Summary of RENT A CENTER INC DE

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
The statements, other than statements of historical facts, included in this report are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "would," "expect," "intend," "could," "estimate," "should," "anticipate" or "believe." We believe the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that these expectations will occur. Our actual future performance could differ materially from such statements. Factors that could cause or contribute to these differences include, but are not limited to:
• uncertainties regarding the ability to open new rent-to-own stores;

• our ability to acquire additional rent-to-own stores or customer accounts on favorable terms;

• our ability to control costs and increase profitability;

• our ability to successfully add financial services locations within our existing rent-to-own stores;

• our ability to identify and successfully enter new lines of business offering products and services that appeal to our customer demographic, including our financial services products;

• our ability to enhance the performance of acquired stores;

• our ability to retain the revenue associated with acquired customer accounts;

• our ability to identify and successfully market products and services that appeal to our customer demographic;

• our ability to enter into new and collect on our rental purchase agreements;

• our ability to enter into new and collect on our short term loans;

• the passage of legislation adversely affecting the rent-to-own or financial services industries;

• our failure to comply with statutes or regulations governing the rent-to-own or financial services industries;

• interest rates;

• increases in the unemployment rate;

• economic pressures, such as high fuel and utility costs, affecting the disposable income available to our targeted consumers;

• changes in our stock price and the number of shares of common stock that we may or may not repurchase;

• changes in estimates relating to self-insurance liabilities and income tax and litigation reserves;

• changes in our effective tax rate;

• our ability to maintain an effective system of internal controls;

• changes in the number of share-based compensation grants, methods used to value future share-based payments and changes in estimated forfeiture rates with respect to share-based compensation;

• the resolution of any material litigation; and

• the other risks detailed from time to time in our SEC reports.

Table of Contents

RENT-A-CENTER, INC. AND SUBSIDIARIES Additional important factors that could cause our actual results to differ materially from our expectations are discussed under "Risk Factors" later in this report as well as our Annual Report on Form 10-K for our fiscal year ended December 31, 2008. You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events. Our Business
We are the largest operator in the United States rent-to-own industry with an approximate 38% market share based on store count. At March 31, 2009, we operated 3,038 company-owned stores nationwide and in Canada and Puerto Rico, including 34 retail installment sales stores under the names "Get It Now" and "Home Choice" and 10 rent-to-own stores located in Canada under the names "Rent-A-Centre" and "Better Living." Our subsidiary, ColorTyme, is a national franchisor of rent-to-own stores. At March 31, 2009, ColorTyme had 219 franchised rent-to-own stores in 33 states. These franchise stores represent an additional 3% market share based on store count.
Our stores generally offer high quality durable products such as major consumer electronics, appliances, computers, and furniture and accessories under flexible rental purchase agreements that generally allow the customer to obtain ownership of the merchandise at the conclusion of an agreed-upon rental period. The rental purchase transaction is a flexible alternative for consumers to obtain use and enjoyment of brand name merchandise without incurring debt. Key features of the rental purchase transaction include:
• convenient payment options - in-store or over the phone;

• no long-term obligations;

• right to terminate without penalty;

• no requirement of a credit history;

• set-up and delivery included at no additional charge;

• product maintenance;

• lifetime reinstatement; and

• flexible options to obtain ownership - 90 days same as cash, early purchase options, or payment through the term of the agreement.

Rental payments are made generally on a weekly basis and, together with applicable fees, constitute our primary revenue source.
Our expenses primarily relate to merchandise costs and the operations of our stores, including salaries and benefits for our employees, occupancy expense for our leased real estate, advertising expenses, lost, damaged, or stolen merchandise, fixed asset depreciation, and corporate and other expenses. From 1993 to 2006, we pursued an aggressive growth strategy in which we sought to acquire underperforming rent-to-own stores to which we could apply our operating model as well as open new stores. As a result, the acquired stores have generally experienced more significant revenue growth during the initial periods following their acquisition than in subsequent periods. Typically, a newly opened rent-to-own store is profitable on a monthly basis in the ninth to twelfth month after its initial opening. Historically, a typical store has achieved cumulative break-even profitability in 18 to 24 months after its initial opening. Total financing requirements of a typical new store approximate $500,000, with roughly 75% of that amount relating to the purchase of rental merchandise inventory. A newly opened store historically has achieved results consistent with other stores that have been operating within the system for greater than two years by the end of its third year of operation. As a result, our quarterly earnings are impacted by how many new stores we opened during a particular quarter and the quarters preceding it. Because of significant growth since our formation, our historical results of

Table of Contents

RENT-A-CENTER, INC. AND SUBSIDIARIES operations and period-to-period comparisons of such results and other financial data, including the rate of earnings growth, may not be meaningful or indicative of future results.
In addition, we strategically open or acquire stores near market areas served by existing stores ("cannibalize") to enhance service levels, gain incremental sales and increase market penetration. This planned cannibalization may negatively impact our same store revenue and cause us to grow at a slower rate. There can be no assurance that we will open any new rent-to-own stores in the future, or as to the number, location or profitability thereof. We also offer financial services products, such as short term secured and unsecured loans, debit cards, check cashing, tax preparation and money transfer services, in some of our existing rent-to-own stores under the trade names "RAC Financial Services" and "Cash AdvantEdge." As of March 31, 2009, we offered some or all of these financial services products in 351 Rent-A-Center store locations in 18 states. We intend to focus our resources on improving the operations in these existing financial services store locations and do not plan to add significantly to the number of Rent-A-Center store locations offering financial services at this time. There can be no assurance that we will be successful in our efforts to improve and expand our financial services operations or that such operations, should they be added, will prove to be profitable. Recent Developments
On April 6, 2009, we announced that we gave notice to the indenture trustee of our election to redeem $150.0 million in aggregate principal amount of our 71/2% senior subordinated notes due May 2010, at a redemption price equal to 100% of the principal amount outstanding, plus accrued interest to the redemption date. Effective May 1, 2009, the notes are redeemable at par at our option. We expect to fund the redemption on or about May 19, 2009. On that date, the redemption price will become due and payable and interest on the redeemed notes will cease to accrue. Following the completion of the redemption, approximately $75.4 million of our 71/2% senior subordinated notes due May 2010 will remain outstanding under the indenture. We expect to fund the redemption primarily with cash flow generated from operations, together with amounts available under our senior credit facilities.
Critical Accounting Policies Involving Critical Estimates, Uncertainties or Assessments in Our Financial Statements
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent losses and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. We believe the following are areas where the degree of judgment and complexity in determining amounts recorded in our consolidated financial statements make the accounting policies critical. Self-Insurance Liabilities. We have self-insured retentions with respect to losses under our workers' compensation, general liability and auto liability insurance policies. We establish reserves for our liabilities associated with these losses by obtaining forecasts for the ultimate expected losses and estimating amounts needed to pay losses within our self-insured retentions. We continually institute procedures to manage our loss exposure and increases in health care costs associated with our insurance claims through a greater focus on the risk management function, a transitional duty program for injured workers, ongoing safety and accident prevention training, and various programs designed to minimize losses and improve our loss experience in our store locations. We make assumptions on our liabilities within our self-insured retentions using actuarial loss forecasts, company specific development factors, general industry loss development factors, and third party claim administrator loss estimates which are based on known facts surrounding individual claims. These assumptions incorporate expected increases in health care costs. Periodically, we reevaluate our estimate of liability within our self-insured retentions. At that time, we evaluate the adequacy of our accruals by comparing amounts accrued on our balance sheet for anticipated losses to our updated actuarial loss forecasts and third party claim administrator loss estimates, and make adjustments to our accruals as needed.
As of March 31, 2009, the amount accrued for losses within our self-insured retentions with respect to workers' compensation, general liability and auto liability insurance was $122.2 million, as compared to $117.9 million at December 31, 2008 and $113.5 million at March 31, 2008. If any of the factors that contribute to the overall cost of insurance claims

Table of Contents

RENT-A-CENTER, INC. AND SUBSIDIARIES were to change, the actual amount incurred for our self-insurance liability would be directly affected. While we believe our loss prevention programs will reduce our total cost for self-insurance claims, our actual cost could be greater than the amounts currently accrued.
Litigation Reserves. We are the subject of litigation in the ordinary course of our business. Historically, our litigation has involved lawsuits alleging various regulatory violations. In preparing our financial statements at a given point in time, we account for loss contingencies pursuant to the provisions of Statement of Financial Accounting Standards No. 5, Accounting for Contingencies ("SFAS No. 5") and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss - An Interpretation of FASB Statement No. 5 ("FIN 14"), which require that we accrue for losses that are both probable and reasonably estimable.
Each quarter, we make estimates of our probable losses, if reasonably estimable, and record such amounts in our consolidated financial statements. These amounts represent our best estimate, or may be the minimum range of probable loss when no single best estimate is determinable. We, together with our counsel, monitor developments related to these legal matters and, when appropriate, adjustments are made to reflect current facts and circumstances. We expense legal fees and expenses incurred in connection with the defense of all of our litigation at the time such amounts are invoiced or otherwise made known to us.
Our accruals relating to probable losses for our outstanding litigation follow:

                                                   At March 31,                At March 31,
                                                       2009                        2008
                                                                (In millions)
      Shafer/Johnson Matter                              $ -                     $ 11.0
      California Attorney General Settlement               -                        9.6
      Other Litigation                                     -                        1.1

      Total Accrual                                      $ -                     $ 21.7

As with most litigation, the ultimate outcome of our pending litigation is uncertain. Additional developments in our litigation or other adverse or positive developments or rulings in our litigation could affect our assumptions and, thus, our accrual. Our estimates with respect to accrual for our litigation expenses reflect our judgment as to the appropriate accounting charge at the end of a period under SFAS No. 5 and FIN 14. Factors that we consider in evaluating our litigation reserves include:
• the procedural status of the matter;

• our views and the views of our counsel as to the probability of a loss in the matter;

• the relative strength of the parties' arguments with respect to liability and damages in the matter;

• settlement discussions, if any, between the parties;

• how we intend to defend ourselves in the matter; and

• our experience.

Significant factors that may cause us to increase or decrease our accrual with respect to a matter include:

• judgments or finding of liability against us in the matter by a trial court;

• the granting of, or declining to grant, a motion for class certification in the matter;

• definitive decisions by appellate courts in the requisite jurisdiction interpreting or otherwise providing guidance as to applicable law;

• favorable or unfavorable decisions as the matter progresses;

Table of Contents

RENT-A-CENTER, INC. AND SUBSIDIARIES • settlements agreed to in principle by the parties in the matter, subject to court approval; and

• final settlement of the matter.

Income Taxes. Our annual tax rate is affected by many factors, including the mix of our earnings, legislation and acquisitions, and is based on our income, statutory tax rates and tax planning opportunities available to us in the jurisdictions in which we operate. Tax laws are complex and subject to differing interpretations between the taxpayer and the taxing authorities. Significant judgment is required in determining our tax expense, evaluating our tax positions and evaluating uncertainties under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 ("FIN 48"). As required by FIN 48, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. We review our tax positions quarterly and adjust the balance as new information becomes available.
If we make changes to our accruals with respect to our self-insurance liabilities, or litigation or income tax reserves in accordance with the policies described above, these changes would impact our earnings. Increases to our accruals would reduce earnings and, similarly, reductions to our accruals would increase our earnings. A pre-tax change of $1.1 million in our estimates would result in a corresponding $0.01 change in our earnings per common share. Stock-Based Compensation Expense. We account for stock-based compensation expense under Statement of Financial Accounting Standards No. 123, Share-Based Payment ("SFAS 123R") and recognize share-based payment awards to our employees and directors at the estimated fair value on the grant date. Determining the fair value of any share-based awards requires information about several variables including, but not limited to, expected stock volatility over the terms of the awards, expected dividend yields and the predicted employee exercise behavior. We base expected life on historical exercise and post-vesting employment-termination experience, and expected volatility on historical realized volatility trends. In addition, all stock-based compensation expense is recorded net of an estimated forfeiture rate. The forfeiture rate is based upon historical activity and is analyzed at least quarterly as actual forfeitures occur. Stock options granted during the quarter ended March 31, 2009 were valued using the binomial method pricing model with the following assumptions for employee options: expected volatility of 45.30% to 66.50%, a risk-free interest rate of 0.40% to 1.59%, no dividend yield, and an expected life of 5.34 years. During the quarter ended March 31, 2009, we recognized $1.2 million in pre-tax compensation expense related to stock options and restricted stock units granted.
Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe our consolidated financial statements provide a meaningful and fair perspective of our company. However, we do not suggest that other general risk factors, such as those discussed later in this report and in our Annual Report on Form 10-K for our fiscal year ended December 31, 2008 as well as changes in our growth objectives or performance of new or acquired stores, could not adversely impact our consolidated financial position, results of operations and cash flows in future periods.
Significant Accounting Policies
Our significant accounting policies are summarized below and in Note A to our consolidated financial statements included in our Annual Report on Form 10-K. Revenue. Merchandise is rented to customers pursuant to rental purchase agreements which provide for weekly, semi-monthly or monthly rental terms with non-refundable rental payments. Generally, the customer has the right to acquire title either through a purchase option or through payment of all required rentals. Rental revenue and fees are recognized over the rental term and merchandise sales revenue is recognized when the customer exercises the purchase option and pays the cash price due. Cash received prior to the period in which it should be recognized is deferred and recognized according to the rental term. Revenue is accrued for uncollected amounts due based on historical collection experience. However, the total amount of the rental purchase agreement is not accrued because the customer can terminate the rental agreement at any time and we cannot enforce collection for non-payment of future rents. Revenue from the sale of merchandise in our retail installment stores is recognized when the installment note is signed, the customer has taken possession of the merchandise and collectability is reasonably assured.

Table of Contents

RENT-A-CENTER, INC. AND SUBSIDIARIES The revenue from our financial services is recognized depending on the type of transaction. Fees collected on loans are recognized ratably over the term of the loan. For money orders, wire transfers, check cashing and other customer service type transactions, fee revenue is recognized at the time the service is performed.
Franchise Revenue. Revenue from the sale of rental merchandise is recognized upon shipment of the merchandise to the franchisee. Franchise fee revenue is recognized upon completion of substantially all services and satisfaction of all material conditions required under the terms of the franchise agreement. Depreciation of Rental Merchandise. Depreciation of rental merchandise is included in the cost of rentals and fees on our statement of earnings. We depreciate our rental merchandise using the income forecasting method. Under the income forecasting method, merchandise held for rent is not depreciated and merchandise on rent is depreciated in the proportion of rents received to total rents provided in the rental contract, which is an activity-based method similar to the units of production method. On computers that are 24 months old or older and which have become idle, depreciation is recognized using the straight-line method for a period of at least six months, generally not to exceed an aggregate depreciation period of 30 months.
Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold also includes the cost of services offered by us, such as prepaid telephone and electric services.
Salaries and Other Expenses. Salaries and other expenses include all salaries and wages paid to store level employees, together with district managers' salaries, travel and occupancy, including any related benefits and taxes, as well as all store level general and administrative expenses and selling, advertising, insurance, occupancy, delivery, fixed asset depreciation and other operating expenses.
General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, taxes and benefits, occupancy, administrative and other operating expenses. Results of Operations
Three Months Ended March 31, 2009 compared to Three Months Ended March 31, 2008 Store Revenue. Total store revenue decreased by $26.5 million, or 3.6%, to $719.0 million for the three months ended March 31, 2009 as compared to $745.5 million for the three months ended March 31, 2008. The decrease in total store revenue was primarily attributable to a decrease in same store sales of 2.5% and the anticipated revenue attrition from approximately 380 stores that received customer agreements from stores closed in the 2007 restructuring plan. Same store revenues represent those revenues earned in 2,419 stores that were operated by us for each of the entire three month periods ended March 31, 2009 and 2008. Same store revenues decreased by $14.1 million, or 2.5%, to $550.3 million for the three months ended March 31, 2009 as compared to $564.4 million in 2008. This decrease in same store revenues was primarily attributable to a decrease in the number of units on rent in the first quarter of 2009 as compared to 2008.
Franchise Revenue. Total franchise revenue decreased by $1.9 million, or 16.9%, to $9.2 million for the three months ended March 31, 2009 as compared to $11.1 million in 2008. This decrease was primarily attributable to a decrease in the number of products sold to franchisees in the first quarter of 2009 as compared to the first quarter of 2008 due to fewer franchise stores in the first quarter of 2009.
Cost of Rentals and Fees. Cost of rentals and fees consists of depreciation of rental merchandise and the costs associated with our membership programs. Cost of rentals and fees for the three months ended March 31, 2009 decreased by $11.1 million, or 7.5%, to $135.1 million as compared to $146.2 million in 2008. The decrease in cost of rentals and fees is primarily attributable to a decrease in the number of units on rent in the first quarter of 2009 as compared to 2008. Cost of rentals and fees expressed as a percentage of store rentals and fees revenue decreased slightly to 22.6% for the three months ended March 31, 2009 as compared to 22.8% in 2008.
Cost of Merchandise Sold. Cost of merchandise sold increased by $2.5 million, or 3.9%, to $65.8 million for the three months ended March 31, 2009 from $63.3 million in 2008. The gross margin percent of merchandise sales increased to

Table of Contents

RENT-A-CENTER, INC. AND SUBSIDIARIES 31.3% for the three months ended March 31, 2009 from 25.8% in 2008. This percentage increase was primarily attributable to a higher margin on early purchase option transactions during the 2009 period.
Salaries and Other Expenses. Salaries and other expenses decreased by $15.9 million, or 3.8%, to $401.5 million for the three months ended March 31, 2009 as compared to $417.4 million in 2008. This decrease was primarily attributable to a decrease in store level expenses due to our cost control initiatives such as improvements in management of labor expense, delivery costs and inventory losses. Charge offs in our rental stores due to customer stolen merchandise, expressed as a percentage of rental store revenues, were approximately 2.2% for the three months ended March 31, 2009 as compared to 2.6% in 2008. Salaries and other expenses expressed as a percentage of total store revenue decreased slightly to 55.8% for the three months ended March 31, 2009 from 56.0% in 2008.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold decreased by $1.8 million or 18.8%, to $7.6 million for the three months ended March 31, 2009 as compared to $9.4 million in 2008. This decrease was primarily attributable to a decrease in the number of products sold to franchisees in the first quarter of 2009 as compared to 2008.
General and Administrative Expenses. General and administrative expenses increased by $3.4 million, or 10.7%, to $34.3 million for the three months ended March 31, 2009 as compared to $30.9 million in 2008. General and administrative expenses expressed as a percentage of total revenue increased slightly to 4.7% for the three months ended March 31, 2009 from 4.1% in 2008. These increases are . . .