Rental Chains Turning to New Formats to Boost Business

Rent-a-Center installed RAC Acceptance kiosks inside 150 more of its stores in Q2, increasing the number deployed at Ashley, Conn’s, Rooms to Go and others to 611, with a goal of reaching 750 by year-end. The kiosks, which Rent-a-Center introduced in 2010, are located inside the retailer’s store, but use RAC staff to offer customers who were turned down for credit the chance anew to rent product. RAC Acceptance has increased its presence to all 80 Conn’s stores in the past 60 to 90 days, company officials said. Rent-a-Center, which doubled its business when it bought The Rental Store (TRS) chain in late 2010 (CED Dec 27 p1), increased the number of forecast openings for this year to 350-375 from 325 to 375. Rent-a-Center will seek to increase RAC Acceptance’s presence at CE and appliance chains, broadening it from its base in furniture stores, the company said.

Meanwhile, Aaron’s will double the number of its HomeSmart locations offering weekly rental contracts with the recent acquisition of Crusader Rent to Own (CED July 21 p6), Chief Operating Officer Kenneth Butler said in a conference call. Standard Aaron Rents stores market monthly rental contracts, but HomeSmart launched in the Houston area nine months ago to test 60-, 90- and 120-week agreements requiring weekly payments, the company said. Before buying Crusader, Aaron’s had only standalone locations, Chief Financial Officer Gilbert Danielson said. The Crusader stores will be converted to HomeSmart by October, Danielson told us.

The testing of new formats may signal the maturing of the standard rent-to-own stores, analysts said. Rent-a-Center, with 2,948 stores as of June 30, and Aaron’s, with 1,858, see the new formats as an attempt to gain and better attract new customers, industry officials said. RAC Acceptance tends to attract customers with higher incomes and better credit scores than those who shop standard Rent-a-Center stores, Butler said. RAC Acceptance customers have credit scores 100 points higher than those at Rent-a-Centers, the company said. Rent-a-Center pays 40-50 percent more for products it buys through retail partners for RAC Acceptance. It also has given added responsibility to district managers for 10 kiosks each and added some “middle management” to oversee the format, CEO Mark Speese said in a conference call.

At HomeSmart, 8 percent of the customers also do business with Aaron’s stores offering monthly contracts and 45 percent of them are former customers of the chain, Butler said. While there might be some overlap between HomeSmart and Aaron’s locations, more than half of HomeSmart customers have “never seen” the chain’s stores, Butler said. Aaron’s also will likely turn the HomeSmart format over to its franchisees, which already operate 681 Aaron’s locations, he said. The timing for franchising HomeSmart hasn’t been set, but the chain could reach 200-300 stores “pretty quickly” once a program begins, Butler said. While franchisees typically take three years to develop a concept, “it will be a very easy sell to our best operators,” Butler said. The 6,000-square-foot Houston store made money after seven months in operation, he said. Other HomeSmart locations are in Biloxi, Miss., Conyers, Ga., Kileen and Midland, Texas and Pensacola, Fla. Standard Aaron’s stores average 8,000 square feet. In addition to franchisees, Aaron’s will seek to acquire RTO chains interested in converting to the HomeSmart format, Danielson told us.

Rent-a-Center’s Q2 net income improved to $93.5 million from $84.1 million, despite a $4.9 million restructuring charge to cancel some TRS leases, Chief Financial Officer Robert Davis said. TRS had 100 locations and about $100 million in annual revenue. RAC Acceptance posted about $41 million in Q2 revenue and will account for 6-7 percent of RAC’s $2.9 billion in annual sales, Speese said. Rent-a-Center’s lease revenue and fees rose to $617.7 million from $586.6 million, while those from merchandise sales rose to $50.9 million from $43 million. Franchise royalties, fees and merchandise sales from 210 ColorTyme locations improved to $8.7 million from $7.9 million. Same-store sales declined 0.3 percent. RAC Acceptance will be a 1-2-cent drag on Rent-a-Center’s Q4 earnings. Rent-a-Center will expand in Mexico, which it has 16 locations, but the chain lowered the forecast for new stores this year to 40-55 from 40-75 as lease negotiations and other logistics have taken longer than expected.

Aaron’s Q2 net earnings dropped to $10.7 million from $24.4 million as the chain took a $36.5 million charge for the costs of defending a sexual harassment suit. A federal jury in Illinois in June awarded $93.5 million for former Aaron’s employee Ashley Alford, who alleged she was sexually harassed by store manager Richard Moore (CED June 15 p4). “We were disappointed by the trial and court decision,” Aaron’s Chairman Charles Loudermilk said. “We were out-lawyered and we'll come back and have a different development down the road.”

Aaron’s Q2 revenue rose to $482.7 million from $444.9 million on a 3.2 percent increase in same-store sales. Lease revenue and fees improved to $371.1 million from $344.9 million, while revenue from non-retail sales grew to $84.6 million from $73.5 million. Franchise royalties and fees jumped to $15.1 million from $14.1 million. Average monthly customer payments rose to $134.25 in Q2 from $134.14 in March. Aaron’s added 32,000 contracts at company-owned stores in Q2, down from 34,000 in the previous quarter, to end the period with 911,000, up 9.2 percent from a year earlier. Aaron’s TV unit sales rose 11 percent in Q2, but dollar figures weren’t available.