PROG Holdings, Inc. (NYSE:PRG) Q4 2022 Earnings Call Transcript

PROG Holdings, Inc. (NYSE:PRG) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Good day, and thank you for standing by. Welcome to the PROG Holdings Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. 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, Vice President, Investor Relations. Please go ahead.

John Baugh: Thank you, and good morning everyone. Welcome to the PROG Holdings fourth quarter 2022 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 our expectations related to the benefits we expect from the three pillars of our strategy, our lease portfolio performance in 2023, including with respect to delinquencies and write-offs, our GMV for 2023, and our outlook for the 2023 full-year and first quarter.

I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of the earnings press release that we issued earlier this morning. That Safe Harbor provision identifies risks that may cause actual results to differ materially from the expectations discussed in our forward-looking statements. There are additional risks that can be found in our annual report on Form 10-K for the year ended December 31, 2022, which we expect to file later today. 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 provide 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 this morning as we report our Q4 and full-year 2022 results, as well as take this opportunity to provide thoughts on our additional 2023 financial outlook. Last year was a challenging year for both our customers and merchant partners and the combination of weaker than expected retail traffic and rising inflation pressures impacted our business. In response, we quickly adapted balancing near-term expectations against long-term growth strategy, managing our portfolio, and rightsizing our cost structure, while still advancing key investments and initiatives. Towards the end of the first half of the year, we enacted changes to our decisioning that continue to bolster our portfolio performance today.

We substantially reduced our write-offs in the second half of the year with Q4’s 6.5% marking our low point for 2022. And I’m extremely proud of our efforts that resulted in annual write-offs of 7.7%, which is within our targeted annual range of 6% to 8%. We have a long history of managing our portfolio in various macro environments and have not exceeded our targeted annual write-off range since we established that range in 2016. Entering 2023, we feel good about the health of our portfolio based on the decisioning changes made last year and the delinquency performance we have seen since that time. Since the beginning of last year, our leadership team has continued to improve with a number of key additions in technology, finance, and other critical areas.

I believe that the experience and stability our executives and department heads offer will provide the leadership necessary to successfully navigate this dynamic macro environment. Again, in 2022, we executed multi-year renewals with a number of our top partners. These renewed and extended exclusivity agreements are recognition by our retail partners of the value they see in continuing to partner with progressive leasing. Despite declines across the retail landscape, our balance of share within leasable categories grew with nearly every one of our top accounts. Thanks to technological improvements, deeper integrations, a mix shift towards e-commerce, and success with co-branded marketing campaigns. We believe our history of delivering value for our existing and new partners will continue to benefit our future growth.

In Q4, e-commerce as a percentage of progressive leasing GMV reached an all-time high of 20.4%. During the year, we saw a continued shift towards a more online or omnichannel shopping experience following the transition forced by the pandemic. As the largest e-commerce leased to home provider by GMV, the value in aligning our offerings with our customers’ behavior is clear. We remain focused on providing a range of customizable e-commerce integration options for our retail partners. These accomplishments allowed us to operate more efficiently, while continuing to support growth initiatives for both the short and long-term. And we exited the year in a strong financial position, despite the macroeconomic headwinds. Our strategy remains centered around three-key pillars: grow, enhance, and expand.

We believe these pillars will deliver growth and value for our shareholders. First, we plan to grow GMV through strategic collaboration and marketing efforts with our . In addition, we remain focused on converting our pipeline of retailers into new POS partners and our ability to maintain and strengthen new and existing relationships, including addressing the changing needs of our POS partners is critical to the long-term growth of our business. We will also continue to expand our direct-to-consumer marketing efforts to attract new customers and drive more GMV through in-store and online retailers. Second, we are investing in technology platforms that enhance customer engagement and simplify the lease application, origination, and servicing experiences.

Photo by Adeolu Eletu on Unsplash

We are committed to providing our customers with transparency, flexibility, and greater choice on how and where they choose to shop. And we are enhancing and innovating our e-commerce capabilities to benefit existing and new POS partners and customers. Third, we expect to expand our financial technology product ecosystem through research and development efforts and strategic acquisitions that we believe will result in a more loyal and engaged customer base. We will leverage our extensive database of lease agreements to offer current and previous customers products that meet their needs. While Brian will get into more detail on our 2023 outlook, I’d like to summarize how we are thinking about the macro backdrop related to our positioning going into 2023.

Due to continued economic pressures held by our consumer, we believe there could be a delay in purchase intentions or a trade down to lower ticket items. Consumer’s cash reserves are declining while credit utilization is increasing, a data show that customer liquidity stress is at the highest level in three years. Despite the challenging macro environment, our tighter decisioning posture has helped the portfolio recover with leases originated in the second half of the year performing on par with pre-pandemic results, with volume performance metrics look strong entering 2023, with lower delinquency rates and charge-offs, which should improve gross margin year-over-year. While we are still early in the year, we are on-track to achieve our annual write-off target of 6% to 8% of revenue yet again based on the results we have seen year to date.

From a GMV standpoint, in addition to the consumer stress, potential declines in average ticket and potential deferred purchases that I just mentioned, because of our tightening of lease decisioning in late Q2 of 2022, we expect GMV results to be pressured in the first half of 2023 as we comp against higher approval rates from last year. As we have discussed in the past, we believe we are a more valuable partner to retailers during tough retail environments and we look forward to helping our partners convert more traffic. As you’ll see in this morning’s release, we also shared a view of how we expect Q1 to shape up in addition to providing our normal annual outlook. As we move throughout 2023, we plan to continue providing key current quarter metrics for greater visibility into how we believe the year will unfold.

As Brian will talk about momentarily, we ended 2022 with our gross lease assets balance, the driver of future period revenue, down 5.3% year-over-year. This decline in addition to our first half expectations around GMV will weigh on our quarterly revenue comparisons. And we expect that these top line headwinds, when coupled with factors such as wage inflation and continued investment in growth initiatives, will result in negative operating leverage. Finally, during the year we purchased 8.7 million shares, which represents 15.5% of our outstanding stock and we generated 242 million in cash flow from operations illustrating our financial strength and commitment to returning value to shareholders. Our net leverage ratio at the end of Q4 was 1.8x, which is still in our opinion within a comfortable range.

We believe that the capital we generated in 2023 will continue to allow us to maintain a strong balance sheet, reinvest in the business, and return excess capital to shareholders. In closing, I want to take a moment to thank our team for navigating through a challenging year by being adaptable and continue to execute on our strategy. We controlled the control of of the business as we head into 2023 with a healthy portfolio, and an eye towards future growth. I’ll now turn the call over to our CFO, Brian Garner, who will discuss our 2022 financial results and 2023 outlook in greater detail. Brian?

Brian Garner: Thanks, Steve. Our fourth quarter results demonstrate our ability to remain nimble in a challenging macroeconomic environment by addressing financial drivers within our control. Our portfolio management and cost actions resulted in year-over-year adjusted EBITDA growth in the fourth quarter, despite a 5.3% decline in revenues, which when combined with a materially lower share count resulted in a 25.4% increase in non-GAAP diluted EPS for the quarter, compared to Q4 of 2021. Our better than expected consolidated results were primarily driven by margin improvement in our Progressive Leasing segment, which had a Q4 adjusted EBITDA margin of 13.6%, compared to 10.5% in the same quarter last year. As indicated on prior calls, throughout 2022, we navigated quickly changing trends in customer payment performance as cash reserves from stimulus decided delinquency started to climb in the first half of the year, and lease merchandise write-offs of 9.8% in Q2.

Our continued investment in our data science team coupled with our short duration portfolio allowed us to quickly reverse the write-off trajectory we saw in the first half. Driving lower write-offs, higher margins, and increased profitability as we exited the year. Moving to consolidated results. Consolidated revenues declined 5.3% in Q4 2022 as the company faced headwinds on GMV stemming from a more conservative decision posture year-over-year combined with a softness in consumer trends for the categories we serve. As Steve mentioned, these factors drove a declining gross leased asset balance and our accounts receivable provision remained elevated in comparison to pre-pandemic levels. Consolidated SG&A as a percentage of revenue was relatively unchanged from 14.8% in Q4 of 2021 to 14.9% in Q4 2022.

The overall SG&A expense decreased by 4.4 million year-over-year in Q4 as a result of the cost reduction actions taken in Q2. Consolidated adjusted EBITDA increased 3.2% to 74.4 million in Q4 2022 from 72.1 million in Q4 of 2021, driven primarily by improvement in gross margin and progressive leasing from a lower accounts receivable provision and declining 90-day buyouts, as well as lower SG&A expense year-over-year. For our progressive leasing segment, gross merchandise volume decreased 14.8% to 540.9 million in Q4 of 2022 as compared Q4 of 2021, primarily result of the impact of tighter decisioning executed in Q2 and weaker retail traffic. Revenue in the period declined 5.9%. However, the segment’s Q4 gross margin improved year-over-year, returning to historical levels for the period.

Progressive Leasing’s SG&A expense as a percent of revenue declined year-over-year to 13.2% in Q4 of 2022 from 13.4% in Q4 of 2021. And SG&A expense decreased 6.4 million year-over-year, also primarily a result of our cost actions. The rest of leases write-off was 38.3 million or 6.5% of revenues in Q4, down from 6.8% in the previous year’s period. Additionally, that 6.5% represents a decline from the 7.2% in Q3 of 2022 and from our peak of 9.8% in Q2 of 2022. Looking at our balance sheet. We ended the quarter with net debt of 468.1 million, a function of our 131.9 million in cash and gross debt of 600 million, which is 1.83x our trailing 12 months adjusted EBITDA. In 2022, we repurchased 8.7 million shares of our common stock at a weighted average price of $25.64 and have $337.3 million remaining under our previously authorized $1 billion share repurchase program.

I’d now like to touch on two key aspects of our 2023 outlook, which was provided in this morning’s earnings release. As Steve mentioned, we believe the economic and liquidity pressures felt by our customers will have an impact on our 2023 results, including GMV, which will face a tougher compare in the first half of the year, the timing of our decisioning in Q2 of last year. Additionally, we expect the year-over-year percentage decline of our first quarter GMV to be roughly in-line with our Q4 rate of decline. We entered 2023 with a gross leased asset balance, 5.3% lower year-over-year, which is the basis for future period revenue. We expect this decline to serve as a headwind to revenue, particularly in the first half of the year. Our base case does not assume further economic downturn or material negative impact on the unemployment of our consumers nor does it assume any benefit from timing by providers above us in the credit stack.

Some factors we did take into account include a decline in average ticket size, a lower average tax refund amount versus last year, and reduced government support programs. Turning to our consolidated outlook for 2023, we expect revenues to be in the range of $2.34 billion to $2.44 billion, adjusted EBITDA to be in the range of 215 million to 245 million, and non-GAAP EPS in the range of $2.11 to $2.54. This outlook assumes a difficult operating environment with continued soft demand for consumer durable goods. No material changes in the company’s decisioning posture and effective tax rate for non-GAAP EPS of approximately 28%, and no impact from additional share repurchases. As Steve mentioned, while the revenue picture for 2023 was challenging, we anticipate that our lease portfolio performance from lower 90-day buyout rates 2023 will drive our progressive leasing gross margins higher year-over-year helping to offset much of the pressured earnings from lower revenues.

In closing, I’m also extremely proud of our company’s ability to react to a macroeconomic backdrop in 2022. It was different from anything we have experienced over 20 years in this business. Our team of dedicated employees showed a remarkable ability to quickly respond to external pressures and I remain confident in our team’s ability to continue and adaptable approach. I will now turn the call back over to the operator for the Q&A portion of the call. Operator?

See also 15 Most Promising QQQ Stocks and Bill Gates’ Current Portfolio: 10 Dividend Stocks.

Q&A Session

Operator: Our first question comes from the line of Brad Thomas from KeyBanc. Your line is open.

Brad Thomas: Hi, good morning. Steve and Brian, and I had a couple of questions if I could. First one, kind of on the environment that you’re in and one on how you’re operating the business today. And so first, Brian, I think it was in your prepared remarks, you mentioned that the outlook does not factor in any benefit from tightening within the subprime part of the credit stack. And I’d just be curious, what you’re seeing out there and hearing out there and if you think you’re starting to get any benefit from tightening in that part of the credit world?

Brian Garner: Yes. I appreciate your question. I’ll let Steve weigh in on that as he’s been close to the following now with the sales team.

Steve Michaels: Yes, Brad, good morning. Yes, I would just say this is €“ it’s kind of a confusing one for me because as we’ve talked about on several calls, this has been an expectation in mind for a while that as you €“ that should have happened already, but as you’re looking at the cash reserve data and the savings rates, certainly, our customer was impacted more quickly than the prime customer. And we’re waiting to see that prime customer show up in our application funnel. You’re starting to hear some of the product providers using the word tightening on their calls and you’re certainly seeing their results, higher delinquencies, and higher provisions. Although I would say, we have not yet seen a material impact from those actions.

It has to €“ well, it’s our expectation that it will lead to reduced credit supply above us on the stack, but we have not seen it to any material effect yet. And so, while we think it will happen, it is not baked into our outlook because I’ve been terrible in predicting the timing of it thus far. So, more specifically, we do operate in business. And so €“ and there are a few instances where we are both the and the tertiary provider within a retail environment and has tightened several times over the last 18 months and has seen a little bit of tightening for the prime provider above them. But more broadly, we have just not seen it yet, although we are watching like a hawk and looking for it.

Brad Thomas: That’s helpful Steve. And then I was wondering if you could just help us think a little bit more about how you think about the expense base of the business? Obviously, there were €“ have been many years where Progressive experienced significant growth. I think there’s still a tremendous amount growth opportunity ahead of you all, but nonetheless, a tougher operating environment here in the near-term, in terms of GMV, how do you feel about the cost structure of the business, the level of spending and maybe could you talk a little bit more about some of the specific savings opportunities that you might have here this year?

Steve Michaels: Yes, I’ll start and then Brian can chime in. We’re very focused on the expense side, but as you said in your question, nothing has changed. Even though this has been a crazy couple of years managing and navigate through this environment, nothing has changed about our view on the size of the price and the market that we’re out there trying to capture. So, while we’re trying to be prudent on near-term results, we’re also investing for the future. As you will remember, we did a reduction in last year, took out about 10% of our headcount. That was earlier than most did that. We definitely took some cost actions with anything. We right sized the expense base. As we started to plan for 2023, we started to think about how our revenue picture was shaping up.

We are very focused on the cost and there’s not really any hiring in the base plan. In fact, based on active leases and how GMV shakes out, there could be some headcount reductions just through attrition in our ops area, but we are also operating in an environment of a tough recruiting and talent retention environment, there’s wage inflation. And so, we have to win with the teams that we have on the field and we think it’s appropriate investment to the best back in those talented folks. As it relates to specific investments, we continue to invest in products and technology in order to improve our offering both on e-com and the customer experience. So, we believe that they just feel the right things because as you mentioned, it’s been a tough revenue environment, but we don’t think that this is the new normal that we do believe that that growth will come and we look forward to spring boarding off of a better foundation when it does.

Brian Garner : Yes, Brad I would just add. As Steve said, it’s a balancing act, and we need obviously the cost structure going to 2023 and I think the opportunity remains as well as the, kind of near term set-up in the prepared remarks about the near-term headwinds on revenue. There’s going to be a national deleveraging, if you will, from an operating leverage standpoint. With €“ we’re highly variable cost structure, but we do have fixed costs and that’s going to be something that does weigh on margins in 2023 is our expectation. So, the levers exist. We do control them to a large degree. I think it’s €“ and our judgment getting €“ being too reactive in this environment, I think it would be the right decision. We’re going to be careful and thoughtful about the investments in these expected ROI from those investments as we evaluate that structure.

Brad Thomas: Really helpful. Thanks Steve. Thanks Brian.

Brian Garner: Brad, thank you.

Operator: One moment for our next question. Our next question comes from the line of Anthony Chukumba from Loop Capital. Your line is open.

Anthony Chukumba: Thank you. Good morning. Thanks for taking my question. So, just had a question on guidance, specifically first quarter guidance. So, as I look at your first quarter guidance pretty simplistically, particularly from an earnings perspective, you’re implying that earnings will be up pretty significantly year-over-year and that EBITDA will account for, call it, about 33%-ish of the full-year EBITDA. And then I look back at last year and EBITDA for the first quarter was about 25% of your full-year EBITDA. So, it would seem to imply that you’re expecting numbers performance to, sort of get worse as the year goes on like, I guess what’s leading you to think that or am I misinterpreting? I’m just trying to sort of €“ I’m just trying to square that all.

Brian Garner: I believe it’s a good question, Anthony. I’ll start and Steve can weigh in as well. I think there’s some nuances as we enter 2023 that we’re thinking about from a headwind perspective and given the uncertainty in the environment where we’re throwing out a and I think that’s what’s reflected in the guidance. I think to start, we set up we’re entering this year with a gross leased asset balances down roughly 5.5%. And so, that’s the driver of our future period revenue. And so, while it’s impacting Q1 to some extent, we expect continued €“ that amortizes in the revenue pressures from that dynamic. Steve also indicated some near-term GMV challenges to start the first half of the year. And so, that’s going to be in addition to your starting point on GLA.

There’s also an expectation within our models that we are, while payment performance trends are much better than they were in the first half of 2022, we still haven’t got back from an integral referring to our accounts receivable provision. We’re not yet back to what we saw pre-pandemic from a performance standpoint. It’s our expectation there’s still going to be some level of challenged customer to a degree within our model. And that’s working its way through. So, the last thing I’d say that was, kind of front weight] the performance would be just the seasonality of that accounts receivable provision typically and it feels like forever since we’ve had a normal cycle to talk about any kind of seasonality, but typically in Q1, you will see the lowest bad debt expense or AR provision in that period.

So, that’s going to be helping the Q1 results and we expect that to soften a bit as we look throughout the year. But those are kind of the three things that I would point to when I mentioned the deleveraging aspects as pressure as well.

Anthony Chukumba: Got it. That’s helpful. And then just one follow-up question. So, you gave some very helpful stats in terms of your existing retail partners and the fact that the penetration €“ lease penetration is growing and you execute these multi-year renewals. Would just love any update in terms of the retail partner pipeline?

Steve Michaels: Yes. Thanks, Anthony. It’s Steve. This will be my normal frustrating answer, but it’s difficult to talk about the pipeline, so we actually have assigned MSA, which we’re obviously working on every day. or €“ with various €“ that’s our goal obviously to convert that pipeline. We do expect to sign up some in 2023 whether they will be named in press release where they remain to be seen. But we’re positive on pipeline that it’s just that nothing has changed in the regard of when we’re dealing with these large enterprise retailers, the timing of that conversion is difficult to predict. But I’ll say that nothing has changed and in fact when the economy is as tough, and retail comps are hard to come by, we feel €“ and are experiencing positive momentum in processes and conversations in other environments may have otherwise stalled.

So, certainly, it’s a massive focus of ours to broaden our base. So that when the retail environment is more positive that we have a bigger platform to grow from.

Anthony Chukumba: Got it. Yes, your answer was frustrating, but consistent. Good luck with that.

Operator: One moment for next question. Our next question comes from the line of Jason Haas from Bank of America. Your line is open.

Jason Haas: Hey, good morning and thanks for taking my questions. So, for the first one, I was curious if you could talk about how your retail partners are performing just generally. I’m curious how the holiday shaped up for them? And then as we started this year, how performance has been? I know that’s been an issue that you called out weak customer traffic, it’s been the case for a while. So, I’m curious if there’s been any signs of improvement or is it still been a pretty weak backdrop?

Brian Garner: Yes, Jason. Obviously, we don’t like the €“ call it any specific retailer definitely not before they release their Q4 results. But €“ and you have to do a little bit of read through. I know you’re deep in the , but the headline comps that they may report are going to be slightly different than the leasable categories that we participate within their within their stores. And also the price points, whether it be super high-end mattress or super high-end piece of jewelry would potentially perform differently than an opening price point item. So, we were €“ the holiday season was generally weaker than we anticipated when we were going into it in, kind of October, not massively weaker because we were not expecting a strong one, but it was not, it kind of seems to weaken as the quarter went on.

We’re not really commenting on what we’re seeing in €“ since other than to provide that outlook that we expect our GMV to be down in the same neighborhood as we were down in Q4 of 2022.

Jason Haas: Got it. Thanks. That’s fair. And then as a follow-up, I think this question was maybe asked earlier, but I’m going to ask you a little bit differently. So, for the cadence of the margin guidance through the year, I was getting to like about 11.5% for 1Q and then I think there are many of the years closer to 9%. Brian, based on your response to an earlier question, I think the biggest driver of that would be, it sounds like it’s the AR reserve coming through. So, is that €“ is the €“ like effective that that we should see like maybe like outsized gross margins in 1Q and then it, sort of normalizes in the remainder of the year? And sort of along the lines of that, I guess my question more broadly is just for this year for 2023, if I compare your P&L for what’s expected for 2023 versus what we saw like pre-pandemic in 2018 or 2019, I think we’re still, I think margins are still below where you want them to be that like 11% to 13% target.

So, I’m curious what’s the driver of that is of the AR provision? Are write-offs coming in higher? Is it just like wage inflation over the years? So, if you could kind of help compare those two, that’d be helpful too. Thank you.

Brian Garner: Let me take this out in pieces. From a €“ I think your math is roughly correct in terms of the rest of the year margins and bringing it back to my earlier response. In order of magnitude, I’d say the deleveraging aspect of this is real and probably this is not slightly above the AR component that I referenced and it’s €“ as we run internal models, the sensitivity on that is pretty meaningful in terms of, if you’re growing 5%, 10% your margin profile can improve pretty meaningfully and it quickly gets certainly below that 11% to 13%. So, I think the focus on growth and investments and growth are critical to getting that margin where we have typically seen it. And obviously, we’re going to hold ourselves accountable on those investments and making sure that they are bleeding through the margins over time.

I think historically, just to keep in mind, obviously, 2018 and 2019 is progressive reported out, on public half of the time. So, a lot of the costs of being public are there, but when you’re talking about something north of 11% EBITDA margin, I think as Steve had talked about it internally and that’s certainly €“ that’s certainly where we want to be. And I think there is €“ if you think about the of the business, the contribution margin that it generates, it’s attainable. So, we’ve got some execution that we need to see happen to get us to where we want to be there.

Steve Michaels: I would just add and Brian can keep me on , but your point about the AR provision and bad net expense, I mean, while we’re happy with where the portfolio is and proud of the actions we took last year to get the write-offs where they are and the portfolio where it is, we do expect to €“ is also none to be higher than €“ better than 2022 and comparable, but still higher than the pre-pandemic levels by some measure.

Jason Haas: Got it. That’s all helpful color. Thank you.

Operator: One moment for our next question. Our next question comes from the line of Bobby Griffin from Raymond James. Your line is open.

Alessandra Jimenez: Good morning. This is Alessandra Jimenez on for Bobby Griffin. Thank you for taking our questions. First, I just wanted to touch on, kind of listening terms. So what would you need to see in the economy or payment performance to start to loosen terms again and go after more GMV growth?

Brian Garner: Yes. So, from a decisioning standpoint, we’re in the, kind of the same ballpark from a decisioning posture that we’ve been in since the summertime when we talked about our timing actions. We are €“ our base case does not assume a recession in 2023, but also doesn’t assume really any tailwinds or any improvement. We’re watching all the BLS data and all the leading economic indicator data. As we mentioned on the prepared remarks, the liquidity stresses is high for our consumer credit utilization is up. So, we meet every two weeks on our risk committee and we review the portfolio by vintage pool and how it’s playing out. And we also review an inventory of levers that we have at our disposal, which some are to tightened in pockets and some are to look for opportunities to increase approval rates.

We don’t want to knowingly leave profitable GMV on the table for us or our retail partners, but we also feel like in this uncertain environment that we’re operating in, a little bit of defensive posture is appropriate. I certainly hope, it’s not my baseline expectation, but I hope that as we move through this year, we can look for opportunities to increase approval rates and we have those initiatives at the ready, but we’re just being prudent in €“ before we deploy them.

Alessandra Jimenez: That’s very helpful. And then maybe just a follow-up on that. What have you seen in terms of application volumes? Are you continuing to see sequential pressure? Has that kind of stabilized modestly?

Brian Garner: Yes, we’ve seen and we have to look at it by channel, right. So, in-store volumes are kind of flat to slightly down. E-com volumes are up a little, but what you, kind of go through the funnel there’s a pretty material difference in funded GMV from an in-store app versus an e-com app and that makes sense. There’s higher purchase intent when someone’s in the store talking to a sales associates. So, approval rates are higher in store, conversion rates higher in store. And so, when you have app increases online. It has €“ while the big numbers kicks in, it does have a smaller flow through per app at least to GMV. So, that’s something we’re watching from the app side that we’re watching, but we’re also more specifically watching the profile of the app to look for evidence of that opening of the from the credit providers above us tightening, but that’s what we’re observing so far.

Alessandra Jimenez: Thank you so much. And best of luck in 2023.

Brian Garner: Thank you.

Operator: One moment for next question. Our next question comes from the line of Hal Goestch from Loop Capital. Your line is open.

Hal Goestch: Hey, good morning guys. I’d like to ask you about the components of GMV for 2023. And like your thoughts on how much of it you might think is coming from their back book, merchants you had on the books in 2021 that are like basically same store sales off through now and then merchants you added in 2022 and then your assumption for GMV that might come from merchants you add this year that are those in your forecast? Give us your thoughts on those kind of of like where GMV is being originated from?

Brian Garner : Yes. So, I’ll start with the last one. And we always have €“ we also have a number in our GMV plan for pipeline. We want to make sure, keep that pressure on the bizdev team. So, pipeline is in there, but the named accounts are the really exciting ones. Even if we have an announcement this year, it would not be a material impact to 2023 GMV. So, there’s a smaller number in our view or in our outlook from a pipeline standpoint. And then the rest is, kind of just baseline existing retailers and not really with the specificity of calling out the 2019 vintage or the 2021 vintage. We do have the ability and the initiatives to become more productive. And so that will ultimately play out in what you said, which is kind of like a same store sales metric, but we have the ability €“ we’re focusing on these deeper integrations as we mentioned in our prepared remarks.

And so, e-com card integrations, which we’ve talked about over the last couple of years, we still have some opportunities with top 10 partners in that area. More waterfalls, more prominent displays on landing pages and PDPs on the e-com side. In-store POP, credit waterfalls, things of those nature €“ things of that nature in order to increase and grow GMV within the same retail environment and become €“ continue to grow that balance of sale even in a potentially down comp environment for that retailer. One thing that we mentioned and I just want to reiterate here is, we’re obviously still comping against the higher approval rates from 2022 in the first half €“ in the first half of 2023. So, those will €“ that will be more difficult to overcome even with those productivity initiatives.

And the timing of those productivity initiatives are difficult to predict even throughout the year because we have to collaborate and partner well with our retail partners, tech teams or merchant teams, whatever the project might be. We’re working hard on using this opportunity to become more meaningful partner with all of our retailers and we have some well-developed roadmaps at the partner level to achieve that.

Hal Goestch: Could I ask a follow-up on your risk model? You’re now trending toward the lower-end of your lease write-off range, the job market for maybe the lease to own customers seems to be very, very strong at this point in time. And like your color on how the job market is factored into your decisioning and what we’ve heard from other lenders in the less than prime space, you know, several companies have said, hey, we’re probably leading some loan volume on the table or doing less than we could about a bonus of caution, just wanted to get your thoughts on where you stand relative to a statement like that because all these companies focus on the job market, which is pretty good, but they’re all saying €“ they’d probably leave some volume on the table, your thoughts on that?

A – Brian Garner Listen, I mean, I think we’re all €“ for a couple of years, we are all armchair virologists trying to figure out the pandemic and now we’re all armchair economist trying to figure out what’s going to happen on the side. I have no exception to that because I always frustrate my team talking about all these macro things that I hear on when I’m working out in the morning. So, listen, the one thing that could be a tailwind for us that would be a welcome tailwind is we might actually see some increase in unemployment rate, but not in our customer base, right? And so, you kind of alluded to that . That jobs number for January was to move the doors off. I don’t know if that’s sustainable or not. I don’t want to give it a big long economic commentary that I’m not qualified to give.

But I would say that there are some elements of the macro that could actually break our way, I’m not used to things breaking our way over the last couple of years, so I’m not counting on them. But back to the original question, I mean, it’s possible and probably more likely than not that we are leaving some volume out of the bunch of cautions. And I think that’s the appropriate position for us to be in until we get some more clarity.

Hal Goestch: Thank you.

Operator: One moment for our next question. Our next question comes from the line of Vincent Caintic with Stephens. Your line is open.

Vincent Caintic: Hey, good morning. Thanks for taking my question. Most of my questions have been asked. I wanted to touch on cash generation and your expectations for 2023. I know in the 2023 guidance, there was no share repurchases, but you were active in 2022. So, just want to get your thoughts on how you’re thinking about capital return for 2023? Thank you.

Steve Michaels: Yes. I mean from a cash standpoint, we will generate cash in 2023. That’s one of the really nice elements of our business model with the quick cash conversion cycle and the short duration portfolio. So, obviously, the timing of the GMV production will impact the actual cash levels. And as Brian was right when he said, we haven’t had a normal year in many, many years. But in a normal year, we would generate more than 100% of our cash in the first half of the calendar year and then depending on GMV production in the back half we might actually be a cash user. But over the course of the year, we will generate positive cash flow. As it relates to share repurchases or shareholder return. Obviously, our history would show that we have optimism about our future prospects and I think the shares are a good value here.

We’ll always look at it to lend with prudent capital allocation and I want to keep a strong balance sheet keeping, kind of a view over the next two years-ish of what the leverage ratio will look like. And then we’ll always prioritize investment in the business first, but then by our definition of excess capital, we’ll look to return to shareholders. And our , we generally favor the share repurchases. And I don’t remember the exact number, but I think it’s in the neighborhood of $337 million is remaining under our original forward authorized share repurchase program.

Vincent Caintic: Okay, perfect. That’s very helpful. And then last question, just a quick follow-up on the merchant questions from earlier. So, understanding the comments on the pipeline, but when you talk about with your existing merchant partners and there was some discussion about engagement there. I was wondering if you could maybe talk about that in more detail? Are you seeing more, say, cold marketing campaigns or anything like that as the engagement increasing there? Thank you.

Brian Garner: Yes. Thanks, Vincent. Yes, we definitely are. I’m pleased with the level of engagement. I don’t think we’ve had better collaboration and partnering with our counterparts at our merchant partners than we have now. And that makes sense because every retailer is out there trying to for comps. So, the idea of someone always having a negative view on our first material in storage, but then deciding, okay, let’s try that out and give it a test. That’s about the development. The pronged partner league, which has been really successful at coming up with that. We’ve got more and more partners wanting to participate in our product partner week, which really €“ which markets to previous customers on a co-branded, not co-branded, well, progressive co-branded as well, but two of our merchants will be, would send something out with progressive on there as well.

For example, like Best Buy and or something like that. So, that’s increasing in velocity and frequency and we’re seeing some good returns there. And then just generally, we have a pretty good track record and data backing up like talked about the tool and our tool about now and conversations and potential resource allocation, which is the most important part of that statement are positive and like if there’s tools that are left unused in that tool belt, across a specific merchant partner, those things, now, there’s always limitations and everybody has good intentions and they might not have the resource to be able to execute on that before holiday this year or something like that. But we’re focused on taking the burden, taking as much of the burden off the retailer as we can and putting that work on our side of the ledger to the extent we can.

We can’t do it a 100%, but to the extent we can make it easier integrations and easier deployment of those tools that benefits us and the retailer and makes us a continued preferred partner. So, we’re encouraged by those things and we hope to have actual evidence and execution of a number of those things in 2023.

Vincent Caintic: Perfect. Thanks very much.

Operator: Thank you. And I’m not showing any further questions in the queue. I’ll turn the call back over to Steve for any closing remarks.

Steve Michaels: Thank you, Victor. It’s a privilege you all joining us today. As we wrapped up a very challenging 2022, 2023 also had those challenges, but we’re optimistic about what we can accomplish, and what the future €“ the multi-year, I mean near-term to medium-term future holds for us. Really just want to reiterate my appreciation and thanks to the team for executing well and for doing the work that’s going to get us to where we need to be. So, we look forward to updating you all here shortly in 60or so days at the end of April about our Q1 results.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone have a great day.