Rent-A-Center – Competitive Positioning & Demand Amid
Stimulus Crunch – 5 August 2021
Disclaimer
The information, material and content contained in this transcript (“Content”) is for information purposes only and
does not constitute advice of any type or a trade recommendation and should not form the basis of any investment
decision. This transcript has been edited by Third Bridge and may differ from the audio recording of the Interview.
Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability
for the Content or for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the
Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge.
Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification,
reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from,
transferring or selling any Content is strictly prohibited.
Specialist: Mitch Jones (MJ)
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Former VP, Operations Support at Rent-A-Center Inc
Agenda:
1. Write-off rates amid exhaustion of stimulus, plus LTO (lease-to-own) business model evolution
2. LTO options – synergies, sustainability and inventory management considerations amid store closures
3. Rent-A-Center (NYSE: RCII) vs Aaron’s (NYSE: AAN) – retailer exclusivity and key differentiators
4. Franchise and e-commerce dynamics, including customer segmentation
Contents
Q: Could you outline how the LTO [lease-to-own] industry has evolved over the past few years, highlighting
the categories that are in high-demand and the top players?
Q: You referenced the B2B2C category model. When did this model take off and why do you think it came
about? Was it because players such as Rent-A-Center and Aaron’s didn’t want to hold many products on
their balance sheet?
Q: It seems there is more growth and opportunity in the LTO vs the RTO [rent-to-own] model. What are
some of the LTO model’s benefits or weaknesses around cost? Are there fewer overheads or is more
marketing involved, considering the consumer is probably unaware of the difference between the two?
Q: You mentioned potential drawbacks around returns and consumer perception. How much does that fall
to the manufacturer or the retailer to say that they are receiving a high volume of returns on a product and
Rent-A-Center has to take some of that on?
3
4
5
5
Q: To what extent does Rent-A-Center’s apparent lead in the LTO option provide a competitive advantage or
first mover’s advantage vs peers such as Aaron’s? The competitor also adopted the LTO model and had a
strong team backing its partnership with Progressive before they split at the end of 2020.
6
Q: What is stopping retailers from working with multiple payment processors or partners that are willing to
operate in the LTO market?
7
Q: How might the LTO model prevail or change as Rent-A-Center’s revenue mix shifts towards mainly
online channels? Could you discuss the digital aspect when consumers are ordering on a computer or on
their phone? How big or significant does the marketing aspect need to be to get this option out there for
customers?
8
Q: Your comments imply lots of synergies within the LTO business model, so why wouldn’t Rent-A-Center
play in all channels? The bricks-and-mortar retailer takes on much of the marketing cost, the online platform
offers D2C and the physical footprint can be used for warehouses. Could you also explain the costs involved
with the digital model when a consumer is trying to work out how much they are being charged for a
product? Would a customer buying a USD 500 couch eventually pay back USD 1,000?
8
Q: Which tranche do most of Rent-A-Center’s consumer base fall under? Would the best tranche be tier 3,
where they buy out the product?
9
Q: Consumers seem incentivised and motivated to pay as soon as possible, but the most lucrative aspect is in
that 6-18-months timeline. Is this where you noticed the most returns or breach of leases? At what stage
would Rent-A-Center have to take back the product, find space for it and sell it? You talked about sending
things to Texas and the issues there. How did that develop and which segment or customer profile did it
concern?
10
Q: You suggested that the LTO model was unsustainable. Are you referring to the growth we’re noticing with
Rent-A-Center and new customers who perhaps haven’t hit that timeline to recognise if this is something
they want to re-enter? Are you saying these sales might be one-time events that are boom and bust?
11
Q: Could you outline the financial risk of Rent-A-Center’s LTO options? This customer is potentially
underserved and the product is being geared towards a consumer that wouldn’t get access to traditional
credit, but it seems an attractive value proposition for those who have strong credit, if they’re willing to buy it
11
out early.
Rent-A-Center – Competitive Positioning & Demand
Amid Stimulus Crunch
Transcription begins at 00:00:05 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Rent-A-Center – Competitive Positioning &
Demand Amid Stimulus Crunch. I am Nyree Hinton, and I will be facilitating today’s Interview with Mr Mitch
Jones, former VP of Operations Support at Rent-A-Center Inc.
Mitch, before we start today’s Interview, please state I agree or I disagree to the following statement: You
understand the definition of material non-public information and agree not to disclose any such information,
or any other information which is confidential, during this Interview.
MJ: I agree.
NH: Thank you, Mitch. Could you start with an brief introduction to your background?
MJ: I was with Rent-A-Center for almost a little over 17 years, and I served in a variety of different capacities,
from field operations to strategic planning and eventually executive, where I reported to the CEO or the COO.
The COO at the time is the current CEO, Mitch Fadel. To that capacity, I watched us go through a lot of
victories and face a lot of headwinds. One of the roles I was tasked with was competitive intelligence and so I
have a pretty good grasp of the competitive landscape but also the players in the arena. I’m still in the sub-
prime market, just in secondary lending now in my current role, but I still have to stay abreast of those same
competitors because the market is changing very rapidly where lease-to-own and fintech are crossing lines so
it’s a very interesting time right now.
[00:02:05]
Q: Could you outline how the LTO [lease-to-own] industry has evolved over the past few years, highlighting
the categories that are in high-demand and the top players?
MJ: Coming up in the industry, originally, in the early 2000s, there was a lot of stigma around Rent-A-Center
and some of the other rent-to-own players, and this is before the lease-to-own option, which I’ll define in a
minute, really came about. That stigma has changed now and Rent-A-Center has become a little bit more of a,
I guess, appealing option for some people. I think part of that’s because there were some changes to their
business model but also the lease-to-own option. Let me explain the two differences. The rent-to-own option
that most people consider is, there’s a bricks-and-mortar location that you go and pick out a product from a
store and then you decide you want that item, that item is delivered to your house and you make incremental
payments on it until the definition of the lease is over or until you purchase out of that lease early. The lease-
to-own option now has been more defined by what’s a B2B2C category where, let’s say, Rooms To Go or
Ashley Furniture, these big box retailers, Rent-A-Center in early 2008 created a partnership with some of
those guys and they created this lease-to-own option and it really was the onset of fintech, as you would
describe. What would happen then is a customer would come into Ashley Furniture or Rooms To Go, they
would pick out their item they wanted and they would try to get approved for traditional financing. If that
situation happened currently, what would happen is, typically, a big box retailer would have a primary
financier and they would have a secondary financier. What Rent-A-Center did is we came in and said, “What if
you don’t use traditional financing and you use a lease-to-own option?”
We actually became tertiary lenders. The customer got turned down for traditional credit, they would come
Private and confidential 3
and apply at a kiosk inside the Rooms To Go or Ashley Furniture, one of the Rent-A-Center’s employees would
be there and they would walk them through the process and what would happen is Rent-A-Center would buy
the product from Ashley Furniture or Rooms To Go at a pre-negotiated discount or sometimes it wasn’t even a
discount and then they would put that on a lease-to-own agreement. Usually, most of the lease-to-own
agreement are turn-based so it would be, I paid USD 1,000 for the product, I’m going to make the lease worth
USD 2,000 or USD 2,500 at full term. That’s how Rent-A-Center make their money is they would make the
money on the term of the lease paying that modifier of 2x or 2.5x. Those are the two different models that
we’re talking about. When I say RTO, I’m thinking bricks-and-mortar, if I say LTO, I’m talking about the
B2B2C location. Honestly, all the growth for the two biggest players in this arena has been in the LTO option
in the last decade. The traditional RTO model has really been in decline. You can see by looking at store counts
the volume drop of store counts for the bricks-and-mortar locations, which is not surprising if you think about
the way the internet has changed and how people get things delivered, etc, etc, that’s why we see a lot of
bricks-and-mortar locations closing.
[00:06:51]
Q: You referenced the B2B2C category model. When did this model take off and why do you think it came
about? Was it because players such as Rent-A-Center and Aaron’s didn’t want to hold many products on their
balance sheet?
MJ: Originally, it was designed as just simply an option to be incremental revenue and maybe target some
customers that initially would never walk in our doors. The initial target of the customer was the customer that
was right on the border of being able to get credit, where the traditional RTO customer, they were much less
likely to be closer towards creditworthy, they’re typically 400, 500 credit score. The thought was, we could
increase our customer base by getting a little bit higher up in the socioeconomic demographic without
cannibalising ourselves, and we can do this by creating partnerships with these big box retailers. That was the
initial reason that the whole industry came about. Like I said, I was on the tip of the spear of this because I was
in strategic planning at the time and I was very much involved in the forefront of this industry.
We took a very, my God, it was a duct-taped and pieced-together approach to get our systems into the Ashley
Furnitures, the Rooms To Go of the world, so it wasn’t by any means a pretty process but it started to work.
We started to see in certain retailers we were getting a lot of traction with this approach and we were doing it
with a very, very mediocre product at the time because it wasn’t a good process. We started putting more time
and effort into the process, we started building infrastructure around the leadership teams and even
diversified the two businesses where they had completely separate leadership and divisional vice presidents,
regional directors, district managers, etc. It was a completely bifurcated system which we eventually realised
that wasn’t sustainable too, that’s a different story.
I would say that it started hitting its peak in probably 2013-14, and we didn’t (inaudible 09.46) at it but our
number one competitor was Aaron’s. They went out and purchased Progressive Leasing and they overpaid
tremendously for that company, I think they paid damn near USD 1bn for it. It became a really good move for
them because their CEO of Progressive was a pretty dynamic guy who had some fantastic people skills and
leadership skills and he ended up turning Aaron’s around for the better, and Progressive. I don’t know if
you’ve kept up with recent times but Aaron’s recently re-split, they split their LTO and RTO options into two
separate companies and now they’re both publicly traded but they’re under different stock tickers.
It was interesting. During that time frame, Aaron’s was really doing great with their bricks-and-mortar
locations and we were doing okay, they were really hot and heavy on our heels and then they went out and got
Progressive and it changed the game for them. To be quite frank, Progressive has way more accounts and
doors than Rent-A-Center’s lease-to-own option. I think that Rent-A-Center’s lease-to-own option now has
been renamed Preferred Lease, it was AcceptanceNow and now it’s called Preferred Lease, but Rent-A-Center,
a calendar back, I think it was last year, they went back, they bought Acima Finance, which was primarily they
bought Acima for their technology because they had a much better mousetrap, the (inaudible 11.45) design
system.
Private and confidential 4
[00:11:53]
Q: It seems there is more growth and opportunity in the LTO vs the RTO [rent-to-own] model. What are some
of the LTO model’s benefits or weaknesses around cost? Are there fewer overheads or is more marketing
involved, considering the consumer is probably unaware of the difference between the two?
MJ: There are some weaknesses in the LTO model and some strengths. One of the things you mentioned is
you don’t have to sit on physical assets, the partner is doing that for you. One of the weaknesses right off the
bat if you go back to what I was saying is that you’re purchasing that product at retail cost from the big box
retailer. You’re not going to be able to leverage their warehouse discount because then you’re cutting into the
crux of why you’re even in the Ashley Furniture or Rooms To Go is because they’re trying to make more sales
at their margin so you don’t get a discount on the product but you don’t have to carry the asset. The delivery is
done by the retailer so you don’t have to worry about the structure of logistics, you don’t have to deliver the
product, you don’t have to pick it up, etc.
Also, that brings some interesting legalities around the lease-to-own option, is because part of making any
lease-to-own option legal is that you have to be able to return the product if you can’t pay for it or if you don’t
want it any more. The retailer is not going to pick up that product so you have to figure out a logistics
programme where you can pick up products if the customer can no longer afford it or they don’t want it. With
Rent-A-Center, what they’ve been able to do in the past is leverage their bricks-and-mortar locations to do
these pickups, but then you create some brand issues when a Rent-A-Center truck rolls up to your house and
you’ve been doing business with Lease Preferred. The stigma around still exists and especially a Rent-A-Center
truck might not roll into some of these neighbourhoods that have this lease-to-own option. It’s created issues
for us in the past where a customer is, “I don’t want that truck here. What are they doing here? I’m not doing
business with Rent-A-Center, I’m doing business with AcceptanceNow or Lease Preferred,” but that’s not been
a huge issue.
The bigger problem is having an outlet to pick up those assets and then what happens is now you have a super-
expensive asset you’ve picked up, you’re still carrying the remaining value of that asset on your balance sheet
and what do you do with it? I know for years we would funnel that product back into the Rent-A-Center
bricks-and-mortar locations which, again, it created some issues, especially in areas where we had a high flow
of the LTO business, it can overwhelm a section or subset of stores with product that’s just flowing in that’s
super expensive. Again, there are some good parts to that is you would have product that may traditionally
never make it to the Rent-A-Center store that now is there. This problem hit pretty much critical mass around
2016, so much so, and I led this operation, this is why I know it, I had to create two pop-up stores, one in
Houston and one in Atlanta, where we had a hotbed of activity from the LTO. We had so many returns I had to
basically lease big box stores, fill that, and then get the logistics to have those products shipped to those two
locations so that I could sell them dirt cheap. The reason we were selling them dirt cheap is that we already
bought them, so the money was spent and it was all about creating cash flow so we were selling USD 1,000
couches for USD 300 in this big box room. There are certainly some challenges around that logistic.
[00:16:43]
Q: You mentioned potential drawbacks around returns and consumer perception. How much does that fall to
the manufacturer or the retailer to say that they are receiving a high volume of returns on a product and Rent-
A-Center has to take some of that on?
MJ: You took it to where I wanted you to go with this, so thank you. The one thing that we learned is that no
matter what we did, it was never enough for the retailer and they would come back to us and, “We’re going to
charge you a finder’s fee to acquire these customers because we spent the money to market to these customers
that came in. Not only are we going to charge you full cost for the product, we’re going to charge you a USD 75
fee per agreement that you write.” Things actually got worse and were getting worse. There was always a
pressure on, because the way we did things then, which I finally talked Rent-A-Center out of this and changed
Private and confidential 5
it, early on and for the last two or three years when they finally started to change, Rent-A-Center would have
associates in most of these locations. What that meant is that you had our co-workers inside of an Ashley
Furniture or Rooms To Go or worse, sometimes it was some small mom-and-pop places that we had signed on
to do business with us.
They eventually were, “Why don’t we just train your guys to be salespeople too?” Our employees ended up
being their employees and to be quite frank, it was a little bit of a pissing match between the relationships
between us and retailers. One of the examples is Conn’s. Conn’s was one of our early partnerships and were
one of our biggest but, I guess it was in 2016, or no, 2017, our old CEO came back after we removed our
previous CEO, Robert Davis, Mark Speese came back. Mark, who, and I had a great relationship, he trusted me
a lot, he came to me and said, “I want you to evaluate these relationships with some of these vendors.” I took a
deep dive into it with my team and some of these vendors were just raking us over the coals, and Conn’s was
one of them. I went back to Mark and I was, “Mark, Conn’s is killing us.”
We built a waterfall into Conn’s where, when a customer applied for credit and they got turned down, they
automatically waterfalled through our application and approval system, and so the customers were knowing
right away without any delay if they got turned down for credit, they were still approved for a lease-to-own
option. What we came to find out was after we started doing some digging and review that they were sending
customers through their waterfall to us that they had previously charged all from their own financing and they
simply didn’t care what they sent us because they just wanted us to write business for them. Every year, they
came back to us, “We need you to write another percent or two.” When we quit that relationship with Conn’s in
2017, we were billing almost 15% of Conn’s revenue, and that’s when Mark went back to the CEO of Conn’s
and said, “We need to make some changes here. We’re really getting killing in this model,” and they guy was, “I
don’t care, it’s your problem.” Mark said, “Alright, we’ll be out in 60 days,” and that’s what we did.
That’s the way these relationships go because the retailer doesn’t care, it’s our problem, not theirs. Now,
because this option has gotten way more mainstream now and there are so many players now, you’ve got
everybody and their brother in the fintech business, you’ve got FlexShopper, you’ve got Snap, you’ve got
America’s First, then you have Lease Preferred, Rent-A-Center and Progressive for Aaron’s, and so now it’s
getting more mainstream. I’m not really sure if that issue still persists because I think they all know that they
need to have this tertiary model to approve customers who can’t get through with traditional credit or they’re
going to be at a competitive disadvantage against the other big box retailers.
[00:21:51]
Q: To what extent does Rent-A-Center’s apparent lead in the LTO option provide a competitive advantage or
first mover’s advantage vs peers such as Aaron’s? The competitor also adopted the LTO model and had a
strong team backing its partnership with Progressive before they split at the end of 2020.
MJ: When this industry first kicked off, we were fumbling along because it was new and we were trying to
figure it out. I think we made, what we thought then were strategic advantages turned out to work against us
later. I’ll give an example where I said earlier, if you walked into a Rooms To Go, you got turned down for
traditional financing, initially, because we didn’t have technology in place, it was very manual. They would
walk the customer over to one of our employees that was hanging out in the store waiting for a decline to come
through. Initially, and probably for the first three or four years, we had an advantage because we had an
employee in there that could explain the agreement and really talk the customer through what they’re getting
into and make sure that they were comfortable with it, but at the time, those same locations did the collections
for these customers, so they would call passive customers and they would call collections.
To get to where I’m going is a couple of things caught up to Rent-A-Center where Aaron’s/Progressive really
started to kick our butts a little bit. Early on, when we didn’t have any competition, this model worked great,
but we didn’t invest, and I kept pressing the company and the leadership to invest in technology to be able to
better serve this clientele and the customers, and it was, “We’re doing fine, blah, blah, blah.” You know how it
goes. If you’re not evolving, you’re dying, and nobody wanted to hear that. Then Progressive came along and
they came along and their model was completely different than ours, and this is the model that almost every
Private and confidential 6
fintech/LTO company has adopted now. They came in with a really lean, agile product for their point of sale
and their application process that was easily open API that could connect to any retailer’s website or through
their credit approval process and waterfall through.
What they did is they approached it where they would train the management team and the sales team what the
lease-to-own option is. The fact that salespeople don’t care how they get a sale, right, they don’t care if it gets
financed through credit, through lease-to-own, they’re going to get paid and they’re going to get their
commission. They trained the salespeople on what the agreement is and, of course, the salespeople see the
advantage is, “Shit, I’m going to get some sales that I would have missed because I have this other option
now.” With this lean package that they could easily install and they made it really simple and they were able to
somehow pin down their agreements to two pages where ours is 13 pages, and they made a really neat, concise
package and that’s when the whole industry changed.
When Rent-A-Center bought Acima, they bought Acima clear for one reason and one reason only, it was
Acima’s intellectual property around their point of sale and their integration and open API. Now, slowly, and if
they open new stores, they’re using Acima’s, if they open new locations with new partners or if they get a new
partner to sign up with them, they’re using the Acima product and they’re calling it Lease Preferred. Any of the
old locations are called AcceptanceNow and they’re basically using the antiquated software that we had, but
Rent-A-Center is in the process of backfilling all the locations to this new software. What will happen here?
Let’s try to summarise this real quick. If you think about Rent-A-Center’s what we consider a competitive
advantage, it also created more cost, a tremendous amount of labour compared to Progressive, so right now,
you’re dipping into your overhead.
The other thing we learned is that the retailers didn’t particularly like us being in their stores. We got lapped
competitively and we had to make changes to that model to try and catch up, and they’re still playing catch-up.
Now, I don’t think anybody has a competitive advantage over the other. Right now, who owns the competitive
advantage is who owns the exclusivity to the biggest partners. For Rent-A-Center, they’ve still been able to
hang on to Ashley Furniture and Rooms To Go, but Progressive has got Lowe’s, I think they even signed Home
Depot up, so really, the competitive advantage is based on finding the retailers that are more popular and
getting involved in getting behind those doors because, basically now… there is one difference and that’s
pricing.
Now that you can run a cheaper, leaner model, instead of having to do a 2x or 2.5x modifier of what you
bought the product for, both companies have been developing, I’m going to use a word that’s highly overused,
but they’ve been developing pricing algorithm. To try and figure out price elasticity and where they should be
on some of the products because some of the products, going two times doesn’t make sense. Some consumer
electronics, you can’t get USD 1,000 for a USD 500 PlayStation, nobody is going to pay for it, nobody is going
to pay that. They’ve realised that on some of the smaller items, they have to use different pricing multipliers.
Almost all of them now are at a multiplier of 1.8 to 1.5, but because they’re both using somewhat of the same
pricing structure, even price isn’t necessarily competitive. I would say the bigger advantage is who can keep
the big fish happy and stay in their locations as the tertiary model.
[00:29:38]
Q: What is stopping retailers from working with multiple payment processors or partners that are willing to
operate in the LTO market?
MJ: I know Progressive and Rent-A-Center had exclusivity in our agreements. When we signed a partner, you
can’t use another lease-to-own model and Progressive had the same thing for when they signed a new partner
up. They had quick exits though. Most of our exits were, 60 days that if you decided and then we would be out
in 60 days and then they could bring another partner in, but everybody that is in this space now has exclusivity
in their contracts because they fight hard to get those doors and you don’t want to lose them or fight against a
competitor inside that location.
Private and confidential 7
NH: Are these agreements very store-set specific or is this on a much larger environment within a region?
MJ: Typically, when we landed a brand, we would get all their locations. Rooms To Go, we were in every
Rooms To Go, except for there are a few states where the model is not technically legal, like Minnesota and
Wisconsin. They have laws banning lease-to-own so in those situations where they had big box retailers in
their stores, we couldn’t go there, we didn’t have a model that would work.
[00:31:40]
Q: How might the LTO model prevail or change as Rent-A-Center’s revenue mix shifts towards mainly online
channels? Could you discuss the digital aspect when consumers are ordering on a computer or on their phone?
How big or significant does the marketing aspect need to be to get this option out there for customers?
MJ: Here’s what’s really funny about this model, is that all your marketing, other than marketing to inactive
customers that you’ve acquired already from a retailer, there’s really no marketing for you. The marketing is
done by the retailer to get them to the website and to the store. One of the things that Rent-A-Center has done
and this just got announced, I don’t know if you saw, but they’ve created a platform where it’s more like
FlexShopper, I don’t know if you’ve ever done any research on FlexShopper or seen them, but FlexShopper
allows you to shop anywhere and they create the lease-to-own programme by, basically, they buy the product
via a virtual credit card to the retailer and then, once that happens, they own the product so then they turn
around, lease it and create the lease all in one process.
Rent-A-Center has got the same thing that they just started through Acima. I think that’s where you have some
competitive advantage because you don’t have to get the retailer involved. You can just buy it for whatever the
retailer sells it for and you don’t have a partnership, so it removes a lot of the headache. It can all be done
digitally, from creating the agreement, the customer signs, DocuSigns, and they can manage their account
right through an app on their phone or through a website and they can see how much more they have to pay,
they can send emails if they need help or if they need support with the product. I think that’s where the future
is going to go, I really do because I can’t imagine that it’s going to continue to be sustainable when the partner,
from Ashley and Rooms To Go, they’re going to continue to drive to want more and more and more.
I just don’t think it’s a sustainable model for long, long term when, if I’m a consumer, I can pick up my app
and buy anything I want and then have it done on a lease-to-own agreement. It doesn’t hit my credit and I get
what I want, why would I care. I don’t care who I use, I use whatever is convenient or whatever has the best
financing on lease-to-own terms or the best cost. Then there come some unique problems with that model too,
is that now, you have to market your app because the retailer is not doing the marketing for you and then you
have to get your name out there and then you have to also get people to understand how it works because it’s
pretty complicated.
On the surface, it seems like it’s, that sounds easy but it’s pretty complicated what has to happen to make all
those things work. I think there are some layers to that. I think the way Rent-A-Center is approaching it is
they’re trying to continue to land partnerships when they try to grow their app. I know FlexShopper, that’s the
only model they have, and they’ve been around, I wanted to purchase FlexShopper in 2013 and they came back
with a ridiculous price for us to buy it and I wasn’t going to buy it at that, because I was, “They’ve got this
technology, we’ve got to get ahead of the game.” FlexShopper also is a small company and they didn’t have the
kind of capital and backing that a publicly traded company like Rent-A-Center would have and they didn’t
have USD 400m or USD 500m in the bank. It didn’t work out and now everything is going full circle. I’ll sit
back and say that I saw the future a little bit.
[00:36:31]
Q: Your comments imply lots of synergies within the LTO business model, so why wouldn’t Rent-A-Center
play in all channels? The bricks-and-mortar retailer takes on much of the marketing cost, the online platform
Private and confidential 8
offers D2C and the physical footprint can be used for warehouses. Could you also explain the costs involved
with the digital model when a consumer is trying to work out how much they are being charged for a product?
Would a customer buying a USD 500 couch eventually pay back USD 1,000?
MJ: What I was talking about earlier, I was talking about multipliers. The lease-to-own business has always
been a cost times X business, that’s what we’re going to charge the consumer, it’s cost times X, that’s how they
make their money. The thing about lease-to-own agreements is they are non-executory agreements so they
don’t fall under protection from bankruptcy, but they’re non-executory because you can return a product and
you have a way out of it, but by being non-executory, they have to do full disclosure on every penny that you’re
going to pay. If you bought a couch at USD 500, using your example, and our modifier was 2x, just for
simplicity, the rental agreement would say, there would be typically a 120-180 day same-as-cash period. What
Rent-A-Center would do for that same-as-cash is they would typically do a 15% markup from the retail cost. If
I paid USD 500, it will be, what, 10% would be USD 50, 5%, so it would be USD 75. If you paid the amount out
in the first 120-180 days, we would charge you USD 575 so we only make USD 75 on that agreement.
If you think about it, we really did no work and we made USD 75. We created an agreement, you got your
product, Rooms To Go delivered it, we just took your money. If you went past the same-as-cash option and
you went to full disclosure, there are two ways that you could own it in most states. Most states have what’s
called an end lease, they have a buyout option, and it would be a percentage based on the state regulation.
North Carolina, for example, it’s 60% of the remaining lease, you could buy it out. Let’s say, that example,
you’ve got USD 500 what you paid for it, USD 575 would be the same-as-cash price and then the multiplier is
two times so you’d have USD 1,150 as the total agreement. Based on the terms of the lease, let’s say it’s 12
months, you’ve got six months left, we’d take what you paid in minus the total amount to the lease and let you
buy it out for 60% of what’s remaining. Then the other option is that you make every payment per the
agreement up to term and at the end of the term, you own the product. There are three ways you can really
own the product with this lease-to-own option. It’s the same-as cash 90-180 days based on the state, then
there’s the early purchase option which is X percentage of the remaining lease based on the time that you pay
it out, and then there’s simply make every single monthly payment until the agreement ends and it’s yours.
[00:40:53]
Q: Which tranche do most of Rent-A-Center’s consumer base fall under? Would the best tranche be tier 3,
where they buy out the product?
MJ: Actually, it’s funny. When you’re talking about financing, you’re talking about the relationship between
time and money, that’s really what you’re talking about. Let’s say that you pay your agreement out in 90 days.
From a cash-flow perspective, I paid USD 500 90 days ago and in 90 days, I got USD 575 back, not a bad deal
to get that kind of money back in that short period of time. I think the best option is really the early purchase
option. Eventually, about 80% of the customers use that option because the systems are designed where you
get to a certain point that if the monthly payment is going to be higher than the remaining lease, it
automatically pays out the system using the early purchase option, just to be fair to the consumer.
About almost all the agreements never go to a full term unless it just gets lucky by how the agreement falls.
Most of them are paid out in the early purchase option. A lot of the customers, especially a repeat customer,
understand that and they may know that they’re not going to be able to pay out that cash price in the 90 or 180
days but they know nine months in that they’ll be able to afford what’s the remainder, and maybe it’s USD 200
to pay the remaining lease. That’s what I would say about, one of the things that we started tracking and,
again, I’m going to give myself credit here is that I kept trying to tell Rent-A-Center that with the changing
dynamics between millennials and Gen Z, one of the things that we needed to focus on was ownership.
When we started tracking our ownership percentage, the goal was to get up to over 60%, which means 60% of
the leases that we create end up in ownership for the customer. When Mr Speese came back in 2017, I helped
him, we wrote the plan to try and… he got there, we were down almost 14% same store sales YoY. We changed
our pricing, we changed our product mix and a quarter later, we were back to positive comps. Four quarters
later, we turned negative 14% to positive. It was using folks on the ownership model. We had states where we
Private and confidential 9
could charge 80% EPO and we were doing it and I thought that was a terrible idea, I thought it was terrible to
treat our customers that way, so we changed it. We changed our cash multipliers on a lot of the products for
bricks-and-mortar and for AcceptanceNow and we shortened up all of the terms for AcceptanceNow because
that was another thing. Like I said, the relationship between time and money is important. Originally, we were
in the lease-to-own option, we had 36-month agreements and that’s just too long to wait to get your money
back in that business. We went to a position where we were able to average out getting our average agreement
to about 15 months instead of 22 months. This creates obviously more cash flow, more ownership, so it was a
win-win for the customer and the consumer, which is what you prefer in any business, right.
NH: To clarify, within that 180 days, do customers have the option to exit the lease and return the product?
MJ: Yes.
NH: In that situation, are they paying 60% of the product so far and then you also get inventory?
MJ: No. There are three options. The most advantageous one for the customer is to pay it out during the
same-as-cash period, which is what we call it. Like I said, we would buy the product for USD 500 from the
retailer, we would charge a 10-15% markup for the same-as-cash. For this example, let’s just say it’s 10%. Let’s
say your monthly payments are USD 50 a month. In order for you to get to, let’s say, 180 days, that’s six
payments at USD 50 a month. You’re going to have USD 300 in, so at the end of the same-as-cash period,
you’ve got to come up with an extra USD 250 and pay it out before that time period expires, and if you do, you
own it, it’s yours, the agreement is over. The next option is the early purchase agreement, so you go over your
six months, and let’s just say that this is an 18-month agreement, now you’re six months in, you have 12
months remaining on your lease out of 18 months. Now what we do is we take all the money you’ve paid, so at
that point, if you didn’t pay it out early and you just made your normal payments, you’d be at USD 300, USD
50 a month for six months.
Six monthly payments, USD 50, USD 300. The total lease on USD 550 would be USD 1,100 at a 2x modifier. I
have USD 800 remaining in the total agreement. Whatever the state percentage modifier is on your early
purchase option, we would let you buy it out, credit you the USD 300 you’d paid minus the USD 1,100 total.
You have USD 800 in remaining lease payments and we would let you buy it out at 60%, some states are even
40% of the remaining balance. If you paid that in one lump sum, it’s yours too, it’s over, the end of the
agreement, you own the product. Then, if you decide not to execute the early purchase option ever and you just
make the minimum, you continue to make your monthly payments for all 18 months, the product is yours at
the end of the agreement. Like you said, this is a complicated agreement that people have to understand, and
in a lot of situations now we’re doing it in a digital transaction.
[00:48:37]
Q: Consumers seem incentivised and motivated to pay as soon as possible, but the most lucrative aspect is in
that 6-18-months timeline. Is this where you noticed the most returns or breach of leases? At what stage would
Rent-A-Center have to take back the product, find space for it and sell it? You talked about sending things to
Texas and the issues there. How did that develop and which segment or customer profile did it concern?
MJ: That’s a great question because what happens is there’s a little bit of sticker shock on the 181st day when
you came in last month and, what’s my price to purchase it while I’m still in the six months, and at your six-
month payment, you only owed USD 250. Now what’s going to happen is it’s going to jump up the next time
you come in to be USD 300 minus USD 1,100 times the multiplier. Typically, that first payment after the 180
days, it’s a very tough conversation explaining it to people, even though it’s in the agreement and fully
disclosed. A lot of times, people will get very upset there and that creates an issue where they want to return
the product if we can’t calm them down and talk them out of it. Then the other situation is the longer that the
customer is in that agreement, the more fatigue we get and that’s where we start to see them skip and not pay.
It was a tremendous problem when we had 36-month agreements. Anything after 21 months started, the
customer will no longer pay this any more. That’s why we shortened our term to get around that average term
Private and confidential 10
of around 15 months because there’s no fatigue around that period of time. Once you get over month 21, our
loss, it was like Mount Everest if you were looking at it on a graph, it went from pretty linear for who would
skip across and then you hit month 21 and it shot up like a rocket, so that’s why we shortened it. Our
competitors have done the same to try and avoid that. You still have people who two months in stop paying,
just like every traditional… It’s part of financing, it’s part of the risk you take when you sell money. That’s what
you’re doing at the end of the day is you’re selling money.
[00:51:47]
Q: You suggested that the LTO model was unsustainable. Are you referring to the growth we’re noticing with
Rent-A-Center and new customers who perhaps haven’t hit that timeline to recognise if this is something they
want to re-enter? Are you saying these sales might be one-time events that are boom and bust?
MJ: You’ve got a couple of things happening. If you go back to 2010, Rent-A-Center had 3,000 bricks-and-
mortar locations. Now, they have 2,200. In a decade, you’ve lost almost 30% of your stores, bricks-and-
mortar. If you were just to hear that, you would think, “Oh my God, this company is in terrible shape,” but it’s
not the case because what happened is we would have multiple stores. I live in Charlotte, and there would be
eight or nine stores in Charlotte inside a 10-mile ring because of the density of the population and serving
small communities that are near there. That was always Rent-A-Center’s bricks-and-mortar model was that
we’re in your neighbourhood, we’re easy to get to, it’s easy for you to pay us, it’s easy for us to come and get it if
you need it to and it’s easy for us to service it if we had to.
Once the lease-to-own option model opened, they realised that these lease-to-own stores are actually
cannibalising our core bricks-and-mortar customer. That’s why you’ve seen a pretty decent decline in store
count is that where an area could hold nine Rent-A-Center stores but now you pop in that you’ve got three
Ashleys and two Rooms To Go and then Bob’s Furniture all in the same area, there wasn’t enough support or
customer base to sustain nine Rent-A-Centers any more. Now, you might only need four, but you’re still, at the
end of the day, net-net, you’re doing more business because you have actually more bricks-and-mortar
locations per se because you’re in all these retailers.
My outlook on the future is that Rent-A-Center is going to continue to close bricks-and-mortar locations and
that they’re eventually going to get to a sweet spot, and I don’t know what that number is, that they’re going to
have X amount of bricks-and-mortar locations, call it 1,200, 1,000. I don’t know what it is, and they’re betting
the farm on the LTO fintech model and so is everybody else. The players that have popped up that are involved
in fintech and lease-to-own now is insanity. They’re everywhere, everybody wants a piece of this pie, and part
of the problem is this customer, it’s a very underserved customer because most of them are midline credit, and
they get treated like shit. If somebody treats them well and they’re able to own the products they have, these
consumers have a decent amount amount of money and can pay.
It’s just like the prepaid card industry that has gotten so huge, is because customers that a lot of times banks
don’t want to do business with this middle-of-the-road customer that feels underserved and is underserved. If
you think about Gen Z and millennials, those guys don’t go into Subway, they order Subway from an app. I had
my nephew up in my game room and I was, “Let’s call and order pizza,” he goes, “Why are you going to call?
I’m just going to order it from the app,” I’m, “Jesus, I feel old.” They don’t want to talk to anybody and I get it.
I think that they’re betting on that future. I don’t think it’s a bad bet, it’s probably a smart play to continue
digital.
[00:56:40]
Q: Could you outline the financial risk of Rent-A-Center’s LTO options? This customer is potentially
underserved and the product is being geared towards a consumer that wouldn’t get access to traditional credit,
but it seems an attractive value proposition for those who have strong credit, if they’re willing to buy it out
early.
Private and confidential 11
MJ: Yes, the risk is the more retailers you get, the more exposure you put yourself every day. Most of these
retailers want their money immediately, so you’re setting up an ACH net debit account at the end of the day.
The more agreements I write, the more money I have to have on hand so that I can pay the retailers. To me,
that’s been the biggest exposure. We had partnered with Lowe’s initially and based on early estimates, just for
Lowe’s, because they have, what, 3,000 locations, it was going to take, we were going to need damn near USD
0.5bn in the bank just to be prepared to handle purchases for Lowe’s. You’d better have a pretty big revolver so
that you can afford to pay it and you’d better have lean debt because you can’t afford to have any other debt
because you’re shelling out cash upfront and boat loads of it. To me, that’s the biggest risk.
NH: Is FlexShopper the more sustainable credit-driven model where you need a high level of debt?
MJ: You’re going to have the same process. One of the things, if you go look at, this, to me, is mind-boggling
what’s just the metric that people were defining success with, is invoice amounts, how much invoices they
wrote. For me, that’s how much money I had to pay, that doesn’t mean anything except I think what they’re
saying is that if I wrote this many invoices, that amount of invoices, I should have X potential revenue coming
back. They’re saying that there should be a leading indicator, invoices amount written in the month of August,
and knowing your multiplier on average is two, if I wrote USD 100m in August, I would expect over the next 18
months that that’s going to bring me USD 200m minus losses, etc.
NH: Is that recognised immediately on the balance sheet?
MJ: Yes, it has to be because you’re paying the retailers immediately. Like I said, most of the terms are net
zero. If I go into Rooms To Go and we create an agreement for a USD 3,000 bedroom suite, Rent-A-Center’s
ACH is USD 3,000 to Rooms To Go at the end of the day. If you imagine, if we do four or five agreements in a
day then we’re writing a cheque for USD 12,000 at the end of the day and then you multiple that times 10,000
retailers, you can imagine that things could get pretty freaking hairy.
NH: What about in terms of the future value of the present cost?
MJ: No. With Rent-A-Center and being publicly traded, it’s a number that is talked about as a leading
indicator of future success but it’s not realised, it doesn’t mean anything yet.
[01:01:06]
NH: Mitch, I think that is a great place to conclude. Thank you very much for your time and insights, it was a
very interesting discussion. Clients, thank you for joining Third Bridge Forum's Interview today. If anyone
would like to speak with Mitch in a private call or meeting, please let your relationship manager know. Mitch,
thanks again.
MJ: Thanks.
Transcription ends at 01:01:33 of the recorded material
Private and confidential 12