Retail Sales Down, Margins Up at Aaron's

Implications: An analyst listening to the recent RNT earnings call asked a simple question: "Why were retail sales down in Q4?" The answer is equally simple, and has some interesting implications.  Aaron's management commented on the decline in retail sales, the corresponding margin increase on customer payouts, and the reason cash prices increased in the first place.

Analysis:

An analyst listening to the recent RNT earnings call asked a simple question:  "Why were retail sales down in Q4?"  The answer is equally simple, and has some interesting implications. 

The company increased retail prices in the second half of 2006.  Retail pricing at Aaron's is tied to the 12-month lease rate of the product.  Take the 12-month lease rate, multiply it by 8, and you had the cash price - until a recent decision by the New Jersey Supreme Court.

A Rent-A-Center customer in New Jersey got a judgment against RAC on the basis that its pricing violated state usury laws.  In order to comply with usury laws, rent to own operators increased their cash prices.  RNT increased the multiple of its 12-month lease rate from 8 times to 9.5 times in order to protect the existence of its 12 NJ stores (6 company-operated, 6 franchisee-operated).  It could have left pricing in its other 1300+ stores alone.  Instead, it increased the multiple company-wide (excluding New Jersey) to 9 times.  The bad news?  Retail sales go down when pricing is less competitive.  The good news?  Retail sales are a small portion of a rent to own store's revenue.  The even better news?  An increase in retail prices leads to a corresponding increase in margins on all agreements paid out early, including 90 days same-as-cash.

Early payouts at RNT have trended up consistently over the past few years.  Q1 is tax refund time, and customers are paying out agreements left and right, and earlier than ever, with instant-refund places sprouting up on every corner.  This is time of year when RNT will reap benefits from its retail pricing increases.