Sears Does Shoppers a Financial Disservice

I was once told by someone who wanted to justify buying stuff on credit, "Just because you can't afford something doesn't mean you can't buy it." While spending beyond on our means is a national epidemic sucking the lifeblood out of the economy one interest payment at a time, Sears Holdings (NASDAQ: SHLD  ) is assuming the role of enabler by having its Kmart division roll out a national rent-to-own program just in time for Christmas.

Following in the footsteps of the Sears chain, which already has a similar program in place, Kmart shoppers can fill up their carts with TVs, refrigerators, and anything else worth $150 or more, and finance their purchase over time without the need for a credit check. They can buy stuff now that they can't afford and pay for it later. And pay and pay and pay.

The rent-to-own industry has a long, unsavory history with consumers who end up paying far more for an item than what they would have if they'd just bought it with a credit card -- or, better yet, simply saved up the money until they could afford it. And Sears admits it's a high-cost option for shoppers, as its vice president of consumer services told Bloomberg, "I'm not here to convince you lease-to-own is not more expensive than a credit program." 

Good thing. As the story notes, a Sears customer could buy a $400 item, make 10 biweekly payments over five months at $33 each, and then decide whether to keep making payments or return the merchandise. The customer could also pay off the lease by paying an additional $220, bringing the total to $553 -- which would be equivalent to a 114% annual rate. It's a business model that makes even loan sharks jealous.

A few years ago, rent-to-own industry leader Rent-A-Center (NASDAQ: RCII  ) was successfully sued because its rates were considered usurious. Its effective APR of 80% was well above the 30% cap imposed by the state of New Jersey.

Sears, though, says its base costs and total cost of ownership are significantly cheaper than the rent-to-own industry as a whole, and unlike the pure plays that allow lease contracts to run as long as four years, Sears limits its own leases to 18 months. That doesn't make it better, only less worse.

Like payday lenders, pawn shops, and check cashing services, the rent-to-own business is a poor alternative for those with poor or bad credit, the unbanked, and those with limited financial resources. Although they provide a service that many traditional institutions ignore, it's not in the consumer's best interest to use them.

Aaron's (NYSE: AAN  ) , for example, says its lease-to-own business model is better because 46% of its customers eventually take ownership of the products, compared with the industry norm of just 25%. Left unsaid is that anywhere from half to three-quarters of all customers who rent products don't buy them, meaning Aaron's and Rent-A-Center -- which between them control nearly two-thirds of the market in North America -- get back possession of the items and can do the whole process again. Wash, rinse, repeat. The consumer, though, is left out of pocket with nothing to show for it. 

From Wal-Mart to T.J. Maxx, Toys R Us to Burlington Coat Factory, everyone's copied Sears' successful resurrection of the layaway program, an early staple of the retail industry that got lost in the shuffle of the credit explosion. It was a smart alternative for everyone because the customer didn't rack up debt and the store didn't move the product until it was paid for.

But with sales still sliding at the old-line retailer, down 6% at the end of last quarter and losses widening to $194 million, Sears apparently felt it needed something more to lure customers in and keep at least some of them from bolting to the competition. But the lease-to-own program only further cheapens the brand, one that already suffers an image problem from a failure by management to invest in its stores. 

Sears tested a similar program last year before rolling it out nationwide back in May, and now Kmart is following suit. In the end, it's a bad deal for consumers, and ultimately a poor business decision for Sears, one that's focusing only on possible short-term gains without considering the long-term impact on the business.

That's something we've seen time and again from this company, and investors should flunk it for its financial illiteracy and the disservice its doing to its customers.

Fall from grace
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