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Rent-A-Center: A Cheapster's Nemesis Print E-mail
(4 votes, average 4.75 out of 5)
Personal Finance - Credit Cards
Written by Omie Ismail   
Monday, 09 November 2009 09:23
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Rent-A-Center: A Cheapster's Nemesis
Inefficient and Expensive
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Its amazing to me that with the widespread availability of credit from both financial institutions and stores that the Rent-to-Own industry even exists.  Is it possible that there are enough uninformed Americans to make this a $7 billion plus industry each and every year?  Unfortunately, I know the answer to that question.

There are over 8,500 rent-to-own stores in America and the 800 lb gorilla is Rent-A-Center (RAC) which is a publicly traded company.  RAC (ticker: RCII), operates over 3,000 stores and has nearly $3 billion in revenue.  They have a spokesperson, Magic Johnson, who's friendly mug dorns their website.  But analyzing their most recent Annual Report shows no magic for consumers and will give you an idea of how absurd their rental agreements are.

RAC breaks out their revenue as follows:

Rent_a_Center_2008

These amounts are in thousands so add three more zeros and this is how much money one company is making by renting.  You can see that about 10% of all the revenue is from purchases.  People who decide they will buy that TV before the 90 days is up.  In that case, "Merchandise Sales" you can see that RAC is making a 24% margin.  In other words, they are buying a product for $100 and selling it for $131 ($31/$131 = 24%).  Now that's a pretty good margin for most retail items but it pales in comparison to the financial metrics for the top line.

Renting is how RAC makes the big bucks and the numbers are staggering.  77% margins are the kind of margins that people associate with the software industry and RAC is doing it with TVs and couches.  Basically, RAC is buying a product for $1,000 and renting it out for $4,380! ($3,380 / $4380) =77%.  Super profitable for them but painful if you are the guy paying the extra $3,380.



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lakeview  - Thanks |2009-10-19 20:25:55
The people who can least afford these RAC scams are targeted by celebs that have everything. Shameful. Thanks for the insightful article.
RAC Employee |2009-11-12 08:03:49
I work at Rent-A-Center and am hoping it’s OK if I pipe up with a different POV and info that I Googled and found on Nasdaq. Sorry if this is long, but you said a lot!

Rent to own isn’t right for everyone, but I know our customers use us because we take small payments for items and provide included services in a way that’s more manageable and makes sense for them. If they're laid off, for instance, or really for any reason, they can return an item, for no penalty with the pick-up being no extra charge and when they want the item back, they can pick up the payments where they left off, again with the delivery being no extra charge. Try to do any of that at a regular retailer and see how it goes over. Too, getting lines of credit from banks or retailers is not even an option for many of our customers because other companies often turn our customers away. Especially now – it’s simply not true that credit is available to everyone and while it’s great to save and then have the total payment ready and waiting for something that you’ve found the absolute lowest price for, the truth is that sometimes things break and you need reliable replacements now, in a way that you can actually pay it.

I searched consumer stocks by profit margin on NASDAQ and found that there are hundreds of companies that have a higher profit margin than Rent-A-Center’s 5.8% margin:
http://www.nasd100.com/2009/11/ranking-consumer-stocks-by-profit-margi n.html Some of the companies with higher profit margins are Bed Bath & Beyond, Luxottica (Lenscrafters) Coke, Pepsi, Comcast, Mattel, Kellogg, and McDonald’s, just to name a few. (I’m no finance person, but I know it’s profit margin, not gross margin, that tells you what a company walks away with in terms of profit.)

Our customers get a different benefit from using us (automatic acceptance/being able to drop the rental and pick it up later without losing what they paid in) rather than retailers and we have different business costs. Selling to customers who do not have credit has a higher business risk - we spend more labor hours doing things like ensuring that we get payments. Since people can move in and out of the rental, that means we have to spend a bunch in delivery trucks, gas and labor to drop off and pick up merchandise. Since we maintain products while on rent, we have those costs, too. A Best Buy or other retailer just doesn’t have those types of costs – it’s a different business model and a different customer benefit.

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