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Aaron explores new avenue for growth

Clint Engel, Staff Staff -- Furniture Today, September 2, 2002

Aaron Rents plans to acquire home furnishings retailer Sight'n Sound Appliance Centers in a deal that moves the primarily rent-to-own operator deeper into pure retail.

"If we are successful, then it opens up much larger opportunities for the company's future expansion," said Charlie Loudermilk, chairman and chief executive officer of Aaron's, which has more than 650 company-owned and franchised stores.

Oklahoma City-based Sight'n Sound is a furniture, appliances and electronics retailer with 26 stores in Oklahoma and Kansas with annual sales of about $60 million. Aaron expects to pay less than $12 million in cash to acquire it from owner Darrell Chabino.

The 33-year-old Sight'n Sound chain has not been profitable lately, Loudermilk said. Aaron plans to boost its business by adding its own successful furniture lineup and its RTO program, which it calls lease ownership. This differs from most RTO operations in that in targets a consumer who's a better financial risk, and requires monthly rather than weekly payments.

"In addition to selling merchandise for cash, credit card and credit, we will give customers a new option of leasing merchandise under our sales and lease ownership program," Loudermilk said.

Aaron considers this acquisition a test to see if it can acquire a traditional retailer and expand its business by offering the RTO plan, he said. The thought is that Aaron will be able to pick up additional business from consumers that the credit-oriented retailer typically turns down.

A success with Sight'n Sound could lead Aaron to look at acquiring other credit-oriented retailers, Loudermilk said.

The company had a similar idea two years ago when it was negotiating a much larger deal that never came to fruition — the purchase of Heilig-Meyers stores, before Heilig filed for Chapter 11 bankruptcy and began closing or selling most of its units.

Aaron later acquired more than 80 closed Heilig stores, successfully converting them to Aaron stores, but the big retail experiment was delayed until now.

The company should know if it has been successful within about six months, Loudermilk said.

"If we can ramp them up over the next 12 months to $70 million, we'd be pleased," he added.

While he believes Aaron can improve Sight'n Sound's performance with the addition of its RTO program and furniture assortment, "We're the first to admit we don't know the retail business," he said. "Part of this ... exercise is to learn the retail business from the buying to the advertising to the merchandising."

Loudermilk estimated that Aaron's straight retail sales — consumers buying merchandise not leased out previously — represents 15% to 20% of total business and has doubled in the past year. About 35% of the company's total revenues come from furniture, bedding and accessories.

Revenue this year, including business at its 215 franchise stores and 72 rent-to-rent units, is expected to reach nearly $750 million, Loudermilk said.

Under the agreement with Sight'n Sound, Aaron would acquire substantially all of the retailer's assets — primarily inventory — and assume the real estate obligations of the stores, including three in Oklahoma City, two in Wichita, Kan., and others primarily in small towns.

The acquisition will immediately increase Aaron's revenues, especially retail sales, but it isn't expected to be accretive to earnings right away, Loudermilk said. The deal is not expected to affect earnings guidance for the current year, which is in a range of $1.27 to $1.32 per share.

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