Law change prompts new tactics in credit

Furniture retailers try layaway, rent-to-own

Clint Engel -- Furniture Today, February 23, 2010

HIGH POINT — In this environment of tightening credit standards, many furniture retailers are looking at consumer finance alternatives to help keep customers and business in their stores.

And they're finding them in various forms, from so-called second- and third-look finance companies that are willing to take on more risk for a price, to rent-to-own operators making plays for business in furniture stores. 

Jackson, Miss.-based Miskelly Furniture, for instance, has brought in a secondary finance company to take a look at credit turndowns from its primary consumer finance source, Well Fargo. Tower Loans, based in Jackson, has helped Miskelly get back some of the business that would otherwise be lost, offering a basic 12-month, no-interest plan, said Tommy Miskelly, a partner in the business with brothers Chip and Oscar.

The three-store retailer saw a spike in credit turndowns early into the credit crisis, a little over a year ago. Miskelly said the situation has since improved, but "we're definitely not out of the woods yet."

That's why the company is not only adding the second-look lender, but is also considering other alternatives for consumers, including layaway and a rent-to-own arrangement with Rent-A-Center.

"I'm talking to more and more retailers doing layaway," Miskelly said. "That seems to be a very popular thing right now. Everybody has a different take on how they want it to work, but I know a lot of stores are having some success with it."

Both of those tactics, and others, have been implemented by the owners of 11 Ashley Furniture HomeStores in the Carolinas and Georgia, Charlie Malouf and Jonathan Ishee (Ishee happens to be a nephew of the Miskelly brothers). 

Malouf said that lenders like Citi Financial, which his company uses, "have gotten a lot tougher on that marginal customer" who would have qualified or a free-financing offer just a couple of years ago. His HomeStores run about 1,000 consumer finance applications through Citi each month, and said the approval rate has declined from 65% to 70% a few years ago to about 50% today. 

"That's a big hit," he said. "When customer credit is squeezed like that and (a consumer can't afford to pay cash) it certainly hurts." 

But the stores have added options, including a secondary lender, Regional Finance of Greenville, S.C. Consumers that get turned down by Citi are turned to Regional, which checks credit and with acceptance, offers consumers a simple-interest contract, with a fixed rate ranging 17.99% to 23.99% and payoff terms that typically run 12 to 36 months. 

Regional usually finances up to a $5,000 maximum, said Scott Juvelier, a district supervisor with the company in Charlotte, N.C. 

Juvelier said the lender, a division of Regional Management Corp., is doing business with "several dozen" furniture stores in areas where it has branches (the Carolinas, Tennessee, Texas and Alabama) and is expanding its business with the industry. 

Malouf said sales through Regional for his HomeStores account for about 4% of total business, calling it an "in-between option" for customers not approved by Wells for free financing, but also not interested in rent-to-own. What's more, the Regional plan doesn't cost the HomeStores anything to offer and the retailer gets paid 100% of the sale upon delivery. 

Malouf's HomeStores also offer rent-to-own through RAC Acceptance, part of the Plano, Texas-based Rent-A-Center. RAC has an employee in each store helping consumers who don't have the credit or cash to pay today.
The retailer takes a bigger hit on this type of sale, Malouf said. RAC pays the retailer 1.5 times the cost of goods sold, and then takes over the transaction. So, for instance, a $1,000 (cost) furniture group that the store might typically sell for $2,000 retail, instead is sold for $1,500 to RAC Acceptance, which then completes a rental purchase agreement with the customer.

RAC marks up the goods, but because the HomeStores are taking a margin hit (33% to 38% vs a more typical 48% gross margin), "it enables RAC to charge the customer a lot less than they would otherwise," Malouf said. Both the HomeStore and RAC are shortening their margins, he said, which keeps the offer competitive and the customer happy.

RAC has been a "great partner," Malouf said, and currently accounts for about 8% of the stores' overall sales. Business through the program tends to be cyclical and is at a peak right now with the influx of tax refund checks.
Another advantage to the Regional and RAC programs: They both have other area locations, which leads to referral business.

Malouf and Ishee's stores offer layaway, too. This helps that customer, who, for instance, is interested in a short-term promotion offering a big-screen television with a furniture purchase, but is short on cash or credit to pay for it today.
For the HomeStores, it works like this: Customers pay 15% of the purchase up front and then make monthly installments for up to six months until the balance is paid off. Ashley doesn't order or reserve goods until they are paid for in full. 

The retailer only recently brought layaway back after a several-year hiatus, Malouf said, so it doesn't have much of a track record yet. But delivered layaway sales for the month through mid-February accounted for about 1% of business, he said, adding that customers usually come in within 30 to 60 days to pay off their balances.

"For a furniture retailer the benefit is it gets that customer out of the marketplace," he said. "And ultimately, you want to be easier to do business with. If a customer wants to give us money, we want to take it. That's a borrowed philosophy but definitely one we've accomplished." 

For Mueller Furniture in the St. Louis suburb of Belleville, Ill., it's not so much the credit approval rate that has suffered as the purchase limit banks are paring back on for customers. 

"Instead of getting $5,000, they're getting $4,000," for example, said Mark Mueller, marketing director of the family-owned store. So the retailer is getting ready to offer a new service called Flex Pay Plus, he said.

The retailer's primary consumer finance lender is Wells Fargo, and Mueller said the bank is fast and efficient with notice of approval within 90 seconds of sending the application. But now, when the approved amount for the typical 12-months, same-as-cash financing is less than needed, Mueller will have the Flex option to cover the difference. This will mean a second bill for the customer, and is a 12-month, with-interest plan, but the interest is only on the balance not covered by the primary lender. 

At Miskelly, which also has primary and secondary lenders, Tommy Miskelly and his brothers aren't quite ready to pull the trigger on the RTO and layaway alternatives they've been evaluating. But because long-term business conditions remain iffy, they're keeping their options open. 

"Maybe this is the new normal. Maybe it gets worse. Maybe it gets better," he said. "But either way, there's a place for those second and third looks in your stores."