Aaron Rents, Inc. Business Information, Profile, and History

Company Perspectives:

The Company believes it possesses a valuable brand name in the rental business, as well as operating characteristics which differentiate it from its competitors. For instance, the Company's rental purchase concept is unique in offering 12-month rental purchase agreements, larger and more attractive store showrooms and a wider selection of merchandise. In the rent-to-rent business, the Company believes that its ability to deliver residential and office furniture and equipment to its customers quickly and efficiently gives the Company an advantage over furniture retailers who often require several weeks to effect delivery. By having its own manufacturing capabilities, an extensive distribution network and sophisticated management information systems, the Company is well-positioned to meet the distinct needs of its rent-to-rent and rental purchase customers.

History of Aaron Rents, Inc.

Aaron Rents, Inc. rents and sells residential and office furniture, household appliances, consumer electronics, and accessories to both individual and corporate customers. In addition to being one of the largest companies in its industry, Aaron is distinguished as the only rental company that manufactures and reconditions its own furniture. Aaron's Rental Purchase division focuses on providing durable household goods to lower to middle income consumers with limited or no access to traditional credit sources such as bank financing, installment credit, or credit cards. The company operated more than 475 company-operated and franchised stores in 40 states at the end of 1999 and was enjoying its eighth consecutive year of record growth.

Steady Growth from the Late 1950s

Aaron Rents is the creation of entrepreneur R. Charles Loudermilk. Loudermilk was born in Atlanta, Georgia, in 1927--'on the wrong side of the tracks,' by his admission. He attended Georgia Tech, had a tour in the Navy, and earned his business degree from the University of North Carolina, before accepting a job with Pet Milk Company and, later, the pharmaceutical and chemical giant Pfizer. While working for Pfizer during the early 1950s, Loudermilk came across a small North Carolina store that rented furniture and other merchandise. Eager to strike out on his own, Loudermilk drew on the concept and started a rental business in 1955, borrowing $500 from Trust Company Bank, while a partner invested another $500.

Loudermilk's first order was for 300 chairs. He and his partner rushed to an army surplus store and purchased 500 chairs. They delivered 300 of them to an auction in Atlanta and charged ten cents per chair per day. 'It was a hot day and the chairs didn't stack well,' Loudermilk recalled in company annals. 'My partner decided he didn't want to be in the rental business anymore.' After his partner bailed out, Loudermilk stuck with his idea and continued to buy and rent furniture. Because he had little money to invest in the business, he worked at his mother's restaurant and poured virtually every nickel back into his rental venture for seven straight years. Later, Loudermilk was able to rent a small storefront and hire a woman to answer the telephone; he named the company Aaron Rents to ensure top billing in the Yellow Pages.

Loudermilk gave his receptionist a catalog from a California company and told her to buy rental equipment from it. When a customer called or came in to rent some item, she would simply let that person select pieces from the catalog. If an order came in for a table or bed, for example, Loudermilk would drive down to Sears, buy a piece similar to the one in the catalog, and deliver it himself. Thus Loudermilk got into renting party equipment and sickroom gear, later moving into office and residential furniture. 'People said it was a gamble,' Loudermilk recalled in the November 21, 1983 issue of Forbes. 'It really wasn't. We never bought the second item until the first one was rented.'

Expansion in the 1960s to Mid-1970s

Loudermilk spent the late 1950s nurturing the business at his original Buckhead area store before branching out in the 1960s with a second shop. A third store was opened in 1964 and rented only furniture. By that time, inventory had grown to include large outdoor tents. Loudermilk rented four tents to civil rights marchers when they made their famous trek from Selma to Montgomery, Alabama in 1965. Two years later, the company opened an outlet in Baltimore, its first outside of Atlanta. By 1969, Aaron Rents was generating a healthy $2 million annually from an inventory of about $3 million.

Aside from furniture and party-related supplies, eventually Aaron Rents outlets were renting everything from corkscrews and pillowcases to sofas and executive desks. The business was relatively simple and straightforward. Loudermilk would purchase goods, rent them out, and depreciate them down to a value of zero. Tax laws during the early 1970s allowed him to depreciate the entire value of the item over a period of three years; the depreciated value was written off against income to reduce taxes. Everything that he could get in rent or resale of the item after that was pure profit.

Aaron Rents prospered during the 1960s and 1970s. By the mid-1970s, in fact, the operation had expanded to include nearly 20 showrooms that were generating annual sales of about $10 million. That sales figure made Aaron the largest private company operating in the burgeoning U.S. furniture rental business. Although Aaron's steady growth prior to the 1980s was admirable, it was meager in comparison with the rampant expansion the company would achieve in the following 15 years. Several factors contributed to that expansion. Significantly, in the late 1970s, Loudermilk decided to focus his efforts on the residential and office markets, rather than his traditional party and sickroom segment. That decision resulted in a rapid climb in sales. Therefore, in 1982, Loudermilk sold off his party and sickroom equipment operations and dumped the proceeds into his residential and business division.

In addition to shifting the company's focus, Loudermilk achieved growth during the late 1970s and early 1980s through new financing strategies. Rather than waiting until his goods had depreciated to reap his profits, he began taking less depreciation during the rental period and then barely breaking even on the resale of the furniture. A $200 desk, for instance, would be depreciated down to $100 and then marked up to $130 for resale. Simply put, he found a way to take his profits earlier. When the furniture was no longer rentable, Loudermilk would sell it alongside value-oriented new furniture in warehouse-style stores--they were called Aaron Sells Furniture--next to his rental shops. That way, he was able to attract customers who did not want to rent but did not have cash for expensive new furniture.

The overall strategy helped to boost the company's net income to a record $4.7 million in 1983 from sales of $55.4 million. By the end of that year, Aaron Rents was operating a total of 92 stores in 14 mostly southern states. It was servicing 50,000 rental contracts worth an average of $48 monthly, giving Aaron roughly 15 percent of the $350 million furniture rental market. Loudermilk had become a multimillionaire. He spent his weekends on his 3,700-acre south Georgia plantation, where he tended his herd of purebred limousin cattle and perused his corn and soybean fields. When not at the plantation, he might be found hunting geese in Alaska or Scotland. Otherwise, Loudermilk worked to enlarge his rental empire.

Growth Through Acquisitions in the 1980s

Another important factor in Aaron Rents' tremendous expansion during the early 1980s was Loudermilk's strategy to add to the company's growth through acquisition. Loudermilk took Aaron Rents public in 1982 to raise expansion capital--although he had retained 42 percent of the company's stock as of 1983, which was valued at about $38 million. He used part of the money from the public offering to buy a few of his biggest private competitors. Most notable were the acquisitions of leading private rental companies Metrolease (Metropolitan Furniture Leasing), of North Carolina, and the Houston-based Modern Furniture Rental. Loudermilk bought Modern Furniture in July of 1983 for $6.5 million in cash before plunking down $4.5 million for Metrolease the following summer. Meanwhile, the rental industry in general was expanding, adding fuel to Aaron Rents' growth. Aaron Rents' annual revenues surged to a whopping $84 million in 1984, making it the largest rental company in the nation. Indeed, Aaron Rents surpassed the venerable industry leader GranTree, which had doubled its revenues from $41 million in 1977 to $82 million in 1984.

At the same time, Aaron Rents' bottom line was benefiting from in-house manufacturing operations. The company had started producing its furniture out of necessity in 1971 when Lockheed Corp. brought employees to Atlanta from all over the world to build a new plane.

Manufacturers simply could not meet Aaron's demand for furniture to rent to the influx of workers, so Loudermilk decided to begin building the furniture himself. He purchased a local manufacturer called MacTavish Furniture Industries and was instantly in the furniture-making business. The decision to manufacture proved fruitful, and Aaron became the only company in the rental industry to exclusively build its furniture. The benefits were multifold. Not only did Aaron benefit from a dependable, low-cost furniture source, but it also saved money and time related to the repair and reconditioning of its old furniture. In addition, Aaron was able to control both styling and price to suit the specific needs of its targeted customers.

Aaron continued to pursue acquisitions and to expand its furniture making operations during 1984 and 1985. By early 1986, the chain had grown to include 154 stores in 20 states and annual revenues were topping a fat $100 million. Despite sales gains, however, earnings growth had stalled. The problem was primarily the result of the fast store expansion. New stores typically took 12 to 18 months to achieve profitability; many of Aaron's outlets were still dragging down the bottom line. Loudermilk decided to slow the company's expansion and to focus on consolidating and streamlining existing operations. During 1986 and 1987, the company closed some Aaron Sells outlets, beefed up its management team, and launched a drive to cut costs and improve profit margins. Loudermilk took a break from day-to-day management of the company during those years, devoting much of his time to his duties as chairman of the Metro Atlanta Rapid Transit Authority and to his political interests.

The effects of management efforts at Aaron seemed apparent by 1988. Sales rose to $119 million and $132 million in 1987 and 1988, respectively, while net earnings climbed to $4.79 million and $5.54 million. The sales gains, however, were partially the result of Loudermilk's October 1987 purchase of Ball Stalker Inc., an Atlanta-based manufacturer and distributor of upscale office furniture. Similarly, the profit increase was generated primarily by a cut in Aaron's effective corporate tax rate from 46 percent to 34 percent; the tax cut was ushered in with the renowned Tax Reform Act of 1986 (TRA). The TRA eliminated many of the depreciation benefits that Aaron had enjoyed previously, however. So, although earnings rose between 1987 and 1988, they were still low compared with previous projections, and the TRA promised to hurt future profits as well. Evidencing investor discontent with the situation, Aaron's stock price skidded from a high of $25.75 in 1984 to just $12 before the 1987 stock market crash, after which it plummeted to a low $6.50.

Realizing that his company was struggling, Loudermilk returned to day-to-day control of the company in 1987. He renewed the company's efforts to overhaul operations, cut costs, and boost margins. At the same time, Loudermilk continued to expand the Aaron network of stores. Early in 1988, in fact, he purchased furniture rental operations in Florida from Furniture Enterprises and Powell Furniture Rental, as well as a Jackson, Mississippi store from competitor Cort Furniture Rental Corp. By late 1988, the company was operating 183 stores in 31 states. Before the end of the year, however, that number would be reduced as a result of the consolidation of several Aaron Sells outlets with adjacent Aaron Rents stores.

Significantly, Aaron followed in the footsteps of its chief competitors, GranTree and the highly successful Rent-A-Center, in 1987 when it entered the rent-to-own business. Under that program, customers were allowed to make regular payments over a pre-determined period--usually 18 or 24 months&mdashø use furniture, appliances, electronics, and other goods. These payments differed from usual rent payments by being applied to the purchase price, and the consumer could own the item at the end of the rental period. By late 1988, Aaron was offering rent-to-own at 18 of its store locations, introducing a 12-month ownership plan, and Loudermilk was planning to expand the successful program throughout his network. The rent-to-own initiative was part of Loudermilk's push to focus on renting rather than selling furniture.

Reorganization and Franchising in the Late 1980s and 1990s

Facing flat market growth in the furniture rental industry, Loudermilk stepped up reorganization efforts in 1989 by eliminating distinctions between the rental, sales, and combination-store divisions. He replaced them with six geographical regions, each with a vice-president responsible for ten to 20 outlets; previously, a single manager had been placed in charge of about 60 stores. Similarly, the office furniture rental division, which consisted of about 47 stores going into 1990, was reorganized into six geographical regions, each of which was headed by a vice-president. Finally, Loudermilk initiated a franchising campaign designed to increase Aaron's regional coverage with minimal capital cost to the company.

The reorganization was slow to take hold. In fact, Aaron suffered three consecutive years of declining sales and earnings beginning in 1989. Eventually, though, the company's financial performance recovered. Among Loudermilk's successful moves during the early 1990s was renting office equipment, not just office furniture. He had hesitated to rent equipment for several years because he felt that Aaron lacked the management expertise to handle that market segment. That move contributed to Aaron's turnaround, however, which began in 1992. Indeed, although Aaron's sales for 1992 grew marginally to about $145 million, the company posted a profit of about $3.1 million--Aaron's first profit gain since 1988.

Encouraged by success with the Aaron Rental Purchase stores, which made up Aaron's rent-to-own business, Loudermilk began expanding the chain through both franchises and company-owned stores. As a result, revenues sailed to $158 million in 1993 before rocketing to about $186 million in 1994. Throughout the fiscal 1994 year, the second-ranked company on Franchise magazine's Gold 100 list added rental-purchase stores to its chain at a rate of one per week. Growth continued during 1995. By September 1995, in fact, Aaron was operating a total of 206 company-owned outlets and 33 franchised stores, and sales were booming. Revenues swelled 24 percent in fiscal 1995 to nearly $230 million as net income vaulted to a record $11.33 million. By 1998, the number of stores had increased to about 300 (368 by 1999) and revenues were at $380 million, $200 million of which came from the rental purchase business. Aaron also continued to benefit from its five furniture manufacturing plants in Georgia and Florida.

Aaron was selective about to whom it would sell franchise rights and where its franchises were located. 'We don't want to be hidden in the middle of a shopping center. We want locations comparable to Blockbuster Video. You never see a Blockbuster store that is not very, very visible,' Loudermilk was quoted as saying in the October/November 1995 issue of Progressive Rentals. Aaron's stores were on average 10,000 to 12,000 square feet, larger and more attractive than the competition, usually suburban in location, and serving customers with a higher income than other rent-to-own businesses. When he could not find a large enough store, Loudermilk would build a stand-alone unit marked by Aaron's unique design. Aaron's franchise support center provided assistance to franchisees in selecting store location and training in management and operation.

In the late 1990s, the company commanded approximately 30 percent of the estimated $600 rent-to-rent market in the United States and was branching out into the corporate relocation and small office/home office markets. Apartment management companies represented another expanding segment of its rent-to-rent customer base. Aaron Direct, the company's warehouse concept, had a presence in six markets serving national customers that provided interim housing for companies relocating employees. In 1998, the company acquired Lamps Forever, a manufacturer of designer lamps, tables, and matching accessories. The following year, in a major expansion of its national advertising, Aaron acquired rights to the NASCAR Busch Grand National Car Race. Beginning in 2000, the 'Aaron's 312' campaign played off the longest race of the season, a 312-mile run, while reminding sports fans, whose demographic profile exactly matched the company's target customer base, of Aaron's three forms of purchasing--cash or check, credit card, or its Lease Plus 12-month lease program.

In 1999, Aaron also was added to the S & P SmallCap 600 Index. That year, for the second time straight, the company was named one of the 200 best small companies by Forbes. The company fixed its strategic focus on expansion for the years 2000 and beyond. Adding stores in established markets, targeting the growing office furniture rental segment, accelerating franchised rental purchase store openings, and adding company-operated stores in major markets, Aaron Rents sought to continue growing.

Principal Subsidiaries: Aaron Investment Company.

Principal Divisions: Aaron Rents' Rent-to-Rent; Aaron's Rental Purchase; MacTavish Furniture.

Principal Competitors: Rent-A-Center; Renters Choice; Rent-Way, Inc.; CORT Business Services Corporation.

Chronology

• Key Dates:

• 1955: R. Charles Loudermilk starts Aaron Rents.
• 1964: Aaron Rents opens its first furniture rental store.
• 1971: Aaron Rents acquires MacTavish Furniture Industries.
• 1982: Aaron rents sells off its party and sick room equipment and goes public.
• 1983: Aaron Rents acquires Modern Furniture.
• 1984: The company acquires Metrolease and becomes the largest rental outfit in the United States.
• 1987: The company purchases Ball Stalker and enters the rent-to-own business.
• 1988: The company purchases furniture rental operations from Furniture Enterprises, Powell Furniture Rental, and Cort Furniture Rental Corp.
• 1990: Aaron Rents begins to offer franchise options.
• 1998: The company acquires Lamps Forever.