Rent-A-Center (RCII) Q1 2019 Earnings Call Transcript

Rent-A-Center (RCII 1.89%)
Q1 2019 Earnings Call
May. 07, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for holding. Welcome to Rent-A-Center's first-quarter 2019 earnings conference call. As a reminder, this conference is being recorded, Tuesday, May 7th, 2019. Your speakers for today are Mr.

Mitch Fadel, chief executive officer of Rent-A-Center; Maureen Short, chief financial officer; and Robert Kylie, director of finance. I would now like to turn the conference over to Mr. Kylie. Please go ahead, sir.

Robert Kylie -- Director of Finance

Thank you, Marcella. Good morning, everyone, and thank you for joining us. Our earnings release was distributed after market close yesterday, which outlines our operational and financial results for the first quarter of 2019. All related materials, including a link to the live webcast, are available on our website at investor.rentacenter.com.

As a reminder, some of the statements provided on this call are forward-looking statements, which are subject to many factors that could cause actual results to differ materially from our expectations. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements. These factors are described in our earnings release issued yesterday, as well as in the company's SEC filings. I'd now like to turn the call over to Mitch.

Mitch Fadel -- Chief Executive Officer

Thank you, Rob, and good morning, everyone. Thank you for joining us. Before we get to our financial and operational performance, I want to first address the status of the termination of the merger agreement with affiliates of Vintage Capital. On April 22nd, we reported the resolution of all further litigation with Vintage Capital and B.Riley.

Under the terms of the settlement, Rent-A-Center will receive a payment of $92.5 million in cash to be paid on or before May 28th of 2019. And after fees and other costs, Rent-A-Center will retain pre-tax proceeds of approximately $80 million, and approximately $60 million after tax. Overall, we're pleased with the outcome of the litigation, and we look forward to turning our sole and undivided attention to executing our strategic plan, and focus on growing our business and enhancing value for our shareholders. Our plan is evidenced by us raising our annual guidance is working well.

And Maureen will be talking more about the guidance increases in just a few minutes. Moving on to the presentation. We will be providing a voiceover to the presentation shown on the webcast. If you're unable to view the webcast, it can also be found on the investor relations section of our website.

So moving on to that -- that very positive strategic update, the 2019 strategic plan focuses on three key pillars, with the underlying goal of improving the customer experience. We continue to see our strategies materialize in our performance results whether in revenues, on the bottom line or in our customer satisfaction surveys. Our focus will continue to be on cost optimization, enhancing and executing the value proposition for our customers and the execution of franchising as a means of improving operating results in underperforming markets and stabilizing our brick and mortar store footprint. Our first-quarter results show that many of the operational headwinds we faced last year have been largely addressed and resolved over the past 12 months.

As a result, our go forward strategies will be geared toward growing the business and simultaneously improving the customer experience. As we progress through the presentation this morning, I'm excited to share more about what we're doing, and some of the very fine results we've seen this past quarter. Starting with our cost optimization strategy. As you're well aware, we began implementing some needed cost rationalization initiatives early in 2018, and we're now benefiting from the full run rate of those initiatives.

Additionally during the first quarter of this year, we identified incremental savings from further overhead efficiencies in other store expenses. We now project annualized savings on a run rate basis in excess of $140 million. At the same time, we're investing some of these savings by enhancing the customer experience through improved staffing levels at the store level in order to meet the growing demand and service needs of our customers. Turning to the enhanced value proposition pillar, we're creating a more seamless online shopping experience for our customers through technology investments.

These online infrastructure investments have driven increases in web traffic and core store web agreements. These improved results together with positive customer feedback reinforced our belief that we're investing in the right areas. Additionally, in our Acceptance NOW business, we test launched in the first-quarter new software that we call Flash Finance, supporting our virtual unmanned and hybrid operating solutions. Now, this enhancement allows us to selectively convert low-volume staff locations into virtual unmanned stores, resulting in potentially significant labor savings.

While we're in the early test stages, we feel our new Flash Finance platform has the potential to be scalable, make us more competitive in the marketplace and put Acceptance NOW in an even better position to take advantage of the great growth opportunities available in the retail kiosk space. Finally, we're continuing the focus on franchising. And to this end, in the first quarter, we refranchised 37 stores in the Baltimore area. And over the past 12 months, we refranchised over 100 locations.

Looking ahead, we remain committed to our strategy of refranchising markets opportunistically. Franchising continues to be a great avenue for us to stabilize our store footprint and improve store performance across certain markets. Now looking at the graphs on the bottom of Slide 3. Our consolidated same-store sales increased 6.8% for the quarter, or 7.6% on a 2-year stack comp basis.

In addition, as you can see, our trailing 12-month EBITDA was $226 million at the end of the first quarter, which again is a result of the turn around our business has made over the past year fueled by our enhanced customer value proposition and substantial cost saving initiatives we started last year. Now looking ahead on Page 4 to just the core segment. Driven by the execution of value proposition changes, the core turned in a better than expected 5.8% same-store sales increase in the first quarter. And when you consider our comp is now driven principally by having more customers, and we don't have the easy collect more of our own money benefit that we saw on the second half of last year, this comp is really quite impressive.

Additionally, the changes we have made have driven lower product returns, higher retention rates, and higher customer satisfaction. I should also mention that the delay in tax returns in the first quarter caused some shifting of payouts within the quarter, but overall, payouts in the core segment were in line with our expectations. And we didn't experience any negative impact from the brief delay. Deliveries and customer growth both trended higher than last year, and as a result our portfolio on a same-store comp basis finished the quarter approximately 4.5% higher than last year, and is a key reason for raising our full-year 2019 guidance.

We've talked about this before. This is a metric with how the portfolio compares to the year before. It's a metric that's a great leading indicator for future same-store sales expectations. And we went into the year about 3% ahead of last year, year over year, and ended the quarter at 4.5%, roughly 4.5% higher than last year, so a good quarter in a lot of aspects.

Finally, web generated agreements were up 33% year over year, and we saw similar increases in our web traffic and web orders, both of which are significant delivery and new customer drivers. And speaking of customer drivers, if you're looking at Slide 4, the bottom right hand corner, you can see our customer per store average at the end of our first quarter. It's the highest it's been in four years, four years, around that track, so we're pretty proud of that. And it's a pretty impressive job the team has done to get our customer count to the highest level per store in the last four years.

Equally impressive in the quarter were the bottom line results. Adjusted EBITDA was $27 million higher than the first quarter in 2018, primarily driven by the cost saving initiatives and store rationalization. Now, moving on to Acceptance NOW. While we saw similar results as our changes to the value proposition drove a same-store sales increase of 10.1% for the quarter, and although our portfolio ended the quarter slightly lower than expected due to some higher than expected payouts in this segment, on a comp basis the portfolio is higher than last year by almost 17%, putting our same-store sales projections on a strong trajectory.

Invoice volume on a per store bases continued to climb as the first quarter was up 27% over last year. Adjusted EBITDA was $22 million for the quarter, $2 million or 90 basis points better than last year. And with the merger litigation now behind us as I mentioned a moment ago, with can now increase our focus on investing in software enhancements, creating greater growth opportunities and cost optimization within this segment. In other words, we can now take Acceptance NOW to the next level now that the merger and the litigation is behind us.

And as these growth efforts pertaining to Acceptance NOW progress over the next couple of months, we look forward to giving you an updated outlook for what our growth outlook is in this segment, so more to come on that. At this point, I'll turn the call over to Maureen for highlights in our financial results.

Maureen Short -- Chief Financial Officer

Thanks, Mitch. Good morning, everyone. I'll cover some financial highlights for the first quarter, and provide an overview of our balance sheet and cash flow. I will then close with our revised guidance for 2019 before opening up the call for questions.

Our first-quarter performance was slightly better than our internal forecast. Free cash flow was better than expected, and additional cost savings were identified and implemented. Consolidated total revenues were approximately $697 million during the first quarter, flat versus the same period of last year, primarily driven by a consolidated same-store sales increase of 6.8%, offset by closures of certain core U.S. stores and refranchising over 100 locations.

Adjusted EBITDA was $66.5 million in the quarter, and EBITDA margin was 9.5%, up 590 basis points over the same period last year. Net diluted profit per share excluding special items was $0.59. The special item charges taken in the quarter were $33.4 million, primarily driven by the Blair class action litigation settlement, legal and advisory fees related to the merger agreement termination, cost savings initiatives and store closures. In our core segment, total revenues in the first quarter decreased 1.7% versus the same period last year primarily due to refranchising and the rationalization of the core U.S.

store base, partially offset by a same-store sales increase of 5.8%. Store labor, and other store expenses decreased by $37.4 million, primarily driven by lower store count and cost savings initiatives. Skip/stolen losses in the core were 3.7% of revenue, which was 60 basis points higher than the same period last year. Adjusted EBITDA in the core segment was approximately $67 million, and EBITDA margin was 14%, which was at 570 basis points versus the prior year.

Now turning to the Acceptance NOW business. same-store sales increased by 10.1% in the first quarter, while total revenues were flat, primarily driven by store closures in 2017. Store labor and other store expenses decreased by $4.6 million, primarily driven by cost savings initiatives. Skip/stolen losses for Acceptance NOW were 10% of revenue, which was 110 basis points higher than the same period last year.

Adjusted EBITDA in the Acceptance NOW segment was approximately $22 million, and EBITDA margin was 11.3%, up 100 basis points versus last year. Mexico grew revenue by 10.9% in the first quarter, and generated $1.4 million in adjusted EBITDA. In the franchise segment, revenue increased by 83% in the first quarter primarily due to the success of our refranchising initiatives with over 100 refranchise the locations versus prior year. Adjusted EBITDA was $1.8 million, representing an increase of 39% versus prior year.

Corporate operating expenses in the first quarter decreased by approximately $12 million due to the rationalization of our cost savings initiatives. Moving on to the balance sheet and cash flow. For the first quarter of 2019, cash generated from operating activities was $76 million, $9 million lower than the prior year, driven by higher inventory purchases and working capital, offset by stronger operating performance. We ended the quarter with $238 million in cash on the balance sheet and reduced net debt by $82 million in the quarter.

Total available capacity on our revolver at the end of Q1 was approximately $95 million, taking into our account our committed layers of credit and reserve. Total liquidity, including cash on hand at the end of the quarter, was approximately $333 million. The company's net debt to adjusted EBITDA ended the quarter at 1.4 times, significantly reduced versus the ratio of two point one at the end of 2018. Over the next few months, we intend to refinance our balance sheet and aggressively delever by utilizing excess cash to reduce our debt balance and extend our debt maturities in a longer term facility.

We expect the new debt facility will give us more flexibility on capital allocations, including dividends, debt repayments and share repurchases. The company is reviewing capital allocation priorities. Given our cash position at the end of the first quarter and the settlement from the termination of the merger agreement, we are in a strong position to refinance and extend the upcoming debt maturities. As you look at Slide 9 in our presentation, it lays out our latest expectations for 2019.

Total consolidated revenue is expected to be in the range of $2,585,000,000 to $2,630,000,000. While our consolidated revenue is unchanged from the previous guidance provided on the Q4 earnings call, the core revenues were increased by $25 million due to the strength of our core portfolio, and Acceptance NOW revenue is reduced by $25 million due to the higher than expected payouts in the first quarter and the planned conversion of some staffed locations to virtual locations. Adjusted EBITDA is now projected to be between $230 million and $260 million as we benefit from improved leverage due to the full-year benefit of our cost savings initiative. Non-GAAP diluted earnings per share are expected to be between $1.85 and $2.25.

Adjusted EBITDA increased $10 million, and EPS increased $0.10 from the previous guidance due to the performance in the first quarter, and incremental cost savings initiatives identified and expected to be implemented in 2019. The settlement from the termination of the merger agreement will positively impact GAAP earnings, but will be treated as a special one-time item. Free cash flow is expected to be between $195 million and $225 million, an increase of $80 million from the guidance provided on the Q4 earnings call, primarily due to the proceeds from the merger termination settlement and our better than expected first-quarter results. Cash taxes are now expected to be between $35 million, and $40 million, up $25 million primarily due to the settlement.

As I mentioned, the company is in active discussions with our bank group and expect to refinance the balance sheet during 2019. However, today's guidance does not include the impact of refinancing. Additionally, the guidance does not include any new refranchised transactions after the first quarter of 2019. Thank you for your time.

Now we'll turn the call over for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Brad Thomas from KeyBanc Capital. Your line is open.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Hi, good morning.

Mitch Fadel -- Chief Executive Officer

Good morning, Brad.

Maureen Short -- Chief Financial Officer

Good morning.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Congrats on the strong start to the year here. I wanted to ask a couple questions just about the refranchising efforts. And for one, Mitch, I was hoping you could just give us an update on how those conversations are going. And then I was hoping you could just remind us all how to think about the economics as it impacts the P&L from a refranchised store versus a store you owned.

Thank you.

Mitch Fadel -- Chief Executive Officer

Well, sure. As you know, Brad, we are using franchising as the means to, number one, stabilize our brick and mortar footprint, and also help improve performance in the underperforming market. So we're doing it opportunistically certain markets to stabilize the footprint, like I said, and to help in some underperforming markets where possibly a franchisee can do better than us. But we'll only do these deals if they benefit us financially.

When you asked about the impacts of the P&L, there can be some EBITDA drop. The royalty may be lower than the profit we're making in the store. In some cases it might even increase it. But you got to compare that to what you're getting up front for the store, so we're only going to do it if the right return on investment is there.

And if the EBITDA's going to be down going forward, we're going to have our money up front, and be able to reinvest that money anyhow. So only if the numbers work for us are we doing the refranchising, so I wouldn't -- when we think about the fact that it's not in our numbers going forward, that doesn't trouble us because we're only going to do them if they benefit the numbers going forward in one way or the other, either through increased EBITDA or the return on capital by if the EBITDA is going down but you've got, you know, I don't know, eight times that, 10 times that amount up front that you can reinvest that's going to help us on our returns.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Makes sense. And just at a high level as we think about the, you know, 100-some-odd stores that you've done thus far, when we think about the EBITDA impact going forward, is that a group that's collectively, having refranchised them, and getting the fees in there, is that a group collectively where EBITDA is higher for you all going forward because of that, or where the EBITDA goes down, and you've gotten the proceeds from it? I'm just trying to think about is that a headwind or a tailwind to your EBITDA run rate?

Mitch Fadel -- Chief Executive Officer

Well, those are already in our guidance going forward, the ones we've already done. And they were pretty de minimis impact on EBITDA. They were underperforming stores, so the EBITDA impact -- most of everything we sold has been underperforming stores, so the EBITDA impact of just the royalty stream compared to the EBITDA we were making, there is some difference in there, but it was pretty small in the scheme of things, pretty de minimis. And relative to the money we received up front, it was a very positive return on capital, return on investment.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Great. Great. And if I could squeeze in one question just around your comments on the FTC. I guess just, for one, could you just give us an update? Is that the only letter that you've received from the FTC at this point? And I guess any more color around that, you know, would be helpful.

Mitch Fadel -- Chief Executive Officer

It is. We've got a civil investigative demand from the FTC, like it says in the press release. They're requesting information relating to the purchases and sales by us to other rent-to-own companies of customer accounts. And we are in the process of responding to the inquiry.

Yeah, I think it's important to say we do believe these transactions to transactions we made were in compliance with the FTC act. So we'll reply and respond accordingly, but we believe our transactions were fully in compliance with the FTC act.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

And Mitch, any context for us on, you know, maybe what percentage of your transactions you tend to in a given year sell to another rent-to-own company? Just so we could size up what they're looking at here.

Mitch Fadel -- Chief Executive Officer

No, I don't have that in front -- we haven't done any in a few years. I mean, this goes back a num -- a few years. It's not a lot of stores. I don't have the number in front of me.

And it hasn't even been in the last couple of years. We haven't sold any stores to a competitor like that, and then when we did it was a few stores here and there. So it's not a very big number in the scheme of things.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

That's very helpful context. Thank you, Mitch.

Mitch Fadel -- Chief Executive Officer

Thanks, Brad.

Operator

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

Kyle Joseph -- Jefferies -- Analyst

Hey, good morning. Thanks for taking my questions, and also congratulations on a strong start to the year. I wanted to focus a bit on Acceptance NOW, given the improvements you've seen in invoice volume, the investments you've made in that business. Can you give us a sense for your outlook in terms of the balance of manned versus unmanned kiosks in that business, and also the long-term growth opportunity in your mind?

Mitch Fadel -- Chief Executive Officer

Sure, Kyle. As I said, we're pretty excited about taking Acceptance NOW to the next level with the new software. Being able to offer a manned location and an unmanned location with this very competitive software, a hybrid of such, you know, maybe some days we're manned, some days we're unmanned. But we are still in the testing stage of that, still quantifying that growth opportunity.

We haven't put anything in our guidance yet from a growth standpoint. And we do feel there's significant -- I think everybody knows there's significant white space there, and we're committed to growing in that space. Over the next couple of months, we're going to put that plan together. Again, now that the litigation is behind us, we're going to put that plan together, what's it look like over the next three years or so, and what do we think the growth can be and so forth, and get back to our folks, to our stockholders, on what we think that plan is.

So more to come on that. We're excited about it. We're working on it. And like I said, in the next couple of months we'll quantify that for you as far as what that growth plan looks like.

Kyle Joseph -- Jefferies -- Analyst

Got it. And then, just talking a little bit -- focusing on seasonality. Obviously, there's a lot of moving parts with cost cuts and what not. But just, I guess first, from a G&A perspective, is the first quarter a decent run rate? I know you said you've identified some additional cost cuts.

And then second part of the question would be can you give us a sense for the seasonality of EPS contributions in 2019 just from a high level given all the moving parts?

Maureen Short -- Chief Financial Officer

Yeah. Kyle, the G&A in the first quarter is a good -- a good run rate. We've achieved a lot of the cost savings initiatives that we implemented in 2018 and are now talking over those that have been implemented. And as we mentioned on the call, we did also implement additional incremental cost savings initiatives toward the middle of the quarter in 2019 in Q1.

So there may be a little bit more, but essentially the G&A is a good run rate going forward. And then your question about seasonality. Yeah, we're back to -- now that we're through the turnaround, we're back to historical seasonality periods where in the first quarter, given tax refund season, we tend to see higher revenue, higher earnings. And then typically in the third quarter, we see a little bit lower revenue and a little bit lower earnings.

But for the most part, we're through the turnaround. We're at a good run rate as far as what we expect to continue to grow from going forward. So back to historical levels of seasonality.

Kyle Joseph -- Jefferies -- Analyst

Got it. One last one from me. Maureen, I know you gave the cash taxes for 2019, but modeling for the business on a core basis going forward, can you -- looks like the tax rate was a little bit lower than we forecasted in the first quarter. What the your long-term outlook there?

Maureen Short -- Chief Financial Officer

Yeah. For the tax rate, we still expect it to be within 22% to 23%. So the run rate from the first quarter is pretty similar to what we expect throughout the year. The cash taxes went up as you saw, mainly driven by the settlement, but also a little bit higher pre-tax income.

Kyle Joseph -- Jefferies -- Analyst

Got it. Thanks very much for answering my questions.

Maureen Short -- Chief Financial Officer

Thank you.

Mitch Fadel -- Chief Executive Officer

Thanks, Kyle.

Operator

Your next question comes from the line of Budd Bugatch from Raymond James. Your line is open.

Budd Bugatch -- Raymond James -- Analyst

Good morning. Couple of questions if I could on Acceptance NOW. I know you were talking a little bit about, Mitch, about the manned and unmanned. Can you give us a little bit more color on when Flash Finance starts to have an impact and what the store count might be at the end of 2019?

Mitch Fadel -- Chief Executive Officer

The -- I think, you know, we'll be testing here the next couple of months, going into expanding the test. We're in the process of expanding the test now. It's working pretty well, and we're in the process of expanding the test. The store count, of course, year to date is down a little bit from some store closures.

We forecasted a few of the lower performing stores out of the store count for this year to convert to Flash. That's part of the reason the revenue's down, because the virtual will do a little less revenue, although more profit because you get the savings for the labor. I don't have what's in our model at the end of the year. We really haven't done much of the model with Flash as far as forecasting what it can do for us in the growth.

We're still in the testing phases. And I just say again, in the next couple of months we'll be coming back to you with a plan, not only for the rest of this year but for the next couple of years on what we see that store count growing to.

Budd Bugatch -- Raymond James -- Analyst

And what's the average term right now? I know you were contracting that to increase the incidence of ownership. How does that look right now? I saw invoice volume on a same-store basis up 27%. What does -- What's the 10-year look like?

Mitch Fadel -- Chief Executive Officer

I'm sorry, what's the what?

Budd Bugatch -- Raymond James -- Analyst

What's the term? What's the length of the term of the agreements on average now for --

Mitch Fadel -- Chief Executive Officer

The average term in Acceptance NOW right now is running about 15 months, so we vary between 12 and 20 depending on the product. But the average is about 15 months, so we've really shortened that term. That's probably half of what it was a few years ago, which has really reduced the returns, increased the ownership. And the returns coming back in the core business are under 10% now out of that business, so it's really impacted business in a very positive way.

Budd Bugatch -- Raymond James -- Analyst

And what's the incidence of 90-day there? If returns were under 10%, that's terrific. What's the incidence of 90 days?

Mitch Fadel -- Chief Executive Officer

I don't have it in front of me. It's probably in the a third, a third of the customers in that range, about a third of them, and then a few returns, and a few losses. And then the rest are doing the EPO somewhere later in the agreement. But it's probably in that 35% range.

Budd Bugatch -- Raymond James -- Analyst

Gotcha. And I was interested in the -- see the core portfolio up about 4.5%. Inventory on rent's actually up about 6%, and the inventory per average store, as we calculated, up about 16%. Can you kind of tell us how to think about those three statistics? How do we think about that when we model going forward?

Mitch Fadel -- Chief Executive Officer

Well, I think the portfolio at the end of the quarter being up 4.5%, the inventory up about 6%, those are kind of in line. I mean, they're never going to be right on top of each other for a variety of reasons. The portfolio is a monthly snapshot of all the agreements combined, whereas the inventory on rent is the total value left. So they're never going to match perfectly based on the age of the product in the inventory on rent on the balance sheet and all that.

I'd say those are significantly the same number. It's 4.5% and 6%. And then what was the third number?

Budd Bugatch -- Raymond James -- Analyst

Well, if you calculate the inventory on rent per average store, it's up about 1,000 basis points better than the gross inventory on rent, which would indicate that the comp store sale should be somewhere above the portfolio growth. Is that the way to think about it? How would you, how would you think about --

Mitch Fadel -- Chief Executive Officer

No. I would think the portfolio being up in the neighborhood of 4.5% is the way to think about comp same-store sales in the core going forward. Now, the portfolio on Acceptance NOW in Mexico, certainly smaller contributors, but Acceptance NOW is a decent sized contributor in the overall comp. Those are higher than 4.5% where those portfolios are compared to the year before.

But -- So I think it's -- the portfolio is how I think about same-store sales. As far as comparing that to the inventory on rent, again, because the age is so much different, we've got a lot more newer product in our stores than we did a year ago based on the fact there's more ownership happening with the customer base, and the changes of the value proposition. When you have newer merchandise on your balance sheet, you're going to have a higher value in that new merchandise than when it's older merchandise like it was a year ago. So I wouldn't try to put those two together.

I never have because you get so many variables in the age of the product.

Budd Bugatch -- Raymond James -- Analyst

OK. I understand that. And last for me. Just talk, Maureen, if you would about the refinancing.

When do you think that will be done? What -- We see a charge on that as a special item. How does -- What's the thought process there?

Maureen Short -- Chief Financial Officer

Yeah. So we plan here in the next few months to refinance and aggressively delever the balance sheet and roll the excess cash flow into that debt balance. As far as the fees and associated expenses of the refinancing, none of that's been forecasted into our plan. But there will likely be one-time fees or one-time items that are associated with the refinancing.

Budd Bugatch -- Raymond James -- Analyst

Do you think you'll get the refinancing done by the end of Q2?

Maureen Short -- Chief Financial Officer

I would say between the end of Q2 and a month or so or a few weeks after that. It should be toward the end of the summer if everything goes as planned.

Budd Bugatch -- Raymond James -- Analyst

OK. Thank you very much. Good luck on the quarter on the balance of the year.

Mitch Fadel -- Chief Executive Officer

Thanks, Budd.

Maureen Short -- Chief Financial Officer

Thank you.OperatorYour next question comes from the line of John Rowan from Janney. Your line is open.

John Rowan -- Janney Montgomery Scott -- Analyst

Good morning.

Mitch Fadel -- Chief Executive Officer

Good morning, John.

Maureen Short -- Chief Financial Officer

Good morning.

John Rowan -- Janney Montgomery Scott -- Analyst

Maureen, just to go back to the refinancing. Are we talking about calling the two notes and refinancing into new notes, or are you refinancing into a revolving facility and getting rid of the notes? And are the notes callable? I mean, I can look it up, but I'm trying to figure out, and size up what could be a one-time cost.

Maureen Short -- Chief Financial Officer

The notes are well, both callable. After the 15th of May I believe is the date, they're both callable at par. We have not determined yet or finalized the decisions around the capital -- the refinancing. But we do plan to have a longer-term debt facility that will provide us the appropriate liquidity to be able to make investments in the business and also contemplate any capital allocation priority changes that the company may establish going forward.

John Rowan -- Janney Montgomery Scott -- Analyst

OK. And then just to size up, just talking about my model to foot with your free cash flow guidance. I'm just trying to make sure. It seems like you're going to pay, what did you say, $25 million in cash taxes for the quarter largely because of the gain in 2Q from the settlement.

I'm just trying to make sure. Does that insinuate that maybe the DTL will be down about $10 million year over year in 2019? I'm just trying to make sure I have that number correct.

Maureen Short -- Chief Financial Officer

I would have to look that piece up, but we did raise the cash flow guidance by $25 million for the full year. But yes, most of that is related to the second-quarter tax impact of the settlement.

Mitch Fadel -- Chief Executive Officer

The cash tax --

John Rowan -- Janney Montgomery Scott -- Analyst

OK. But would you expect the DTL to trend down, though, through the year?

Maureen Short -- Chief Financial Officer

Partially yes, because part of that was based on the pre-tax income impact of increasing our guidance. But John, we can follow up afterwards to talk through the deferred tax impact.

John Rowan -- Janney Montgomery Scott -- Analyst

OK. Thank you.

Maureen Short -- Chief Financial Officer

Thanks.

Mitch Fadel -- Chief Executive Officer

Thanks, John.

Operator

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

John Baugh -- Stifel Financial Corp. -- Analyst

Thank you. Good morning, and job well done. Congrats. I wondered if we could talk about the core business for a second.

Can you tell me where we are in staffing of the stores? You've been reducing, and now you're growing. What's roughly the model you're settling on there?

Mitch Fadel -- Chief Executive Officer

Yeah. Good question, John. The -- glad to clarify that, too. When I say we're investing more in labor, we've really focused on -- well, let me go back.

The staffing model is what we used to use. We've gone back and got rid of the part-timers, got rid of that part-time model and gone back to a full-time staffing model. Not necessarily adding to it. When I say we're adding, we've added some costs, so we've just focused on filling vacancies faster.

For instance, a year ago when you look at 2,000 stores, at any point in time there were 700 or 800 vacancies based on turnover in the stores. And we are -- with the help of our human resource folks, we're filling those so much faster now that in the core business we're averaging more like 300 vacancies because we're filling them so much faster. So when we look at our labor cost in our model, because we have less vacancies, which is a good thing in helping the business, it's actually costing us a little more to stay closer to our staffing model that we want to be at rather than a vacancy. So it's more a matter of we've done such a good job filling vacancies faster that we've had to add money back into the forward-looking model from a cost standpoint.

It's not so much we've changed our staffing model again as that we've done a better job staffing the stores faster when we have turnover, and therefore there's some extra cost there. But certainly benefiting the --

John Baugh -- Stifel Financial Corp. -- Analyst

And then my last question on the core business is -- I don't know, maybe we could look out three to five years. What is your thought about -- because you're closing stores and franchising, so there's clearly a revenue decline. Your comps are positive. I assume, of course, the stores you sold, as well as franchises are taken out of the comp, so if you could give any color on what that positive influence might be, that would be helpful.

But I'm more interested in where the plan is three to five years. Is it to continue to reduce store count and franchise aggressively such that revenue will decline, and you try to hold onto a percentage margin, or is there a plan to stabilize revenue and grow? And if so, how? Thank you.

Mitch Fadel -- Chief Executive Officer

Well, we think that with the fantastic growth we're seeing on the web -- in our web orders, so we're at 30% web visits being up in the first quarter, orders in the 30% range, like we said, web agreements up 33%. I think our web business in the quarter is up over 11% now overall. So that continues to grow. So we've got some great growth tailwinds in the core.

We will refranchise opportunistically, like I said. We're not really shooting for a number as much as we're just shooting for opportunistically being able to help turn underperforming markets around, and maybe franchisees can do better, or probably can do better in our underperforming markets. So more of a way of stabilizing our store footprint rather than continue to close stores, because if we can refranchise them -- and franchisees tend to -- and in our franchise agreements when we sell these markets, they have to maintain a certain level of store count. Whether they close stores or open stores, they have to maintain a certain level.

So it's a way of stabilizing the footprint and not dropping overall stores the way we have over the last three or four years. So it stabilizes the footprint. It'll be done opportunistically. And what we've seen so far is, I mean, our revenue is pretty flat year over year in the court, even with store closures and some being out of the 100 stores or so we refranchised, because the stores we're keeping are making up for that revenue.

Plus we've got the franchise revenue coming in in royalties. And I wouldn't forecast our revenue going way down because we've got the same-store sales to help offset any sales we do do, and then we've got the royalties coming in from those. And again, we're going to do that opportunistically do stabilize the footprint rather than keep going down 100 or 200 stores a year, although I think we're pretty much at the end of store closures anyhow. We got the footprint pretty much down to where we can stabilize, and we'll just look at franchising some underperforming markets.

John Baugh -- Stifel Financial Corp. -- Analyst

OK. And then a quick question ANow. Could you talk about what verticals are so strong? Or you probably don't want to talk about individual customers, but obviously a few retailers left. But what remained seemed to be fairly vibrant.

Any color there? Thank you.

Mitch Fadel -- Chief Executive Officer

Yeah. I'd say in the -- yeah, we're primarily in the furniture space right now because we've been primarily just a manned model, and the volume's high enough in some of the larger furniture stores to do that. So the furniture business has been vibrant. It's been a great vertical.

It's doing well. You can tell that in our numbers as well. I think there's a lot of verticals for us to get into now that we're going to have the unmanned software. There's other verticals that people are in that we're not in, like auto.

And obviously there's some electronics business to do, more appliance business to do, but there's auto business out there, there's eyeglass business and so forth. So there's a lot of verticals for us to get into as we put our reinvigorated growth plan together for Acceptance NOW. But so far it's pretty much been in furniture, and it's been obviously very positive, the furniture business out there.

John Baugh -- Stifel Financial Corp. -- Analyst

Is your door count in furniture growing, stable, shrinking? Just curious what's driving such a strong comp there?

Mitch Fadel -- Chief Executive Officer

The store count, as you see in the press release, is down a little bit. Of course, through the strategic review process, we haven't been trying to grow it, so all you have is some underperforming stores closing. So the store count's down. Of course, you go back to the 2017, where comp is changed hhgregg left, and we still have some headwind from that as far as revenue comp in year over year, not in the same-store sales but in the overall revenue, from an overall revenue standpoint.

By not really focusing on growth because of the strategic review process and then the litigation, all we've had is underperforming closure. So now we're turning that corner, plus with the Flash Finance software, to put a growth plan together. And then we'll start to see that go up the other way and come back to you with our forecast on that over the next couple of months.

John Baugh -- Stifel Financial Corp. -- Analyst

Thanks. Goodluck

Mitch Fadel -- Chief Executive Officer

Thanks, John.

Operator

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

Anthony Chukumba -- Loop Capital Markets

Thank you. Thanks for taking my question. So my first question is on skips and stolens. They were up in the core business and also in Acceptance NOW.

If I recall correctly, I think they might even be both up last quarter as well. Is there any concern that the skips and stolens are increasing? I know obviously your comps are increasing, and your portfolio's getting better. But is there any concern that some of those increases are at the expense of suboptimal credit decisions?

Mitch Fadel -- Chief Executive Officer

Yeah. Good morning, Anthony. No. It's certainly something we're always going to watch closely.

We're always watching our collections closely. But no, I'm not concerned about it. When we think about losses, we think of losses, skip/stolen loss is in a range. And with the core at 3.7% in the first quarter, that's within a range of where we'd like to be.

It's at the high end of the range we want to be. We want to be between 3% and -- between 3% and 4%, so 3.7% being on the higher end. Last year we were on the lower end of 3.1% in the first quarter. This year on the higher end at 3.7%.

But it's within our range. We've had a lot of growth, so it's not surprising we'd be at the top end of the range. We think as we generate more and more out of the web, it's not surprising we'd be on the higher end of our range with web agreements being slightly more risky than a walk-in customer. So we're not out of our comfort zone at all, to answer your question.

And the ANow side, the 10% is actually the second best first quarter we've had in the last four years. Just last year was fantastic at that 9% range. So again, that's within our range. The range in Acceptance NOW has been a 9% to 11% range as we think about the we way calculate losses.

And the way we account for losses, that range has been 9% and 11%. Just last year we were on the low end of it. And again, first quarter there was a little bit toward the higher end of the range, but last year was really the outlier in Acceptance NOW that it was so good. So no, in neither case are we concerned about it.

We'll watch it close. We watch our credit closely every day, how we're collecting our money and so forth. But both of those were higher than last year, higher in the range, but within our range, so we're not out of our comfort zone there.

Anthony Chukumba -- Loop Capital Markets

Got it, that's really helpful. And then my second question, you talked about your new unmanned software, or your new software, Flash Finance. I guess, I was just wondering, what are the primary sort of, you know, improvements or differences between your existing software and Flash Finance?

Mitch Fadel -- Chief Executive Officer

Good question. The biggest difference is Flash Finance can be done without our employee assistance. A customer or a sales associate can get through it very easily, five or six steps, whereas our current software takes our employee assistance, really, to get through it, because it's built to be employee assisted just like we use in our core business. So this can be done without our person being there, either just directly by the customer or by a sales associate and not need to be employee assisted.

That's the biggest difference.

Anthony Chukumba -- Loop Capital Markets

Got it. That's very helpful. Thank you.

Mitch Fadel -- Chief Executive Officer

Thanks, Anthony.

Operator

Your next question comes from the line of Carla Casella from J.P. Morgan. Your line is open.

Sarah Manzone -- J.P. Morgan -- Analyst

Hey, guys, it's Sarah on for Carla. You talked about a refinancing. What do you think is the right level of leverage before you do so? And then, would you guys ever consider rolling up the two tranches of that into one larger tranche? I think they're both trading at par call.

Maureen Short -- Chief Financial Officer

Yeah. So as we think about the refinancing, we're talking through target leverage ratios, capital allocation policies and a number of different items. And we'll be coming back in the coming weeks as we finalize the decisions with more color around target leverage ratios and things of that nature.

Sarah Manzone -- J.P. Morgan -- Analyst

OK. And then, can you just repeat what the cash portion is and the timing of the termination fee?

Maureen Short -- Chief Financial Officer

The termination fee was a payment of $92.5 million. Netting against some fees was pre-tax proceeds of $80 million and after tax proceeds of $60 million.

Sarah Manzone -- J.P. Morgan -- Analyst

OK. Great, thanks.

Maureen Short -- Chief Financial Officer

Thank you.

Mitch Fadel -- Chief Executive Officer

Timing is on or before May 28th.

Maureen Short -- Chief Financial Officer

Right.

Sarah Manzone -- J.P. Morgan -- Analyst

Awesome. Thank you.

Mitch Fadel -- Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. I will now turn the call over to Mitch Fadel for closing comments.

Mitch Fadel -- Chief Executive Officer

Well, thank you, everyone, for your time this morning. Thanks for your support. We enjoy reporting these kind of numbers. It's fun to report good numbers and raise your guidance.

And we're working hard for everyone, our coworkers, and our shareholders, all our stakeholders. And it's showing up in our plan. And we are having fun, working hard and glad to put good results on the board, and we'll just keep doing it. We'll go back to work, and we thank your great time this morning.Operator[Operator signoff]

Duration: 49 minutes

Call participants:

Robert Kylie -- Director of Finance

Mitch Fadel -- Chief Executive Officer

Maureen Short -- Chief Financial Officer

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Kyle Joseph -- Jefferies -- Analyst

Budd Bugatch -- Raymond James -- Analyst

John Rowan -- Janney Montgomery Scott -- Analyst

John Baugh -- Stifel Financial Corp. -- Analyst

Anthony Chukumba -- Loop Capital Markets

Sarah Manzone -- J.P. Morgan -- Analyst

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