5700 Tennyson Parkway, 3rd Floor
From a TV for the family room to the sofa to sit on and watch it, Rent-A-Center provides an easy, affordable way for people to get the things they want for their home today, without incurring a continuing obligation or having to use their credit.
Rent-A-Center, Inc. of Plano, Texas, is America's largest chain of rent-to-own stores. The company owns and operates nearly 2,300 stores in all 50 states, plus Washington, D.C., and Puerto Rico. In addition, a wholly owned subsidiary, ColorTyme, serves as a national franchiser of rent-to-own stores, with 333 units under the ColorTyme brand and 13 under Rent-A-Center. All showrooms of both brands offer furniture, appliances, home electronics, and other accessories that can be rented by customers, who may terminate the contract on short notice or gain ownership of the merchandise after reaching a stipulated rental period. Payments are made to the stores on a weekly basis. Many customers turn to Rent-A-Center and its competitors because of a temporary need for household merchandise. These include college students, military personnel, people going through divorce, or businesspeople on short-term assignments. Other customers, however, are simply strapped for cash and have poor credit ratings and turn to rent-to-own stores as a way to finance the purchase of necessities or luxury items they cannot afford. While Rent-A-Center and its competitors insist that buyout provisions are offered as a courtesy to customers, and they point out that a sizeable portion of customers terminate a rental contract long before it runs its course, the industry has gained a reputation for price gouging and taking advantage of the poor because the final cost of merchandise is far higher than the retail price. Rent-A-Center has been involved in considerable litigation over the years and has been forced to pay settlements for charging exorbitant interest rates. The company insists that it is primarily a leasing business, not a credit operation, and that its customers are not locked into contracts, yet the entire rent-to-own industry continues to suffer from a poor image. Nevertheless, Rent-A-Center has enjoyed healthy profits, enough to ease investor concerns over the company's reputation, warranted or not.
Development of the Rent-to-Own Concept: 1950s
The roots of the rent-to-own business reach back to the 1950s when a number of people pioneered the concept. For instance, Charles Loudermilk, Sr., founder of Atlanta-based Aaron Rents, started out in 1955 by renting Army surplus chairs for ten cents a day. The founder of Rent-A-Center was J. Ernest Talley, widely acknowledged as the most influential figure in the development of the industry. In the 1950s he ran a retail appliance store with a cousin in Kansas. Because tightening bank credit prevented a number of customers from buying his merchandise, he hit on the idea of renting the items. If customers failed to meet the payments, he could always repossess the merchandise; if they reached the end of the rental agreement, they would own the merchandise and Talley would have made some extra cash in addition to increasing the sales volume of his appliance store. In 1963 he developed a rent-to-own chain called Mr. T's, which by 1974 had grown to 14 stores. He sold the business, which became part of the Remco chain, and he turned his attention to commercial real estate in the Dallas area. When the Texas real estate market suffered a crash he returned to the rent-to-own concept in 1987, establishing Talley Leasing with his son Michael. The new company rented appliances to apartment complex owners.
Talley returned to the consumer rent-to-own business in 1989 when he acquired a 22-store chain, Vista of Puerto Rico, which operated in both New Jersey and Puerto Rico. Talley changed the name to Vista Rent to Own. Drawing on his years of experience, he upgraded the chain, improving the selection of merchandise and customer approval procedures, as well as instituting inventory systems and a management training program. In April 1993 he greatly expanded his business by acquiring the 84-store Renters Choice Inc. and merging it with Vista. The combined company then assumed the Renters Choice name, and again he upgraded the operations of the new units. Although the purchase would result in a $600,000 loss for 1993, Talley clearly knew how to make money in the rent-to-own business. Revenues that stood at $15.8 million in 1991 would soar to $74.4 million in 1994. Profits of $1.8 million would increase to $5.5 million over the same period. Moreover, the operating margins for Renters Choice were much healthier than its rivals. Talley's edge was in his stores' success in customer approval. While the industry average for delinquent accounts was 10 percent, the average at Renters Choice was just 6.5 percent of revenues. A main reason for this success was simply that Talley paid higher wages than his competitors, both for store clerks and managers. The company also attempted to weed out management trainees that harbored repressed hostilities or forced their personal philosophy on others. (The battery of psychological tests the company relied on, however, would become a source of conflict later in the 1990s.) Behind this effort was an understanding that many customers turned to rent-to-own stores because they could not afford the outright purchase of a luxury item, like a big-screen TV, or had poor credit because of frequent job changes, and they would not respond well to employees who appeared to be judgmental. Because customers came into the store on a weekly basis to make their payments, it was inevitable that managers would develop some kind of personal relationships with them. Talley preferred that those relationships be positive, especially since it led to repeat business. Managers were granted considerable latitude on deciding if a customer was worth the risk, but at the same time, computer programming allowed the main office to monitor rental payments on a nightly basis. Accounts even a day late would be questioned. In short, Renters Choice developed a tightly run organization that gave it an edge in a highly fragmented industry. Of the approximately 8,000 competing establishments, many were small, poorly run operations ripe for acquisition and the Talley turnaround procedure.
Going Public: 1995
In January 1995 Talley took Renters Choice public in order to fund further growth, raising close to $26 million. Despite a general aversion for what is often considered an unsavory business, investors were attracted to Renters Choice from the start, and the stock, trading on the NASDAQ, made a steady climb in price. In the spring of 1995 Renters Choice paid $20 million for Crown Leasing Corp. of Texarkana, which had recently filed for Chapter 11 protection. The deal added 72 stores in 18 states and expanded the presence of Renters Choice to the southern part of the country. In the fall of 1995 the chain added 135 stores by acquiring Pro Rental Inc. of Dallas for $38.5 million in cash and notes. Pro Rental operated under two brands: Magic Rent-to-Own and Kelway Rent-to-Own. By the end of 1995, with its acquisitions only partially digested, Renters Choice boosted revenues to $133.3 million and net income to $10.7 million. By now, the chain had grown to nearly 320 stores. Another 320 stores were soon added in 1996 when it acquired ColorTyme of Dallas, which was a franchise operation rather than a company-owned chain like Renters Choice. The majority shareholder and Chairman of ColorTyme was Talley's brother, Willie. Ever since his brother had suffered a stroke in the early 1990s, Talley had acted as his legal guardian, a situation that previously required notation in SEC filings because of possible conflicts of interest between ColorTyme and Renters Choice.
Because of the lack of large rent-to-own chains available for purchase in 1996, by the middle of the year Renters Choice hired a director of acquisitions in order to focus on identifying smaller chains and individual operations that were deemed to be underperforming. Between May and the end of the year, the company acquired 88 stores in 20 separate transactions at a cost of $25.3 million. In the process, Renters Choice added five new states to its operations. Moreover, the company opened 13 new stores. As a result of its aggressive expansion, Renters Choice more than doubled its revenues in 1996 over the previous year to $238 million, while posting a net income of $18 million. The company continued to grow in 1997, adding 71 stores in 18 separate transactions at a cost of $30.5 million. Another ten new stores were also opened, bringing the total number of company-owned units by the end of 1997 to 504. Also in 1997 Renters Choice agreed to a $2.9 million settlement of a Wisconsin class-action lawsuit it inherited from Crown Leasing, which had been accused of charging usurious interest rates. In addition, in late 1997 Renters Choice was sued in New Jersey court over a failure to provide certain disclosures in its contracts with customers. Despite these legal costs, Renters Choice remained extremely profitable. Revenues for 1997 grew to $327.5 million and net income to $25.9 million.
In 1998 Renters Choice made a quantum leap in growth when it made two major acquisitions. First it paid $103 million to acquire the 176 stores of Central Rents, Inc. Located in the Los Angeles, California, suburb of Commerce, Central Rents provided Renters Choice with a substantial platform in the western United States, an area where it previously had very few locations. The company now added 43 stores in California alone. Although a substantial acquisition, it would soon be dwarfed by the $900 million purchase of the 1,400-store Rent-A-Center chain. Renters Choice would then assume the Rent-A-Center name and become the largest rent-to-own chain in the industry.
Rent-A-Center had been founded by Tom Devlin in Wichita, Kansas, in 1973. While attending college at Wichita State University in the mid-1960s, Devlin worked at an appliance store and was frustrated with the high rejection rate of his blue collar customers. He and his boss developed a payment plan that allowed customers to rent an appliance until they had paid enough installments in order to gain ownership. Devlin went into business for himself in 1973 with a single rent-to-own store. He developed the Rent-A-Center chain with both company-owned stores and franchisees. In 1987 he sold the business for $594 million to British conglomerate Thorn EMI, which had been involved in the long established English rent-to-own industry. In 1996 Thorn split from the EMI music business, but did not fare well on its own, hurt in large part by a strong economy that made rent-to-own a less attractive option. Thorn also faced litigation over misleading interest rates in the States, an ongoing problem that concerned U.K. investors, especially after a New Jersey judge ruled against the company in 1997, leaving it open to damages that had the potential of reaching $1 billion. As a consequence, Thorn was eager to unload Rent-A-Center and devote its resources to restructuring its British interests.
Merger of Renters Choice and Rent-A-Center
Although Thorn sold Rent-A-Center to Renters Choice, it retained partial responsibility for pending damages in earlier lawsuits. In order to finance the acquisition, Renters Choice issued $235 million of convertible preferred stock to the New York investment firm of Apollo Management, which gained almost a 30 percent stake in the company. Renters Choice closed down the longtime Wichita headquarters of Rent-A-Center, consolidated operations in Plano, then on December 31, 1998, changed its name to Rent-A-Center, Inc. For the year, with only a partial contribution from its new acquisitions, the company's revenues soared to $809.7 million, while income held steady at $24.8 million.
Investors showed some concern over Talley's ability to make the stiff debt payments taken on in 1998, and as a result the price of Rent-A-Center stock dropped. When the company continued to post strong results, investors expressed their relief by again bidding up the company's shares. The process of absorbing 1,400 new stores was not without incident, however, as a number of inherited managers objected to the company's personality testing, and initiated litigation. Plaintiffs maintained that many of the 502 true-false statements of a psychological test were invasive, including "I am very strongly attracted to members of my own sex"; "I have never indulged in any unusual sex practices"; "Evil spirits possess me at times"; and "I am a special agent from God." Although the company maintained that these were standard questions of the well-known Minnesota Multiphasic Personality Inventory exam and that the tests were only scored by computers and not used against employees, it eventually reached a settlement on the case, agreeing to drop the test and pay $2 million in damages.
Rent-A-Center did not acquire new stores in 1999 and focused on converting its recent additions to its way of doing business. It also launched a marketing campaign designed to improve the public impression of the rent-to-own industry. Television commercials, in both English and Spanish, were crafted to alleviate the uneasiness that many lower-income customers felt about doing business at a rent-to-own store. The emphasis was on consumers being empowered to enjoy upscale items that they would not otherwise be able to afford. Rent-A-Center would receive a major boost in its marketing efforts when it signed well-known football analyst and television pitchman John Madden to serve as the public face of its advertising campaign, including in-store signage as well as television commercials. The company could afford Madden's hefty fee and the requisite advertising budget because of a major jump in revenues ($1.4 billion) and net income ($59.4 million) in 1999. That trend would continue in 2000, as revenues rose to $1.6 billion and net income soared to $103 million. Furthermore, brand awareness improved significantly, much of which could be attributed to Madden. The company was also successful in better targeting its direct mail and, as a result, was able to free up dollars for even more broadcast advertising.
Rent-A-Center renewed its plans for growth in 2000. As the undisputed leader in the rent-to-own industry, which remained very much fragmented, the company was well positioned to take advantage of its size to open new stores, as well as to acquire underperforming operations that could be converted to a Rent-A-Center format. The company also branched into offering "pay as you go" Internet-access service. In October 2001 Talley announced his retirement. He was replaced as chairman and CEO by Mark E. Speese, who at the age of 44 already had more than 22 years of experience in the rent-to-own industry. He had joined Talley in 1986 and had been instrumental in the company's growth. In the short-term, Rent-A-Center was set to benefit from a troubled economy, which would undoubtedly result in more business from lower-income customers, but in the long-term it was also a company that was well managed and set to improve its dominant position in the rent-to-own industry.
Principal Subsidiaries: ColorTyme, Inc.; Advantage Companies, Inc.
Principal Competitors: Aaron Rents, Inc.; Bestway; Cash America International, Inc.; EZCORP Inc.; Rainbow Rentals; Rent-Way.