Upbound Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 11 speakers on the call.

Operator

Good day. Thank you for standing by. Welcome to the Q2 2024 Unbound Group Inc. Earnings Conference Call. At this time, all participants are in listen only mode.

Operator

After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jeff Chestnut, Head of IR. Please go ahead.

Speaker 1

Good morning, and thank you all for joining us to discuss the company's performance for the Q2 of 2024. We issued our earnings release this morning before the market opened and the release and all related materials, including a link to the live webcast, are available on our website at investor. Upbound.com. On the call today from UPBOUND Group, we have Mitch Fadel, our CEO and Fami Cuddam, our CFO. As a reminder, some of the statements provided on this call are forward looking and are subject to factors that could cause actual results to differ materially and adversely from our expectations.

Speaker 1

These factors are described in our earnings release as well as in the company's SEC filings. UPBOUND Group undertakes no obligation to publicly update or revise any forward looking statements except as required by law. This call will also include references to non GAAP financial measures. Please refer to today's earnings release, which can be found on our website for a description of the non GAAP financial measures and the reconciliations to the most comparable GAAP financial measures. Finally, UPOUND Group is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties.

Speaker 1

Please refer to our website for the only authorized webcast. With that, I'll turn the call over to Mitch.

Speaker 2

Thank you, Jeff, and good morning, everyone on the call today. I'll begin with a review of the key highlights from the Q2, then I'll hand it off to Fami for a more detailed review of our financial results and our financial outlook. And after that, we'll take some questions. We are very pleased with the results from the quarter, which included revenues of nearly $1,100,000,000 adjusted EBITDA of approximately 125,000,000 dollars and non GAAP earnings per share of $1.04 Our concentrated focus on execution paid off with Rent A Center's revenue up nearly 2% against the prior year and Aseema's revenue up 19%. Consistent with prior quarters, these results were driven by a steady focus on performance at both segments.

Speaker 2

Aseema continued its strong momentum with growth in merchant count, enhanced productivity of our existing merchants and a growing contribution from Asema's direct to consumer e commerce channel. Our lease charge offs were in line with our expectations as Aseemas finished the quarter at 9.6% and Rent A Center slightly better than expected at 4.2%. We also delivered strong sequential improvement in Nasimas adjusted EBITDA margin to 14.7% compared to 11.6% in the Q1, which we'll discuss in a little more detail later in the presentation. With these results and based on our current expectations for the balance of the year, we're raising the midpoint of our previous guidance for revenue, adjusted EBITDA and non GAAP diluted EPS. So before we review our segment results, let's discuss some of the enterprise wide themes we've seen across the past quarter.

Speaker 2

The economic backdrop for our business this quarter continued to evolve. Unemployment edged higher to the 4% area and while still by still low by historic standards, it's up from the 54 year low of 3.4% in April of last year. We also monitor inflation levels, especially in categories like rent and food and fuel, and we're pleased to see June's headline CPI, which was the first negative month over month print in 4 years. That will be welcome news to our consumers since inflation can have a larger impact on lower income households. Other factors like credit card debt and delinquencies, hard goods demand, the NPL balances and election uncertainty mean that the lower income consumers confronting a blizzard of economic variables, but that's nothing new for our consumers.

Speaker 2

They're being deliberate in their spending choices as they seek value and flexibility while working to stretch their incomes. So it's not surprising to see more reports of trade down activity, especially when factoring in the ongoing uncertainty over the credit card late fee regulations. As the credit lenders above us and merchant waterfalls have implemented mitigating actions, we believe some have also further adjusted underwriting, which can then introduce new consumers to lease owned solutions. Although the read through isn't exact, we are seeing recent trends of more applicants and higher scoring applicants on average, especially in our SEMA segment. Our data analytics team is constantly evaluating and adjusting our underwriting to adapt to this dynamic environment to achieve reasonable risk levels, while continuing to focus on sustainable and profitable earnings growth.

Speaker 2

As this particular economic cycle evolves, we believe our business will be well positioned for continued success. As someone who's been around this business for a long time, over 4 decades in the industry and with this company, I've seen all variations of cycles tonight, and I know that our business and our value proposition is not only durable, it's resilient. Our consumers appreciate the low predictable payments that fit within their budget and the flexibility to continue to renew their short term leases to acquire ownership, to exercise and really purchase option and save or just terminate the contract at any time without penalties or even terminate and reinstate and when they're ready to shop. Our online presence offers convenience and selection while the in store experience offers key values like seeing and testing out the products while building a relationship with our neighborhood based store teams. For our retail partners, we can deploy our staff model which puts subject matter expert in their stores and can drive significant improvements in conversions.

Speaker 2

Supporting all of these channels and team members are our centralized support functions where we optimize underwriting, account management, marketing and operations across the company to minimize costs and maximize efficiency, while supporting our business units and delivering value to our retail partners and our customers. Importantly, we have scale both with our 2,000 plus branded stores and our 35,000 plus partner locations and the business model has been built and tested for over 50 years now. And in uncertain times like these, scale and liquidity are critical to manage through the headwinds and position the company for long term success as the environment improves. So the business is counterbalanced with an algorithm that supports profitable returns across economic cycles. Leaner macroeconomic cycles generally increase our business opportunities through trade down, while more robust economies with healthy labor markets will generally see all cohorts performing better and generating lower losses.

Speaker 2

And that's how we delivered nearly 10% top line growth this period with a consolidated loss rate that's in line with our expectations and geared to optimize profitable returns. Now let's walk through the details behind our segment financial results on Slide 4. Starting with Asema, we achieved our 3rd consecutive quarter of GMV growth in the 20% range with an improvement of 21% in this most recent quarter. Other than the stimulus period in 2021, we achieved a new record for the highest Q2 GMV that DECIMA has ever recorded. Similar to last quarter, this was powered by 2 primary factors, the addition of new merchant partners as well as the lift in productivity from our existing network of retailers, which means we're transacting more leases per location.

Speaker 2

In terms of new partners, Sysima's business development team has signed up nearly 10% net new merchant nameplates year over year. Now while we do focus on enrolling new retail partners, we're equally committed to providing our current merchants with top tier service tailored to their particular business in retail specialty. And by collaborating with them on our marketing initiatives, we're able to more efficiently deliver more effectively deliver the right message to consumers at the right time, like data driven marketing campaigns or theme promotions, which provides a better experience for our customers and drives better outcomes for the retailer's top line. Our current merchants see the value in these efforts, which is why active location count was up nearly 10% against a year ago period. As a result, we saw a notable 35% lift in applications compared to last year.

Speaker 2

When you add together the more merchants and more effective in within those merchants, 35% application growth over last year. But it's also important to remember that in the intervening year, we deepened our relationships with 2 of our enterprise partners in Wayfair and nationally.com and we'll start to comp their ENHANCE volumes later this year. I'm also pleased to share that Aseema's direct to consumer offering continues to grow with GMV from that funnel up over 50% as we add brand name retailers to the site and continuously improve the shopping experience for our consumers. While most consumers first encounter a CEMA when shopping a retail partner either in store or online, our Asema marketplace also enables customers to start their journey directly with us. And with shopping destinations like Ashley, IKEA, Amazon and Best Buy, our customers can quickly and easily find what they need and complete their lease on our site, 24 hours a day, 7 days a week, 3 65 days a year.

Speaker 2

Collectively, these are the efforts that resulted in Q2 revenues to be up 19% year over year. Similar to Q1, average ticket size was down a little bit, so the top line lift was driven by the expanded penetration and the productivity that I've been talking about. Overall, Aseema exited the 2nd quarter with a funded lease count that was approximately 24% higher versus last year as well as sequentially higher when comparing it against the Q1 of 2024. And from an underwriting standpoint, we continue to take a proactive and vigilant approach to risk management. Our CEMA segment loss rate was 9.6%, in line with our expectations and flat sequentially to last quarter.

Speaker 2

Despite the volume of applications increasing 35% year over year and the strong growth numbers we've been talking about, the seamless approval rate declined 160 basis points from last year. And in terms of delinquencies, Aseema's 60 plus past due rate in the 2nd quarter was down 80 basis points from a year ago and down 90 basis points sequentially to the Q1 of this year. These results were in line with our expectations for the 2nd quarter and with the Acceptance NOW integration into a seamless decision engine nearly behind us, we remain very confident in our risk management outlook for the year. As noted earlier, I'm pleased to share that our adjusted EBITDA margin at Aseemah improved by 3 10 basis points to 14.7 in the Q2 as compared to the Q1 as we've begun to experience some of the flow through we talked about with that higher GMV. The EBITDA margins from a year ago Q2 were atypically high and driven by the macro backdrop at that time.

Speaker 2

So expecting the next couple of quarters of EBITDA margins is Asimaa to follow the current performance curve and land in this area, which is right in line with our expectations of low to mid teens for the segment. Our team has committed to running a lean business that realizes the scale inherent in its virtual platform model, and I'm confident we can continue to deliver sustainable profitable growth. Now on Rent A Center, we finished the 2nd quarter with a same store lease portfolio that was up 140 basis points year over year and that portfolio growth helped drive positive same store sales growth of 2.6% as we carried forward the momentum from last quarter's positive same store sales growth. Renaissance web channel volume continues to perform and it represented approximately 26% of revenue in the 2nd quarter, which was consistent with the year ago period. These elements helped deliver revenue growth of 1.9% year over year, which flowed through to gross profit with a similar lift.

Speaker 2

Operating expenses increased approximately 4% compared to last year due to a combination of elevated labor benefits costs, delivery costs and store technology investments. We expect the labor benefits expenses to normalize in the back half of the year, especially with the store consolidation this past quarter and our fleet management team is actively working on operating strategies to optimize efficiency. Our continued emphasis on underwriting and account management at Rentals Center resulted in a lease charge off rate of 4.2% for the quarter, down 30 basis points from the Q2 of last year. Our past due rate, which is an early indicator of potential future lease charge offs, was stable at 2.7% for the quarter, down 40 basis points sequentially. Although the pace of inflation has recently abated, which will reduce the economic pressure on Rent Centers customer base over time, our account management efforts will continue to be an important element of customer connectivity in the near to mid to medium term to help us maintain our delinquency and charge offs rates at our target ranges.

Speaker 2

Overall, we're very pleased with our operating and financial results in the segment or both segments successfully anticipated and met our customers and merchants' expectations, enabling us to achieve that 21% GMV growth at DECIMA, while meeting that mid teens EBITDA margin target, along with the same store sales growth at Rent A Center. These results along with the momentum we've already seen in the early July results give us confidence that we're tracking well towards achieving our updated and increased full year targets. So on Slide 5, let's review the status of the strategic priorities we outlined for the year. At Asema, we believe we continue to grow our market share with a nearly 10% increase in merchant partners year over year, with additions such as Purple Mattress and Ifit, whose family of brands includes NordicTrack and ProForm. We also onboarded 2 of the top 50 furniture retailers in the U.

Speaker 2

S, Levin Furniture and Slumberland Furniture. While we haven't yet seen Hardlines category fully recover from the pandemic era pull forward, we believe our lineup of merchandise of merchants in that vertical is poised to accelerate when it does. In fact, we now partner with 6 of the top 15 furniture retailers in the U. S. And it's important to note that in addition to maintaining a strong presence among the largest furniture retailers, our teams have the talent and technology to deliver superior service and outcomes to sizable partners in a number of retail categories.

Speaker 2

And even as we add national and regional accounts, Aseema's merchant network remains well diversified. In the Q2, our largest retailer represented approximately 6% of total GMV and the top 5 were collectively about 20%. We strongly believe that the diversification of our merchant base and product categories will help provide a stable foundation of predictable and sustainable growth for the future. So we continue to add national and regional players, but we also add the smaller players to keep that diversity and growth. One of our recent operational priorities has been the migration of the Acceptance NOW staff business from the legacy underwriting platform over to a seamless decision engine.

Speaker 2

I'm pleased to report that that journey is nearly done with only a few stores in Puerto Rico remaining. As we wrap up our conversion, I'd like to speak to the benefits of the initiative. For our retailers, we can embed a CEMA team members on-site at certain high volume locations to supplement the merchants in house team. Our representatives can serve as the leasing coordinator to help customers complete an LTO transaction and in between transactions they can reinforce the training we provide to the retailer staff about a seamless leasing process. At hundreds of locations across the country, our team can drive nearly double the conversion rate of an unstaffed store while allowing the retailer to redeploy resources more efficiently.

Speaker 2

In terms of underwriting in the consumer experience, the shift is a really important milestone for SEMA. The legacy platform was not designed for virtual e comm transactions. Given the CEMA's fully virtual model, the decision engine was designed from the beginning to handle digital orders and should deliver stronger lease outcomes with lower losses. From a customer experience standpoint, the Aseemo platform allows our customers the flexibility to fully check out online without speaking to one of our representatives or physically going into the retail store like they had to do at Acceptance NOW. This should improve conversion and increase GMV at these locations because now they can best handle the whole spectrum of customer interactions.

Speaker 2

We're excited about the opportunity to improve yields, increase GMV for those merchant partners and supplement our staff business with a sophisticated underwriting platform. At Rent A Center, we've highlighted our continuing investments in technology and in particular in our digital channels to help us seamlessly serve our customers, whether it's in store or online. And those investments are paying off with nearly 17,000,000 visits to renosirn.com in the 2nd quarter, which increased double digits against the year ago quarter. Reflects our team's efforts to drive online traffic and create a consistent friction free customer experience across each of our channels. More specifically, we've added new identity validation steps to expedite the online checkout process for customers while improving our ability to screen out fraudulent traffic.

Speaker 2

As we see more of our customer interaction shift to digital channels, we have an opportunity to optimize our footprint, our store footprint, which is already closely managed based on key store level metrics we look at and what's going on in the local area. And based on those variables, we consolidated 55 stores or approximately 3% of our company owned stores during the first half of the year, most of which took place in the Q2. We expect to maintain those relationships with the majority of customers by serving them as a nearby store or by engaging them online. And going forward, we'll keep working to strike the right balance to serve our customers efficiently across all our connection points, while optimizing Renaissance scale and productivity. At the Upbound level, we continue to test and learn in the consumer credit space through our partnership with Concurra.

Speaker 2

We've made sequential progress each month since we launched the pilots in February for the Aseema Class Credit General Purpose Mastercard and the Aseema Private Label Credit Cards, each of which expands our offerings as well as financial access for our customers. In particular, we've been pleased to see that the private label offering has resonated with our existing and prospective retail partners. Some of our current merchant partners are looking to streamline their vendor relationships and our combined second look and LTO offering delivers increased opportunities to serve more consumers with our leading solutions. We've also found that potential clients, especially those without an incumbent second look credit provider, appreciate the one stop shop approach, especially when considering integration effort for the POS systems. As a reminder, we structured our existing partnership with Concurra, so we're not taking any credit risk and our economics are driven by upfront fees and revenue sharing.

Speaker 2

Also at the upfront level, we continue to make significant investments in digital technology to support our business. Our strategic initiatives on the connected enterprise are on target to supercharge our omnichannel strategy within Rent A Center and across the organization. The recent launch of Rackpad, our next generation cloud native POS system, sets the direction towards an integrated customer experience across all channels. Its microservices architecture promotes swift development of features and product integration, prioritizing customer experience and boosting co worker efficiency with user friendly workflows. Our online traffic continues to show double digit growth and to support this increased demand, we're introducing a new e commerce platform based on a modular architecture that will allow our brands to adopt, deploy and scale an omnichannel sales approach focused on increased conversion and retention rates.

Speaker 2

As we reduce our data center footprint, both of these initiatives mark a significant milestone of improving scalability of our operations, reducing technical debt and bolstering our cyber resiliency, which are key components to support our growth. Overall, there's plenty of uncertainty in the market, whether it's where the economy is headed, consumer sentiment, industry dynamics or even the upcoming election. But we view that as an opportunity as our build business is built to succeed across these cycles. We're already passionate about serving our current customers and we expect new customers will discover our product offerings as trade down continues. And when they do, we'll be ready as a trusted brand to help them get the products they need to live their lives, their daily lives to the fullest.

Speaker 2

Now before I hand it off to Fama, I'd like to briefly address the lawsuit that CEMA Leasing filed against the CFPB last week. We brought this action in Texas Federal Court seeking to halt what we contend is the CFPB's unauthorized attempt to expand its authority, which is limited by federal law and U SERP the longstanding comprehensive state regulatory framework governing our industry, governing the lease to own industry. As you know, we previously disclosed that the CFPB has been conducting an investigation of a outbound acquisition of the company in 2021. After this protracted investigation, the CFPB threatened an imminent enforcement action against Aseema. I want to make clear that Asima filed this lawsuit reluctantly.

Speaker 2

Despite our long standing cooperation, we ultimately concluded that CFPB was not prepared to settle Acima on acceptable terms. Then, as expected, the CFPB subsequently initiated an enforcement action against the CEMA on July 26 alleging allegations or alleging violations of various federal consumer financial protection statutes. We believe the CFPB is engaging

Speaker 3

in forum

Speaker 2

shopping by filing a lawsuit in Utah after our lawsuit was already pending in Texas addressing the same subject matter. We strongly contest our claims and will vigorously defend ourselves against them. So as you would expect though, because of the pending litigation, we're not able to comment any further on this matter. So as I wrap up my section, I'd like to thank my exceptional teammates across all the corners of our business for their energy, their enthusiasm and their dedication. I know they're just as excited as I am about carrying the momentum from the first half of the year across the second half and beyond.

Speaker 2

Whether working on segment specific projects or collaborating on enterprise wide priorities, our coworkers are the driving force to help us deliver a strong finish to the year. And with that, I'll turn the call over to Fami.

Speaker 4

Thank you, Mitch, and good morning, everyone. I'll start today with a review of the 2nd quarter results and then discuss our outlook for the rest of the year, after which we will take questions. Beginning on Page 6 of the presentation. Consolidated revenue for the Q2 was up 9.9% year over year with the CEMA up 19% and Rent A Center up 1.9%. Rentals and fees revenues were up 9.7%, while merchandise sales revenue increased 17.3%, reflecting a larger portfolio balance at asema coming into the quarter.

Speaker 4

Consolidated gross margin was 49.4% and decreased 230 basis points year over year with 190 basis point decrease in the Ascema segment and a 40 basis point decrease in the Rent A Center segment. Consolidated non GAAP operating expenses excluding lease charge offs and depreciation and amortization were up mid single digits, led by a low double digit increase in non labor operating expenses, including delivery costs at Rent A Center and a high single digit increase in general and administrative costs, which was a result of targeted corporate investments in technology and people. The consolidated lease charge off rate was 7.2%, a 30 basis point increase from the prior year period and in line with our expectations. On a sequential basis, the consolidated lease charge off rate decreased 20 basis points due to a 50 basis point sequential improvement at Rent A Center. Consolidated adjusted EBITDA of $124,500,000 decreased 4.6% year over year with higher Asema segment adjusted EBITDA offset by lower Rent A Center segment adjusted EBITDA and higher corporate costs.

Speaker 4

Adjusted EBITDA margin of 11.6 percent was down approximately 170 basis points compared to the prior year period with approximately 160 basis points of contraction for Rent A Center and approximately 210 basis points of margin contraction for Aseema, offset by a 20 basis point decrease in corporate costs as a percentage of sales. I'll provide more detail on the segment results in a moment. Looking below the line, 2nd quarter net interest expense was approximately $28,000,000 which is roughly flat compared to the prior year period. The effective tax rate on a non GAAP basis was 25.8% compared to 25.5% for the prior year period. The diluted average share count was 55,800,000 shares in the quarter.

Speaker 4

GAAP earnings per share was $0.61 in the 2nd quarter compared to a loss per share of $0.83 in the prior year period, which was driven by the prior year tax impact associated with divesting of Resurgent stock awards issued in connection with the Aseema acquisition. After adjusting for special items that we believe do not reflect the underlying performance of our business, non GAAP diluted EPS was $1.04 in the Q2 of 2024 compared to $1.11 in the prior year period. During the Q2, we generated $600,000 of free cash flow, which decreased from $24,700,000 in the prior year period, primarily due to the increase of GMV at Asema. We distributed a quarterly dividend of $0.37 per share and we finished the 2nd quarter with a net leverage ratio of approximately 2.8 times. Drilling down to the segment results starting on Page 7.

Speaker 4

For Aseemah, double digit year over year GMV growth continued for the 3rd consecutive quarter. Following nearly 20% year over year growth in the prior two quarters, GMV grew 21% in the 2nd quarter and approximately 15% on a 2 year stacked basis. The GMV lift was driven by year over year growth in key underlying drivers with active merchant locations up 9.8% year over year, more productivity per merchant and applications increasing over 35%. Those tailwinds were partially offset by lower approval rates as we remain disciplined in our underwriting approach as inflation continues to impact our core consumer base. The net asset value of inventory under lease was up approximately 23% year over year.

Speaker 4

Revenue increased 19% year over year including an 18.2% increase in rentals and fees revenue and a 22% increase in merchandise sales revenue due to a larger portfolio at the beginning of the Q2 compared to last year. Lease charge offs for the Aseemos segment were 9.6%, 70 basis points higher year over year and flat sequentially. The year over year increase in Aseemos lease charge offs was in line with our expectations as the ANOW leases originated on the legacy Decision engine continue to wind down. The conversion will strengthen our underwriting capabilities and should reduce lease charge off rates as prior cohorts from the legacy system wind down throughout the year. Operating costs excluding lease charge offs were up on a dollar basis approximately $4,600,000 in the 2nd quarter, which was 60 basis points lower as a percentage of revenue.

Speaker 4

Adjusted EBITDA of $81,300,000 was up 4.5% year over year, primarily due to the 19% increase in revenue that was partially offset by 22.5% increase in cost of goods sold. Adjusted EBITDA margin of 14 point 7% increased approximately 3 10 basis points sequentially and decreased approximately 2 10 basis points year over year, primarily due to 190 basis point contraction of gross margin compared to the Q2 of 2023. The decrease in gross margins compared to the prior year was a result of a few factors, including a growing portfolio where revenue lags GMV production, an increase in merchandise sales which represented a larger percentage of revenue compared to the prior year period, and the conversion of Acceptance NOW locations to the CEMA platform, which increases merchandise depreciation expense and cost of goods sold. EBITDA margins were impacted by higher labor costs, underwriting costs as application volumes significantly surpassed the prior year and the performance of the legacy ANOW portfolio increasing our LCO rate. All of these headwinds were in line with our expectations were included in our guide for the year and are expected to improve as we get into the second half of this year.

Speaker 4

For the Rent and Center segment, at quarter end the same store lease portfolio value was up 1.4% year over year, while same store sales increased 2.6% year over year improving from an 80 basis point increase in the Q1 of 2024. Total segment revenue grew year over year for the 2nd consecutive quarter increasing 1.9% compared to the Q2 of 2023 and improving from a 20 basis point year over year increase in the Q1 of this year. The increase in revenue was driven primarily by a 2.1% year over year increase in rentals and fees revenue, while 2nd quarter merchandise sales revenue increased 1.6% year over year, an improvement from a 3.6% decrease in the 1st quarter. Lease charge offs were 4.2 percent of revenue in the 2nd quarter, 30 basis points lower year over year and 50 basis points lower sequentially, a result of ongoing underwriting and account management efforts. 30 day past due rates averaged 2.7% for the 2nd quarter, up 10 basis points from the prior year period and 40 basis points lower sequentially.

Speaker 4

Adjusted EBITDA margin for the 2nd quarter decreased 160 basis points year over year to 16.3%, primarily due to higher operating expenses, including elevated labor benefit costs, delivery costs and SOAR technology investments. This is reflected by 150 basis point year over year increase in the ratio of non GAAP operating expenses excluding lease charge offs to segment revenue. For the Mexico segment, adjusted EBITDA was higher year over year and the franchise segment's adjusted EBITDA was lower. Non GAAP corporate expenses were approximately 7 percent higher compared to the prior year, primarily due to additional investments in technology and people. Shifting to the financial outlook.

Speaker 4

Considering our sustained momentum through the first half of the year and the latest projections for the macroeconomic environment, we are pleased to raise the midpoint of our full year 2024 targets for revenue, adjusted EBITDA and non GAAP diluted EPS. Our portfolio and GMV growth coupled with low delinquencies give us confidence that we can improve margins in the second half of the year and achieve these updated targets. Our forecast continues to assume a generally stable macro environment with durable goods demand remaining under pressure and continued discipline in our underwriting. At Asema, we'll start comping against higher growth rates in the 3rd quarter. So we expect GMV growth to drop from the 20% area we've achieved for 3 consecutive quarters to low double digits in the upcoming quarter.

Speaker 4

Rent A Center's portfolio value is expected to seasonally drop in the Q3 from the Q2 similar to the prior year. For both Aseema and Rent A Center, we expect 3rd quarter revenue to follow the same sequential pattern as in 2023 with a slight increase sequentially at asema due to a growing portfolio. We expect losses to remain within our previous guidance commentary for the year with Rent A Center experiencing a typical seasonal uptick in the Q3 from the Q2 and to be in the 4.5% range. Aseemah losses are expected to improve in the Q3 as the legacy ANOW portfolio continues to wind down and finished in a 9% area for the quarter. In terms of adjusted EBITDA margins for the 3rd quarter, the Rent A Center segment will follow a similar seasonal trend from Q2 to Q3 as we experienced last year and be down sequentially to the mid teens area.

Speaker 4

The store optimization efforts this past quarter will have a minimal impact to the financials for the year, with pressure on total segment revenues offset by lower expenses, which should slightly improve adjusted EBITDA margins going forward. We expect Aseema to realize an improvement in adjusted EBITDA margins sequentially as flow through from higher GMV continues to benefit the P and L and from lower loss rates. If trade down activity continues to expand, GMV could improve from our guidance today. We are assuming a fully diluted average share count of 55,800,000 shares for the quarter with no share repurchases assumed in our guidance. Interest expense and our tax rate are expected to be similar to the 2nd quarter resulting in a non GAAP EPS range for the Q3 of $0.90 to $1 For the quarter, we expect to generate $60,000,000 to $75,000,000 of free cash flow and increase sequentially due to the pace of growth changing at asema, lower inventory purchases at Rent A Center and timing related to other working capital needs that were recorded in the Q2.

Speaker 4

For the year, we are revising revenues to be in the $4,100,000,000 to $4,300,000,000 range, adjusted EBITDA to be $465,000,000 to $485,000,000 and we're tightening our full year guide of non GAAP EPS to a range of $3.65 per share to $4 per share. Our 2024 outlook reflects our continued focus on execution to drive sustainable and profitable growth. The midpoint of our revised guidance compared to 2023 represents a 4% increase in revenue, a 5% increase in adjusted EBITDA and an 8% increase in non GAAP EPS with no share repurchases assumed. Our ability to navigate this challenging environment and generate earnings growth at both segments while meeting our margin and loss targets is a testament to the entire team's effort and dedication to drive shareholder value. In terms of capital allocation, we have a proven business model that generates strong operating cash flows over time and an experienced management team that allocates those cash flows in support of our strategic priorities.

Speaker 4

Our first priority continues to be supporting growth with profitable leases and innovative ideas that will improve our customer interactions and merchant outcomes. Concurrently, we will focus on enhancing shareholder value by maintaining our commitment to our dividend program and being opportunistic regarding share repurchases. I'm pleased to share that during the Q2, we optimize our capital structure in support of our long term capital allocation priorities. Capitalizing on our strong recent performance and favorable market conditions, we refinanced our term loan debt, which resulted in over 60 basis points of annual interest savings, while also extending the maturity of our $560,000,000 ABL revolver through 2029. Combined, these enhancements to our capital structure secure our liquidity position while reducing the cost of capital for the company.

Speaker 4

We expect the balance of our free cash flow this year will go towards deleveraging as we progress towards a net leverage ratio of under 2 times and towards our long term target of 1.5 times. We ended the 2nd quarter at 2.8 times, up from 2.7 times at the end of the first quarter due to an increase in working capital needs to support GMV growth. The strength of our balance sheet helps to insulate us from market volatility and enables us to act confidently and decisively when pursuing our strategic priorities. As of quarter end, we carried nearly $500,000,000 of available liquidity, which enables us to invest during periods of broader uncertainty, whether supporting our homegrown initiatives or targeted inorganic opportunities. Wrapping up on Slide 11.

Speaker 4

We're encouraged by the company's sustained momentum across the first half of this year, which included top line growth at both primary segments, GMV growth at asema and same store sales growth at Rent A Center and importantly a notable improvement in adjusted EBITDA margins at Ascema in line with our low to mid teens target. Our prudent risk management and account management strategies help deliver loss rates that were in line with our expectations and allowed us to raise the midpoint of our guidance as we look out across the balance of the year. Going forward, we will continue to execute against our day to day priorities to serve our customers and elevate our retail partners' businesses, while pushing forward with new ideas and business strategies that will help us achieve our long term growth plans. Thank you for your time this morning. Operator, you may now open the line for questions.

Operator

Thank you. At this time, we will conduct a question and answer session. The first question will come from sorry about that, Vincent Caintic. Vincent, your line is open.

Speaker 5

Hi, good morning. Thanks for taking my questions and great results this quarter. First, I wanted to focus on that trade down opportunity you discussed and it was very encouraging to see that 35% higher applications. I'm wondering if you could talk about how much that's lifting your business so far, the trade down opportunity, if you see more of it. And then you brought up Concora and I was just wondering if there are opportunities to grow that with this trade down opportunity or if there's other ways to take advantage of that?

Speaker 5

Thank you.

Speaker 2

Yes. Good morning, Vincent. This is Mitch. Thanks for the questions. Yes, the trade down is certainly front and center when we look at everything, all the data and certainly the Vantage scores and things like that.

Speaker 2

And of course, you're hearing it throughout different businesses and we're certainly no exception. With those 35% applications, When you say how much comes from one place versus the other, we think about 10% growth in merchants, 50% growth on our direct to consumer, which is a small piece, but it still drives some of that 21% GMV growth. So and then the productivity of the merchants really is where the trade down comes in as well as our teams just doing a better job training those merchants and getting in first position in those stores or exclusivity and so forth. So I don't know if I had to break down 21%, tens with new merchants, 1 or 2 maybe is coming from the direct to consumer even though that's 50 percent growth is a small number. And the rest is a combination of the trade down and our sales team working with those merchants to get in a better position.

Speaker 2

So maybe it's somewhere between, I don't know, family 30% 40% of the 21%. It's kind of hard to put a number on, but it's definitely part of it. Yes. I would say the way

Speaker 4

I break down the growth in GMV, and I think you covered it, Mitch, which is about 50% of it or just under 50% of it came from new merchant locations. 5% of it came from the direct to consumer and the marketplace growth and the rest of it came from merchant productivity and that's probably where you see some of the trade down impact. Yes.

Speaker 2

So maybe it's more like 25% of our growth, 25%, 30%, 40%, somewhere in that range. But like 1% or 2%, it's definitely real and we would have continued we'd expect it to continue and if it accelerates then there's even upside to our numbers. On the Concura question, yes, I think with the second look provider because it's still a subprime offering or near prime offering with our retail partners, there's certainly a lot of interest in it as there's tightening above the near prime tightening in the with the prime lenders. So I think that does create opportunity. As we mentioned in our prepared comments, as Fami mentioned, yes, we do think that creates and those kind of things.

Speaker 2

So it's kind of just taking off. But yes, we do think that creates opportunity in this environment.

Speaker 5

Okay, great. That's very helpful. And actually following up, it's a good segue. Just I want to get a sense of maybe the merchant engagement and if any of those merchant discussions have evolved and changed. I guess to your point about if there's trading down and if what's happening is that the higher credit providers are tightening up and

Speaker 6

I would assume that there'd

Speaker 5

be more merchant need for your products. So if you could maybe talk about merchant engagement now that's the opportunities there? Thank you.

Speaker 2

Yes. I think that's certainly happening with our from an SMB standpoint, when you think about 10% net merchant growth year over year, you think about a couple of the signing just last quarter, a couple of the top 50 furniture retailers like Levin and Slumberland and more in the pipeline. So yes, I think that's definitely happening. The pipeline is robust. The team at Asimos is doing a great job bringing in new partners.

Speaker 2

Obviously, the bigger the partner, the longer the cycle runs, but the regionals are bringing in and the SMBs are bringing in, they're just doing an excellent job.

Speaker 1

Okay, great. Very helpful. Thank you.

Speaker 2

Thanks, Vincent.

Operator

Thank you. Please stand by for the next question. The next question comes from Hung Wen with TD Cowen. Your line is now open.

Speaker 6

Hi, team and congratulations on the quarter. Just wanted to touch on the guidance. Looks like you guys raised the high end of revenue guidance, but I mean, didn't raise the high end for EBITDA and EPS. I mean can you touch a little bit on the rationale behind that? I mean does it have to do with more mix of merchandise sales versus rental?

Speaker 6

And I have a follow-up.

Speaker 4

Good morning, Hong. Thanks for the question. Yes, I think the guide for the year, especially on the revenue side, really reflects the GMV growth that we've experienced over the last couple of quarters. Obviously, this is the 3rd quarter in a row where we've had nearly 20% growth in GMV, and we started to reflect that now into the revenue guide. As far as the margin profile goes, I think we talked a little bit about it last time as far as having some really tough comps coming into the year, especially in the first half.

Speaker 4

We think that improves when we get into the second half, especially on the Asimos side. On the Asimos side, Q2 started to see some of that flow through from GMV come into play. So Q2 was better than Q1 and we expect Q3 to be better than Q2. And so nothing really as far as the mix goes, just more kind of where the trends have been heading towards the margin profile for the year and then where revenue is coming in. I think for Q3, the guide is consistent.

Speaker 4

We'll be up on the revenue side and then flat to slightly better on the margin side.

Speaker 2

Yes. I think I'd add to that, Hung. This is Mitch. As Fami mentioned, as we talked about last quarter, the margins take a little longer to catch up with the large GMV growth we saw this quarter, right, with the 310 basis point improvement in Aseemus EBITDA margin. So you're starting to see that flow through and there's more to come, but it does run a little behind the revenue is kind of the short answer to your question.

Speaker 2

And I'd also say from a guidance standpoint, the you got to remember, we had a lot of momentum going into the year. We had in the Q4, we had almost 20% GMV growth at Asema and Rent A Center was starting to turn positive on the same store sales. So we had momentum. We knew it was going to carry over. We saw trade down coming, those kind of things.

Speaker 2

And our original guide was relatively stout. When you think about the revenue at our original guide, the revenue was up 3% year over year and the EPS was up about 6%. And now we've updated it and I'm just talking midpoint when I say this. Now revenue instead of 3% year over year is 5% in EPS instead of 6% above last year at 8%. So we started out with pretty high numbers.

Speaker 2

We have a small raise here, but I just want to remind everybody, we started out pretty high with the 3% year over year on the revenue, now it's 5% and EPS at 6%, now it's 8%. And as trade down continues, we hope to outperform. But we're pretty excited about the flow through we're starting to see now, as I mentioned, with that when you look at the ACIMA margins compared to the Q1.

Speaker 6

Got it. And maybe if you can talk a little bit about the the court fight with the CFPB. You guys sued them in Texas. They sued back in Utah. I mean, can you talk high level about the next step in the process?

Speaker 6

I mean, maybe in terms of the venue and what's the next milestone will be? Thank you.

Speaker 2

Well, I can't with ongoing litigation, I can't say a lot. My prepared comments have to suffice. As I said in my prepared comments, we think they're form shopping by filing in Utah when there was already our case pending in Texas addressing the same subjects. So we'll strongly contest their claims and defend ourselves from them trying to take over state regulatory framework that's governed our industry for a long time, like I said in my prepared comments. But as far as next steps and all that, we'll have to leave it at that rather than get into a legal discussion about next steps.

Speaker 2

I'm not an attorney and of course they'd yell at me if I say more than I've already said anyhow. So we'll have to leave it at that.

Speaker 1

Thank you.

Speaker 5

Thanks, Hung.

Operator

Please stand by for the next question. The next question comes from Bobby Griffin with Raymond James. Your line is now open.

Speaker 7

Good morning, Bobby. Thanks for taking my questions and congrats on another good quarter of momentum.

Speaker 2

Thanks, Bobby.

Speaker 7

So Mitch, my first question really is kind of on that on a high level aspect. It seems we look at your results as well as some other peers' results, the industry is really starting to see some inflection points, whether it's on GMV growth, trade down, the portfolio performance, etcetera. What could potentially derail that, I guess, is the question? Is it just availability of credit becoming more available again? Or like when you sit here and you kind of think out on multi quarter and even kind of a year basis, what do you worry about that could derail some of this momentum?

Speaker 2

That's a good question. I see only of course, I'm usually the optimist in the room, but I see only positive things coming, Bobby, with the trade down. Of course, we talk about all the time about how resilient we are in a good economy, we did great. I mean, we're still trying to catch the record numbers we did from stimulus money. So when people have money, we do great too.

Speaker 2

So it's such a resilient model. I think you're seeing it now. Also when some subprime traditional retail at subprime is having some headwinds, right, with a lot of closures out there, but not the leased owned industry. I mean, rent a center is going positive as well as, of course, the alternative of a CEMA being within our retail partners is going strong even though subprime retail, like I said, there's a lot of closures. So we're that's the benefit of our of the lease owned business model.

Speaker 2

It's there for all retailers for those customers that don't have the credit. You don't have to start out in a subprime store, but there's actually tailwinds coming from even some of those closures I mentioned probably when you think about for companies like or segments like Rent A Center. So I don't know, Bobby, I'm not really I don't I just I worry about our strategy and things like that and are we executing and talk to the team all the time about execution. I worried when if are we taking advantage of every Fair enough. That's helpful.

Speaker 2

And I

Speaker 7

Fair enough. That's helpful. And I guess my second question is kind of a combo question just on the Aseema side of the business. I mean, first, with the momentum that we now are seeing across the industry and as well as your results, what are you seeing competitively? Is everybody still behaving from a competitive standpoint because I know competition is tough out there.

Speaker 7

And then can you just define how you guys really define pipeline? Like what are those active merchants that are in conversation about actually engaging or is it just a list of potential merchants? Like what exactly is in the pipeline where we know how real it is and how the

Speaker 2

list. Like last quarter, we talked about there's some good regional players in the pipeline and then we end up signing Levin Slumberland, Purple, Ifit, things like that. Some of those are regional furniture players, obviously Purple more of a nationwide e com play for mattresses even though they do have some stores and so forth. So it's we're talking about active conversations. And of course, our sales team, field sales and inside sales, a little over 100 people, they got tons of conversations going on with the 1 and 2 and 3 store merchants and they're up 10% year over year almost 10%.

Speaker 2

So they're knocking it out of the park as they have for many years. So competition is about the same. I wouldn't say competition has gotten any stiffer or crazier as far as offerings and things like that. I'd say that's been pretty consistent. Of course, competition on the Rent A Center side is probably less than it was when we think about the store closures that are happening out there with some of our not even not direct competitors, but indirect competitors that do business similarly with same customers.

Speaker 2

So as I mentioned earlier, we see some of those closures as opportunities, especially on the Rent A Center side.

Speaker 7

Thank you. Very helpful. Best of luck here for the remainder of the year.

Speaker 2

Thanks, Bobby.

Operator

Please standby for the next question. The next question comes from Brad Thomas with KeyBanc Capital Markets. Brad, your line is open.

Speaker 8

Hi, good morning. And let me add my congrats on some nice results here as well. I wanted to follow-up a

Speaker 2

little bit

Speaker 8

more on the growth, Mitch. Yes, absolutely well deserved. And I was hoping you could add a little bit more perspective on what you're seeing from a category perspective. And I say that with the knowledge that the many of your end markets, the retailers are seeing very challenged trends. So curious what you're seeing from a category perspective in terms of some of those dynamics like new merchant growth and what you're seeing from the D2C and productivity standpoint as Thank you.

Speaker 4

Good morning, Brad. This is Fanny. Yes, I think from a category standpoint, I think it's been pretty steady year over year as far as kind of our mix of where the GMV is coming from. But I would say that we are starting to see some greater mix coming through the e com channel. We've talked about Wayfair and actually.com.

Speaker 4

So we've seen a greater mix of e com, which tends for us to be heavier on the furniture side. So when you look at the categories, I would say there's softer demand on furniture, and some of those household goals categories that we've talked about. But for us, we're offsetting that with some of the productivity gains and some of the merchant gains that we've talked about. So even though furniture may have some softer demand and applications on a per location basis may be down, what we're seeing is that 35% increase because of some of the things that we've talked about. So the mix is changing a little bit as far as whether brick and mortar versus e comm.

Speaker 4

I would say auto and jewelry also very strong when we look year over year from a growth in applications and a growth in GMV standpoint. So it's pretty much the growth is coming across the board. We also talked about average ticket size. Average ticket size has come down. That's also partly of mix.

Speaker 4

Typically, our average ticket size is lower on the e com side, but there are some pricing benefits that we're seeing across the board as well. So some of that is also underwriting as we look to tighten on the bottom, we do cut the average ticket size. So I would say the growth is coming across the board across all categories. And when you add it up, it's well said, Fami.

Speaker 2

And but Fred, when you add it up, it's it can be, let's say, less than intuitive that especially in the furniture business with the business, a lot of people public companies at least and even private companies suck in negative same store sales and things like that. But when you add growth and trade down together, we saw growth in furniture. A good example of the large furniture company that reported numbers this morning was slightly negative revenue, but we're up with that merchant. And is that trade down? Is that because our product offering is the best product offering they have?

Speaker 2

I don't know. It's probably a combination of all that, but we're up with that merchant. So, we can be up with a merchant that's down in revenue. And then when you add 10% growth in merchants to that factor that I just mentioned, in other words, add growth and trade down together, that's how you can be going the opposite way of maybe what people think is happening in the furniture industry.

Speaker 8

That's very helpful. Maybe to follow-up a little bit on Bobby's question, I don't know that I'd say derailing, but a question that we get asked is sort of thinking about how different macro scenarios might impact you all. And so I guess the question that should be, as you maybe look at a year and think about potentially tail opportunities on the economy and if we get discretionary really coming back, maybe how do you think that affects you and maybe vice versa if we saw unemployment rise, how do you think Upbound Group fares?

Speaker 2

Yes. I think it's the resilience and the durability of the model when if we get more at one end of the spectrum, maybe as the economy improves, the you can start adding back some of the what Fami just referred to from an underwriting standpoint, the bottom. You can add some more back to the bottom, plus you get longer retention, especially on the Rent A Center side when people have more money. So it helps the portfolio. So you can drive there.

Speaker 2

Eventually, maybe you'll lose some of the trade down on the other end, but that's the resiliency how it just goes back and forth like a swing a little bit and you end up strong in any economic environment. But I will say that as things like demand for household furnishings come back that overall I see that as very positive for Rent A Center and for Aseema whereas people start moving again, interest rates come down and people start moving again. People buying starter homes use lease to own a lot, especially that starter home category. And of course, those are the ones most affected by these mortgage rates. So as people not just Home Depot and Lowe's that will start benefiting from people moving around again.

Speaker 2

It's also our industry with very few on the headwind side because again, even very few on the headwind side because again, even when things get a whole lot better, we still perform just the not just us, but the industry will still perform because of the reasons I've already said. And if it gets a lot worse, to your point about unemployment could skyrocket again, we've certainly been through those cycles and we've done fine because you get even more trade down. So obviously, we're pretty optimistic.

Speaker 8

Sounds good. Thanks so much, Mitch.

Speaker 2

Thanks, Brett.

Operator

One moment for the next question. The next question comes from Derek Sommers with Jefferies. Your line is open.

Speaker 9

Hi, good morning, everyone. What's the typical GMV ramp time when you onboard with a new retail partner?

Speaker 2

The ramp time, I suppose it depends on the industry a little bit and how big they are. The bigger they are, it ramps up a little slower because they might put it in a few stores to start and make sure everything's working and so forth. If you got a 2 store chain, there may be very little ramp up. I mean very little time. By the 2nd month you might be at your run rate.

Speaker 2

So I think it kind of depends, but it doesn't take a long time. Let me just say that it's a couple of months even on the big ones, it's still only a couple of months to ramp up.

Speaker 4

In staffed versus unstaffed, the staff stores will ramp up faster than the un staffed. That's right. That's right.

Speaker 9

Great. Helpful color there. And then just one quick one on the rack store count. How should we think about store count moving forward? Was most of that kind of consolidation exercise concentrated in this quarter?

Speaker 9

And how do you think about same store sales trends moving forward?

Speaker 2

Yes. Good question. Yes. I think it was concentrated in all depends on the market. But And so it all depends on the market.

Speaker 2

But no, we don't see that from an ongoing standpoint. We hadn't through the pandemic, it was a stimulus money. We didn't have any underperforming stuff first. So as we looked at here 3 years away from that, that in the majority of what we've closed and only 2% or 3% of our stores, but the majority were underperforming. I'd also want to point out that the majority of those stores, almost all of them were less than 3 miles from another rent a center.

Speaker 2

Like 90% of them were less than 3 miles from another rent a center. So and they were underperforming. So we're able to still serve those customers. We run reports that the ops team, Anthony and his team look at every week where we take the customers out of those closed stores. When we put them in the next closest store, we run the reports to see how what our retention level is for those customers as we put them in different stores in the report.

Speaker 2

I was just looking at it the other day, the weekly report where and the stores in the report right now because it goes back 2 years, the stores on the report right now that we've closed averaged 7 months of closure, and we're over 80% retention of those customers. So it's pretty high retention when you get rid of the outright of a store and keep that level of customers even 7 months later on average. So but the short answer to your question is going forward, we don't see a lot more of that. We're in positive territory same store sales. We see that continuing through the rest of the year.

Speaker 2

We don't see anything bringing that back down to negative territory. So we continue to expect that will be low single digits. It's not we're not going to start putting the SEMA numbers on the board at Rent A Center, but I think it's still be low single digit same store sales growth as we move forward.

Speaker 9

Great. Thanks for that. That's all for me.

Speaker 2

Thanks, Derek.

Operator

One moment for the next question. The next question comes from John Rowan with Janney Montgomery Scott. Your line is now open.

Speaker 10

Hey, guys. Good morning. So obviously, you can see the trade down pretty clearly in the Asema business with the applications coming down from a waterfall. But are you seeing the same type of trade down benefit in the core rack business that you're seeing from whatever it might be people tightening up above you because of impending or recently enacted credit card regulations?

Speaker 2

Yes. Good question, John. It's certainly not as direct at Rent A Center, right? You can't you don't really see it. It takes a little longer because the customer is not in a waterfall at a retailer or online where they got denied and then their next option would be a lease.

Speaker 2

So it takes longer. Yes, I'd say positive same store sales hotels we're seeing a little. Certainly, the Vantage scores don't have the increase like we're seeing at a SEMA, things like that. But I think that we're seeing a little bit. It's just a lot slower happening and it probably picks up over we don't have it in our forecast that a lot of trade down would pick up on the Rent A Center side going forward, but it probably picks up.

Speaker 2

It just takes a little longer because it's not that direct sale like at a retail partner the way it seemed it does. But I mentioned it earlier too, John. I think there's some opportunities. There's some store closures out there where rent centers and they're in our neighborhoods. Some of the ones that the 2 larger chains nationwide that announced closures in the last couple of weeks, we're in the same neighborhood.

Speaker 2

So we see that only as an opportunity. And thankfully on the Aseema side, we don't do business with either one of those 2. So it's nothing but positive to us.

Speaker 10

Okay. I'm going to ask one question on the CFEV, a broad question. If you can't answer it, I won't hold it against you. But I'm just trying to understand the main tenant of your lawsuit against them. I'm assuming, it's an assumption that it's based on the legal definition of a lease in Dodd Frank and whether or not the CFE actually has jurisdiction over it.

Speaker 10

Is that correct?

Speaker 2

Well, as I said in my prepared comments, what we think they're we see them trying to do is expand their authority and usurp the state regulatory framework that governs our industry. And that's really the gist of it.

Speaker 5

Okay. All right. Thank you. Thanks, John.

Operator

One moment for our next question. The next question comes from the line of Carla Casella with JPMorgan. Your line is open.

Speaker 3

Hi, thank you. You talked about the store closures and it sounds like you're getting good trends or retention to your other stores. Have you given the number of how many more you see opportunity to close and if there's any specific kind of regions where they're concentrated?

Speaker 2

No, Carla. We haven't we don't really see any more this year. Now whether it be 1 or 2 sprinkled in, of course, I mean, we lose leases and markets change and so forth. And we open a few stores here and there as we see the opportunity as well. So no, we haven't given that number, but as I mentioned, we don't really see any we don't see any more on the near horizon.

Speaker 2

Anyhow, that was like we did a review of just about every store in the system or certainly every underperforming store in the system. And also to answer your question, no, it wasn't regional. It was where we had an underperforming store and another store within 3 miles, or less than 3 miles of the vast majority. So but no, there wasn't any one regional country or anything like that.

Speaker 3

Okay, great. And then you talked about deleveraging from both EBITDA or cash flow as well as paying down debt. It looks like you're really the only debt payable right now is the ABL. Can you just talk about are you thinking about something more broadly than that or maybe ABL and eventually address some of the term loan as you with your free cash flow?

Speaker 4

Yes. Hey, Carla, it's Fannie. Yes, we have about $80,000,000 outstanding on the ABL, but I the deleveraging comment will be more it's going to be a combination of paying down the ABL. We can also prepay the term loan depending on where our cash flow is. But it will be a combination of EBITDA growth as well as actually paying down some of that gross debt.

Speaker 4

Cash flows, obviously, this year have been the free cash flow number has been light compared to year over year as we fund the GMV growth at a CEMA and fund some of the technology advancements that Mitch mentioned. But we do see that as some of the growth changes throughout the rest of the year as we comp over some of the bigger numbers Year over year, we do expect free cash flow to increase in the second half of the year and we guided for the Q3 of $60,000,000 to $75,000,000 and part of that will go down to paying down debt.

Speaker 3

Okay, great. That's helpful. Thank you.

Operator

I am showing no further questions at this time. I would now like to turn it back to our Chief Executive Officer, Mitch Fadell for closing remarks.

Speaker 2

Thank you, Elizabeth, and thank you to everyone who joined us today for an update on our second quarter and our outlook for the rest of the year. I'm really thankful for the collective efforts of my teammates and our merchants who helped deliver such strong GMV and the same store sales results for the quarter and we're grateful for your interest and your support and we look forward to updating you next quarter on our continued progress towards the goals we've outlined. So have a great day everybody. Thank you.

Operator

Thank you for joining participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Upbound Group Q2 2024
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