Uncertainty equals opportunity for some retailers

LARGO, FLA. —The sky is falling.

Or at least it has felt like that lately as some of the biggest names in retail scaled back growth plans, missed earnings estimates and spooked investors with their concerns about consumer spending. With the fallout from the sub-prime lending mess ongoing and the housing industry unsure whether it has hit bottom, it’s no wonder the retail industry has dialed back its expectations for sales growth.

Despite all the angst about the consumer, one retail executive who thinks the marketplace is blown out of proportion is Don Marks. As president of Badcock Home Furnishings, Marks’ view is shaped by the fact that the privately held company operates 320 furniture stores in nine southeastern states, and during its fiscal year ended June 30, generated sales of $515 million. In addition to its exposure to furniture and home furnishings, Badcock has perspective on the strength of the consumers because it offers a wide range of credit products. The success of its business model is dependent on a pricing and margin structure that involves offering financing to customers with less than perfect credit.

At any given time, 15% of Badcock’s credit customers are delinquent, according to Marks, who added, “our chargeoffs are not bad, but we have seen a little uptick in bankruptcy filings. Our delinquencies are not particularly bad either, although they have ticked up a little.”

To compensate, Marks said the company increased its reserves for bad debt but has not had to use it. The action was taken primarily because of all the noise in the market regarding sub-prime credit as opposed to the company’s experience.

As retailers go, Badcock is in a unique position because it underwrites all of its financing deals rather than extending credit through third parties. Because the company carries its own paper, it can allow its network of independent dealers who operates stores in primarily small and mid-size markets to extend credit to people whose only qualifications are that they have lived at the same place and held the same job for an acceptable period of time. In such cases, the dealer assumes the liability for the debt.

“We do our own collections because we carry our own credit which mean sour stores may have to go out and repossess products and our dealers are responsible for bad debts. If you’re a dealer, you have to learn how to handle collections,” Marks said.

Collections and repossessions are a fact of life when dealing with subprime customers, and sometimes the merchandise “walks”—when debtor customers can’t be located. Marks, who prior to joining Badcock nearly 10 years ago, worked for Rent-A-Center and another rent-to-own company in the United Kindgom, is undeterred by such issues. In fact, Badcock is moving forward with a new retail concept that gives it even more exposure to the weak housing market and sub-prime consumers.

The company recently opened its fourth Home Now rent-to-own store and Marks envisions someday to have nearly 100 of the stores, due to marketplace demand and because their smaller footprint—5,000 square feet versus 25,000 square feet for a full-blown furniture store—makes the concept suitable for urban markets with higher real estate costs.

“We are able to qualify a lot of folks with our wide range of credit offers and our independent dealers can deviate from the credit approval process, but if someone just can’t qualify and they have lived in the same place and have had the same job for awhile, that is a fairly typical rent-to-own customer,” Marks said.

The Home Now stores offer customers with poor or no credit the opportunity to purchase items at prices that Marks contends are fair, although ultimately higher than what a cash customer pays because Badcock assumes a greater risk since it has to build into its margin structure the higher loss history and increased expenses associated with collections—part of the equation when serving sub-prime customers. In addition, Badcock and others in the rent-to-own industry are moving to monthly payment terms and greater transparency to insulate themselves from criticism of business practices seen by some as taking advantage of consumers.

“We have fair prices and try to treat people right,” Marks said. “With the weekly payment model only about 20% of customers ever acquire ownership whereas the percentage that acquires ownership with our model is above 50%,” Marks said.