10-K 1 a2016rcii10-k.htm 10-K Wdesk | Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-25370
 
 
 
 
 
Rent-A-Center, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
45-0491516
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
5501 Headquarters Drive
Plano, Texas 75024
(Address, including zip code of registrant's
principal executive offices)
Registrant's telephone number, including area code: 972-801-1100
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, par value $0.01 per share
 
The Nasdaq Global Select Market, Inc.
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ   No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes ¨   No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ     Accelerated filer ¨     Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨   No þ
Aggregate market value of the 51,850,190 shares of Common Stock held by non-affiliates of the registrant at the closing sales price as reported on The Nasdaq Global Select Market, Inc. on June 30, 2016
$
636,720,333

Number of shares of Common Stock outstanding as of the close of business on February 21, 2017:
53,196,843


Documents incorporated by reference:

Portions of the definitive proxy statement relating to the 2017 Annual Meeting of Stockholders of Rent-A-Center, Inc. are incorporated by reference into Part III of this report.

.



TABLE OF CONTENTS 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. Factors that could cause or contribute to these differences include, but are not limited to:
the general strength of the economy and other economic conditions affecting consumer preferences and spending;
factors affecting the disposable income available to our current and potential customers;
changes in the unemployment rate;
difficulties encountered in improving the financial and operational performance of our business segments;
our chief executive officer and chief financial officer transitions, including our ability to effectively operate and execute our strategies during the interim period and difficulties or delays in identifying and attracting a permanent chief executive officer and chief financial officer, each with the required level of experience and expertise;
failure to manage our store labor and other store expenses;
our ability to identify, develop and successfully execute strategic initiatives;
disruptions caused by the implementation and operation of our new store information management system, including capacity-related outages;
our ability to successfully market smartphones and related services to our customers;
our ability to develop and successfully implement virtual or e-commerce capabilities;
disruptions in our supply chain;
limitations of, or disruptions in, our distribution network;
rapid inflation or deflation in prices of our products;
our ability to execute and the effectiveness of a store consolidation, including our ability to retain the revenue from customer accounts merged into another store location as a result of a store consolidation;
our available cash flow;
our ability to identify and successfully market products and services that appeal to our customer demographic;
consumer preferences and perceptions of our brands;
uncertainties regarding the ability to open new locations;
our ability to acquire additional stores or customer accounts on favorable terms;
our ability to control costs and increase profitability;
our ability to retain the revenue associated with acquired customer accounts and enhance the performance of acquired stores;
our ability to enter into new and collect on our rental or lease purchase agreements;
the passage of legislation or adoption of regulations adversely affecting the rent-to-own industry;
our compliance with applicable statutes or regulations governing our transactions;
changes in interest rates;
adverse changes in the economic conditions of the industries, countries or markets that we serve;

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information technology and data security costs;
the impact of any breaches in data security or other disturbances to our information technology and other networks and our ability to protect the integrity and security of individually identifiable data of our customers and employees;
changes in our stock price, the number of shares of common stock that we may or may not repurchase, and future dividends, if any;
changes in estimates relating to self-insurance liabilities and income tax and litigation reserves;
changes in our effective tax rate;
fluctuations in foreign currency exchange rates;
our ability to maintain an effective system of internal controls;
the resolution of our litigation; and
the other risks detailed from time to time in our reports to the Securities and Exchange Commission.




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PART I
Item 1. Business.
History of Rent-A-Center
Unless the context indicates otherwise, references to “we,” “us” and “our” refer to the consolidated business operations of Rent-A-Center, Inc., the parent, and any or all of its direct and indirect subsidiaries. For any references in this document to Note A through Note U, refer to the Notes to Consolidated Financial Statements in Item 8.
We are one of the largest rent-to-own operators in North America, focused on improving the quality of life for our customers by providing them the opportunity to obtain ownership of high-quality durable products, such as consumer electronics, appliances, computers (including tablets), smartphones, and furniture (including accessories), under flexible rental purchase agreements with no long-term obligation. We were incorporated in the State of Delaware in 1986, and our common stock is traded on the Nasdaq Global Select Market under the symbol "RCII."
Our principal executive offices are located at 5501 Headquarters Drive, Plano, Texas 75024. Our telephone number is (972) 801-1100 and our company website is www.rentacenter.com. We do not intend for information contained on our website to be part of this Annual Report on Form 10-K. We make available free of charge on or through our website our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). Additionally, we provide electronic or paper copies of our filings free of charge upon request.
The Rental Purchase Transaction
The rental purchase transaction is a flexible alternative for consumers to obtain use and enjoyment of brand name merchandise with no long-term obligation. Key features of the rental purchase transaction include:
Brand name merchandise. We offer well-known brands such as LG, Samsung, Sony and Vizio home electronics; Frigidaire, General Electric, LG, Samsung and Whirlpool appliances; Acer, Apple, Asus, Samsung and Toshiba computers and/or tablets; LG and Samsung smartphones; and Ashley, Powell and Standard furniture.
Convenient payment options. Our customers make payments on a weekly, semi-monthly or monthly basis in our stores, kiosks, online or by telephone. We accept cash, credit or debit cards. Rental payments are generally made in advance and, together with applicable fees, constitute our primary revenue source. Approximately 85% and 92% of our rental purchase agreements are on a weekly term in our Core U.S. rent-to-own stores and our Mexico segment, respectively. Payments are made in advance on a monthly basis in our Acceptance Now segment.
No negative consequences. A customer may terminate a rental purchase agreement at any time without penalty.
No credit needed. Generally, we do not conduct a formal credit investigation of our customers. We verify a customer’s residence and sources of income. References provided by the customer are also contacted to verify certain information contained in the rental purchase order form.
Delivery & set-up included. We generally offer same-day or next-day delivery and installation of our merchandise at no additional cost to the customer in our rent-to-own stores. Our Acceptance Now locations rely on our third-party retail partners to deliver merchandise rented by the customer. Such third-party retail partners typically charge us a fee for delivery, which we pass on to the customer.
Product maintenance & replacement. We provide any required service or repair without additional charge, except for damage in excess of normal wear and tear. Repair services are provided through our network of service centers, the cost of which may be reimbursed by the vendor if the item is still under factory warranty. If the product cannot be repaired at the customer’s residence, we provide a temporary replacement while the product is being repaired. If the product cannot be repaired, we will replace it with a product of comparable quality, age and condition.
Lifetime reinstatement. If a customer is temporarily unable to make payments on a piece of rental merchandise and must return the merchandise, that customer generally may later re-rent the same piece of merchandise (or if unavailable, a substitute of comparable quality, age and condition) on the terms that existed at the time the merchandise was returned, and pick up payments where they left off without losing what they previously paid.

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Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer has continuously renewed the rental purchase agreement for a period of seven to 30 months, depending upon the product type, or exercises a specified early purchase option.
Our Growth Strategy
Beginning in 2013, we launched a multi-year program designed to transform and modernize our operations in order to improve the profitability of the Core U.S. segment while continuing to grow our Acceptance Now segment. This program was focused on building new competencies and capabilities through a variety of operational and infrastructure initiatives such as introducing a new labor model in our Core U.S. rent-to-own stores, formulating a customer-focused, value-based pricing strategy, developing a new sourcing and distribution model, implementing new technology into our Acceptance Now locations, and introducing e-commerce capabilities to our Core U.S. segment. Many of these initiatives are now complete.
We remain focused on strengthening our Core business while continuing to build upon Acceptance Now’s recent success with signing pilot agreements with two new national retailers representing a significant scale opportunity. We will continue to review strategic priorities and opportunities in both businesses to enhance value.
In order to position the Company for long-term growth and profitability, we are taking important steps to drive operational improvements, including:
achieving an optimal product mix by shifting to a higher concentration of the higher-end, aspirational products that our customers want, and which have always helped make Rent-A-Center a leader in the rent-to-own industry;
providing a better value proposition and being more customer centric, which will help us extend average rental time, translating to happier, more loyal customers that return to us in the future;
stabilizing our workforce by adding back a full-time co-worker to most of our stores, as we believe that investing in the frontline will improve customer satisfaction and business results;
utilizing technology investments and new capabilities to enable or accelerate business strategies and find innovative, engaging ways to better serve customers; and
implementing a streamlined collection process and enhancing customer service through employee training to reduce delinquencies and collection times.
Our Operating Segments
We report four operating segments: Core U.S., Acceptance Now, Mexico, and Franchising. Additional information regarding our operating segments is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 of this Annual Report on Form 10-K, and financial information regarding these segments and revenues by geographic area are provided in Note S to the consolidated financial statements contained in this Annual Report on Form 10-K. Substantially all of our revenues for the past three years originated in the United States.
Core U.S.
Our Core U.S. segment is our largest operating segment, comprising approximately 70% of our consolidated net revenues for the year ended December 31, 2016. Approximately 79% of our business in this segment is from repeat customers.
At December 31, 2016, we operated 2,463 company-owned stores in the United States, Canada and Puerto Rico, including 45 retail installment sales stores under the names “Get It Now” and “Home Choice.” We routinely evaluate the markets in which we operate and will close, sell or merge underperforming stores.
Acceptance Now
Through our Acceptance Now segment, we generally provide an on-site rent-to-own option at a third-party retailer’s location. In the event a retail purchase credit application is declined, the customer can be introduced to an in-store Acceptance Now representative who explains an alternative transaction for acquiring the use and ownership of the merchandise. Because we neither require nor perform a formal credit investigation for the approval of the rental purchase transaction, applicants who meet certain basic criteria are generally approved. We believe our Acceptance Now program is beneficial for both the retailer and the consumer. The retailer captures more sales because we buy the merchandise directly from them and future rental payments are generally made at the retailer’s location. We believe consumers also benefit from our Acceptance Now program because they are able to obtain the products they want and need without the necessity of credit. The gross margins in this segment are lower than the gross margins in our Core U.S. segment because we pay retail for the product. Through certain retail partners, we offer our customers the option

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to obtain ownership of the product at or slightly above the full retail price if they pay within 90 days. In some cases, the retailer provides us a rebate on the cost of the merchandise if the customer exercises this 90 day option.
Each Acceptance Now kiosk location typically consists of an area with a computer, desk and chairs. We occupy the space without charge by agreement with each retailer. Accordingly, capital expenditures with respect to a new Acceptance Now location are minimal, and any exit costs associated with the closure of an Acceptance Now location would also be immaterial on an individual basis. Our operating model is highly agile and dynamic because we can open and close locations quickly and efficiently.
We rely on our third-party retail partners to deliver merchandise rented by the customer. Such third-party retail partners typically charge us a fee for delivery, which we pass on to the customer. In the event the customer returns rented merchandise, we pick it up at no additional charge. Merchandise returned from an Acceptance Now kiosk location is offered for rent at one of our Core U.S. rent-to-own stores.
We intend to grow the Acceptance Now segment by increasing the number of our retail partners and the number of locations with our existing retail partners. As of December 31, 2016, we operated 1,431 staffed kiosk locations inside furniture and electronics retailers located in 40 states and Puerto Rico, and 478 virtual (direct) locations.
Mexico
Our Mexico segment currently consists of our company-owned rent-to-own stores in Mexico. At December 31, 2016, we operated 130 stores in this segment. The financial performance of our Mexico segment met our expectations in 2016 as a result of the operational initiatives implemented in 2015, and we are evaluating additional strategies for our operations in Mexico.
We are subject to the risks of doing business internationally as described under "Risk Factors."
Franchising
The stores in our Franchising segment use Rent-A-Center's, ColorTyme's or RimTyme's trade names, service marks, trademarks and logos, and operate under distinctive operating procedures and standards. Franchising's primary source of revenue is the sale of rental merchandise to its franchisees who, in turn, offer the merchandise to the general public for rent or purchase under a rent-to-own transaction.
At December 31, 2016, this segment franchised 229 stores in 31 states operating under the Rent-A-Center (152 stores), ColorTyme (39 stores) and RimTyme (38 stores) names. These rent-to-own stores primarily offer high quality durable products such as consumer electronics, appliances, computers, furniture and accessories, wheels and tires.
As franchisor, Franchising receives royalties of 2.0% to 6.0% of the franchisees’ monthly gross revenue and, generally, an initial fee up to $35,000 per new location.
The following table summarizes our locations allocated among these operating segments as of December 31:
 
2016
 
2015
 
2014
Core U.S.
2,463

 
2,672

 
2,824

Acceptance Now Staffed
1,431

 
1,444

 
1,406

Acceptance Now Direct
478

 
532

 

Mexico
130

 
143

 
177

Franchising
229

 
227

 
187

Total locations
4,731

 
5,018

 
4,594

The following discussion applies generally to all of our operating segments, unless otherwise noted.
Rent-A-Center Operations
Store Expenses
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 other expenses.
As a result of the investment in new stores and kiosk locations and their growth curves, our quarterly earnings are impacted by how many new locations we opened during a particular quarter and the quarters preceding it.

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Product Selection
Our Core U.S. and Mexico stores generally offer merchandise from five basic product categories: consumer electronics, appliances, computers (including tablets), smartphones, and furniture (including accessories). Although we seek to maintain sufficient inventory in our stores to offer customers a wide variety of models, styles and brands, we generally limit merchandise to prescribed levels to maintain strict inventory controls. We seek to provide a wide variety of high quality merchandise to our customers, and we emphasize products from name-brand manufacturers. Customers may request either new merchandise or previously rented merchandise. Previously rented merchandise is generally offered at a similar weekly or monthly rental rate as is offered for new merchandise, but with an opportunity to obtain ownership of the merchandise after fewer rental payments.
Consumer electronic products offered by our stores include high definition televisions, home theater systems, video game consoles and stereos. Appliances include refrigerators, freezers, washing machines, dryers, and ranges. We offer desktop, laptop, tablet computers and smartphones. Our furniture products include dining room, living room and bedroom furniture featuring a number of styles, materials and colors. Accessories include lamps and tables and are typically rented as part of a package of items, such as a complete room of furniture. Showroom displays enable customers to visualize how the product will look in their homes and provide a showcase for accessories.
The merchandise assortment may vary in our non-U.S. stores according to market characteristics and consumer demand unique to the particular country in which we are operating. For example, in Mexico, the appliances we offer are sourced locally, providing our customers in Mexico the look and feel to which they are accustomed in that product category.
Acceptance Now locations offer the merchandise available for sale at the applicable third-party retailer, primarily furniture and accessories, consumer electronics and appliances.
For the year ended December 31, 2016, furniture and accessories accounted for approximately 37% of our consolidated rentals and fees revenue, consumer electronic products for 22%, appliances for 16%, computers for 6%, smartphones for 4% and other products and services for 15%.
Product Turnover
On average, in the Core U.S. segment, a rental term of 15 months or exercising an early purchase option is generally required to obtain ownership of new merchandise. Product turnover is the number of times a product is rented to a different customer. On average, a product is rented (turned over) to three customers before a customer acquires ownership. Merchandise returned in the Acceptance Now segment is moved to a Core U.S. store where it is offered for rent. Ownership is attained in approximately 25% of first-time rental purchase agreements in the Core U.S. segment. The average total life for each product in our Core U.S. segment is approximately 18 months, which includes the initial rental period, all re-rental periods and idle time in our system. To cover the higher operating expenses generated by product turnover and the key features of rental purchase transactions, rental purchase agreements require higher aggregate payments than are generally charged under other types of purchase plans, such as installment purchase or credit plans.
Collections
Store managers use our management information system to track collections on a daily basis. If a customer fails to make a rental payment when due, store personnel will attempt to contact the customer to obtain payment and reinstate the agreement, or will terminate the account and arrange to regain possession of the merchandise. We attempt to recover the rental items as soon as possible following termination or default of a rental purchase agreement, generally by the seventh day. Collection efforts are enhanced by the personal and job-related references required of customers, the personal nature of the relationships between our employees and customers, and the availability of lifetime reinstatement. Currently, we track past due amounts using a guideline of seven days in our Core U.S. segment and 30 days in the Acceptance Now segment. These metrics align with the majority of the rental purchase agreements in each segment, since payments are generally made weekly in the Core U.S. segment and monthly in the Acceptance Now segment.
If a customer does not return the merchandise or make payment, the remaining book value of the rental merchandise associated with delinquent accounts is generally charged off on or before the 90th day following the time the account became past due in the Core U.S. segment, on or before the 150th day in the Acceptance Now segment and on or before the 60th day in the Mexico segment.

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Management
Our executive management team has extensive rent-to-own or similar retail experience and has demonstrated the ability to grow and manage our business through their operational leadership and strategic vision. In addition, our regional and district managers have long tenures with us, and we have a history of promoting management personnel from within. We believe this extensive industry and company experience will allow us to effectively execute our growth strategies.
Purchasing
Our centralized inventory management organization utilizes a combination of automated and manual merchandise planning, forecasting and replenishment processes to determine appropriate inventory levels to maintain in our third-party distribution centers and company-owned stores. Inventory levels are monitored on a daily basis, and purchase orders are processed and sent to manufacturers and distributors on a weekly basis to replenish inventory housed in our third-party distribution centers. We use customized software solution that builds recommended store replenishment orders based on current store inventory levels, current store rental and return trends, seasonality, product needs, desired weeks of supply targets, and other key factors. Approved orders are then passed through an automated solution to our third party distribution center and furniture manufacturers and product ships to the stores. The replenishment system and associated processes allow us to retain tight control over our inventory, ensure assortment diversity in our stores and assists us in having the right products available at the right time.
In our Core U.S. and Mexico segments, we purchase our rental merchandise from a variety of suppliers. In 2016, approximately 12% of our merchandise purchases were attributable to Ashley Furniture Industries. No other brand accounted for more than 10% of merchandise purchased during these periods. We do not generally enter into written contracts with our suppliers that obligate us to meet certain minimum purchasing levels. Although we expect to continue relationships with our existing suppliers, we believe there are numerous sources of products available, and we do not believe the success of our operations is dependent on any one or more of our present suppliers.
In our Acceptance Now segment, we purchase the merchandise selected by the customer from the applicable third-party retailer at the time such customer enters into a rental purchase agreement with us.
With respect to our Franchising segment, the franchise agreement requires the franchised stores to exclusively offer for rent or sale only those brands, types and models of products that Franchising has approved. The franchised stores are required to maintain an adequate mix of inventory that consists of approved products for rent as dictated by Franchising policy manuals. Franchising negotiates purchase arrangements with various suppliers it has approved, and franchisees purchase directly from those suppliers and from inventory housed in our third-party distribution centers.
Marketing
We promote our products and services through television and radio commercials, print advertisements, store telemarketing, digital display advertisements, direct email campaigns, social networks, paid and organic search, website and store signage. Our advertisements emphasize such features as product and name-brand selection, the opportunity to pay as you go without credit, long-term contracts or obligations, delivery and set-up at no additional cost, product repair and loaner services at no extra cost, lifetime reinstatement and multiple options to acquire ownership, including 90 day option pricing, an early purchase option or through a fixed number of payments. In addition, we promote the “RAC Worry-Free Guarantee®” to further highlight these aspects of the rental purchase transaction. We believe that by leveraging our advertising efforts to highlight the benefits of the rental purchase transaction, we will continue to educate our customers and potential customers about the rent-to-own alternative to credit as well as solidify our reputation as a leading provider of high-quality, branded merchandise and services.
Franchising has established national advertising funds for the franchised stores, whereby Franchising has the right to collect up to 3% of the monthly gross revenue from each franchisee as contributions to the fund. Franchising directs the advertising programs of the fund, generally consisting of television and radio commercials and print advertisements. Franchising also has the right to require franchisees to expend up to 3% of their monthly gross revenue on local advertising.

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Industry & Competition
According to a report published by the Association of Progressive Rental Organizations in 2016, the $8.5 billion rent-to-own industry in the United States, Mexico and Canada consists of approximately 9,200 stores, serves approximately 4.8 million customers and approximately 83% of rent-to-own customers have household incomes between $15,000 and $50,000 per year. The rent-to-own industry provides customers the opportunity to obtain merchandise they might otherwise be unable to obtain due to insufficient cash resources or a lack of access to credit. We believe the number of consumers lacking access to credit is increasing. According to data released by the Fair Isaac Corporation on September 13, 2016, consumers in the “subprime” category (those with credit scores below 650) made up 31% of the United States population.
The rent-to-own industry is experiencing rapid change with the emergence of virtual and kiosk-based operations, such as our Acceptance Now business. These new industry participants are disrupting traditional rent-to-own stores by attracting customers and making the rent-to-own transaction more acceptable to potential customers. In addition, banks and consumer finance companies are developing products and services designed to compete for the traditional rent-to-own customer.
These factors are increasingly contributing to an already highly competitive environment. Our stores and kiosks compete with other national, regional and local rent-to-own businesses, including on-line only competitors, as well as with rental stores that do not offer their customers a purchase option. With respect to customers desiring to purchase merchandise for cash or on credit, we also compete with retail stores, online competitors, and non-traditional lenders. Competition is based primarily on convenience, store location, product selection and availability, customer service, rental rates and terms.
Seasonality
Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year. Generally, our customers will more frequently exercise the early purchase option on their existing rental purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year, primarily due to federal income tax refunds. Furthermore, we tend to experience slower growth in the number of rental purchase agreements in the third quarter of each fiscal year when compared to other quarters throughout the year. We expect these trends to continue in the future.
Trademarks
We own various trademarks and service marks, including Rent-A-Center® and RAC Worry-Free Guarantee® that are used in connection with our operations and have been registered with the United States Patent and Trademark Office. The duration of our trademarks is unlimited, subject to periodic renewal and continued use. In addition, we have obtained trademark registrations in Mexico, Canada and certain other foreign jurisdictions. We believe we hold the necessary rights for protection of the trademarks and service marks essential to our business. The products held for rent in our stores also bear trademarks and service marks held by their respective manufacturers.
Franchising licenses the use of the Rent-A-Center and ColorTyme trademarks and service marks to its franchisees under the franchise agreement. Franchising owns various trademarks and service marks, including ColorTyme® and RimTyme®, that are used in connection with its operations and have been registered with the United States Patent and Trademark office. The duration of these marks is unlimited, subject to periodic renewal and continued use.
Employees
As of February 21, 2017, we had approximately 21,600 employees.

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Government Regulation
Core U.S. & Acceptance Now
State Regulation.    Currently, 46 states, the District of Columbia and Puerto Rico have rental purchase statutes that recognize and regulate rental purchase transactions as separate and distinct from credit sales. We believe this existing legislation is generally favorable to us, as it defines and clarifies the various disclosures, procedures and transaction structures related to the rent-to-own business with which we must comply. With some variations in individual states, most related state legislation requires the lessor to make prescribed disclosures to customers about the rental purchase agreement and transaction, and provides time periods during which customers may reinstate agreements despite having failed to make a timely payment. Some state rental purchase laws prescribe grace periods for non-payment, prohibit or limit certain types of collection or other practices, and limit certain fees that may be charged. Ten states limit the total rental payments that can be charged to amounts ranging from 2.0 times to 2.4 times the disclosed cash price or the retail value of the rental product. Five states limit the cash price of merchandise to amounts ranging from 1.56 to 2.5 times our cost for each item.
Although Minnesota has a rental purchase statute, the rental purchase transaction is also treated as a credit sale subject to consumer lending restrictions pursuant to judicial decision. Therefore, we offer our customers in Minnesota an opportunity to purchase our merchandise through an installment sale transaction in our Home Choice stores. We operate 17 Home Choice stores in Minnesota.
North Carolina has no rental purchase legislation. However, the retail installment sales statute in North Carolina expressly provides that lease transactions which provide for more than a nominal purchase price at the end of the agreed rental period are not credit sales under the statute. We operate 99 rent-to-own stores, and 82 and 73 Acceptance Now Staffed and Acceptance Now Direct locations, respectively, in North Carolina.
Courts in Wisconsin and New Jersey, which do not have rental purchase statutes, have rendered decisions which classify rental purchase transactions as credit sales subject to consumer lending restrictions. Accordingly, in Wisconsin, we offer our customers an opportunity to purchase our merchandise through an installment sale transaction in our Get It Now stores. In New Jersey, we have modified our typical rental purchase agreements to provide disclosures, grace periods, and pricing that we believe comply with the retail installment sales act. We operate 28 Get It Now stores in Wisconsin and 46 Rent-A-Center stores in New Jersey.
There can be no assurance as to whether new or revised rental purchase laws will be enacted or whether, if enacted, the laws would not have a material and adverse effect on us.
Federal Regulation.    To date, no comprehensive federal legislation has been enacted regulating or otherwise impacting the rental purchase transaction. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) does not regulate leases with terms of 90 days or less. Because the rent-to-own transaction is for a term of week to week, or at most, month to month, and established federal law deems the term of a lease to be its minimum term regardless of extensions or renewals, if any, we believe the rent-to-own transaction is not covered by the Dodd-Frank Act.
From time to time, we have supported legislation introduced in Congress that would regulate the rental purchase transaction. While both beneficial and adverse legislation may be introduced in Congress in the future, any adverse federal legislation, if enacted, could have a material and adverse effect on us.
Mexico and Canada
No comprehensive legislation regulating the rent-to-own transaction has been enacted in Mexico or Canada. We use substantially the same rental purchase transaction in those countries as in the U.S. stores, but with such additional provisions as we believe may be necessary to comply with such country’s specific laws and customs.

9




Item 1A. Risk Factors.
You should carefully consider the risks described below before making an investment decision. We believe these are all the material risks currently facing our business. Our business, financial condition or results of operations could be materially adversely affected by these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. You should also refer to the other information included in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.
Our success depends on the effective implementation and continued execution of our strategies.
Our Core U.S. store base is mature and our Acceptance Now business operates in an intensively competitive environment. We recently completed a multi-year program designed to address these dynamics by transforming and modernizing our operations in order to improve the profitability of the Core U.S. segment while continuing to grow profitably our Acceptance Now segment. We remain focused on strengthening our Core business while continuing to build upon Acceptance Now's recent success with signing pilot agreements with two new national retailers representing a significant scale opportunity. We will continue to review strategic priorities and opportunities in both businesses to enhance value.
In order to position the Company for long-term growth and profitability, we are taking important steps to drive operational improvements, including:
achieving an optimal product mix by shifting to a higher concentration of the higher-end, aspirational products that our customers want, and which have always helped make Rent-A-Center a leader in the rent-to-own industry;
providing a better value proposition and being more customer centric, which will help us extend average rental time, translating to happier, more loyal customers that return to us in the future;
stabilizing our workforce by adding back a full-time co-worker to most of our stores, as we believe that investing in the frontline will improve customer satisfaction and business results;
utilizing technology investments and new capabilities to enable or accelerate business strategies and find innovative, engaging ways to better serve customers; and
implementing a streamlined collection process and enhancing customer service through employee training to reduce delinquencies and collection times.
There is no assurance that we will be able to implement and execute these strategic initiatives in accordance with our expectations. Higher costs or failure to achieve targeted results associated with the implementation of such new programs or initiatives could adversely affect our results of operations or negatively impact our ability to successfully execute future strategies, which may result in an adverse impact on our business and financial results.
We are highly dependent on the financial performance of our Core U.S. operating segment.
Our financial performance is highly dependent on our Core U.S. segment, which comprised approximately 70% of our consolidated net revenues for the year ended December 31, 2016. Any significant decrease in the financial performance of the Core U.S. segment may also have a material adverse impact on our ability to implement our growth strategies.
We are in a management transition period in which the individuals serving as both our chief executive officer and chief financial officer are acting in interim roles. We may not be able to effectively operate and execute our strategies during this interim period and may encounter difficulties or delays in identifying and attracting a permanent chief executive officer and chief financial officer, each with the required level of experience and expertise.
On December 2, 2016, Guy J. Constant resigned as Executive Vice President - Finance, Chief Financial Officer & Treasurer of the Company, and Maureen B. Short was named as Interim Chief Financial Officer. On January 9, 2017, Robert D. Davis resigned as Chief Executive Officer and a director of the Company. On that date, our founder, former chief executive officer, and Chairman of the Board, Mark E. Speese, was named as Interim Chief Executive Officer. We are in the process of searching for a permanent chief executive officer and chief financial officer. However, if we are unsuccessful in appointing a chief executive officer and a chief financial officer each with the required level of experience and expertise in a timely manner, our operations and business strategies could be materially and adversely affected. Any significant leadership change or executive management transition creates uncertainty, involves inherent risk, and may involve a diversion of resources and management attention, be disruptive to our daily operations or impact public or market perception, any of which could negatively impact our ability to operate effectively or execute our strategies and result in a material adverse impact on our business, financial condition, results of operations or cash flows.
Our ability to attract and retain key employees may be adversely impacted by the recent executive departures and resulting management transition, and our recent financial results.
Executive leadership transitions can be inherently difficult to manage and may cause disruption to our business. As a result of the recent changes in our executive management team, our existing management team has taken on substantially more responsibility,

10




which has resulted in greater workload demands and could divert their attention away from other key areas of our business. In addition, management transition inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution, and our results of operations and financial condition could suffer as a result.
Our future success depends in large part upon our ability to attract and retain key management executives and other key employees. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash and equity compensation. Because of our lower than expected operating results for the year ended December 31, 2016, our senior management did not earn any amounts under the annual cash incentive plan for 2016, and salary increases and future cash incentive compensation opportunities could be limited. In addition, our long-term incentive program includes equity awards in the form of stock options and restricted stock units. Any prolonged inability to provide salary increases or cash incentive compensation opportunities, or if the anticipated value of such equity awards does not materialize or our equity compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate executives and key employees could be weakened. In addition the uncertainty and operational disruptions caused by the management changes and related transitions could result in additional key employees deciding to leave the Company. If we are unable to retain, attract and motivate talented employees with the appropriate skill sets, we may not achieve our objectives and our results of operations could be adversely impacted.
Failure to effectively manage our costs could have a material adverse effect on our profitability.
Certain elements of our cost structure are largely fixed in nature. Consumer spending remains uncertain, which makes it more challenging for us to maintain or increase our operating income in the Core U.S. segment. The competitiveness in our industry and increasing price transparency means that the focus on achieving efficient operations is greater than ever. As a result, we must continuously focus on managing our cost structure. Failure to manage our labor and benefit rates, advertising and marketing expenses, operating leases, charge-offs due to customer stolen merchandise, other store expenses or indirect spending could materially adversely affect our profitability.
Our Acceptance Now segment depends on the success of our third-party retail partners and our continued relationship with them.
Our Acceptance Now segment revenues depend in part on the ability of unaffiliated third-party retailers to attract customers. The failure of our third-party retail partners to maintain quality and consistency in their operations and their ability to continue to provide products and services, or the loss of the relationship with any of these third-party retailers and an inability to replace them, could cause our Acceptance Now segment to lose customers, substantially decreasing the revenues and earnings of our Acceptance Now segment. This could adversely affect our financial results. In 2016, approximately 73% of the total revenue of the Acceptance Now segment originated at our Acceptance Now kiosks located in stores operated by six retail partners. We may be unable to continue growing the Acceptance Now segment if we are unable to find third-party retailers willing to partner with us or if we are unable to enter into agreements with third-party retailers acceptable to us.
The success of our business is dependent on factors affecting consumer spending that are not under our control.
Consumer spending is affected by general economic conditions and other factors including levels of employment, disposable consumer income, prevailing interest rates, consumer debt and availability of credit, costs of fuel, inflation, recession and fears of recession, war and fears of war, pandemics, inclement weather, tax rates and rate increases, timing of receipt of tax refunds, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting discretionary spending could reduce demand for our products and services resulting in lower revenue and negatively impacting the business and its financial results.
If we are unable to compete effectively with the growing e-commerce sector, our business and results of operations may be materially adversely affected.
With the continued expansion of Internet use, as well as mobile computing devices and smartphones, competition from the e-commerce sector continues to grow. We have launched virtual capabilities within our Acceptance Now and Core U.S. segments. There can be no assurance we will be able to grow our e-commerce business in a profitable manner. Certain of our competitors, and a number of e-commerce retailers, have established e-commerce operations against which we compete for customers. It is possible that the increasing competition from the e-commerce sector may reduce our market share, gross margin, and operating margin, and may materially adversely affect our business and results of operations in other ways.
Disruptions in our supply chain and other factors affecting the distribution of our merchandise could adversely impact our business.
Any disruption in the operation of our distribution centers could result in our inability to meet our customers’ expectations, higher costs, an inability to stock our stores or longer lead time associated with distributing merchandise. Any such disruption within our

11




supply chain network, including damage or destruction to one of our five regional distribution centers, could result in decreased net sales, increased costs and reduced profits.
Our debt agreements impose restrictions on us which may limit or prohibit us from engaging in certain transactions. If a default were to occur, our lenders could accelerate the amounts of debt outstanding, and holders of our secured indebtedness could force us to sell our assets to satisfy all or a part of what is owed.
Covenants under our senior credit facilities and the indenture governing our outstanding senior unsecured notes restrict our ability to pay dividends and engage in various operational matters. In addition, covenants under our senior credit facilities require us to maintain specified financial ratios. Our ability to meet these financial ratios may be affected by events beyond our control. These restrictions could limit our ability to obtain future financing, make needed capital expenditures or other investments, repurchase our outstanding debt or equity, pay dividends, withstand a future downturn in our business or in the economy, dispose of operations, engage in mergers, acquire additional stores or otherwise conduct necessary corporate activities. Various transactions that we may view as important opportunities, are also subject to the consent of lenders under the senior credit facilities, which may be withheld or granted subject to conditions specified at the time that may affect the attractiveness or viability of the transaction.
If a default were to occur, the lenders under our senior credit facilities could accelerate the amounts outstanding under the credit facilities. In addition, the lenders under these agreements could terminate their commitments to lend to us. If the lenders under these agreements accelerate the repayment of borrowings, we may not have sufficient liquid assets at that time to repay the amounts then outstanding under our indebtedness or be able to find additional alternative financing. Even if we could obtain additional alternative financing, the terms of the financing may not be favorable or acceptable to us.
The existing indebtedness under our senior credit facilities is secured by substantially all of our assets. Should a default or acceleration of this indebtedness occur, the holders of this indebtedness could sell the assets to satisfy all or a part of what is owed.
Our current insurance program may expose us to unexpected costs and negatively affect our financial performance.
Our insurance coverage is subject to deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on our operations. Because we self-insure a significant portion of expected losses under our workers' compensation, general liability, vehicle and group health insurance programs, unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses, including potential increases in medical and indemnity costs, could result in materially different amounts of expense than expected under these programs. This could have a material adverse effect on our financial condition and results of operations.
Our operations in Mexico are subject to political or regulatory changes and significant changes in the economic environment and other concerns.
We opened our first store in Mexico in October 2010, and operated 130 stores in Mexico as of December 31, 2016. Changes in the business, regulatory or political climate in Mexico could adversely affect our operations there. Mexico is also subject to certain potential risks and uncertainties that are beyond our control, such as violence, social unrest, enforcement of property rights and public safety and security that could restrict or eliminate our ability to open new or operate some or all of our locations in Mexico, or significantly reduce customer traffic or demand. In addition, our assets, investments in, earnings from and dividends from our Mexican subsidiaries must be translated to U.S. dollars from the Mexican peso. Accordingly, we are exposed to risks associated with fluctuations of the exchange rate for the Mexican peso which may have an impact on our future costs or on future cash flows from our Mexico operations, and could adversely affect our financial performance.
Failure to improve our financial performance in Mexico could result in our taking actions that may change or impact our projected results in the future.
We are pursuing several operational initiatives designed to improve the financial performance of our operations in Mexico. If we are unable to achieve an acceptable level of profitability in Mexico, we will consider all available alternatives for our operations in Mexico, some of which may change or impact our projected results in the future.
Our transactions are regulated by and subject to the requirements of various federal and state laws and regulations, which may require significant compliance costs and expose us to litigation. Any negative change in these laws or the passage of unfavorable new laws could require us to alter our business practices in a manner that may be materially adverse to us.
Currently, 46 states, the District of Columbia and Puerto Rico have passed laws that regulate rental purchase transactions as separate and distinct from credit sales. One additional state has a retail installment sales statute that excludes leases, including rent-to-own transactions, from its coverage if the lease provides for more than a nominal purchase price at the end of the rental period. The specific rental purchase laws generally require certain contractual and advertising disclosures. They also provide varying levels of substantive consumer protection, such as requiring a grace period for late fees and contract reinstatement rights in the event the

12




rental purchase agreement is terminated. The rental purchase laws of ten states limit the total amount that may be charged over the life of a rental purchase agreement and the laws of five states limit the cash prices for which we may offer merchandise.
Similar to other consumer transactions, our rental purchase transaction is also governed by various federal and state consumer protection statutes. These consumer protection statutes, as well as the rental purchase statutes under which we operate, provide various consumer remedies, including monetary penalties, for violations. In our history, we have been the subject of litigation alleging that we have violated some of these statutory provisions.
Although there is currently no comprehensive federal legislation regulating rental purchase transactions, adverse federal legislation may be enacted in the future. From time to time, both favorable and adverse legislation seeking to regulate our business has been introduced in Congress. In addition, various legislatures in the states where we currently do business may adopt new legislation or amend existing legislation that could require us to alter our business practices in a manner that could have a material adverse effect on our business, financial condition and results of operations.
Our reputation, ability to do business and operating results may be impaired by improper conduct by any of our employees, agents or business partners.
Our operations in the U.S. and abroad are subject to certain laws generally prohibiting companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, such as the U.S. Foreign Corrupt Practices Act, and similar anti-bribery laws in other jurisdictions. Our employees, contractors or agents may violate the policies and procedures we have implemented to ensure compliance with these laws. Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil and criminal, monetary and non-monetary penalties, and related shareholder lawsuits, could cause us to incur significant legal fees, and could damage our reputation.
We may be subject to legal proceedings from time to time which seek material damages. The costs we incur in defending ourselves or associated with settling any of these proceedings, as well as a material final judgment or decree against us, could materially adversely affect our financial condition by requiring the payment of the settlement amount, a judgment or the posting of a bond.
In our history, we have defended class action lawsuits alleging various regulatory violations and have paid material amounts to settle such claims. Significant settlement amounts or final judgments could materially and adversely affect our liquidity and capital resources. The failure to pay any material judgment would be a default under our senior credit facilities and the indenture governing our outstanding senior unsecured notes.
Our operations are dependent on effective information management systems. Failure of these systems could negatively impact our business, financial condition and results of operations.
We utilize integrated information management systems. The efficient operation of our business is dependent on these systems to effectively manage our financial and operational data. The failure of our information management systems to perform as designed, loss of data or any interruption of our information management systems for a significant period of time could disrupt our business. If the information management systems sustain repeated failures, we may not be able to manage our store operations, which could have a material adverse effect on our business, financial condition and results of operations.
We are currently investing in new information management technology and systems and implementing modifications and upgrades to existing systems to support our growth plan. These investments include replacing legacy systems, making changes to existing systems, building redundancies, and acquiring new systems and hardware with updated functionality. We are taking appropriate actions to ensure the successful implementation of these initiatives, including the testing of new systems and the transfer of existing data, with minimal disruptions to the business. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, may cause disruptions to our existing systems and our business, and may not provide the anticipated benefits. The disruption in our information management systems, or our inability to improve, upgrade, integrate or expand our systems to meet our evolving business requirements, could impair our ability to achieve critical strategic initiatives and could materially adversely impact our business, financial condition and results of operations.
In the third quarter of 2016, we experienced unexpected capacity-related system outages of our new store information management system in our Core U.S. stores which negatively impacted our third quarter operating results. In the fourth quarter of 2016, we implemented software releases to improve stability and added hardware to help mitigate over-utilization issues. As a result, we did not experience any additional capacity-related outages in the fourth quarter of 2016.
If we fail to protect the integrity and security of customer and employee information, we could be exposed to litigation or regulatory enforcement and our business could be adversely impacted.
We collect and store certain personal information provided to us by our customers and employees in the ordinary course of our business. Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are

13




entirely free from vulnerability to attack. Computer hackers may attempt to penetrate our network security and, if successful, misappropriate confidential customer or employee information. In addition, one of our employees, contractors or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently cause a breach involving such information. Loss of customer or employee information could disrupt our operations, damage our reputation, and expose us to claims from customers, employees, regulators and other persons, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, the costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws, and costs incurred to prevent or remediate information security breaches, could adversely impact our business.
A change of control could accelerate our obligation to pay our outstanding indebtedness, and we may not have sufficient liquid assets at that time to repay these amounts.
Under our senior credit facilities, an event of default would result if a third party became the beneficial owner of 35.0% or more of our voting stock or upon certain changes in the constitution of Rent-A-Center’s Board of Directors. As of December 31, 2016, $191.8 million was outstanding under our senior credit facilities.
Under the indenture governing our outstanding senior unsecured notes, in the event of a change in control, we may be required to offer to purchase all of our outstanding senior unsecured notes at 101% of their original aggregate principal amount, plus accrued interest to the date of repurchase. A change in control also would result in an event of default under our senior credit facilities, which would allow our lenders to accelerate indebtedness owed to them.
If a specified change in control occurs and the lenders under our debt instruments accelerate these obligations, we may not have sufficient liquid assets to repay amounts outstanding under these agreements.
Rent-A-Center's organizational documents and our debt instruments contain provisions that may prevent or deter another group from paying a premium over the market price to Rent-A-Center's stockholders to acquire its stock.
Rent-A-Center’s organizational documents contain provisions that classify its Board of Directors, authorize its Board of Directors to issue blank check preferred stock and establish advance notice requirements on its stockholders for director nominations and actions to be taken at meetings of the stockholders. In addition, as a Delaware corporation, Rent-A-Center is subject to Section 203 of the Delaware General Corporation Law relating to business combinations. Our senior credit facilities and the indentures governing our senior unsecured notes each contain various change of control provisions which, in the event of a change of control, would cause a default under those provisions. These provisions and arrangements could delay, deter or prevent a merger, consolidation, tender offer or other business combination or change of control involving us that could include a premium over the market price of Rent-A-Center’s common stock that some or a majority of Rent-A-Center’s stockholders might consider to be in their best interests.
Rent-A-Center is a holding company and is dependent on the operations and funds of its subsidiaries.
Rent-A-Center is a holding company, with no revenue generating operations and no assets other than its ownership interests in its direct and indirect subsidiaries. Accordingly, Rent-A-Center is dependent on the cash flow generated by its direct and indirect operating subsidiaries and must rely on dividends or other intercompany transfers from its operating subsidiaries to generate the funds necessary to meet its obligations, including the obligations under the senior credit facilities. The ability of Rent-A-Center’s subsidiaries to pay dividends or make other payments to it is subject to applicable state laws. Should one or more of Rent-A-Center’s subsidiaries be unable to pay dividends or make distributions, its ability to meet its ongoing obligations could be materially and adversely impacted.
Our stock price is volatile, and you may not be able to recover your investment if our stock price declines.
The price of our common stock has been volatile and can be expected to be significantly affected by factors such as:
our ability to meet market expectations with respect to the growth and profitability of each of our operating segments;
quarterly variations in our results of operations, which may be impacted by, among other things, changes in same store sales or when and how many locations we acquire or open;
quarterly variations in our competitors’ results of operations;
changes in earnings estimates or buy/sell recommendations by financial analysts; and
the stock price performance of comparable companies.
In addition, the stock market as a whole historically has experienced price and volume fluctuations that have affected the market price of many specialty retailers in ways that may have been unrelated to these companies' operating performance.

14




Failure to achieve and maintain effective internal controls could have a material adverse effect on our business and stock price.
Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our brand and operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
While we continue to evaluate and improve our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.

15




Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We lease space for substantially all of our Core U.S. and Mexico stores and certain support facilities under operating leases expiring at various times through 2023. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed-upon formulas. Store sizes average approximately 4,700 square feet. Approximately 75% of each store’s space is generally used for showroom space and 25% for offices and storage space. Our Acceptance Now kiosks occupy space without charge in the retailer's location with no lease commitment.
We believe suitable store space generally is available for lease and we would be able to relocate any of our stores or support facilities without significant difficulty should we be unable to renew a particular lease. We also expect additional space is readily available at competitive rates to open new stores or support facilities, as necessary.
We own the land and building in Plano, Texas, in which our corporate headquarters is located. The land and improvements are pledged as collateral under our senior credit facilities.
Item 3. Legal Proceedings.
From time to time, we, along with our subsidiaries, are party to various legal proceedings arising in the ordinary course of business. We reserve for loss contingencies that are both probable and reasonably estimable. We regularly monitor developments related to these legal proceedings, and review the adequacy of our legal reserves on a quarterly basis. We do not expect these losses to have a material impact on our consolidated financial statements if and when such losses are incurred.
We are subject to unclaimed property audits by states in the ordinary course of business. A comprehensive multi-state unclaimed property audit is currently in progress. The property subject to review in this audit process includes unclaimed wages, vendor payments and customer refunds. State escheat laws generally require entities to report and remit abandoned and unclaimed property to the state. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability itself. We routinely remit escheat payments to states in compliance with applicable escheat laws. Management believes it is too early to determine the ultimate outcome of this audit, as our remediation efforts are still in process and there have been recent developments in escheat laws which may be applicable to this matter.
Alan Hall, et. al. v. Rent-A-Center, Inc., et. al.; James DePalma, et. al. v. Rent-A-Center, Inc., et. al. On December 23, 2016, a putative class action was filed against us and certain of our former officers by Alan Hall in federal court in Sherman, Texas. The complaint alleges that the defendants violated Section 10(b) and/or Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by issuing false and misleading statements and omitting material facts regarding our business, operations and prospects during the period covered by the complaint. The complaint purports to be brought on behalf of all purchasers of our common stock from July 27, 2015, through October 10, 2016, and seeks damages in unspecified amounts. A complaint filed by James DePalma also in Sherman, Texas alleging similar claims was consolidated by the court into the Hall matter. We believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that we will be found to have no liability in this matter.

Item 4. Mine Safety Disclosures.
Not applicable. 

16




PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been listed on the Nasdaq Global Select Market® and its predecessors under the symbol “RCII” since January 25, 1995, the date we commenced our initial public offering. The following table sets forth, for the periods indicated, the high and low sales price per share of our common stock as reported, and the quarterly cash dividend declared per share on our common stock.
2016
High
 
Low
 
Cash Dividends
Declared
Fourth Quarter
$13.16
 
$8.00
 
$0.08
Third Quarter
$13.73
 
$10.20
 
$0.08
Second Quarter
$15.94
 
$11.21
 
$0.08
First Quarter
$16.37
 
$9.76
 
$0.08
2015
High
 
Low
 
Cash Dividends
Declared
Fourth Quarter
$26.26
 
$14.69
 
$0.24
Third Quarter
$29.66
 
$23.68
 
$0.24
Second Quarter
$33.59
 
$25.13
 
$0.24
First Quarter
$37.23
 
$26.47
 
$0.24
As of February 21, 2017, there were approximately 38 record holders of our common stock.
Future decisions to pay cash dividends on our common stock continue to be at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, contractual restrictions, financial condition, future prospects and any other factors our Board of Directors may deem relevant. Cash dividend payments are subject to certain restrictions in our debt agreements. Please see Note I and Note J to the consolidated financial statements for further discussion of such restrictions.
Under our current common stock repurchase program, our Board of Directors has authorized the purchase, from time to time, in the open market and privately negotiated transactions, up to an aggregate of $1.25 billion of Rent-A-Center common stock. As of December 31, 2016, we had purchased a total of 36,994,653 shares of Rent-A-Center common stock for an aggregate purchase price of $994.8 million under this common stock repurchase program. No shares were repurchased during 2016 and 2015.


17




Stock Performance Graph
The following chart represents a comparison of the five year total return of our common stock to the NASDAQ Composite Index and the S&P 1500 Specialty Retail Index. We selected the S&P 1500 Specialty Retail Index for comparison because we use this published industry index as the comparator group to measure our relative total shareholder return for purposes of determining vesting of performance stock units granted under our long-term incentive compensation program. The graph assumes $100 was invested on December 31, 2011, and dividends, if any, were reinvested for all years ending December 31.
rac2016-fo_chartx56053.jpg

18




Item 6. Selected Financial Data.
The selected financial data presented below for the five years ended December 31, 2016, have been derived from our audited consolidated financial statements. The historical financial data are qualified in their entirety by, and should be read in conjunction with, the consolidated financial statements and the notes thereto, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included in this report.
 
Year Ended December 31,
 (In thousands, except per share data)
2016
 
2015(1)
 
2014
 
2013
 
2012
Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
 
 
Rentals and fees
$
2,500,053

 
$
2,781,315

 
$
2,745,828

(8) 
$
2,695,895

 
$
2,653,925

Merchandise sales
351,198

 
377,240

 
290,048

 
278,753

 
300,077

Installment sales
74,509

 
76,238

 
75,889

 
71,475

 
67,071

Other
12,706

 
19,158

 
19,949

 
18,133

 
16,391

Franchise
 
 
 
 
 
 
 
 
 
Merchandise sales
16,358

 
15,577

 
19,236

 
24,556

 
32,893

Royalty income and fees
8,428

 
8,892

 
6,846

 
5,206

 
5,314

Total revenues
2,963,252

 
3,278,420

 
3,157,796

 
3,094,018

 
3,075,671

Cost of revenues
 
 
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
 
 
Cost of rentals and fees
664,845

 
728,706

 
704,595

 
676,674

 
642,387

Cost of merchandise sold
323,727


356,696

 
231,520

 
216,206

 
241,219

Cost of installment sales
24,285

 
25,677

 
26,084

 
24,541

 
23,287

Other charges and (credits)

 
34,698

(4) 
(6,836
)
(9) 

 

Franchise cost of merchandise sold
15,346

 
14,534

 
18,070

 
23,104

 
31,314

Total cost of revenues
1,028,203

 
1,160,311

 
973,433

 
940,525

 
938,207

Gross profit
1,935,049

 
2,118,109

 
2,184,363

 
2,153,493

 
2,137,464

Operating expenses
 
 
 
 
 
 
 
 
 
Store expenses
 
 
 
 
 
 
 
 
 
Labor
789,049

 
854,610

 
888,929

 
881,671

 
840,377

Other store expenses
791,614

 
833,914

 
842,254

 
789,212

 
764,770

General and administrative expenses
168,907

 
166,102

 
162,316

 
147,621

 
140,039

Depreciation, amortization and write-down of intangibles
80,456

 
80,720

 
83,168

 
86,912

 
79,249

Goodwill impairment charge
151,320

(2) 
1,170,000

(5) 

 
1,068

 

Other charges
20,299

(3) 
20,651

(6) 
14,234

(10) 

 

Total operating expenses
2,001,645

 
3,125,997

 
1,990,901

 
1,906,484

 
1,824,435

Operating (loss) profit
(66,596
)
 
(1,007,888
)
 
193,462

 
247,009

 
313,029

Finance charges from refinancing

 

 
4,213

(11) 

 

Interest expense, net
46,678

 
48,692

 
46,896

 
38,813

 
31,223

(Loss) earnings before income taxes
(113,274
)
 
(1,056,580
)
 
142,353

 
208,196

 
281,806

Income tax (benefit) expense
(8,079
)
 
(103,060
)
(7) 
45,931

 
79,439

 
101,788

Net (loss) earnings
$
(105,195
)
 
$
(953,520
)
 
$
96,422

 
$
128,757

 
$
180,018

Basic (loss) earnings per common share
$
(1.98
)
 
$
(17.97
)
 
$
1.82

 
$
2.35

 
$
3.06

Diluted (loss) earnings per common share
$
(1.98
)
 
$
(17.97
)
 
$
1.81

 
$
2.33

 
$
3.03

Cash dividends declared per common share
$
0.32

 
$
0.96

 
$
0.93

 
$
0.86

 
$
0.69



19




Item 6. Selected Financial Data — Continued.
 
December 31,
 (Dollar amounts in thousands)
2016
 
2015(1)
 
2014
 
2013
 
2012
Consolidated Balance Sheet Data
 
 
 
 
 
 
 
 
 
Rental merchandise, net
$
1,001,954

 
$
1,136,472

 
$
1,237,856

 
$
1,124,198

 
$
1,006,419

Intangible assets, net
60,560

 
213,899

 
1,377,992

 
1,373,518

 
1,352,888

Total assets
1,602,741

 
1,974,468

 
3,271,197

 
3,018,175

 
2,859,085

Total debt
724,230

 
955,833

 
1,042,813

 
916,275

 
687,500

Total liabilities
1,337,808

 
1,590,878

 
1,881,802

 
1,682,306

 
1,403,228

Total stockholders' equity
264,933

 
383,590

 
1,389,395

 
1,335,869

 
1,455,857

 
 
 
 
 
 
 
 
 
 
Operating Data (Unaudited)
 
 
 
 
 
 
 
 
 
Core U.S. and Mexico stores open at end of period
2,593

 
2,815

 
3,001

 
3,161

 
3,098

Acceptance Now Staffed locations open at end of period
1,431

 
1,444

 
1,406

 
1,325

 
966

Acceptance Now Direct locations open at end of period
478

 
532

 

 

 

Same store revenue (decrease) growth (12)
(6.2
)%
 
5.7
%
 
1.2
%
 
(2.0
)%
 
1.4
%
Franchise stores open at end of period
229

 
227

 
187

 
179

 
224

(1) 
Includes revisions for correction of deferred tax error associated with our goodwill impairment reported in the fourth quarter of 2015 as discussed in Note B in the consolidated financial statements.
(2) 
Includes a $151.3 million goodwill impairment charge in the Core U.S. segment.
(3) 
As discussed further in Note M, includes a $22.5 million restructuring charge primarily related to the closure of Core U.S. stores, Acceptance Now locations, and Mexico stores, partially offset by a $2.2 million litigation claims settlement
(4) 
Includes a $34.7 million write-down of smartphones.
(5) 
Includes a $1,170.0 million goodwill impairment charge in the Core U.S. segment.
(6) 
As discussed further in Note M, includes a $7.5 million loss on the sale of Core U.S. and Canada stores, a $7.2 million charge related to the closure of Core U.S. and Mexico stores, $2.8 million of charges for start-up and warehouse closure expenses related to our sourcing and distribution initiative, a $2.0 million restructuring charge and $1.1 million of losses for other store sales and closures.
(7) 
Includes $6.0 million of discrete adjustments to income tax reserves.
(8) 
Includes a $0.6 million reduction of revenue due to consumer refunds as a result of an operating system programming error.
(9) 
Includes a $6.8 million credit due to the settlement of a lawsuit against the manufacturers of LCD screen displays.
(10) 
As discussed further in Note M, includes store closure charges of $5.1 million, corporate restructuring charges of $2.8 million, asset impairment charges of $4.6 million and a $1.8 million loss on the sale of stores in the Core U.S. segment.
(11) 
Includes the effects of a $4.2 million financing expense related to the payment of debt origination costs and the write-off of unamortized financing costs.
(12) 
In 2012, same store revenue growth includes revenues only of stores open throughout the full period and the comparable prior period. Beginning in 2013, new or acquired stores were added to the same store revenue base in the 13th full month of operation.



20




Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
The following discussion focuses on our results of operations and issues related to our liquidity and capital resources. You should read this discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Overview
The Core U.S. segment experienced decreases in its revenues, gross profit and operating profit for the year ended December 31, 2016 as compared to 2015 primarily due to a 9.0% decrease in same store sales and the continued rationalization of our Core U.S. store base. Same store revenues were negatively impacted by unexpected capacity-related system outages occurring in the third quarter following the full implementation of our new store information system within our Core U.S. stores. We have implemented software releases to improve stability and added hardware to help mitigate over-utilization issues and did not experience any additional capacity-related system outages in the fourth quarter of 2016. However, the recovery from these outages to rebuild our portfolio and improve account management is taking longer than expected. We are currently evaluating and implementing a number of actions to stabilize the core business, focusing on product mix, pricing, our store-level workforce and delinquencies. As part of our continued rationalization of our Core U.S. store base, we closed, sold or converted 209 stores in 2016, 157 stores in 2015 and 202 stores in 2014.
Our annual goodwill impairment testing performed as of December 31, 2016 resulted in the recognition of an impairment charge of $151.3 million, thus writing off the remaining goodwill in the Core U.S. segment. The impairment is a non-cash charge and does not affect our liquidity, debt covenants or our ability to declare and pay dividends. The goodwill in our Acceptance Now segment was not impaired.
The growth in our Acceptance Now segment was relatively flat for the year ended December 31, 2016 as compared to 2015. We did experience an increase in charge-offs due to customer stolen merchandise. Expressed as a percentage of revenues, charge-offs were approximately 10% in 2016 as compared to 8.5% in 2015. This is due to an increase in multi-line vendor partners which offer higher risk merchandise versus a traditional furniture vendor as well as challenges in operational execution of the account management process.
Cash flow from operations was $353.7 million for the year ended December 31, 2016. We used our free cash flow to pay down debt by $233.8 million, ending the period with $95.4 million of cash and cash equivalents.
Recent Developments
Executive Management Changes.
On December 2, 2016, Guy J. Constant resigned from his position as Chief Financial Officer and Maureen B. Short was appointed as our Interim Chief Financial Officer. Ms. Short joined the Company in 2008 and has served as Senior Vice President - Finance, Investor Relations and Treasury since November 2014.
On January 9, 2017, Robert D. Davis resigned from his position as Chief Executive Officer and Mark E. Speese was appointed as our Interim Chief Executive Officer. Mr. Speese has served as the Chairman of the Board since October 2001 and as one of the Company's directors since 1990.

21




The following table is a reference for the discussion that follows.
 
Year Ended December 31,
 
2016-2015 Change
 
2015-2014 Change
(Dollar amounts in thousands)
2016
 
2015
 
2014
 
$
 
%
 
$
 
%
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
 
 
 
 
 
 
Rentals and fees
$
2,500,053

 
$
2,781,315

 
$
2,745,828

 
$
(281,262
)
 
(10.1
)%
 
$
35,487

 
1.3
 %
Merchandise sales
351,198

 
377,240

 
290,048

 
(26,042
)
 
(6.9
)%
 
87,192

 
30.1
 %
Installment sales
74,509

 
76,238

 
75,889

 
(1,729
)
 
(2.3
)%
 
349

 
0.5
 %
Other
12,706

 
19,158

 
19,949

 
(6,452
)
 
(33.7
)%
 
(791
)
 
(4.0
)%
Total store revenues
2,938,466

 
3,253,951

 
3,131,714

 
(315,485
)
 
(9.7
)%
 
122,237

 
3.9
 %
Franchise
 
 
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
16,358

 
15,577

 
19,236

 
781

 
5.0
 %
 
(3,659
)
 
(19.0
)%
Royalty income and fees
8,428

 
8,892

 
6,846

 
(464
)
 
(5.2
)%
 
2,046

 
29.9
 %
Total revenues
2,963,252

 
3,278,420

 
3,157,796

 
(315,168
)
 
(9.6
)%
 
120,624

 
3.8
 %
Cost of revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of rentals and fees
664,845

 
728,706

 
704,595

 
(63,861
)
 
(8.8
)%
 
24,111

 
3.4
 %
Cost of merchandise sold
323,727

 
356,696

 
231,520

 
(32,969
)
 
(9.2
)%
 
125,176

 
54.1
 %
Cost of installment sales
24,285

 
25,677

 
26,084

 
(1,392
)
 
(5.4
)%
 
(407
)
 
(1.6
)%
Total cost of store revenues
1,012,857

 
1,111,079

 
962,199

 
(98,222
)
 
(8.8
)%
 
148,880

 
15.5
 %
Other charges and (credits)

 
34,698

 
(6,836
)
 
(34,698
)
 
(100.0
)%
 
41,534

 
607.6
 %
Franchise cost of merchandise sold
15,346

 
14,534

 
18,070

 
812

 
5.6
 %
 
(3,536
)
 
(19.6
)%
Total cost of revenues
1,028,203

 
1,160,311

 
973,433

 
(132,108
)
 
(11.4
)%
 
186,878

 
19.2
 %
Gross profit
1,935,049

 
2,118,109

 
2,184,363

 
(183,060
)
 
(8.6
)%
 
(66,254
)
 
(3.0
)%
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Store expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
789,049

 
854,610

 
888,929

 
(65,561
)
 
(7.7
)%
 
(34,319
)
 
(3.9
)%
Other store expenses
791,614

 
833,914

 
842,254

 
(42,300
)
 
(5.1
)%
 
(8,340
)
 
(1.0
)%
General and administrative
168,907

 
166,102

 
162,316

 
2,805

 
1.7
 %
 
3,786

 
2.3
 %
Depreciation, amortization and write-down of intangibles
80,456

 
80,720

 
83,168

 
(264
)
 
(0.3
)%
 
(2,448
)
 
(2.9
)%
Goodwill impairment charge
151,320

 
1,170,000

 

 
(1,018,680
)
 

 
1,170,000

 

Other charges
20,299

 
20,651

 
14,234

 
(352
)
 
(1.7
)%
 
6,417

 
45.1
 %
Total operating expenses
2,001,645

 
3,125,997

 
1,990,901

 
(1,124,352
)
 
(36.0
)%
 
1,135,096

 
57.0
 %
Operating (loss) profit
(66,596
)
 
(1,007,888
)
 
193,462

 
941,292

 
93.4
 %
 
(1,201,350
)
 
(621.0
)%
Finance charges from refinancing

 

 
4,213

 

 
 %
 
(4,213
)
 
(100.0
)%
Interest, net
46,678

 
48,692

 
46,896

 
(2,014
)
 
(4.1
)%
 
1,796

 
3.8
 %
(Loss) earnings before income taxes
(113,274
)
 
(1,056,580
)
 
142,353

 
943,306

 
89.3
 %
 
(1,198,933
)
 
(842.2
)%
Income tax (benefit) expense
(8,079
)
 
(103,060
)
 
45,931

 
94,981

 
92.2
 %
 
(148,991
)
 
(324.4
)%
Net (loss) earnings
$
(105,195
)
 
$
(953,520
)
 
$
96,422

 
$
848,325

 
89.0
 %
 
$
(1,049,942
)
 
(1,088.9
)%
Comparison of the Years Ended December 31, 2016 and 2015
Store Revenue. Total store revenue decreased by $315.5 million, or 9.7%, to $2,938.5 million for the year ended December 31, 2016, from $3,254.0 million for 2015. This was primarily due to a decrease of approximately $302.1 million in the Core U.S. segment, as discussed further in the segment performance section below.
Same store revenue generally represents revenue earned in 3,469 locations that were operated by us for 13 months or more. Same store revenues decreased by $134.7 million, or 6.2%, to $2,043.0 million for the year ended December 31, 2016, as compared to

22




$2,177.7 million in 2015. The decrease in same store revenues was primarily attributable to a decline in the Core U.S. segment,     as discussed further in the segment performance section below. Same store revenues are reported on a constant currency basis.
Cost of Rentals and Fees. Cost of rentals and fees consists of depreciation of rental merchandise. Cost of rentals and fees for the year ended December 31, 2016, decreased by $63.9 million, or 8.8%, to $664.8 million, as compared to $728.7 million in 2015. This decrease in cost of rentals and fees was primarily attributable to a $64.0 million decrease in the Core U.S. segment primarily as a result of lower rentals and fees revenue. Cost of rentals and fees expressed as a percentage of rentals and fees revenue increased to 26.6% for the year ended December 31, 2016 as compared to 26.2% in 2015.
Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold decreased by $33.0 million, or 9.2%, to $323.7 million for the year ended December 31, 2016, from $356.7 million in 2015, primarily attributable to a decrease of $24.8 million in the Core U.S. segment. The gross margin percent of merchandise sales increased to 7.8% for the year ended December 31, 2016, from 5.4% in 2015.
Other Charges - Cost of Revenues. During 2015, a charge of $34.7 million was recognized for the write-down of smartphones in the Core U.S. segment.
Gross Profit. Gross profit decreased by $183.1 million, or 8.6%, to $1,935.0 million for the year ended December 31, 2016, from $2,118.1 million in 2015, due primarily to a decrease of $177.2 million in the Core U.S. segment. Gross profit as a percentage of total revenue increased to 65.3% in 2016 compared to 64.6% in 2015 primarily due to improvements in the Acceptance Now segment, as discussed further in the segment performance section below. Excluding other charges, gross profit was $1,935.0 million, or 65.3% of revenue for the year ended December 31, 2016, compared to $2,152.8 million, or 65.7% of revenue for 2015. These changes are primarily due to the decrease in the Core U.S. store revenue.
Store Labor. Store labor includes all salaries and wages paid to store-level employees and district managers' salaries, together with payroll taxes and benefits. Store labor decreased by $65.6 million, or 7.7%, to $789.0 million for the year ended December 31, 2016, as compared to $854.6 million in 2015. Labor in the Core U.S. segment decreased $59.5 million due to our flexible labor initiative and the continued rationalization of the Core U.S. store base. Store labor expressed as a percentage of total store revenue increased to 26.9% for the year ended December 31, 2016, from 26.3% in 2015.
Other Store Expenses. Other store expenses include occupancy, charge-offs due to customer stolen merchandise, delivery, advertising, selling, insurance, travel and other store-level operating expenses. Other store expenses decreased by $42.3 million, or 5.1%, to $791.6 million for the year ended December 31, 2016, as compared to $833.9 million in 2015. Other store expenses in the Core U.S. segment decreased $47.9 million due primarily to the continued rationalization of the Core U.S. store base. Other store expenses expressed as a percentage of total store revenue increased to 26.9% for the year ended December 31, 2016, from 25.6% in 2015.
General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, payroll taxes and benefits, stock-based compensation, occupancy, administrative and other operating expenses, as well as salaries and labor costs for our regional directors, divisional vice presidents and executive vice presidents. General and administrative expenses increased by $2.8 million, or 1.7%, to $168.9 million for the year ended December 31, 2016, as compared to $166.1 million in 2015, primarily due to severance costs. General and administrative expenses expressed as a percentage of total revenue increased to 5.7% for the year ended December 31, 2016, compared to 5.1% in 2015.
Goodwill Impairment Charge. During 2016 and 2015, we recognized goodwill impairment charges of $151.3 million and $1,170.0, respectively, due to an impairment in the goodwill in the Core U.S. segment. Goodwill impairment charge is discussed further in Note F in the consolidated financial statements.
Other Charges - Operating Expenses. Other charges relating to store sales and consolidations, startup costs related to our new sourcing and distribution network and corporate restructuring decreased by $0.4 million, or 1.7%, to $20.3 million in 2016, as compared to $20.7 million in 2015. Other charges for the year ended December 31, 2016 included restructuring charges for the closure of Core U.S., Acceptance Now, and Mexico locations, partially offset by a litigation claims settlement. See Note M to the notes to the consolidated financial statements for additional detail regarding these other charges.
Operating Loss. Operating loss decreased $941.3 million, or 93.4%, to $66.6 million for the year ended December 31, 2016, as compared to $1,007.9 million in 2015. Operating loss as a percentage of total revenue was 2.2% for the year ended December 31, 2016, as compared to 30.7% for 2015, primarily due to the goodwill impairment charges and other charges discussed above. Excluding the $171.6 million and $1,190.7 million of goodwill impairment and other charges in 2016 and 2015, respectively, discussed above, operating profit as a percentage of revenue would have been 3.5% and 5.6% in 2016 and 2015, respectively, discussed further in the Core U.S. segment performance section below.

23




Income Tax Benefit. Our effective income tax rate was 7.1% for 2016 as compared to a rate of 9.8% for 2015. The decrease in income tax benefit is primarily due to the lower goodwill impairment charge in 2016 compared to 2015.
Net Loss. Net loss was $105.2 million for the year ended December 31, 2016 as compared to $953.5 million in 2015, a decrease of $848.3 million
Comparison of the Years Ended December 31, 2015 and 2014
Store Revenue. Total store revenue increased by $122.2 million, or 3.9%, to $3,254.0 million for the year ended December 31, 2015, from $3,131.7 million for 2014. This was primarily due to an increase of approximately $173.5 million in the Acceptance Now segment, partially offset by decreases of approximately $42.8 million and $8.4 million in the Core U.S. and Mexico segments, respectively, as discussed further in the segment performance section below.
Same store revenue represents revenue earned in 4,105 locations that were operated by us for 13 months or more. Same store revenues increased by $143.0 million, or 5.7%, to $2,641.7 million for the year ended December 31, 2015, as compared to $2,498.8 million in 2014. The increase in same store revenues was primarily attributable to growth in the Acceptance Now segment.
Cost of Rentals and Fees. Cost of rentals and fees for the year ended December 31, 2015, increased by $24.1 million, or 3.4%, to $728.7 million, as compared to $704.6 million in 2014. This increase in cost of rentals and fees was primarily attributable to growth in rentals and fees revenue in the Acceptance Now segment in 2015 as compared to 2014, partially offset by decreases in rentals and fees revenue in the Core U.S. and Mexico segments. The gross margin percent of rentals and fees decreased to 73.8% for the year ended December 31, 2015, as compared to 74.3% in 2014, driven by increased revenue in the Acceptance Now segment, which has higher costs of rental merchandise.
Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold increased by $125.2 million, or 54.1%, to $356.7 million for the year ended December 31, 2015, from $231.5 million in 2014. The gross margin percent of merchandise sales decreased to 5.4% for the year ended December 31, 2015, from 20.2% in 2014, driven by a lower gross profit margin on merchandise sales and a higher mix of merchandise sales, primarily due to increased usage of the 90 day cash option in the Acceptance Now segment and sales of smartphones in the Core U.S. segment.
Other Charges and (Credits). During 2015, we recognized a $34.7 million charge for the write-down of smartphones as discussed above, compared to a $6.8 million credit recognized in 2014 as a result of a class-action settlement with the manufacturers of LCD screen displays, which is discussed further in Note L to the consolidated financial statements.
Gross Profit. Gross profit decreased by $66.3 million, or 3.0%, to $2,118.1 million for the year ended December 31, 2015, from $2,184.4 million in 2014, driven by decreases of $108.4 million and $8.7 million in the Core U.S. and Mexico segments, partially offset by a $49.0 million increase in the Acceptance Now segment, as discussed further in the segment performance section below. Gross profit as a percentage of total revenue decreased to 64.6% in 2015 compared to 69.2% in 2014. Without the $34.7 million smartphone write-down and the $6.8 million vendor settlement credit discussed above, gross margin as a percentage of total revenue would have been 65.7% for the year ended December 31, 2015, a decrease of 3.3% from the prior year, primarily due to the lower margins in the Acceptance Now segment as discussed above.
Store Labor. Store labor decreased by $34.3 million, or 3.9%, to $854.6 million for the year ended December 31, 2015, as compared to $888.9 million in 2014. Store labor in the Core U.S. and Mexico segments decreased $46.7 million and $5.5 million, respectively, partially offset by an increase of $17.9 million in the Acceptance Now segment. Store labor expressed as a percentage of total store revenue decreased to 26.3% for the year ended December 31, 2015, from 28.4% in 2014, as discussed further in the segment performance section below.
Other Store Expenses. Other store expenses decreased by $8.3 million, or 1.0%, to $833.9 million for the year ended December 31, 2015, as compared to $842.3 million in 2014. Other store expenses expressed as a percentage of total store revenue decreased to 25.6% for the year ended December 31, 2015, from 26.9% in 2014, as discussed further in the segment performance section below.
General and Administrative Expenses. General and administrative expenses increased by $3.8 million, or 2.3%, to $166.1 million for the year ended December 31, 2015, as compared to $162.3 million in 2014. General and administrative expenses expressed as a percentage of total revenue were 5.1% for each of the years ended December 31, 2015 and 2014.
Goodwill Impairment Charge. During 2015, we recognized a $1,170.0 goodwill impairment charge due to an impairment in the goodwill in the Core U.S. segment. Goodwill impairment charge is discussed further in Note F to the notes to the consolidated financial statements.

24




Other Charges. Other charges increased by $6.4 million, or 45.1%, to $20.7 million in 2015, as compared to $14.2 million in 2014. See Note M to the notes to the consolidated financial statements for additional detail regarding these other charges.
Operating Profit (Loss). Operating loss was $1,007.9 million for the year ended December 31, 2015, as compared to an operating profit of $193.5 million in 2014, a decrease of $1,201.4 million. Operating loss as a percentage of total revenue was 30.7% for the year ended December 31, 2015, as compared to an operating profit of 6.1% for 2014, primarily due to the goodwill impairment charge and other charges and credits discussed above. Excluding the $1,225.3 million and $7.4 million of goodwill impairment charge and other charges and credits in 2015 and 2014, respectively, discussed above, operating profit as a percentage of revenue would have been 6.6% and 6.4% in 2015 and 2014, respectively, discussed further in the segment performance section below.
Finance Charges from Refinancing. We refinanced our senior credit facility during March 2014, and recognized a $4.2 million charge to write off approximately $2.3 million of new origination fees and $1.9 million of unamortized financing costs from our previous credit agreement.
Income Tax (Benefit) Expense. Our effective income tax rate was a benefit of 9.8% for 2015 as compared to an expense of 32.3% for 2014. The 2015 rate for income taxes is less than that of 2014 due primarily to the non-deductible portion of the goodwill write-down.
Net Earnings (Loss). Net loss was $953.5 million for the year ended December 31, 2015 as compared to net earnings of $96.4 million in 2014, a decrease of $1,049.9 million
Segment Performance
Core U.S. segment. 
 
Year Ended December 31,
 
2016-2015 Change
 
2015-2014 Change
(Dollar amounts in thousands)
2016
 
2015
 
2014
 
$
 
%
 
$
 
%
Revenues
$
2,069,725

 
$
2,371,823

 
$
2,414,659

 
$
(302,098
)
 
(12.7
)%
 
$
(42,836
)
 
(1.8
)%
Gross profit
1,467,679

 
1,644,840

 
1,753,269

 
(177,161
)
 
(10.8
)%
 
(108,429
)
 
(6.2
)%
Operating (loss) profit
(1,020
)
 
(959,447
)
 
264,967

 
958,427

 
(99.9
)%
 
(1,224,414
)
 
(462.1
)%
Change in same store revenue
 
 
 
 
 
 


 
(9.0
)%
 


 
0.1
 %
Stores in same store revenue calculation
 
 
 
 
 
 
 
 
2,053

 
 
 
2,679

Revenues. Revenue decreased in 2016 compared to 2015, primarily driven by a decrease of $272.4 million in rentals and fees revenue and a $21.0 million decrease in merchandise sales. The decrease is primarily due to the decrease in same store revenue and the continued rationalization of our Core U.S. store base. The decrease in same store revenue was driven primarily by the impact of recovery challenges from the capacity-related outages of our store information management system that occurred in the third quarter, and other factors including the recast of the smartphone category, declines in television and computer/tablet categories, deterioration in oil affected markets, and heavy promotional activity. Same store revenue generally represents revenue earned in stores that were operated by us for 13 months or more.
Gross Profit. Gross profit decreased in 2016 from 2015, primarily due to the decrease in store revenue as discussed above, partially offset by the $34.7 million write-down of smartphones inventory in 2015. Gross profit as a percentage of segment revenues increased to 70.9% in 2016 from 69.3% in 2015. Excluding other charges, gross profit as a percentage of segment revenue was 70.9% in 2016 and 70.8% in 2015.
Operating Loss. Operating loss as a percentage of segment revenues was 0.1% in 2016 compared to operating loss of 40.5% for 2015. Excluding other charges, operating profit as a percentage of segment revenues decreased to 8.1%, for the year ended December 31, 2016, compared to 11.0% in 2015. Labor, as a percentage of store revenue, was negatively impacted by sales deleverage and higher health care expenses, partially offset by improved labor productivity. Other store expenses, as a percentage of store revenue, were negatively impacted by sales deleverage, and increased customer stolen merchandise losses, partially offset by a lower store count. Charge-offs in our Core U.S. rent-to-own stores due to customer stolen merchandise, expressed as a percentage of Core U.S. rent-to-own revenues, were approximately 3.7% for the year ended December 31, 2016, compared to 3.1% in 2015. Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims. Charge-offs in our Core U.S. rent-to-own stores due to other merchandise losses, expressed as a percentage of revenues, were approximately 2.0% for the years ended December 31, 2016 and 2015.

25




Acceptance Now segment. 
 
Year Ended December 31,
 
2016-2015 Change
 
2015-2014 Change
(Dollar amounts in thousands)
2016
 
2015
 
2014
 
$
 
%
 
$
 
%
Revenues
$
817,814

 
$
818,325

 
$
644,853

 
$
(511
)
 
(0.1
)%
 
$
173,472

 
26.9
%
Gross profit
422,381

 
420,980

 
372,012

 
1,401

 
0.3
 %
 
48,968

 
13.2
%
Operating profit
105,925

 
123,971

 
112,918

 
(18,046
)
 
(14.6
)%
 
11,053

 
9.8
%
Change in same store revenue
 
 
 
 
 
 


 
(0.4
)%
 
 
 
25.8
%
Stores in same store revenue calculation
 
 
 
 
 
 
 
 
1,297

 
 
 
1,286

Revenues. Revenues were flat for the year ended December 31, 2016 compared to 2015. Overall, this segment contributed approximately 27.6% of consolidated revenues in 2016 as compared to 25.0% in 2015.
Gross Profit. Gross profit increased for the year ended December 31, 2016 compared to 2015. Gross profit as a percentage of segment revenues was 51.6% in 2016 as compared to 51.4% in 2015.
Operating Profit. Operating profit as a percentage of total segment revenue decreased to 13.0% in 2016 from 15.1% for 2015. Other store expenses, as a percentage of store revenue, for the year ended December 31, 2016 were negatively impacted by higher customer stolen merchandise. Charge-offs in our Acceptance Now locations due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 10.0% in 2016 as compared to 8.5% in 2015, primarily due to an increase in multi-line vendor partners which offer higher risk merchandise versus a traditional furniture vendor, as well as challenges in operational execution of the account management process. Other merchandise losses include unrepairable merchandise and loss/damage waiver claims. Charge-offs in our Acceptance Now locations due to other merchandise losses, expressed as a percentage of revenues, were approximately 0.9% and 0.6% in 2016 and 2015, respectively.
Mexico segment. 
 
Year Ended December 31,
 
2016-2015 Change
 
2015-2014 Change
(Dollar amounts in thousands)
2016
 
2015
 
2014
 
$
 
%
 
$
 
%
Revenues
$
50,927

 
$
63,803

 
$
72,202

 
$
(12,876
)
 
(20.2
)%
 
$
(8,399
)
 
(11.6
)%
Gross profit
35,549

 
42,354

 
51,070

 
(6,805
)
 
(16.1
)%
 
(8,716
)
 
(17.1
)%
Operating loss
(2,449
)
 
(14,149
)
 
(21,961
)
 
11,700

 
(82.7
)%
 
7,812

 
(35.6
)%
Change in same store revenue
 
 
 
 
 
 


 
6.6
 %
 
 
 
9.6
 %
Stores in same store revenue calculation
 
 
 
 
 
 
 
 
119

 
 
 
140

Revenues. Revenues for 2016 were negatively impacted by approximately $9.1 million due to exchange rate fluctuations as compared to 2015. On a constant currency basis, revenue for 2016 was negatively impacted by approximately 6.0% due primarily to the impact of store closures in 2016 and 2015.
Gross Profit. Gross profit for the year ended December 31, 2016 was negatively impacted by approximately $6.4 million due to exchange rate fluctuations as compared to 2015. On a constant currency basis, gross profit also decreased as a result of decreased revenues in the segment due to store closures in 2016 and 2015. Gross profit as a percentage of segment revenues increased to 69.8% in 2016 from 66.4% in 2015 primarily due to revenue mix and higher merchandise sales gross margin due to pricing initiatives.
Operating Loss. Operating losses were positively impacted by approximately $1.4 million for the year ended December 31, 2016 due to exchange rate fluctuations compared to 2015. Operating losses as a percentage of segment revenues decreased to 4.8% in 2016 from 22.2% for 2015. Operating losses included restructuring charges of $2.3 million and $3.0 million, related to store closures during 2016 and 2015, respectively. Excluding these store closure charges, operating losses as a percentage of segment revenues would have been 0.3% in 2016, compared to 17.5% in 2015 as a result of operating initiatives designed to improve the financial performance of our Mexico operations.

26




Franchising segment. 
 
Year Ended December 31,
 
2016-2015 Change
 
2015-2014 Change
(Dollar amounts in thousands)
2016
 
2015
 
2014
 
$
 
%
 
$
 
%
Revenues
$
24,786

 
$
24,469

 
$
26,082

 
$
317

 
1.3
 %
 
$
(1,613
)
 
(6.2
)%
Gross profit
9,440

 
9,935

 
8,012

 
(495
)
 
(5.0
)%
 
1,923

 
24.0
 %
Operating profit
5,650

 
5,793

 
3,295

 
(143
)
 
(2.5
)%
 
2,498

 
75.8
 %
Revenues. Merchandise sales and royalty income and fees increased approximately $0.3 million for the year ended December 31, 2016, compared to 2015.
Gross Profit. Gross profit as a percentage of segment revenues decreased to 38.1% in 2016 from 40.6% in 2015.
Operating Profit. Operating profit as a percentage of segment revenues decreased to 22.8% in 2016 from 23.7% for 2015 primarily due to decreased gross profit.
Quarterly Results
The following table contains certain unaudited historical financial information for the quarters indicated:
(In thousands, except per share data)
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Year Ended December 31, 2016
 
 
 
 
 
 
 
Revenues
$
835,652

 
$
749,619

 
$
693,877

 
$
684,104

Gross profit
534,944

 
500,158

 
457,226

 
442,721

Operating profit (loss)
48,430

 
27,550

 
16,700

 
(159,276
)
Net earnings (loss)
25,061

 
9,946

 
6,181

 
(146,383
)
Basic earnings (loss) per common share
$
0.47

 
$
0.19

 
$
0.12

 
$
(2.76
)
Diluted earnings (loss) per common share
$
0.47

 
$
0.19

 
$
0.12

 
$
(2.76
)
Cash dividends declared per common share
$
0.08

 
$
0.08

 
$
0.08

 
$
0.08

(In thousands, except per share data)
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter(1)
Year Ended December 31, 2015
 
 
 
 
 
 
 
Revenues
$
877,639

 
$
815,343

 
$
791,605

 
$
793,833

Gross profit
564,593

 
538,529

 
488,612

 
526,375

Operating profit (loss)
56,598

 
49,701

 
6,565

 
(1,120,752
)
Net earnings (loss)
27,298

 
23,147

 
(4,092
)
 
(999,873
)
Basic earnings (loss) per common share
$
0.51

 
$
0.44

 
$
(0.08
)
 
$
(18.84
)
Diluted earnings (loss) per common share
$
0.51

 
$
0.43

 
$
(0.08
)
 
$
(18.84
)
Cash dividends declared per common share
$
0.24

 
$
0.24

 
$
0.24

 
$
0.24

(1) Fourth quarter net loss and loss per share revised for correction of deferred tax error associated with our goodwill impairment reported in the fourth quarter of 2015 as discussed in Note B in the consolidated financial statements.
(As a percentage of revenues)
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Year Ended December 31, 2016
 
 
 
 
 
 
 
Revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0
 %
Gross profit
64.0
%
 
66.7
%
 
65.9
%
 
64.7
 %
Operating profit (loss)
5.8
%
 
3.7
%
 
2.4
%
 
(23.3
)%
Net earnings (loss)
3.0
%
 
1.3
%
 
0.9
%
 
(21.4
)%

27




(As a percentage of revenues)
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Year Ended December 31, 2015
 
 
 
 
 
 
 
Revenues
100.0
%
 
100.0
%
 
100.0
 %
 
100.0
 %
Gross profit
64.3
%
 
66.0
%
 
61.7
 %
 
66.3
 %
Operating profit (loss)
6.4
%
 
6.1
%
 
0.8
 %
 
(141.2
)%
Net earnings (loss)
3.1
%
 
2.8
%
 
(0.5
)%
 
(126.0
)%
Liquidity and Capital Resources
Overview.  For the year ended December 31, 2016, we generated $353.7 million in operating cash flow. We paid down debt by $233.8 million from cash generated from operations and an $84.9 million income tax refund. We also used cash in the amount of $61.1 million for capital expenditures and $25.6 million for payment of dividends, ending the year with $95.4 million in cash and cash equivalents.
Analysis of Cash Flow.  Net cash provided by operating activities increased by $123.2 million to $353.7 million in 2016 from $230.5 million in 2015. This was primarily attributable to the receipt in 2016 of income tax refunds of approximately $84.9 million in addition to a decrease in merchandise purchases due to lower sales in the Core U.S. segment and lower 90 days same as cash sales in the Acceptance Now segment.
Net cash used in investing activities decreased by $31.1 million to $59.0 million in 2016 from $90.1 million in 2015, due to a decrease in capital expenditures, business acquisitions, and property sales.
Net cash used in financing activities increased by $135.5 million to $259.4 million in 2016 from $123.9 million in 2015, primarily driven by our net reduction in debt of $233.8 million in 2016, as compared to a net decrease in debt of $74.4 million in 2015, and lower dividend payments year over year.
Liquidity Requirements. Our primary liquidity requirements are for rental merchandise purchases. As we implement our growth strategies, the need for additional rental merchandise is expected to remain our primary capital requirement. Other capital requirements include expenditures for property assets and debt service. Our primary sources of liquidity have been cash provided by operations. In the future, to provide any additional funds necessary for the continued operations and expansion of our business, we may incur from time to time additional short-term or long-term bank indebtedness and may issue, in public or private transactions, equity and debt securities. The availability and attractiveness of any outside sources of financing will depend on a number of factors, some of which relate to our financial condition and performance, and some of which are beyond our control, such as prevailing interest rates and general financing and economic conditions. There can be no assurance that additional financing will be available, or if available, that it will be on terms we find acceptable.
We believe the cash flow generated from operations will be sufficient to fund our liquidity requirements as discussed above during the next 12 months. Should we require additional funding sources, we maintain revolving credit facilities, including a $20.0 million line of credit at INTRUST Bank, which provide us with revolving loans in an aggregate principal amount not exceeding $695.0 million. At February 21, 2017, we had $77.9 million in cash and $91.1 million in outstanding letters of credit, resulting in availability of $583.9 million in our revolving credit facilities.
In order to draw on our credit facilities, we must be in compliance with certain debt covenant requirements. We are required to maintain certain financial ratios under the Credit Agreement, including a consolidated fixed charge coverage ratio of no less than 1.50:1, and a consolidated senior secured leverage ratio of no greater than 4.00:1. At December 31, 2016, our consolidated fixed charge coverage ratio was 1.50:1, and our consolidated senior secured leverage ratio was 3.58:1. If our consolidated EBITDA continues to decline, our consolidated fixed charge coverage ratio or our consolidated senior secured leverage ratio may not meet the required levels, which would be a breach of the Credit Agreement. A breach of either covenant may result in acceleration of all amounts outstanding under the Credit Agreement (upon consent or request of more than 50% of the lenders). If all amounts outstanding under the Credit Agreement were to become due and we were unable to repay such amounts, a default under our senior notes would occur which may result in the holders of the notes declaring the full principal amount of, and all accrued and unpaid interest on, the notes immediately due and payable. We cannot assure you that we would have enough funds to immediately pay our accelerated senior credit facilities and senior note obligations or that we would be able to obtain financing to do so on favorable terms, if at all. We are reviewing any potential impacts of our expected operating performance on covenant compliance and are in discussions with our lead bank regarding near and long-term solutions, including amendment, waiver and refinancing.
As of December 31, 2016, the revolving credit facilities were undrawn and the amount we could borrow under our revolving credit facilities was effectively limited by the consolidated senior secured leverage ratio covenant to an amount equal to $78.0 million.

28




We generally have used the revolving credit facilities to manage normal fluctuations in operational cash flow caused by the timing of cash receipts, drawing funds and repaying those amounts as cash is generated by our operating activities.
To the extent we have available cash that is not necessary to fund the items listed above, and subject to conditions and covenants within our Credit Agreement, we may declare and pay dividends on our common stock, make additional payments to reduce our existing debt or repurchase additional shares of our common stock. While our operating cash flow has been strong and we expect this strength to continue, our liquidity could be negatively impacted if we do not remain as profitable as we expect.
A change in control would result in an event of default under our senior credit facilities which would allow our lenders to accelerate the indebtedness owed to them. In addition, if a change in control occurs, we may be required to offer to repurchase all of our outstanding senior unsecured notes at 101% of their principal amount, plus accrued interest to the date of repurchase. Our senior credit facilities limit our ability to repurchase the senior unsecured notes, including in the event of a change in control. In the event a change in control occurs, we cannot be sure we would have enough funds to immediately pay our accelerated senior credit facilities and senior note obligations or that we would be able to obtain financing to do so on favorable terms, if at all.
Deferred Taxes. Certain federal tax legislation enacted during the period 2009 to 2014 permitted bonus first-year depreciation deductions ranging from 50% to 100% of the adjusted basis of qualified property placed in service during such years. The depreciation benefits associated with these tax acts are now reversing. On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 ("PATH") extended the bonus depreciation to 2015 and through December 2019. The PATH act permits first-year bonus depreciation of 50% in 2015-2017, 40% in 2018, and 30% in 2019. The PATH act resulted in an estimated benefit of $154 million for us in 2016. We estimate the remaining tax deferral associated with these acts is approximately $199 million at December 31, 2016, of which approximately 75.4%, or $150 million will reverse in 2017, and the remainder will reverse between 2018 and 2019. We also estimate a benefit of $171 million resulting from bonus depreciation in 2017 which will offset the $150 million reversal, resulting in a net positive impact to cash taxes of $22 million.
Merchandise Losses.  Merchandise losses consist of the following: 
 
Year Ended December 31,
(In thousands)
2016
 
2015
 
2014
Customer stolen merchandise
$
169,021

 
$
154,781

 
$
137,107

Other merchandise losses(1)
49,731

 
52,003

 
41,770

Total merchandise losses
$
218,752

 
$
206,784

 
$
178,877

(1) 
Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims.
Capital Expenditures.  We make capital expenditures in order to maintain our existing operations as well as for new capital assets in new and acquired stores, and investment in information technology. We spent $61.1 million, $80.9 million and $83.8 million on capital expenditures in the years 2016, 2015 and 2014, respectively.
Acquisitions and New Location Openings.  See Note F to the consolidated financial statements for information about cash used to acquire locations and accounts. The table below summarizes the location activity for the years ended December 31, 2016, 2015 and 2014.
 
Year Ended December 31, 2016
 
Core U.S.
 
Acceptance Now Staffed
 
Acceptance Now Direct
 
Mexico
 
Franchising
 
Total
Locations at beginning of period
2,672

 
1,444

 
532

 
143

 
227

 
5,018

New location openings

 
171

 
67

 
1

 
2

 
241

Acquired locations remaining open

 

 

 

 
5

 
5

Conversions

 
1

 
(2
)
 

 

 
(1
)
Closed locations
 
 
 
 
 
 
 
 
 
 
 
Merged with existing locations
(185
)
 
(185
)
 

 
(4
)
 
(1
)
 
(375
)
Sold or closed with no surviving location
(24
)
 

 
(119
)
 
(10
)
 
(4
)
 
(157
)
Locations at end of period
2,463

 
1,431

 
478

 
130

 
229

 
4,731

Acquired locations closed and accounts merged with existing locations
3

 

 

 

 

 
3

Total approximate purchase price (in millions)
$
2.3

 
$

 
$

 
$

 
$

 
$
2.3


29




 
Year Ended December 31, 2015
 
Core U.S.
 
Acceptance Now Staffed
 
Acceptance Now Direct
 
Mexico
 
Franchising
 
Total
Locations at beginning of period
2,824

 
1,406

 

 
177

 
187

 
4,594

New location openings

 
161

 
505

 

 
11

 
677

Acquired locations remaining open
5

 

 

 

 

 
5

Conversions
(40
)
 
(29
)
 
29

 

 
40

 

Closed locations
 
 
 
 
 
 

 
 
 


Merged with existing locations
(83
)
 
(94
)
 

 
(34
)
 

 
(211
)
Sold or closed with no surviving location
(34
)
 

 
(2
)
 

 
(11
)
 
(47
)
Locations at end of period
2,672

 
1,444

 
532

 
143

 
227

 
5,018

Acquired locations closed and accounts merged with existing locations
34

 

 

 

 

 
34

Total approximate purchase price (in millions)
$
25.5

 
$

 
$

 
$

 
$

 
$
25.5

 
Year Ended December 31, 2014
 
Core U.S.
 
Acceptance Now Staffed
Acceptance Now Direct
 
Mexico
 
Franchising
 
Total
Locations at beginning of period
3,010

 
1,325

 

 
151

 
179

 
4,665

New location openings
10

 
209

 

 
31

 
30

 
280

Acquired locations remaining open
6

 

 

 

 

 
6

Closed locations
 
 
 
 
 
 
 
 
 
 


Merged with existing locations
(163
)
 
(127
)
 

 
(5
)
 

 
(295
)
Sold or closed with no surviving location
(39
)
 
(1
)
 

 

 
(22
)
 
(62
)
Locations at end of period
2,824

 
1,406

 

 
177

 
187

 
4,594

Acquired locations closed and accounts merged with existing locations
13

 

 

 

 

 
13

Total approximate purchase price (in millions)
$
21.2

 
$

 
$

 
$

 
$

 
$
21.2

Senior Debt.  As discussed in Note I to the consolidated financial statements, the $900.0 million Credit Agreement consists of $225.0 million, seven-year Term Loans, and a $675.0 million, five-year Revolving Facility.
The full amount of the Revolving Facility may be used for the issuance of letters of credit, of which $91.1 million had been so utilized as of February 21, 2017, at which date $583.9 million was available. The Term Loans are scheduled to mature on March 19, 2021 and the Revolving Facility has a scheduled maturity of March 19, 2019. The weighted average Eurodollar rate on our outstanding debt was 0.91% at February 21, 2017.
Senior Notes. See descriptions of the senior notes in Note J to the consolidated financial statements.
Store Leases.  We lease space for substantially all of our Core U.S. and Mexico stores and certain support facilities under operating leases expiring at various times through 2023. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed-upon formulas.
Franchising Guarantees. Our subsidiary, ColorTyme Finance, Inc. ("ColorTyme Finance"), is a party to an agreement with Citibank, N.A., pursuant to which Citibank provides up to $27.0 million in aggregate financing to qualifying franchisees of Franchising. Under the Citibank agreement, upon an event of default by the franchisee under agreements governing this financing and upon the occurrence of certain other events, Citibank can assign the loans and the collateral securing such loans to ColorTyme Finance, with ColorTyme Finance paying or causing to be paid the outstanding debt to Citibank and then succeeding to the rights of Citibank under the debt agreements, including the right to foreclose on the collateral. Rent-A-Center and ColorTyme Finance guarantee the obligations of the franchise borrowers under the Citibank facility. An additional $20.0 million of financing is provided by Texas Capital Bank, National Association under an agreement similar to the Citibank financing, which is guaranteed by Rent-A-Center East, Inc., a subsidiary of Rent-A-Center. The maximum guarantee obligations under these agreements, excluding the effects of any amounts that could be recovered under collateralization provisions, is $47.0 million, of which $2.8 million was outstanding as of December 31, 2016.

30




Contractual Cash Commitments.  The table below summarizes debt, lease and other minimum cash obligations outstanding as of December 31, 2016:
 
Payments Due by Period
(In thousands)
Total
 
2017
 
2018-2019
 
2020-2021
 
Thereafter
Senior Term Debt(1)
$
191,813

 
$
2,250

 
$
4,500

 
$
185,063

 
$

6.625% Senior Notes(2)
370,316

 
19,394

 
38,788

 
312,134

 

4.75% Senior Notes(3)
303,437

 
11,875

 
23,750

 
267,812

 

Operating Leases
487,622

 
165,187

 
224,991

 
92,188

 
5,256

Total contractual cash obligations(4)
$
1,353,188

 
$
198,706

 
$
292,029

 
$
857,197

 
$
5,256

(1) 
Does not include interest payments. Our senior term debt bears interest at varying rates equal to the Eurodollar rate (not less than 0.75%) plus 3.00% or the prime rate plus 2.00% at our election. The Eurodollar rate on our senior term debt at December 31, 2016 was 0.91%.
(2) 
Includes interest payments of $9.7 million on each May 15 and November 15 of each year.
(3) 
Includes interest payments of $5.9 million on each May 1 and November 1 of each year.
(4) 
As of December 31, 2016, we have $33.7 million in uncertain tax positions. Because of the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, uncertain tax positions are not reflected in the contractual obligations table.
Seasonality. Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year, primarily related to federal income tax refunds. Generally, our customers will more frequently exercise the early purchase option on their existing rental purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year. Furthermore, we tend to experience slower growth in the number of rental purchase agreements in the third quarter of each fiscal year when compared to other quarters throughout the year. We expect these trends to continue in the future.
Critical Accounting 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.
If we make changes to our reserves in accordance with the policies described below, our earnings would be impacted. Increases to our reserves would reduce earnings and, similarly, reductions to our reserves would increase our earnings. A pre-tax change of approximately $0.8 million in our estimates would result in a corresponding $0.01 change in our diluted earnings per common share.
Self-Insurance Liabilities. We have self-insured retentions with respect to losses under our workers' compensation, general liability and vehicle liability insurance programs. 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 our risk management function, including a transitional duty program for injured workers, ongoing safety and accident prevention training, and various other 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 reserves by comparing amounts reserved 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 reserves as needed.
As of December 31, 2016, the amount reserved for losses within our self-insured retentions with respect to workers’ compensation, general liability and vehicle liability insurance was $120.8 million, as compared to $115.4 million at December 31, 2015. However, if any of the factors that contribute to the overall cost of insurance claims were to change, the actual amount incurred for our self-insurance liabilities could be more or less than the amounts currently reserved.

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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. Deferred income tax assets represent amounts available to reduce income taxes payable in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short- and long-range business forecasts to provide insight and assist us in determining recoverability. 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. A number of years may elapse before a particular matter, for which we have recorded a liability, is audited and effectively settled. We review our tax positions quarterly and adjust our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available.
Valuation of Goodwill. We perform an assessment of goodwill for impairment at the reporting unit level annually on October 1, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors which could necessitate an interim impairment assessment include, but are not limited to, a sustained decline in our market capitalization, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results.
Our reporting units are generally our reportable operating segments identified in Note S to the consolidated financial statements. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions that we believe are reasonable but inherently uncertain, and actual results may differ from those estimates. These estimates and assumptions include, but are not limited to, future cash flows based on revenue growth rates and operating margins, and future economic and market conditions approximated by a discount rate derived from our weighted average cost of capital. Factors that could affect our ability to achieve the expected growth rates or operating margins include, but are not limited to, the general strength of the economy and other economic conditions that affect consumer preferences and spending and factors that affect the disposable income of our current and potential customers. Factors that could affect our weighted average cost of capital include changes in interest rates and changes in our effective tax rate.
We use a two-step approach to assess goodwill impairment. If the fair value of the reporting unit exceeds its carrying value, then the goodwill is not deemed impaired. If the carrying value of the reporting unit exceeds fair value, we perform a second analysis to measure the fair value of all assets and liabilities within the reporting unit, and if the carrying value of goodwill exceeds its implied fair value, goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of goodwill and the implied fair value, which is calculated as if the reporting unit had been acquired and accounted for as a business combination.
During the period from our 2015 goodwill impairment assessment through the third quarter 2016, we periodically analyzed whether any indicators of impairment had occurred. As part of these periodic analyses, we compared estimated fair value of the company, as determined based on the consolidated stock price, to its net book value. As the estimated fair value of the company was higher than its net book value during each of these periods, no additional testing was deemed necessary.
Prior to completion of our annual October 2016 goodwill impairment test, we experienced a significant decline in our stock price, which we attribute to certain events occurring in the fourth quarter of 2016, including the release of our fourth quarter operating performance on a per share basis, and the announcement of changes in executive management.
On October 1, 2016, initial indications of the annual goodwill impairment assessment suggested the Company's derived fair value would exceed its carrying value as of the testing date. Subsequent to October 1, 2016, due to the events discussed above and a significant decline in our stock price, we deemed it more appropriate to assess goodwill impairment as of December 31, 2016, rather than the historical testing date. We believe this conclusion is consistent with the Financial Accounting Standards Board's intent with regards to testing goodwill for impairment.
In conjunction with the events occurring in the fourth quarter, and for purposes of our annual impairment testing at December 31, 2016, we updated our long-term business plan, which is used as the basis for estimating the future cash flows of our reporting units. That plan considered current economic conditions and trends, estimated future operating results, our views of growth rates, and anticipated future economic and regulatory conditions.
Step one of our annual goodwill impairment test as of December 31, 2016, was completed in February 2017. We determined the fair value of the Acceptance Now segment exceeded its carrying value, while the fair value of our Core U.S. segment was below

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its carrying value. Therefore, we conducted step two of the impairment test for our Core U.S. segment and determined the carrying value of goodwill in our Core U.S. segment exceeded its implied fair value, resulting in an impairment charge of $151.3 million.
At December 31, 2016, the remaining amount of goodwill was $55.3 million, solely attributable to the Acceptance Now segment. At December 31, 2015, the amount of goodwill allocated to the Core U.S. and Acceptance Now segments was $150.8 million and $55.3 million, respectively.
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 fairly present in all material respects the financial condition, results of operations and cash flows of our company as of, and for, the periods presented in this Annual Report on Form 10-K. However, we do not suggest that other general risk factors, such as those discussed elsewhere in this report as well as changes in our growth objectives or performance of new or acquired locations, could not adversely impact our consolidated financial position, results of operations and cash flows in future periods.
Effect of New Accounting Pronouncements
Please refer to New Accounting Pronouncements in Note A of this Annual Report on Form 10-K.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Sensitivity
As of December 31, 2016, we had $292.7 million in senior notes outstanding at a fixed interest rate of 6.625% and $250.0 million in senior notes outstanding at a fixe