Rent-to-own makes a comeback

In this down economy, Aaron's business is looking up.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Suzanne Kapner, writer

Aaron's Robin and Charlie Loudermilk (front) with COO Ken Butler and GFO Gil Danielson (rear).

(Fortune Magazine) -- Leasing a TV may sound like the type of scheme cooked up by college students and others suffering from cash-strapped fever. But renting to own ordinary household items is expanding to more mainstream consumers. Just ask the folks at Aaron's, the Atlanta-based company with $1.56 billion in sales that leases new and used appliances and furniture to the credit-unworthy.

Add this retailer, with 1,575 stores, and its competitor Rent-A-Center to the list of companies that do well in a recession. First-quarter earnings at Aaron's (AAN) jumped 57%; sales rose 15%.

Here's how Aaron's model works: Aaron's leases, say, a $1,000 TV to a customer for $99 a month. After 24 months the customer owns the TV for a total of $2,600, including taxes and service charges. If the customer is unable to make monthly payments for any reason, he can cancel the lease with no penalty.

A cheaper way to buy the TV would be at a retailer like Best Buy (BBY, Fortune 500), which might charge $1,500. Aaron's customers, however, don't have the cash to pay upfront and can't get financing, so they end up paying nearly double. About half of Aaron's customers make all their payments and wind up owning the product - the outcome in which Aaron's makes the most money. When merchandise is repossessed, it goes back into stock and is marked accordingly.

To stay profitable, of course, Aaron's must choose its customers wisely. Managers are compensated on the basis of the performance of their store: If a customer walks off with a TV, it impacts their bottom line. That's why reference checks are key for Aaron's, whose typical customer makes less than $50,000 a year. "Sometimes you think, Whoa, I'm not selling that person a $1,000 TV," says David Epright, an Aaron's regional manager. "But just because someone looks bad on paper doesn't mean they're a bad credit risk."

One way Aaron's weeds out deadbeats is the "mama test." When a customer is ready to make a purchase, a store manager confirms the customer's information with three different sources, including one family member. The best reference? Mom. "Nine times out of 10 a mother will tell you the truth," Epright says. "I had a mother tell me her son just got out of jail and didn't have a job yet." (He didn't get the TV.) This approach works: Aaron's says its write-offs for nonrecoverable merchandise hover at about 1.5%.

Despite its size, Aaron's retains the feel of a small business. The company got its start in 1955 when Charlie Loudermilk and a partner borrowed $500 to purchase 300 chairs that they rented out for 10 a day. There is no Aaron. Loudermilk, who remains chairman, chose the name for its pole position in the phone book. His son Robin is CEO. Store managers are encouraged to attend local events with their customers; this way, when someone is out of work, an Aaron's manager has a good chance of hearing about it.

Aaron's business model may be striking the right notes in this cash strapped economy, but after a steep climb (the shares are up 17% since January), some analysts say the stock price needs some breathing room. John Baugh of Stifel Nicolaus lowered his rating to a hold from a buy on April 29, following the company's first quarter earnings report - meaning that he no longer expects the shares to rise by 20% or more over the next 12 months.

But David Magee of SunTrust Robinson Humphrey, one of the few analysts to still rate the stock a buy, says there is more upside. He points to Aaron's 12% rise in sales at stores open at a least a year during the first quarter. "You'd be hard pressed to find another retailer putting up those kinds of gains," he says. Moreover, Aaron's is trading at 14.5 times Magee's 2009 earnings estimates, the low end of its historical range of 14 to 17 times, which, he says, could mean the stock has more room to run.

Ask Mom and other credit checks

Aaron's relies on what Mom would say more than on FICO scores to assess creditworthiness. Here are some other tactics its store managers use.

  • Get to know your customers' friends and family. They make the best references (and could be future customers). One easy way: Go to their church.
  • Understand the nuances of your customers' situation. Do they live alone, or have a roommate? How long have they worked at their current job? How solvent is their employer?
  • Talk to their landlord and their boss. It may sound obvious, but these people know the customer.
  • Interview them about their financial status in private. That way a customer feels freer to talk.
  • Trust your instincts. Aaron's deliverymen can turn their trucks around if they don't like what they see when they get to customers' homes.
  •  To top of page
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.