Upbound Group, Inc.
Q2 2007 Earnings Call Transcript

Published: 31 Jul 2007

[TRANSCRIPT SPONSOR:]

[Executives:]

David Carpenter - VP of IR Mitchell E. Fadel - President and COO Robert D. Davis - Sr. VP - Finance, CFO and Treasurer Mark E. Speese - Chairman and CEO

[Analysts:]

Jeff Schollaert - Wachovia Capital Markets, LLC Dennis Telzrow - Stephens, Inc. Arvind Bhatia - Sterne, Agee & Leach Group, Inc. Emily Shanks - Lehman Brothers Henry Coffey - Ferris, Baker Watts, Inc. John Baugh - Stifel, Nicolaus & Co. Kevin Wenck - Polynous Capital Management

[Operator:]

Good morning and thank you for holding. Welcome to Rent-A-Center's second quarter 2007 earnings release conference call. At this time, all participants are in a listen-only mode. Following today's presentation, we will conduct a question and answer session. [ Operator instructions]. As a reminder, today's conference is being recorded, Tuesday, July 31, 2007. Your speakers today are Mr. Mark Speese, Chairman and Chief Executive Officer of Rent-A-Center; Mr. Mitch Fadel, President and Chief Operating Officer; Mr. Robert Davis, Chief Financial Officer; and Mr. David Carpenter, Vice President of Investor Relations. I would now like to turn the conference over to Mr. Carpenter. Please go ahead sir.

[David Carpenter - Vice President of Investor Relations:]

Thank you Carle. Good morning everyone and thank you for joining us. You should have received a copy of the earnings release distributed after the market closed yesterday that outlines our operational and financial results that were made in the second quarter of 2007. For some reason you did not receive a copy of the release, you can download it from our website at investor.rentacenter.com. In addition, certain financial and statistical information that will be discussed during the conference call will also be provided on the same website. Also, in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of EBITDA is provided in our earnings press release under the statement of earnings highlights. Finally, I must remind you that some of the statements made in this calls such as forecast growth in revenues, earnings, operating margins, cash flow, and profitability, and other business or trend information are forward-looking statements. These matters are of course subject to many factors that could cause actual results to differ materially from our expectations reflected in the forward-looking statements. These factors are described in our most recent annual report on Form 10-K for the year ended December 31, 2006, and our quarterly report on Form 10-Q for the quarter ended March 31, 2007, as filed with the SEC. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements. I'd now like to turn the conference call over to Mitch. Mitch?

[Mitchell E. Fadel - President and Chief Operating Officer:]

Thanks David, good morning everyone, and thanks for joining us on our second quarter earnings call. As you can see in the press release, our second quarter results were within our guidance range in both revenue and earnings. Our same-store sales comparison was better than expected at 2.7%, and our revenue was within our guidance range. We properly estimated our revenue, but we miscalculated how much of that revenue was going to go in and come from our comp stores, so we had a positive surprise on the comp side. Because of all the acquisitions and consolidations we have done, there are numerous moving parts when it comes to source coming into another account. As a result, although we properly estimated overall revenue, we underestimated our comp performance and ended up with that positive surprise. We do believe we have refined our internal methodology to more accurately forecast our comp performance moving forward. Demand was good for most of the quarter, but as of late, more specifically June and July, they have been very slow and due to the recurring nature of our revenue, you really see the revenue drop in the following months after a slower than expected customer growth period. There's kind of a lag to it, as I think most of you know. But with the demand being up in June and July, we had to lower our revenue estimates, and therefore our EPS estimates for the balance of the year. We're also seeing some customer struggles in our collections results as our weekly past due account average went up to 6.9% as compared to a 6.6% average in last year's second quarter. Additionally, our customer losses have been consistent between 2.3% and 2.5% of revenue, went up to 2.7% in the second quarter. These higher loss trends are also contributing to our lower guidance for the remainder of '07. We are experiencing that there is a lot of financial pressure on the customer we serve right now and demand in the last two months has been soft. But we believe this is temporary and remain extremely confident in our business model, as well as our strategy of adding new products and services within our four walls, namely financial services. As you know, when demand softens and things get tough, you have to get better from an operational execution standpoint and we are intensely focused on that. Additionally, we continue to reevaluate how our advertising dollars are being spent and we are testing numerous different things in that arena. A couple of other points, our held for rent inventory level remains within our normal range of 20% to 24%, as we ended the quarter at 23%. The Rent-Way stores that we purchased last November were on track through the second quarter, but they have experienced the same slowdown in demand in the last couple of months. So, in summary, even though the second quarter results were in line, our core business is now being challenged with slower demand and increased operating costs, but we are working very hard on our operational execution at the start level to overcome these obstacles and we will overcome them. I want to thank our 20,000 coworkers for their increased intensity level as we work hard against what we believe to be a temporary slowdown. We are confident that we will come out of this period even stronger from an execution standpoint. And with that, I will turn the call over to our CFO, Robert Davis.

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Thank you Mitch. I am going to spend just a few moments giving an update on our financial highlights during the quarter. I'll then turn the call over to Mark. I would like to reiterate that much of the information that I present, whether it's historical results or forecast results, will be presented on a recurring and comparable basis. As outlined in the press release after last evening's market close, total revenues did increase during second of 2007 by 24.1% with net earnings and diluted earnings per share increasing 3.8% and 3.6% respectively from the prior year to $41.3 million and $0.58 per diluted share. Our EBITDA increased 21.1% from the prior year to $108.6 million in the margin of 15%. Through June year-to-date, first 6 months of 2007 EBITDA equaled roughly $227 million or an increase of 26.5% from the prior year. This is translated into the generation of over $143 million of operating cash flow during the first 6 months of this year. As a result, we were able to reduce our outstanding indebtedness since year-end by over $60 million. Now, leveraged ratio at quarter-end stood 2.86 times. Since the end of June, we have further reduced outstanding indebtedness by $36 million and our current revolver and line of credit capacity is in excess of $300 million, significant liquidity from a balance sheet perspective. Additionally, during the second quarter, we did utilize over $35 million of our cash flow to repurchase approximately 1.3 million shares of outstanding stock or almost the entire amount that was authorized from our Board of Directors at that point in time. However, as disclosed in the press release, our Board has authorized an additional increase of $100 million for future share repurchases. We believe this combination of debt reduction and share repurchases through the first six months of the year has been a prudent use of our cash. Our balance sheet and strong recurring cash flow remains strengths of this company, even during times of softness or slowdown. We still anticipate operating cash flow and free cash flow to be significant, free cash flow around $140 million to $150 million for the year, so, again very, very significant recurring free cash flow. And as such, we remain committed to the long-term prospects and outlook of our company and we will continue to manage our capital accordingly. Our quarter-ending cash balance was just over $79 million and debt-to-book cap at quarter-end equated to roughly 56%. At quarter-end, our debt levels were approximately $933 million in senior term debt and $300 million in 7.5% subordinated notes. However, currently our senior indebtedness outstanding is $897 million, given we paid down additional $36 million since quarter-end. In terms of guidance, we now anticipate for the third quarter of 2007 total revenues to range between $695 million and $710 million on same-store sales between flat to down 1.5% with diluted earnings per share ranging between $0.30 and $0.36. And again I'll remind you that during the third quarter, the comp guidance has been negatively impacted due to the fact that there is one less business day in this third quarter compared to 2006, which happens to be a Saturday and this change alone or calendar shift will equate to about negative 2.5% impact to the comp itself. For the full fiscal year ending December 31, 2007, we expect total revenues between $2.905 billion and $2.935 billion, with same-store sales for the full year between a positive 1% and a positive 2%. Additionally, we are projecting 2007 EBITDA of approximately $410 million and a margin around 14%. Diluted earnings per share are estimated to be in the range of $2.06 and $2.14. Of course, this current guidance excludes any potential benefits associated with future potential stock repurchases or acquisitions completed after the date of the press release. With that financial update, I'd now like to turn the call over to Mark.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Thank you Robert and Mitch and good morning to everyone. As usual, I would like to take a few minutes to update you on additional detail on the most recent quarterly results and then discuss our outlook for the balance of the year. While we are pleased to report second quarter results in line with our expectations, as Mitch mentioned, the current business environment is challenging, as measured by a slowdown in demand as well as an increase in delinquencies. At the same time, our costs have increased, specifically fuel, utilities, and losses. As we look ahead to the balance of the year, obviously we are concerned about the weakening demand we first began to experience in June and which has continued through July. As most of you know and Mitch discussed in his comments, in our business, the revenues we can expect to achieve in future periods is a function of the new business we put on the books today or yesterday, last week, and last month. Because of the headwinds that we have experienced in the last 60 days, that has caused us to lower our guidance for the balance of 2007. We believe that this diminished demand has been caused by a couple of factors. First, the volatility and general upward movement of fuel and utility costs and then the subsequent trickle down effect towards other general merchandise, which really strains the budgets and confidence of our customers. When economies and finances become more uncertain, as we can see that they have, that uncertainty hits our customers first harder and arguably longer, we believe. Simply put, we believe that our customer currently has less disposable or discretionary income to spend. Additionally, as may of you will remember, summer time is our slowest period in the best of times. Having the broader economic and personal financial issues hit our customers as hard enough, and have those factors jump into play at the beginning of the summer has, we believe, amplified that negative effect. Now, let me add that this is not limited to any geographical region or heavily competitive markets, nor is it product or category-specific. Rather, the softness is being experienced throughout the country and across all products or categories. Now in an effort to combat some of these challenges, one step that we've taken is to shorten our terms to ownership on a number of our products, which will lower the cash prices and the total of payments, which we believe will appeal more so to our customers. At the same time, we have modestly increased the weekly rental rate a dollar or two on some of those items. This increase should generate a little more revenue for us now and help offset some of our rising costs. Having said that, we do not believe that a slight increase in some rental rates will have the material effect on demand or on our customers' ability to pay. In fact, we are hopeful that, if anything, the overall drop in total payments and cash price will be attractive to the customers. As many of you may remember, we've tested the effect of lower weekly rental rates we have on demand and did not see an increase in traffic or rentals. Based upon those tests and our experience in the business, we believe that varying the rental rates one direction or the other a dollar or two doesn't make a difference to or for our customers. And the fact is that over time, without modest upward adjustments of our weekly rates, we can find ourselves losing ground to the upward pressure of inflation. For those customers who can't currently afford the weekly rent and who are renting, the ability to own the product more quickly and to pay less in total rent is a positive thing. In other words, we believe that the modest rental increase, coupled with a downward adjustment on the term and the dollars to ownership, will be perceived favorably by our customers and generate additional revenue for the company at the same time. We are also addressing the twin issue of rising delinquencies and increased charge-offs with the renewed focus on account management and collections. As Mitch mentioned, we know that our organization is the best in the business when it comes to working with our customers to meet their needs while at the same time maintaining the strong credit collection standards. With a sharpened focus on this critical area of our business, we are hopeful that delinquencies and losses will diminish as we look at the balance of the year. With regards to our financial services rollout, as noted, we added 58 new locations this quarter, did consolidate 5 and close 9, ending the quarter with 221 stores now offering these services. As we've previously mentioned and having taken some time off last quarter to fine-tune some processes, the newer openings are performing well and that trend continues. At the same time, given the geographical spread out of the new locations, we are now in 15 states, including Texas offering the CSO model, we are occurring some additional or higher-end front-end expense, particularly as it relates to the oversight or middle management of these stores, the district manager. At build out or more maturity, we expect district managers to supervise 12 to 14 locations. Given the current rollout schedule, that number is considerably lower, averaging approximately 6 or 7 locations and we expect it to take a little longer to fill in. As such, given that the earlier store openings were slow to start and with this again a little bit more cost in the middle management, we expect financial services may be an additional $0.03 or $0.04 drag on earning this year or $0.07 to $0.08 in total. Having said that, our long-term outlook is unchanged and remains positive and we will continue this rollout as previously stated, expecting to add 55 to 75 during this current quarter, and ending the year with approximately 300 to 325 location. As we also previously stated, we expect financial services to breakeven or be slightly accretive next year and then ramp up from there, again, unchanged long-term. Again, as I mentioned, we, along with our customers, are facing some challenges or headwinds, but believe that they will pass like before. In the meantime, we'll continue to carry out our initiatives to improve the execution at the store level and expand our financial services business. And finally, as Robert mentioned, the balance sheet and capital structure remains healthy and along with our strong cash flow, gives us the flexibility to continue executing our plans and growing the business. We'll continue to enhance shareholder value by investing in our core stores, opening the financial services, and then through our ongoing share repurchase program. We appreciate your support and with that, we would be now happy to open the call up for questions. Question And Answer

[Operator:]

[Operator Instructions] Your first question comes from Jeff Schollaert with Wachovia.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Good morning.

[Jeff Schollaert - Wachovia Capital Markets, LLC:]

On the macro side, just trying to tie some things together in terms of the energy costs, it looks like, if I look at gas prices, they are only up mid single-digits this year verses last year and last year they were up 20% to 30%, but it didn't seem like you had the same sort of impact last year. And then also, on the employment side, it looks like employment is very strong this year in terms of the wage gains and initial job. So, I was hoping you could just provide maybe a little more color there. Thanks.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Yes, you are correct. As you look at gas today relative to a year ago, it's within pennies, I guess, maybe a little bit higher. Of course, it did jump up quite a bit in, I guess, late April, early May, having gone from... again it then recessed back to the $2.50 or $2.60 and ran back up over $3 and that kind of... I guess, it was in May. And we started to feel the effects of some of that in June. Albeit it's come back now over the last several weeks, the customer hasn't adjusted at this point. Of course, as I mentioned, we believe that we talk about energy costs, it is affecting a much broader products and services, food costs and likes. We believe it's again having a broader impact beyond just the energy cost itself, everything that it's touching. In terms of employment, I am not real sure I understand your comment or question. It is low, has been for quite some time. The broader question there is the fact that you have got more people working, does that not create more opportunities for you. And unemployment generally hasn't been a big indicator of our business. It's more about how much disposable or discretionary income do you have to spend and one of the competing forces on those dollars, if you will.

[Mitchell E. Fadel - President and Chief Operating Officer:]

Yes, Mark, I also think that... this is Mitch, Jeff. It's also the what part of the job market also. The housing slowdown in some parts of the country has... that's our customer who's been in construction, and that hurts in certain parts of the country. The weather in the Midwest and the Southwest the last few months has certainly hurt the construction industry, anybody working outside being our customer. So different pockets of the country have different problems and obviously the [indiscernible] Michigan, Ohio had their own problems for the auto industry. So, you can see there are pockets of that. But along with the fuel prices being higher than last year, the customer obviously is under a lot of financial pressure.

[Mark E. Speese - Chairman and Chief Executive Officer:]

And the weather comment, we've heard a fair amount of that from customers and coworkers alike. Of course, you deal with those issues 12 months out of the year and in various geography and certainly in certain parts [multiple speakers] --

[Mitchell E. Fadel - President and Chief Operating Officer:]

In the construction side of things, the construction workers not getting the hours they were getting prior, certainly consistent pretty much throughout the country. Now, I don't know if there's any one thing. It's all those things combining for a lot of financial pressure on our customers.

[Jeff Schollaert - Wachovia Capital Markets, LLC:]

Okay, thank you. That's very helpful. And then the second quick question is, are you still expecting about $0.20 of EPS accretion from the Rent-Way acquisition for next year?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

As we indicated in our prepared comments, Jeff, this is Robert, Rent-Way is on track through the second quarter with our original expectation. However, lately, they have been experiencing some of the similar pressures that the core business has. And so, while we are optimistic about their outlook, given the recent trend, we might just report back to you at the end of the third quarter, but at this point in time, the $0.20 that we gave guidance to for Rent-Way next year, through the second quarter, they are on track to achieve that. And at this point in time, we have to reevaluate in 90 days given the current pressure.

[Jeff Schollaert - Wachovia Capital Markets, LLC:]

Okay. Thank you very much guys.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Thank you.

[Mitchell E. Fadel - President and Chief Operating Officer:]

Thanks Jeff.

[Operator:]

Your next question comes from Dennis Telzrow with Stephens, Inc.

[Dennis Telzrow - Stephens, Inc.:]

Good morning gentlemen

[Mark E. Speese - Chairman and Chief Executive Officer:]

Good morning, Dennis.

[Dennis Telzrow - Stephens, Inc.:]

Mark, I think you explained this, but in your comment about changing the contract terms, is the total amount that you are getting now less than it was before? You shortened the term, but raised the rate, is that a fair statement?

[Mark E. Speese - Chairman and Chief Executive Officer:]

On certain products, that is correct. We're again... in some cases, the rate may have gone up $1, but the term was reduced by default to the consumer if they go to term and/or exercise an early purchase option. It does equate to a lower cash price and/or lower total rent-to-own dollars that they would have been paid previously. And again, that will be on new agreements going forward, it doesn't affect what was already in place, but yes.

[Dennis Telzrow - Stephens, Inc.:]

Okay. And then on the expense side, in your guidance, it looks like there is a little more expense pressure than I thought, you explained part of it coming from the financial services segment. I think you said $0.03 to $0.04 more, any other than what you said, utilities and fuel and, anything going on in labor or insurance area?

[Mark E. Speese - Chairman and Chief Executive Officer:]

No, the other category that Mitch alluded to in his comments was the losses category. We have increased our expectation for losses for balance of the year and that's part of the reason why the comp guidance came through... the EPS guidance came down as well as the revenue reduction from the softness. So, it's losses and [multiple speakers]

[Mitchell E. Fadel - President and Chief Operating Officer:]

Revenue and the loss of revenue is a big part of it.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Right, but from expense side, the main categories are the losses in the DMs or District Managers for the financial services area, and some delivery costs.

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Percentage is higher, to Mark's point, based on the revenue being down. Dennis, we... our losses were higher in the second quarter and with the delinquency creeping up on us, we do have that factored into our numbers the rest of the year as far as the higher trend, although as I mentioned, we are really working hard on that area, and I'd like to think we are going to be able to get the delinquency back in line and bring those losses down, we have forecasted higher trend although we haven't, we certainly have not accepted a higher trend, even though we forecasted it.

[Dennis Telzrow - Stephens, Inc.:]

And where does that run through, is that in salaries and other expenses?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Yes

[Dennis Telzrow - Stephens, Inc.:]

Okay. Last question, how much availability do you have on your term note to buy stock back? Usually there's some formula there.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Yes, I think it's around $100 million with this quarter's adding to the basket. If you recall, anything under 2.75 times leverage, we have an unlimited amount that we can repurchase. Otherwise, we're limited to a basket, which builds every quarter with 50% of consolidated net income. So we did buy $35 million in the second quarter, which brought that availability down, and added back to the recent quarters. So roughly around $100 million.

[Dennis Telzrow - Stephens, Inc.:]

Thank you very much.

[Mitchell E. Fadel - President and Chief Operating Officer:]

Thanks Dennis.

[Operator:]

Your next question comes from Arvind Bhatia with Sterne, Agee & Leach Group, Inc.

[Arvind Bhatia - Sterne, Agee & Leach Group, Inc.:]

Good morning guys.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Good morning, Arvind.

[Arvind Bhatia - Sterne, Agee & Leach Group, Inc.:]

Okay. So just trying to reconcile everything, I think we tried this a couple of times, but we are looking at the change in guidance, top line didn't change that much, but EPS, if I take the midpoint, came down by $0.18, let's call it. And just to be clear on the breakdown, about $0.04 of that is financial services cost, and if I am doing the math correctly on the top line, I think that went down by $15 million and flow through of 40% there gets me to about $0.06, that's about $0.10, and then you have some delinquency cost, is that... delinquencies, I can imagine, would be $0.08. So is there anything else just that we are all in the same page in terms of the change versus your prior thinking?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Arvind, I think the $0.04 from cash advantages we indicated, Mark did in his prepared comments, the revenue impact is going to have a larger impact than you estimated because that flows straight to the bottom line up to the gross margin level. Some additional costs, but not a lot. And so your flow through was, I think, 40% or 50%, may be closer to 60% or so. So, higher than 6 or 7 that you estimated. And then the additional would be through the losses and some of the delivery costs for the fuel, but generally, on the right track.

[Mitchell E. Fadel - President and Chief Operating Officer:]

That revenue would be more like $0.10 out of the $0.18, after you take depreciation, Arvind, out of it, and that $0.04 on cash advantage, you can put $0.04 towards the expenses, the losses and some higher delivery and utility costs.

[Arvind Bhatia - Sterne, Agee & Leach Group, Inc.:]

Okay. And you mentioned Texas and the CSO model for the financial services, I guess to me that's new. I always thought that that's not going to be a priority and I know there are some changes going on in the law here in Texas, but just kind of help us with your thinking there. Are you going to expand into other markets with that model as well?

[Mark E. Speese - Chairman and Chief Executive Officer:]

No, that's not the current thing. And again, we have always talked about focusing on states that had enabling legislation, albeit Texas is a little bit different, and is enabling and the CSO model has been tested and accepted, if you will. And we've always assumed that we would come here, our original thoughts were it may not be later in the year or perhaps even next year. Given some of the... I think you have heard us talk about why it took quite a while to get licensing and that was one of the delays and then when we've got in there, you've heard us talk about how do we try to size that, knowing that when you go into these locations or going inside the four walls, and in some cases, were precluded to do that because a competitor maybe in that strip center, a non-compete. And so, as we were looking at again wanting to be able to ramp them up fairly quick and where the availability was, getting slowed in some of the other states. It was simply a case of let's move up the calendar in some of these other areas, believing that again, that's still right thing to do, we believe in the model, the long-term prospects, but if we can't get 100 in Ohio today, we can only get 50 as an example, where are the other opportunities, which is what brought us into Texas a little sooner than expected. It was expected, but a little sooner, but it's what also is not allowing us to leverage all of the middle management expense at this point in time, because again, the original hope would have been maybe to beef up Ohio to that 100 and where those DMs were getting to that 12 or 14 relatively short order and then moving onto the next state. Robert, help me out. As we look at where we've got plan this quarter, I don't believe there is any states, it's back filling or continuing to fill in where we currently are. Is that -- ?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

That is correct. The primary focus being on Texas and Ohio.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Right.

[Mitchell E. Fadel - President and Chief Operating Officer:]

And the other part of Arvind's question, the CSO model, we've clearly said we are going to states with enabling legislation and we consider CSO model... Texas to have enabling legislation via this CSO model. But I don't believe that we are working a lot --

[Mark E. Speese - Chairman and Chief Executive Officer:]

We are not looking at that model in other places, not at this point. No.

[Arvind Bhatia - Sterne, Agee & Leach Group, Inc.:]

Okay. And a housekeeping question on the miscalculation of comps. Does that affect anything in the past at all or is that just this quarter?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

No. it doesn't affect anything in the past. If you recall, our first quarter was 2.9%. I think we've given a range of 1% to 2% and something like that, 0.5% to 2% or something like that in the first quarter. So, we've had positive surprise in the first quarter and the second quarter as well, and went back and refined the methodology and the current guidance has taken that into consideration. But it doesn't impact anything historical from a calculation perspective.

[Arvind Bhatia - Sterne, Agee & Leach Group, Inc.:]

And then if you can touch on the advertising side, what you are doing there. I think you were saying revaluating some of the things, I imagine you are trying to spur more demand in this environment, anything new that you are doing that you haven't tried before now?

[Mitchell E. Fadel - President and Chief Operating Officer:]

Well, we have tested quite a few things, Arvind. We are... we've done a lot of, what's called, saturation mail over the years. Ss you know, we are looking at how we do that... testing a little more from a direct mail standpoint versus saturation mail. We've got immediate resource allocation project going on to look at evaluate where we are spending our money. We've got a new media buying company starting in the fourth quarter, OMD, an Omnicom company buying our television starting this fall. That's a change. We are testing some more Hispanic radio. We are revising our search engine marketing. We've got new creative coming up this fall. We've got a store redesign project underway to look at how we use our square footage on the floor. We are testing some different things with our TV spots. And so my point is there really isn't on the way we haven't looked under to see if it's smart use of advertising and what... of our advertising dollars and what can we do to drive more demand, whether it's a change in the way we do direct mail or change in the way we buy TV, what we put on TV from a creative standpoint, what we do on the internet, what we do on radio, pretty much everything we are evaluating. And in almost all of categories, there's a different test going on trying to see if they can drive more demand in certain markets and so forth.

[Arvind Bhatia - Sterne, Agee & Leach Group, Inc.:]

Got it. And I know you are not giving guidance for next year, but just kind of help us out with what you expect in terms of bottom line growth from your core business, and I know you gave some color on Rent-Way, so we can work that, but your thinking at this point given what you are doing with delinquencies and some of that controls you've put in place there, and your best sort of outlook for next year?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Arvind, as we've done historically, we will be giving that type of guidance at the end of the third quarter. So at this point in time, we have not historically given the outlook for next year at the end of the second quarter. We will be doing that in 90 days.

[Arvind Bhatia - Sterne, Agee & Leach Group, Inc.:]

Got you. And the last question on Rent-Way, I think you indicated things were on track, anything on the employee turnover on that front? Has anything changed there recently?

[Mitchell E. Fadel - President and Chief Operating Officer:]

No, it's been pretty consistent. It's been higher in the... as expected, it's been higher in the Rent-Way stores than the core Rent-A-Center stores. Any time you go through an acquisition like that, it runs a little higher in those stores, but there is no as many change in that.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Pretty stable at this point and consistent with what we are seeing in the Rent-A-Center stores [ph].

[Arvind Bhatia - Sterne, Agee & Leach Group, Inc.:]

Okay, thanks guys.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Thank you.

[Operator:]

Your next question comes from Emily Shanks with Lehman Brothers.

[Emily Shanks - Lehman Brothers:]

Hi, thank you. A lot of my question have been answered. I did want to touch a bit though on your outlook for the consumer. I heard in the opening comments that you do think it's temporary and I am just trying to understand how you guys are boxing it or defining in the back half of this year.

[Mitchell E. Fadel - President and Chief Operating Officer:]

Well, I will start with that, Emily. We do believe it's temporary. We have been through this before, especially in the summer, as Mark pointed out, with the higher fuel prices and the stress on the customer, especially when it happens in the summer, we went through this a couple of years ago and bounced back. We don't believe the demand for these household durable goods is going to go away. We think it's a temporary situation for our customer. I mean, they still need the products that are available in our stores, whether it's a bed or a refrigerator or living room or a television or a computer, those are still in necessities in this day and age and there's no one else filling that need, it's not like the demand has gone away to someone else that's filling that need, it's an amount of money they have in their pocket right now. And as long as the products are still the necessity and no one else is filling that demand, we see the demand coming back. That's why we've talked about it being temporary. These are products that consumers are going to need and they don't need them as much in the summer, and this has been softer than we have anticipated, softer than past summers, like I said. Same thing happened a couple of years ago with fuel prices, and when they stabilized and some other factors, the other macro factors started to come back, and the customer got a little stronger, the demand came right back. These are products they need for their homes or apartments.

[Mark E. Speese - Chairman and Chief Executive Officer:]

I think he said it well, I am not sure I can add much more than that. You are right, we have been through it, and I think may be more than anything, there is a lag. I mean, when these things happen, it hits our customer right now today, and until they adjust and/or other people that may have gotten affected fall into the proposition, there is a time delay and much of it is based on our past experience. But I think Mitch said it right. When you think about the products and services we offer, the customer base that we are servicing, the need in the one doesn't go away. And generally speaking, it's not being fulfilled by others. So it's simply that waiting, if you will, such that they can get back on their on their feet and then may come back right in. And so, that's again how we deal with this one.

[Emily Shanks - Lehman Brothers:]

Great, thank you. That's extremely helpful. And then just one follow-up question. As we see Wal-Mart looking at expanding their sort of bank offering, how do you guys look at those guys... how do you at the offering versus your financial services offering?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Yes, Wal-Mart, obviously, they have come out in the last couple of quarters talking more about getting into the debit card or prepaid store value card business unlike us, where the majority of our revenue is going to be focused loan revenue. They are not entering that arena at this point in time, and not sure if they will. We also view them from a... from us, our cash advantage operation being more of a convenience type establishment, whereas in Wal-Mart, parking layout and parking lot and walking a long ways to cash a check, we think that customers that are doing business at Wal-Mart may just cash a check because they are there as opposed to it being a destination point for those products and services, whereas in our business model, it's more of a destination point, and we are offering a full array of services, not just loans, the check cashing, money order, money transfer and so forth, whereas Wal-Mart is not as diverse in those different product lines.

[Mitchell E. Fadel - President and Chief Operating Officer:]

I think the biggest point is, as you said Robert, the inventory of our revenue under financial services are coming from the areas that Wal-Mart is not in on the loan side.

[Emily Shanks - Lehman Brothers:]

Great, thank you very much.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Thank Emily.

[Operator:]

The next question comes from Henry Coffey with Ferris, Baker Watts.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Good morning. I appreciate this articulation, it's helping a lot. I was wondering if you could make some... help me with some stuff on the balance sheet. The EBITDA number you mentioned was, Robert, was it $350 million or --

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

The EBITDA through the six months period was $227 million.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Right.

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

And for the full year, we are anticipating about $410 million.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

$410 million of EBITDA?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Correct.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Okay. In terms of looking at the balance sheet, you've got $79 million worth of cash and about $1.2 billion in debt, and you said you've paid off $36 million of debt?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Since June 30th.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Exactly. Now was that a direct reduction in cash or what do your cash balances look like?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Our cash balances, yes, I mean, if you --

[Henry Coffey - Ferris, Baker Watts, Inc.:]

I mean, are you... is your cash $36 million lower as well?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Right. That's a direct correlation, correct.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

And what do you... I know you are more excited obviously to see the share buyback; what are your expectations in terms of retiring debt for the rest of the year? Do you think it will stay pretty much where it is or--?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

I think it's fair to say at this point in time, given the current pressure on our stock, we'll most likely... and given the fact that our Board increased our authorization to $100 million, I think it's fair say we will be purchasers of our shares. I mean, we came [ph] in about it, we are going to be buying back stock. Now having said that, I will remind you that we do have to fund the Perez litigation in the fourth quarter of this year. So from a debt perspective, it would not surprise me if our indebtedness increased by roughly $100 million by the end of the year. And then, do we just put our recurring cash flow in the back half of the year to work on share repurchases or do we also go into the line of credit to do additional share repurchases, we'll make that determination at a later point.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

The $100 million worth of Perez, is there a related tax credit that goes with that?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Yes.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

So cash out the door is really $65 million.

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Correct, $60 million, $65 million.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Great. The overhead jump is... and just looking at the sort of year-over-year comparisons and focusing in on the third quarter, the overhead jump is big. How long do you think it will take you to sort of work that down and get everybody back in shape and get the numbers back to where they... sort of where they should have been?

[Mitchell E. Fadel - President and Chief Operating Officer:]

year-over-year --

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Are you --

[Henry Coffey - Ferris, Baker Watts, Inc.:]

I'm just looking at the ratios, the store levels... store level cost is at 61% of store level sales.

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Right. So, you are not talking about G&A, you are talking about salaries and other.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Yes, exactly.

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Obviously, as Mitch mentioned earlier, obviously expenses we have got forecast has been higher than previously anticipated. The percentages really stick out also because --

[Henry Coffey - Ferris, Baker Watts, Inc.:]

That's what's I m looking at, yes, there is a big jump here.

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Revenues [ph] declined about $20 million from our original guidance is having an impact on the margin itself as well. So, obviously, from a margin perspective, to the extent we can get a lot of contracts back and build that revenue base back up, that in and of itself will allow that margin to come back in line with historical.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Is that a 12-month fix or a six-month process, what are your thoughts on that?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Well, I mean, given our guidance that we have given for the full year this year, that's what we are, I guess, speaking to today. And then, obviously, our goal and intent is to increase our revenue streaming, and have a great fourth quarter and seasonally strong quarter in the fourth quarter, and we would expect that margin to come back down throughout next year. But at this point, we have given no specific guidance on that.

[Mark E. Speese - Chairman and Chief Executive Officer:]

And certainly suggest something greater than 6 months, Henry.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Yes, 6 to 12, it takes time.

[Mark E. Speese - Chairman and Chief Executive Officer:]

It goes without saying that the other thing... we are certainly looking at expenses, and then I say that we always do. It's a little bit of a balancing act. In my mind, it's not about, oh, that's went out and cut all kinds of costs, because again we believe this is temporary. And if you think about our infrastructure and you have heard talk us about it, particularly at the store level, being somewhat of a fixed cost and if you have five coworkers like we talked about a couple of years ago, the fact that deliveries are down a couple of weeks per store, you don't yank an employee out. And... but having said that, we are mindful about expenses and looking at and always looking at are there opportunities that make sense when you think about costs. But to Robert's point, it's really more about leveraging the cost that we have in place and like growing the revenues back up, it will just self-correct itself, coupled with Mitch's comments about as we get focused on the collections, and I believe that we'll be successful. We know how to do this. We have been down that road, and when business gets a little tough, you tend to may be get a little looser than you should on collections trying to work with them longer. And you got to be mindful of that also. And I think we will be successful in being able to tight that... tighten the weekly delinquency up, which by default will then lead to bringing the losses back down.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Are any of the losses tied to the new TV product, is that a harder product to manage or is it just sort of across the board?

[Mark E. Speese - Chairman and Chief Executive Officer:]

I am sorry.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

The higher losses to the big screen TV --?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

That is pretty is [ph].

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Great. Well, thank you very much

[Mark E. Speese - Chairman and Chief Executive Officer:]

Thank you.

[Henry Coffey - Ferris, Baker Watts, Inc.:]

Take care.

[Operator:]

The next question comes from John Baugh with Stifel.

[John Baugh - Stifel, Nicolaus & Co.:]

Thank you. Could you in some way quantify either by traffic count or BOR number of customer agreements? It sounds that in June and July, obliviously your revenue guidance is lower, just wondering sort of the magnitude of what you saw in June and July.

[Mark E. Speese - Chairman and Chief Executive Officer:]

June was a little worse than we expected and July frankly has been the very difficult month for us and it was significantly lower than we had experienced last year and what we anticipated this year.

[Mitchell E. Fadel - President and Chief Operating Officer:]

And we think about the... if you think kind of about the revenue coming down about $20 million in the last six months, about $3.3 million a month for six months and you know what our average revenue per contract is, you can try to figure out that how many contracts worse than we anticipated we worked. At $3.3 million a month is really what we are down right on air we go. You got $20 million divided by 6 and you know how much a contract is worth and its only contracts we are behind we are always going to be albeit mostly based on July but to some extent include June.

[John Baugh - Stifel, Nicolaus & Co.:]

Is that still on the upper 50s, that number?

[Mitchell E. Fadel - President and Chief Operating Officer:]

what's that

[John Baugh - Stifel, Nicolaus & Co.:]

The average... the APU rather I want to ask about, is that number still the average in the upper 50s?

[Mark E. Speese - Chairman and Chief Executive Officer:]

No, monthly it's $100 plus.

[Mitchell E. Fadel - President and Chief Operating Officer:]

$100 plus a month in average monthly income per agreement.

[John Baugh - Stifel, Nicolaus & Co.:]

Okay. Has there been any change in the average unit price?

[Mitchell E. Fadel - President and Chief Operating Officer:]

Not, no, nothing significant not material no.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Again the changes I have mentioned in terms of reducing the terms and in some cases adding $1 or two those really just take an effect over the last week, or 10 days.

[John Baugh - Stifel, Nicolaus & Co.:]

And on that subject Mark I recall somewhere around 20 months or so was an average, but may be up on that. What are we talking about here in terms of change; I know you've have done a promotion a while back in terms of the last two weeks or something free repayments. I mean is there some really minor tweak to the average term or is it most --?

[Mark E. Speese - Chairman and Chief Executive Officer:]

Yes, well, what your comments others may not that 20 months average we mentioned that the average product is in our system about 20 months from date of purchase to date of disposal and again most of them leading to rental transaction be at the first, third or fifth customer. And again, I have read about 17 of those 20. Again not all products, but those that we looked at or some of the longer term products IE, they may have been 24 month of agreements or longer, those are more than once that we looked at and they came down to 21 as an example, so we may have taken 3 months off for that term. And again many of those cases, most anyways raised it a buck or two a week, and but again for the customer lower cash price, lower total cost at the same time a little more revenue for us right now, but I don't expect it in the over the life of the product to materially effect that 20 months. Again, on a way it really gets affected is that the first customer goes all the way to term who buys it out. If it's for subsequently rental, the future, that second and third term moves around a lot as you know.

[Mitchell E. Fadel - President and Chief Operating Officer:]

So we hope it increases probably want to increase demand necessary, but it will help the... from our execution standpoint, help the close rates when somebody is in the start because as he got a lower price as well as the fact we've got a lower overall price to increased demand, but yet our monthly revenue goes up a little bit and as Mark pointed out the only time that overall price actually ends up on our P&L for a lower margin is that the first customer takes it all the way to the term.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Right.

[John Baugh - Stifel, Nicolaus & Co.:]

Which is about 25% of the case, so everything being equal, the 25% of the case is what 21 months from now, you'd see less revenue for the resilient 3 months, is that the right way to look at it?

[Mark E. Speese - Chairman and Chief Executive Officer:]

25% of the first time rentals in our quarter by that first time rental.

[John Baugh - Stifel, Nicolaus & Co.:]

Correct. And then the interim of course you've got a little higher rental rate. A little more color skips last, what exactly you are seeing... is there any change in any of those numbers or are they all of the same kind of --?

[Mitchell E. Fadel - President and Chief Operating Officer:]

It's kind of a combination John of our half and half of the writing-off more accounts, we've been consistently in 2.3% to 2.5% range, in the second quarter we are 2.7% like I said earlier and that increase is a combination of write-off more accounts and then a higher cost per accounts with a higher in merchandise, some being the new technology as well as the packaging that we've been doing for the last couple of years making bigger agreements where package brings together. So it's about half and half of the fact that there is more actual customers skip insolvency, but then there are higher costs as well to have gone from that. When I say 2.3 to 2.5 range, summer is always a toughest time so if I would have been 2.5 normally in the summer time and we're at 2.7 which 20 basis points is not insignificant on how much money we do in a month.

[Mark E. Speese - Chairman and Chief Executive Officer:]

And just to provide more perspective on the more accounts being written-off at slow level it's not even one full agreement, it's probably 8 or something more.

[Mitchell E. Fadel - President and Chief Operating Officer:]

That's right for the quarter it was 0.8 more.

[Mark E. Speese - Chairman and Chief Executive Officer:]

I don't... what people thinking that there is a written-off 5 more orders and so just 0.8 it is, less than 1 a store.

[John Baugh - Stifel, Nicolaus & Co.:]

Okay. And then lastly on the Rent-Way, how many store... have you done most of the store closings at this point. I noticed 52 stores closed six months, year-to-date, I mean how many of those are Rent-Way versus Rent-A-Center and sort of as you look out to a next six months, where do you expect net store account to go?

[Mitchell E. Fadel - President and Chief Operating Officer:]

I think in the next six months, you know we will continue to consolidate resource not just around new ones but you are in a company that's grown by mergers or acquisitions over the years so we end up with stores not always exactly where we want them because we can put them there. We bottom and they might be in close proximity to one of our other stores and when the lease expires, we are seeing too much cannibalization in that particular market especially smaller markets than we are go and consolidate. We are pretty consistent at 15 or so a quarter, consolidations a quarter will open through the remainder of the year and with another 15 or 20 stores that I think store count wise it might, last six months, we might be down 10 stores but it will be pretty close to even some new stores. Actually there will be some small acquisitions here and there, whereby few stores... but I think maybe down 10 stores where I think consolidation is not just from the Rent-Way acquisition John, just in general, maybe we are down 10 more stores by the end of the year, but it is certainly not that material.

[John Baugh - Stifel, Nicolaus & Co.:]

Great thanks. And there litigations or any thing pending that makes you nervous etcetera?

[Mitchell E. Fadel - President and Chief Operating Officer:]

No, nothing new out there if you will, it all disclosed in the Ks and Qs.

[John Baugh - Stifel, Nicolaus & Co.:]

Thank you.

[Operator:]

Your next question comes from Lance Ettus with Mordorock Capital Management [ph].

[Unidentified Analyst:]

Hi guys. I just had a question sort of on your share buy back. I think we all appreciate that you guys have been an aggressive... fairly aggressive buyback of your own stock. But especially with the fall off today, it just seems like you guys are training and it looks like around six times EBITDA and if you look at just your guidance even taking the lower end, taking $2.06 and then you are saying at least $0.07 of sort of growth CapEx from you paid a lending business. So you get $2.13, you are trading at like nine times. So is there any thoughts so maybe becoming a little more aggressive, I mean at one time you guys were I think after a big acquisition few years back, you guys were at... your debt levels at six times EBITDA, now its about three, I mean why not take that to 5 and really do a Dutch tender offer and buyback a lot of shares herein. Just sort of how do you think about that in terms of your bother, you are just using the excess cash flow or you trying to look at the stock price and look at where your debt is and make a decision to be more aggressive but less suppressive?

[Mark E. Speese - Chairman and Chief Executive Officer:]

Lance this is Mark. Yes, we have been leveraged as high as six times. That was on the heals of the large acquisition we did in 98 for Thorn and obviously looking out knowing that we can enhance the operating results of those stores as we put our business model in place we'd expect that leverage to come down significantly and obviously in fact it did. Not uncomfortable with where we are today, obviously less than three times, we have diluted we have always tried to be mindful of certainly be mindful of how do we enhance shareholder value. We've always stated we are big believers in this business and the long term prospects, as such we were always first and foremost going to reinvest in our business, be it in core stores, acquisitions, products offerings and so forth certainly financial services now fits into that category. Beyond that, it was always a balancing act, if you will, in terms of the capital structure, or the amount of debt we have in leverage as well as share repurchase. And as you know at any given time, you got to look of both of those in concert with one another where is the stock trading, and what's the value of... Robert mentioned that it's been interesting, we get down to 2.5 times leverage, we can buy all the stock we want. You go buy all the stock you want. You get over-leveraged. You get only by half. So how do you, again. Now that's we've got to work through that. Again I guess the way that I have always tried to answer that question is people would say, how do we deal with it in the future in terms of share repurchase, and so forth, but I think the past behavior is a pretty good indication of what you could expect in the future. What that means is yes, we are have been supporters of our stock, and we will be in the future as well, and. I don't have any big plans today, certainly not that I am going to sit here, and articulate at this point in terms of what we may, or may not do and to state the obvious which we put in the press release. We've got about $35 million in the last quarter. The Board is giving us another $100 million, and I think our past conduct can give you an indication of what you might expect in the future from us.

[Operator:]

[Kevin Wenck - Polynous Capital Management:]

I know that there has been comments on the call by the same things you looked at and we are coming up with new guidance, but I mean the stock is trading under the assumption at this point, if this could be further downward revisions from here, and so may be you could add a little additional color as to why you feel like you have really gone through the numbers thoroughly to judge whether there are going to be downward revisions, but even with whatever scrutiny you have given to the numbers maybe you can also add some comments as to things that you would still be uncertain about?

[Mark E. Speese - Chairman and Chief Executive Officer:]

Well I think you know the fact is nobody can say with absolute certainty what the future is going to hold. As we sit here and look at the current environment, again, really looking at the last six weeks if you will, our experience in having gone through similar events in the past, the time of the year and then how do we forecast that going forward I think we try to be in that we are not expecting a lot. We didn't model as we were going to give hammered if you will every month for the next six months we don't believe that will happen, but we haven't been I don't believe we've been aggressive in what we thought might happen over the balance of this year. We do expect an up tick in the fall as we have always seen. So whether or not that comes to fruition, I guess time will bear it out. But I think we've been fair, conservative, open minded if you will as we looked at and thought about the current tone of business and how that may play into the future. We also give consideration to how we feel our ability to move the needle or make a difference, if you will, in some of the initiatives that we are working on. We trying to factor in what is the current cost of doing business and how might that change going forward and what are the underlying consumptions, again, as we talked about our delinquency and losses, given the current results, we factored that in going forward. Is that aggressive or conservative? I can make an argument that it's conservative. But we try to be mindful of that and forecasted accordingly. I can't more than anybody else for that matter tell you with absolute certainty that we've hit it right. We could miss or we could perhaps just as easily surprise the other way. I do think we were very mindful given where we are and how to think about the future and try to forecast accordingly and so with that I am very comfortable with it as I sit here today.

[Kevin Wenck - Polynous Capital Management:]

Okay, thanks, that's helpful. And then one other question, concerning the additional buyback authorized, is there... how long is the restriction around an earnings release or can you be buying stock back today if you chose to?

[Mark E. Speese - Chairman and Chief Executive Officer:]

There is a 48 or 72 hour window opens on Thursday.

[Kevin Wenck - Polynous Capital Management:]

Okay, All right thanks for your help.

[Mark E. Speese - Chairman and Chief Executive Officer:]

You bet

[Operator:]

Your next question comes from Rob Magnuson [ph] of Goldman Sachs Asset Management.

[Unidentified Analyst:]

Hi. I guess I have a couple of questions on capital structure, a little bit different than other people have asked, I guess. In terms of stock buybacks versus debt reduction, I guess flipping it I can from what other people have said, given sentiment towards leverage right now on the capital markets, I guess longer term how do you look at and especially given the outflow for the Perez litigation, how do you evaluate bringing leverage down lower than it is right now. And secondly, any plans on the 2010 maturity that's about stock two and a half years away?

[Mark E. Speese - Chairman and Chief Executive Officer:]

You want to take that Robert, or you want me to?

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

Well, I think we alluded to earlier that it's fait to say that leverage will most likely go up at the end of this year given the Perez litigation funding. We also indicated that we would most likely be in the market as early as this Thursday supporting stock with the new authorization from the Board of Directors. What that translates to in terms of leverage by the end of the year, I would say, it's most likely going to be higher than where it is today, we are not uncomfortable with that. We believe the long term prospects for the company and intend to use our capital accordingly in order to do that. As it relates to 2010, you are referring to subordinated notes, 7.5%, there is no current thoughts on that. We have taken a couple of looks at those here in the last six months or so in terms of when we could re-price those in the markets and is actually higher, we have been... got some information that it would be a 7.75% to 8.25% and we have no interest at this point in time refinancing that. That will be the decision made on a later date.

[Mark E. Speese - Chairman and Chief Executive Officer:]

I think that where we get comfortable, if you will, and again, you got to look at the cash characteristics of this company, our cash flow that are very strong and recurring and have demonstrated that for 15 plus years in good times, bad times and otherwise. At this point albeit conservative in nature, [indiscernible] de-leveraged below two times, going up is not problematic in my view, certainly at this point

[Mitchell E. Fadel - President and Chief Operating Officer:]

Now that the free cash flow is strong.

[Unidentified Analyst:]

But I guess perceptional leverage subprime risk, your customer weakness, any sense that you could increase shareholder value by keeping leverage below 3 times or below 2.5 times?

[Mitchell E. Fadel - President and Chief Operating Officer:]

Not sure I understand your question.

[Unidentified Analyst:]

I guess do you get multiple expansion on your equity by having a more conservative balance sheet, given the current credit environment and perceptional leverage?

[Mark E. Speese - Chairman and Chief Executive Officer:]

I believe, I would. That doesn't... I mean, again it's a little bit different certainly in our mind, I guess, broader question maybe would be for you and the... unlike secured debt, I mean, the customer has the ability to work turn the product, yes our losses have gone up a little bit, but it's not as if we are expecting those to go up by 5%, never mind even 4%.

[Mitchell E. Fadel - President and Chief Operating Officer:]

We went up 0.8 more per store for the whole quarter.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Yes, 0.8 for the course of the quarter, I think the ability and the fact that we have and we retain title, we can get the product back, certainly you got to do something with it, rent it to another customer, sell it off. But by and large, we still own and have access to that asset and so I think it behaves differently than what you might see in a traditional subprime or credit market.

[Mitchell E. Fadel - President and Chief Operating Officer:]

It certainly... everything we look at it is the shareholder value. More prudent use on shareholder value is using our cash on stock repurchases, especially at these prices rather than bring the leverage down.

[Robert D. Davis - Senior Vice President - Finance, Chief Financial Officer and Treasurer:]

And our overall cost of capital will go down by taking out the equities as opposed to paying down debt. We evaluate in that context more than anything else.

[Operator:]

Your next question comes from David Chamberlain from Oz Cap [ph]

[Unidentified Analyst:]

Hi guys, thanks for taking a question. Just quickly, I'm curious when you talked about the bad traffic you guys got in June, July being down. Can you give us any sense at all if certain types of retail merchandise were... saw deeper declines year-over-year in demand versus others or was it just basically across the board?

[Mitchell E. Fadel - President and Chief Operating Officer:]

It was across the board. I think Mark mentioned it earlier that there was really... we haven't seen anything in product categories or geographically, may be some minor differences from a geographical standpoint, but generally it has been across the board and certainly from a product standpoint, it's been across the board, David

[Mark E. Speese - Chairman and Chief Executive Officer:]

Yes, if you... when you say year-over-year, the furniture category we talked about had some softness, but it's not as if that was the only product where it was exacerbated in the last 6, 8 weeks we've been talking about, but yes, it's just the product line in general, if you will.

[Unidentified Analyst:]

Okay. And just finally just talking about the construction worker, it's being the primary client of yours. Give me a sense of all or just ballpark, what the constituents would makes up in terms of your client base?

[Mitchell E. Fadel - President and Chief Operating Officer:]

I don't... I think he was breaking up at the end, you broke up.

[Unidentified Analyst:]

Sorry, just can you hear me better now.

[Mark E. Speese - Chairman and Chief Executive Officer:]

Yes.

[Unidentified Analyst:]

I was curious here what you thought back of the envelope, the people on the construction industry would carry, how big that would be as a client base for you?

[Mark E. Speese - Chairman and Chief Executive Officer:]

I think there was [indiscernible], it was really about this blue collar, certainly a lot of them are --

[Mitchell E. Fadel - President and Chief Operating Officer:]

And they would vary by and that they would vary so much by area. Texas has been... this area here in Dallas-Ft. Worth areas has been such as boom for years, we have a lot of construction work at other places there, there certainly has some balanced [ph] money as just as... like you said Mark, blue collar you have got. People work in crops in California, so you go across the board. So, I wouldn't... I would just be guessing, David. So, I don't even have a back of the envelope number for you. But then certainly our core customer is the blue collar customer, construction, base industry, lawn and garden, landscape, restaurants, painters [multiple speakers].

[Unidentified Analyst:]

Great, thanks a lot guys.

[Mitchell E. Fadel - President and Chief Operating Officer:]

Thanks.

[Operator:]

The next question comes from Andreas Griffin with Aragon Capital [ph].

[Unidentified Analyst:]

Well, going back to the average revenue per contract, is there... are you concerned that if conditions are a little bit tighter for your customers, that that might go down as the mix shift away from some of the large screen TVs etcetera or is that something that you've modeled in the second half assumptions?

[Mark E. Speese - Chairman and Chief Executive Officer:]

We haven't seen that, the average ticket going down. Obviously business is soft, but we have not seen it from a ticket standpoint. The customer is who is filling that need has acted the same way as far as product mix standpoint as they've had in the past and keep in mind that there in not... in our industry the way the pricing works, there is not as big of a price difference between a small TV and a large TV as there is from a retail standpoint. And as an example, you can buy a TV for $200 or you can buy it let's say, buy a flat panel TV for $2000. In a Rent-A-Center, the weekly... you can do the same thing, but the weekly price difference will be the difference between maybe $15 and $30 because the term will be probably different [ph] and then more expensive TV, not just with price. You might pay $30 for two years rather than $15 for one year, but because we put some of the price difference in the term, not just with the rate that when you are looking at small TV versus big TV or a small refrigerator versus the side-by-side rack, you are not making a decision between $200 and $2000, you are making a decision between $15 a week and $30 in my example, and I believe that's the reason we don't see different product mixes, you don't want to things slow down like this as we had a few times in the past.

[Unidentified Analyst:]

Well, then June and July, the average revenue contract was the same?

[Mark E. Speese - Chairman and Chief Executive Officer:]

Correct.

[Unidentified Analyst:]

Okay, great, thanks for clarifying that?

[Mark E. Speese - Chairman and Chief Executive Officer:]

Okay, thanks Ann.

[Operator:]

This does conclude today's question and answer session. Mr. Speese, do you have any closing remarks?

[Mark E. Speese - Chairman and Chief Executive Officer:]

Well, first I would like to thank everyone for your time and joining us today. I realize that the outlook is probably disappointing. We realized we've got some headwinds and work to do, at the same as we have said, we have faced the similar challenges in the past and like before we believe that we and our customers, that we will work through these current challenges. Now, we are committed to grow in the company for the long-term, as I mentioned our strong cash flow forwards us for the ability to do a lot of things, we have looked to utilize that to grow the business and enhance shareholder value. As always, we appreciate your interest and support and we look forward to updating you the conclusion of the next quarter. Thank you very much.

[Operator:]

Thank you for participating in today's conference. You may now disconnect.