Aaron shoots for 2,000
Loudermilk: RTO giant can handle growth
By Clint Engel -- Furniture Today, March 20, 2006
Atlanta — Not long after Aaron Rents topped the 1,000-store mark with its rent-to-own division in 2005, it set its sights on doubling that number.
That's a scary thought. Some fast-growing home furnishings chains have burnt out when they got big, from Breuners Home Furnishings Corp. to HomeLife Furniture to Heilig-Meyers.
But don't think Aaron founder and CEO Charlie Loudermilk hasn't thought of that. He's even had some experience with it.
Years ago, the Atlanta-based Aaron's rent-to-rent operation (which rents furniture primarily to corporate clients) was on a roll. Loudermilk recalls it had grown to 186 stores when, in the mid 1980s — just as rent-to-own was coming on strong — "I lost it from a management point of view," he said.
"What happened to me then is what happened to Heilig," said Loudermilk, 78. "We had no bench strength, no infrastructure. I finally got my hands around it at 125 (stores).
"My job today is to make damn sure that doesn't happen again."
Today, rent-to-rent is a small part of Aaron's business — 58 stores and just over $100 million of its $1.26 billion in annual revenues. The driving force is Aaron's Sales & Lease Ownership, its rent-to-own business — a mix of company-owned and franchised units and the second largest RTO chain in the country behind Rent-A-Center.
Aaron's Sales & Lease Ownership division is still on a roll. Its 11.5% increase in same-store sales (for company-owned stores) in the fourth quarter of 2005 was its 16th consecutive quarter with an increase of more than 5%.
Aaron is counting on the division to get it to the 2,000-store goal by the end of 2008, primarily through organic growth (rather than acquisitions) and a mix of company-owned and franchise store locations. Acquisitions of a significant size, Loudermilk said, are getting harder to come by, and many of the prospects aren't desirable.
So far, Aaron's rapid growth in revenue and store count — from less than 500 RTO stores in 2000 to more than 1,100 today — hasn't come at the expense of profit.
With the exception of 2001 (when it acquired and began converting more than 80 Heilig stores), Aaron's net earnings have risen steadily from $25.6 million in 1999 to nearly $58 million last year. Its most recent guidance to the investment community projects a profit this year of $74 million to $79.5 million.
Aaron added a net 167 stores this past year, finishing with 1,198. That includes the 58 rent-to-rent stores, 392 franchise stores, and 748 company-owned stores under the Sales & Lease division, including nine RIMCO units — a tire-rim rental concept Aaron began testing in November 2004.
Revenue this year is projected to reach $1.3 billion and Aaron expects to add about 180 stores, including 70 franchise units.
Loudermilk said it's not far-fetched to anticipate Aaron eventually having 3,000 to 4,000 stores — one near every Wal-Mart. It has a backlog of 272 awarded franchisee stores, expected to open within the next three years.
"Our problem is getting the franchisees to go ahead and open stores, but we don't want them opening unless they can operate them profitability," he said.
Aaron has taken a successful RTO concept and improved on it, creating what it considers a hybrid form of traditional RTO and credit retailing that combines the best features of each model.
The stores, which average about 9,000 square feet, are larger than typical RTO stores and stock more goods, including brand names in key categories such as La-Z-Boy, Dell, Sony and Frigidaire. They typically offer more flexible payment methods for consumers and require fewer payments — monthly and twice-a-month payments vs. the typical weekly payment for many RTO competitors. That cuts down collection and administration costs as well as the costs to the consumer.
Robin Loudermilk, Charlie's son and Aaron president and chief operating officer, said 70% and 80% of the product in a typical Aaron's showroom is new and the rest used — roughly the inverse of many other RTO stores, he said.
"Our program, advertising, everything is geared to the customer owning the product," he said.
That keeps customers happy and, as Ken Butler, president of the Sales & Lease division, put it, keeps the stores from looking like dumpy RTO showrooms filled with previously rented product.
Furniture and bedding accounts for about 35% of sales. It's a category that held steady over the years despite the addition of goods such as computers and big-screen televisions.
Aaron's emphasizes furniture because of growing demand, said Charlie Loudermilk.
The stores show about 22 living rooms and about 10 bedroom groups in full or abridged form. Roughly half of the mix comes from the Aaron-owned MacTavish Furniture Inds. factories, which produce upholstery as well as desks and other case goods for the rent-to-rent division.
Aaron's aggressive growth plans don't seem to be putting its long-term prospects at risk, says industry analyst Jerry Epperson.
"A lot of it has to do with the stability of having Charlie Loudermilk around," said Epperson, managing director of Richmond, Va.-based Mann, Armistead & Epperson.
"Charlie told me his plan for the business back in 1991, and he's done every stage of it just as he said he would."
Aaron also benefits from Gil Danielson, who Epperson considers the top chief financial officer in the RTO industry. He said Danielson has put in controls and systems for franchisees and Aaron's corporate stores "that everybody else wishes they had.
"You have not seen Aaron Rents have a major accounting issue come up and bite them over the years like almost all the other rental companies have," Epperson said.
What's more, Aaron's has managed to stay innovative and competitive, he said.
"It's everything from their store locations, which are in nicer places than most RTO stores, to the quality of the merchandise to the way they stand behind the brands they carry to their price," he said. "Some of the rent-to-own companies allowed their pricing to get completely out of whack and come under heavy criticisms and even some consumer resistance, but Aaron has not."
Butler said the company has studied many of the retailers that have imploded after rapid growth, and feels certain Aaron isn't in the same company.
"I can't say it can't happen, but we are very sensitive to that and strategically plan our growth," he said. "When we say we're going to go to 2,000 stores, we've got a plan in place for that. The key is management."
Loudermilk said he frequently questions Butler on Aaron's personnel strength and on how many potential mangers the company has in the field and in the pipeline.
The day Butler reports back that Aaron is weak in the field is the day Aaron slows down, Loudermilk said. But that's not today.
"We're ready for the growth," he said, "and I feel good about it."
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