful cash flow from operations for the full year. Our capital allocation priorities remain unchanged, and we expect to continue to fund growth, look for strategic M&A opportunities, and return excess cash to shareholders through dividends and share repurchases. I will now turn the call over to our CFO, Brian Garner, for more details on Q1 results and the remainder of the year outlook. Brian?

Brian Garner: Thanks, Steve. We are pleased to report that our first quarter 2024 results exceeded our outlook on both revenue and earnings, despite a soft demand environment to begin the quarter. This performance was driven by growth initiatives, resilient demand for our flexible payment solution, and our management of portfolio performance and spend levels. Beginning with the progressive leasing segment, as Steve mentioned, GMV for progressive leasing exceeded our expectations of a low single-digit decline as we ended the quarter flat year-over-year. We continued to invest in our sales and marketing motions and delivered on direct-to-consumer initiatives, which contributed to the overall results. Our gross leased asset balance at the end of Q1 2024 was down 4.7% compared to the same period last year, which was an improvement from the 5.2% decline entering the period.

Q1 revenues for our progressive leasing segment declined 2.6%, from $637.1 million to $620.6 million, primarily driven by the gross leased asset balance being down 5.2% as we entered this year, partially offset by higher 90-day early purchases. Revenue exceeded our expectations, largely due to a benefit from the favorable GMV lift we experienced in the back half of Q1 and a larger-than-expected portfolio size. Q1 portfolio performance for progressive leasing came in better than expected, which contributed to earnings exceeding the high-end of our outlook, while the percentage of customers choosing to exercise their 90-day purchase options have returned to pre-pandemic levels. For a year-over-year comparison, our gross margin of 30.5% in Q1 of 2024 was 120 basis points lower compared to Q1 of 2023.

This was primarily driven by normalized levels of 90-day purchases this period, compared to historic lows in Q1 of 2023. The provision for leased merchandise write-offs was 7%, and we expect our full-year 2024 write-offs to be within our annual targeted range of 6% to 8%. Progressive leasing’s SG&A expenses as a percentage of revenue increased slightly year-over-year, to 12.3% in Q1 of 2024, from 11.9% in Q1 of 2023, driven by ongoing investments in sales, technology, and marketing. The period’s results benefited from the restructuring actions taken in January as we managed costs in-line with revenue expectations. Adjusted EBITDA for progressive leasing declined from $90.4 million in Q1 of 2023 to $74.1 million in Q1 of 2024. Adjusted EBITDA margins of 11.9% was at the midpoint of our 11% to 13% annual margin target for the progressive leasing segment.

Pivoting to consolidated results, our Q1 2024 non-GAAP EPS came in at $0.91, exceeding the top-end of our outlook, primarily due to the earnings beat, in part due to lower share count from our share repurchase program. Q1 2024 consolidated revenues declined 2% to $641.9 million, compared to $655.1 million in the same quarter last year, driven by the smaller portfolio at the progressive leasing segment, offset partially by higher 90-day purchases year-over-year. Consolidated adjusted EBITDA was $72.6 million compared to $89.7 million in the year ago period. Looking at our balance sheet, we ended the first quarter of 2024 with $252.8 million in cash and gross debt of $600 million, resulting in a net leverage ratio of 1.24 times, our trailing 12 months adjusted EBITDA.

We remain undrawn on our $350 million revolver at the end of the quarter. In the first quarter, we paid a quarterly cash dividend of $0.12 per share, and we repurchased 781,000 shares of our common stock at a weighted average price of $31.31 per share. We have $475.6 million remaining under our recently authorized $500 million share repurchase program. To summarize, Q1 2024 financial results exceeded our outlook range with GMV and portfolio yield coming in slightly better than internal expectations. We continue to invest in GMV growth initiatives while delivering our targeted portfolio performance. Finally, we remain disciplined on spend and are on track to deliver on our full-year SG&A expectations. With our healthy free cash flow generation, we were able to return capital to shareholders through dividends and share repurchases.

I would now like to touch on a few key aspects of our second quarter and revised full-year outlook, which was provided in this morning’s earnings release. As Steve mentioned, despite the macro-economic challenges, we believe our GMV momentum will carry into the second quarter, and we will end Q2 with low single-digit growth year-over-year. The improving GMV positively impacts the gross leased asset balance, which is a key driver of future period revenue. Portfolio performance is expected to remain strong as we actively manage yields while balancing GMV growth. Similar to Q1, second quarter gross margins will have a difficult comparison to Q2 of 2023 for the progressive leasing segment, with 90-day purchases normalized to pre-pandemic levels.

We expect leased merchandise write-offs to increase in the second quarter compared to Q1 of 2024, driven by normal seasonality. However, as previously mentioned, we expect a full year 2024 to remain within the targeted annual range of 6% to 8%.. We remain disciplined on spending and are on track for Q2, as well as the full year 2024, to deliver SG&A as a percentage of progressive leasing revenue at a level that should be flat to last year. Our revised consolidated outlook for 2024 raises expectations on both revenue and earnings. It assumes adjusted EBITDA margins for the back half of the year that are slightly lower than the first half. Our revised consolidated outlook for 2024 calls for revenues in the range of $2.285 to $2.360 billion, adjusted EBITDA to be in the range of $240 to $255 million, and non-GAAP EPS in the range of $2.85 to $3.10.

This outlook assumes a difficult operating environment with current trends of soft demand for leasable consumer goods, no material changes in the company’s decisioning posture, no meaningful increase in the unemployment rates for our consumer base, an effective tax rate for non-GAAP EPS for approximately 30%, and no impact from additional share repurchases. Our revised outlook does not assume further economic downturn or a material benefit for an improving demand environment within our leasable categories. To conclude, I want to emphasize that we strive to meet the needs of our customers as we empower them on their financial journey by providing them with transparent offerings that include a seamless end-to-end experience. We also enable our retail partners to drive incremental sales, and we expect to deliver significant value to our shareholders.

We are optimistic about our strategic efforts to drive growth while we remain committed to discipline, decisioning, and spending. I will now turn the call back over to the operator for the Q&A portion of the call. Operator?

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Q&A Session

Operator: Thank you, ladies and gentlemen. [Operator instructions]. Our first question comes from Kyle Joseph with Jefferies. Your line is open.

Kyle Joseph: Hey, good morning, guys. Nice start to the year. Steve, just wanted to backtrack a bit on GMV. Just give us a sense for the cadence in the first quarter. Obviously, it seemed to accelerate, really. Was that in February or March? And then on your outlook, I think you talked about low single digits growth going forward. Is that kind of an annual or is that just kind of the second quarter outlook?

Steve Michaels: Yes, Kyle, hi, good morning. Yes, the GMV trend through the quarter certainly has some ebbs and flows. We started off sluggish in January as most of retail got off to a slow start. We did see a little rebounding in the second half of February. And we had some calendar dynamics in the first quarter. So you had a leap day in February, which never hurts to have an extra day. But then the Easter holiday shifted into March this year and landed on the 31 of March. So the calendar kind of had some puts and takes. But it did rebound, because as we talked about it on Feb 21 or when we released earnings, we were predicting low singles negative for GMV and we did manage to get back to flat. So we’re pleased with that. As it relates to April, we’ve got a little bit of a positive Easter holiday shift comping.

But, and that gives us not just that, but our performance month to date gives us confidence to talk about a low singles growth in the second quarter. As it relates to GMV kind of outlook, we’ve been in a practice lately of giving our GMV view for the current quarter that we’re in. So that would be Q2, but not for the full year. So that was not a full year commentary, but we look forward to getting you some more information on that in July, but also doing everything we can to make sure that these trends continue and hopefully accelerate.

Kyle Joseph: Got it. Thanks for the clarification. And just one follow-up from me. in your discussions with retail partners, any kind of sense they’ve given you for potential impacts of the CFPB late fee proposal and how that’s going to impact the POS financing world and any kind of inclination if there would be some accelerated or more of a trade down impact. I mean, I know we’re still waiting to see when and how it goes into place. But just any, what your retail partners are saying on that front?

Steve Michaels: Yes, a lot of unknowns there, as you mentioned, but we have a view from really both sides of the table in that regard. We’ve got our Vive business, which will be impacted by that. Obviously it’s a small part of our business, but it will be impacted by that. So Vive is having conversations with its retail partners. And on the leasing side, our retail partners are certainly having conversations with their primary and secondary credit providers. And there will be change, to the extent that it goes into effect and the timing of that is uncertain, but there will be changes to the unit, the economic model of the providers. It’s my belief that that will include, unknown amount, but some reduction in credit supply above us in the stack. So that coupled with just general tightening and the trade down effect that we’ve been talking about, we believe is a positive for the leasing business. The timing of that is very difficult to predict though.

Operator: [Operator instructions]. Our next question comes from Brad Thomas with KeyBanc Capital Markets. Your line is open.

Bradley Thomas: Hi, good morning, Steve, Brian and John. Maybe wanted to ask a bigger picture question and then something more specific. Maybe starting initially with just the competitive landscape, Steve, first of all, putting into context, I mean, I think your results look very strong when we look at the growth rates that we’re seeing in the end markets that you plan. So that’s really encouraging, but by the same token, we continue to get a lot of questions around the cross-currents and competitive landscape. And I’m wondering if you could just talk a little bit about what pressure share gains you feel like you’re seeing as you look at other leased-owned providers, what’s happening in buy now, pay later, and what, if anything, is happening as you look at what’s happening in the subprime and other financial alternative space?

Steve Michaels: Yes, Brad, thanks. From a competitive environment, and we’ve said this before, but it’s really a bifurcated market. There’s the, in leased-owned specifically, there’s the enterprise accounts, and then there’s the SMB or the regional space. And the regional space has always been very competitive and continues to be. And we have a big business there. Some of our competitors have certainly outgrown us recently in that space, but that is a focus of ours. We can focus on both things and certainly are doing that and will continue to do that. As it relates to other forms of supply, if you will, I think that those things will be impacted by the things that we just talked about, whether it be just delinquency trends, portfolio performance, provisioning, those types of things.

We’re seeing a little bit of tightening there. BNPL continues to be, there’s plenty of demand there. Obviously, very different categories from what we do on the leasing side, but our four technologies business basically grow at whatever rate it chose to grow at because the demand is there. We are throttling that growth for profitability reasons, but we’re pleased where things are going there. And the other subprime supply, I think the trend is neutral to tightening. It’s neutral to positive for us from a setup standpoint, and we look forward to making share gains in the regions, not only in the enterprise side.

Bradley Thomas: That’s very helpful, Steve. Thank you. And as a follow-up, more specifically on the 90-day buyouts, I know that that’s been a factor that’s affected comparability year-over-year and the gross margin in particular, but could you just give us an update on where that’s tracking from a historic perspective? And again, how you think that’s going to play out in the next few quarters?