Retail rent-to-own and lease-to-own concepts that seem tailor-made for recession-stressed consumers with subprime credit are in fact seeing their models tested by a relentless market where buyers show a preference for offers and an additional sensitivity towards tariffs. .
The latest example of this low-end shift was seen on Thursday (Sept 29) in a statement category leader Rent-A-Center, which lowered its outlook for the coming quarter and extended its stock’s year-to-date decline to more than 60%.
“External economic conditions have continued to deteriorate in recent months. This has affected both retail traffic and customer payment behaviour”, CEO Mitch Fadel he said in the business update statement, noting that “recent inflationary conditions have been especially challenging for our clients.”
Still, the head of the Texas-based operator of about 2,000 retail outlets and Acima’s financial arm said he “remained confident in the long-term resilience of the business, even during economic downturns.”
Thursday’s announcement also covers that former Santander Consumer USA CFO Fahmi Karam will join RAC as its new CFO effective October 31, replacing Maureen Short, who left the company on September 28. RAC said.
The question is whether Karam’s experience in consumer finance, pricing and analytics will mean modifications to RAC’s core business model as it struggles in an inflationary climate where logic dictates that more tied-up consumers would be an affordability play.
This weakness in leasing was already evident in the summer, as Fadel told analysts in early August on his second-quarter earnings call that “As the second quarter went on, we started to see signs of that macro weakness was causing leasing volumes and payment behavior to decline. trend below our assumptions for the second half of the year.”
“These trends have continued,” he said then, “and it became clear that if the current weak environment continued for the rest of the year, we would miss the full-year 2022 financial targets presented in February.”
the over The e-commerce unit, acquired in 2020, had a harder time in the second quarter with revenue falling 16.5% year-over-year, while RAC’s physical stores fared better, but were still down 3.1%.
RAC has been criticized for the quality of merchandise (items are often used and limited to in-store inventory) as well as high interest rates that are difficult for its largely high-risk customer base. Despite the access it provides to those with few options to buy expensive furniture and durable goods, consumers are becoming more resistant in this current climate.
Lease with option to buy hit by change of expense
While rent-to-own may be just that, rent that is eventually returned, lease-to-own (LTO) contracts generally obligate the consumer, who often ends up owning the items after meeting the lease terms.
LTO category leader Katapult also missed second-quarter earnings expectations, with CEO Orlando Zayas telling analysts on a second-quarter earnings call in August: “The challenging macro environment for both our retail and our consumers continued in the second quarter of 2022, including inflationary pressures and shifts in spending away from durable goods, which impacted our gross performance on originations, revenues and leasing portfolio for the quarter.”
The LTO option is considered a step up from the rental model, as the merchandise is new and available in the makes, models and styles consumers want, rather than what is in stock and on site. LTO terms may be based on rent where items are returned, although it leans toward ownership.
The study Finding the Invisibles of Retail: Leveraging Flexible Digital Payments to Reach Underserved Durable Goods Customers, a collaboration of PYMNTS and Katapult, surveyed more than 2,100 US consumers and found, “Consumers who choose leasing cited flexibility (79%) as a top reason. Leasing to own allows consumers to make payments for a product over time as they use it, along with options to purchase in advance or the option to return it without further obligation if they no longer need or want it.”
Of those surveyed, 75% said lease-to-own options were the only way they could pay for the transaction, and 73% said it allowed them to get the items they needed right away.
In a PYMNTS interview, Zayas said that merchants benefit from using LTO solutions like Katapult, telling PYMNTS, “It all comes down to prioritization. If you look at how much volume we can bring to a retailer, it’s somewhere between 3% and 10%, maybe 15% of incremental sales, which is a huge amount. For any retailer, even a 4% increase in sales, and they will seize the opportunity.”
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