One frequent question I hear in the commercial real estate world is “what is the next blockbuster business model?” Over the years, I have seen some good “wanna be” brands and some good “one hit wonders." Certainly Starbuck’s (SBUX) should be considered as a worldwide “blockbuster” coffee brand with dominating market share and sustainable earnings results.
To find the answer to the “next blockbuster” question I recently referred to a 1986 book I read by Gail DeGeorge. The book, “The Making of a Blockbuster” is a biographical timeline of Wayne Huizenga and some insight into Mr. Huizenga’s successful business career. As Ms. DeGeorge explained, “Instead of renting dumpsters, he (Huizenga) was renting video tapes ... that view eventually evolved as Blockbuster did, from a rental company to a retail company, to an entertainment company. But Huizenga’s initial instinct was correct - its core business would remain, essentially, rental.” Indeed, Mr. Huizenga’s most successful career in sports, entertainment, trash, golf and hotels all revolve around the rental concept. Perhaps, Mr. Huizenga’s boat should be named “Buy Low, Rent High.”
Aaron Rents – The Rental Giant
With over 1,814 stores in 48 states and Canada, Aaron Rents (AAN) is a “best in class” Rent- To-Own (RTO) retailer of consumer electronics, computers, furniture and household appliances. Aaron Rents is the creation of entrepreneur R. Charles Loudermilk. After attending Georgia Tech, a tour in the Navy, and graduating from the University of North Carolina, Mr. Loudermilk started a rental business in 1955, borrowing $500 from Trust Company Bank, while a partner invested another $500. In 1964, Aaron Rents opened its first furniture rental store and the company name was named (by Loudermilk) to ensure top billing in the Yellow Pages. Here is a summary of historical facts:
- 1955 - R. Charles Loudermilk starts Aaron Rents
- 1982 - Aaron Rents goes public with 92 stores
- 1986 - Aaron Rents has 154 stores
- 1988 - Aaron Rents has 183 stores
- 1990 - Aaron Rents commences franchise model
- 1999 - Aaron Rents has over 368 stores
- 2010 - Aaron Rents has over 1,814 stores
Aaron Rents recently announced its 2010 Year End Results with 91 new company-owned stores and 72 new franchised stores. This aggressive 8% growth is in line with the same growth rates as the two (2) top dollar chains, Dollar General (DG) and Family Dollar (FDO). In addition, Aaron’s guidance for 2011 includes new store growth between 5% and 9% with an equal mix of company and franchised stores. Here is a summary of the company’s portfolio:
Aaron Rents Portfolio |
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Company Owned | 1,138 | 63% |
Franchise Owned | 658 | 36% |
Company Owned - RIMCO | 11 | 1% |
Company Owned - Office Rental | 1 | 0% |
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Total | 1,808 | 100% |
Aaron’s recently announced fourth quarter 2010 and year-end 2010 results are strong indications that the “best in class” retailer qualifies as the next “blockbuster."
Year-End 2010 Key Results
- Revenue $1.88 billion, +7%
- Net Income $ 118.4 million, +5%
- Earnings Per Share $ 1.44, +5%
- Total Customers: 912,000, +10%
As noted on the company’s recent (2-15-11) press release, Robert C. Loudermilk, Jr., president and CEO, stated, “Although current business challenges and conditions affect us as they do other retailers, through the years the strength of the Aaron’s business model has been proven resilient and has delivered consistent and superior financial results.” Here is a recap of the trailing two year results:
Aaron Rents | 2010 | 2009 |
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Revenue | 1.876 B | 1.752 B | 7% |
Net Earnings | 118.37 M | 112.60 M | 5% |
Assets | 1.508 B | 1.321 B | 12% |
Shareholder Equity | 979.41 M | 887.26 M | 9% |
Video - Not a Sustainable Rental Model
At the peak, Blockbuster Video had over 6,000 stores and the video rental giant provided a viable business model of daily entertainment rentals. It was clear to all that the retail video market would not be sustainable as technology and the Internet evolved. That day is here as Blockbuster, Circuit City and now Borders (BGP) (which filed this week) are being replaced with media on demand products.
Rent to Own (RTO) - A Very Sustainable Rental Model
Contrary to video rentals, Aaron Rents' RTO model is working very well. The company’s rental strategy appeals to many recovering or pinched customers. Many high ticket products like TV’s, computers, appliances and furniture are out of reach for consumers shopping at Sears (SHLD), Best Buy (BBY) or Wal-Mart (WMT) and the monthly payments at Aaron Rents are affordable with no credit checks and flexible financing options. With this most sustainable rental model, impressive financial results, and aggressive growth prospects, Aaron Rents should qualify as a “blockbuster” investment opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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