Rent-A-Center: The Economic Catch 22
Published: Friday, November 9, 2012
Updated: Tuesday, November 20, 2012 17:11
It has affected every American, rich or poor, and left a lasting mark on businesses throughout the country: the long-term economic decline starting in September of 2008 that has come to be known more simply as “The Great Recession.” The recession has been tough on the American consumer, with student loans hitting the $1 trillion mark and a jobless rate above 8 percent. But for Rent-A-Center, the largest rent-to-own operator in the U.S., there exists a bold silver lining around the recession’s dark and stormy cloud.
With joblessness remaining stubbornly high, Rent-A-Center has acquired a notably broader range and growing number of customers over the past four years, boosting business to an all-time high. Rent-A-Center has not thrived in spite of the dreary economy, but instead because of it.
Rent-A-Center is a retailer that offers customers brand name computers, appliances, furniture and electronics through flexible rental/purchase agreements that generally allow the customer to obtain the item at the end of the rental period. Rent-A-Center’s flexible contracts allow customers with limited cash resources or lack of credit to obtain items they want without shelling out a lot of cash upfront.
“Since the economy changed, our clientele has changed. We’ve noticed different classifications of customers coming through—it’s much more diverse,” said Noe Flores, a Rent-A-Center employee of 10 years. “Our customers shop here because we don’t require deposits or credit, they can create payment plans convenient to them, and the flexibility of not having to pay a lot [of cash] upfront is appealing.”
During the most recent quarter, Rent-A-Center posted $749.7 million in revenues, a 7.4 percent increase from last year. Its overall net income this quarter was $44.2 million, a healthy 10.8 percent increase from last year. Over the past two years, Rent-A-Center’s stock has risen 75 percent, with a 30 percent increase from 2011 to 2012, leaving Rent-A-Center’s stock worth $35.26 per share.
The company’s strategy of leveraging an extensive network of stores in order to penetrate into its target markets has generated ample sales, giving it a healthy advantage over its top competitors: Aaron, Inc. (AAN) and Advance America. With the opening of a store in Austin, Rent-A-Center now operates in 277 locations within its headquarters state of Texas, and over 3,000 stores throughout the U.S., Puerto Rico, Mexico and Canada.
In the company’s most recent earnings conference call after the second quarter, Robert Davis, Rent-A-Center’s chief financial officer, said that the company experienced “strong top line growth” over the first two quarters, and that its balance sheet was in “extraordinary shape”.
But as the economy slowly begins to improve and more Rent-A-Center customers become able to purchase items upfront, it could become difficult for Rent-A-Center to maintain its robust financial status.
“[Business] got busier as the economy got bad. It was much slower when I started working here,” said Antonio Poelo, a Rent-A-Center employee of over four years.
Rent-A-Center plans to compensate for the growing national economy in part by expanding more heavily into international markets. Rent-A-Center opened 13 locations abroad this year, including seven locations in Mexico. Mark Speese, chairman and chief executive officer of the company, reported “pretty solid” financial results from the Mexican locations during the most recent earnings conference call, leading the company to set a 1,000-store goal in Mexico.
“Economy plays a pretty huge role in our business,” said Flores. “When credit and cash resources are available to customers, they have a lot of options. We’re the last option they explore.”
Until Rent-A-Center finds a way to attract more well-off customers, its success in America will be ever bound inversely to the economy’s.