Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How These 3 Hard-Goods Retailers Use Credit to Their Advantage

Retailers are not banks, but they can keep their customer relationships 'sticky' like banks do with the appropriate use of credit. This is especially true for hard-goods retailers like hhgregg (NYSE: HGG  ) , Aaron's (NYSE: AAN  ) , and Conn's (NASDAQ: CONN  ) , where their customers need credit to buy big-ticket items such as electronics and furniture.

Third-party credit
Started in 1955, hhgregg is a specialty hard-goods retailer with a strong presence in the Eastern U.S., where its 228 stores are located. hhgregg's current credit offering is its private-label credit card offered through GE Capital, which accounted for more than a third of fiscal 2013 sales. This represents a 530 basis point increase from 2011, when private-label credit card sales represented 28.7% of total sales. In addition, GE Capital, not hhgregg, bears the credit risk associated with private-label credit card sales.

Despite strong take-up rates, hhgregg estimated that about one-third of the applicants for its private-label credit card were rejected by GE Capital because of their credit standing. In response to this, hhgregg expanded its credit offerings to regain lost sales from this group of customers. Firstly, it launched a secondary finance option targeted at lower- to middle-income consumers in September. Secondly, it plans to complete the roll-out of lease-to-own options through Rent-A-Center's RAC program to all its stores by the end of the second quarter of fiscal 2014. 

In-house credit
Unlike hhgregg, which outsources its entire credit offerings to third parties, Conn's utilizes both in-house and third-party financing options. While Conn's also has third-party financing and rent-to-own payment programs similar to that of hhgregg, its proprietary in-house credit program is the dominant payment option, responsible for financing 80% of its sales.

Moreover, Conn's in-house credit encourages repeat purchases and purchases of higher-ticket items. As of the third quarter of fiscal 2014, repeat customers accounted for 71% of Conn's credit balances due under its in-house credit program; the average selling price for a television set at Conn's of $1,069 is also more than double the industry average selling price of $465.

Conn's in-house credit business gives it a competitive edge over its competitors utilizing third-party credit options.

Firstly, Conn's in-house credit business targets the unbanked and underbanked population, who can't get access to credit. hhgregg is moving in the same direction in expanding alternative credit offerings to lower- to middle-income consumers, but ultimately there are certain limitations and restrictions leveraging third-party credit.

Secondly, Conn's offers favorable interest rates below those of non-bank lenders and fast credit approval. In fiscal 2013, 65% of its customers' credit applications were automatically approved by Conn's proprietary standardized underwriting model.

Safety first
As a rent-to-own company leasing and selling hard goods, Aaron's is responsible for managing its internal credit risks like Conn's. It relies primarily on the security interest over the leased goods. In the event of a default, it can repossess and sell the collateralized merchandise.

Aaron's also monitors cash collections closely. It goes a step further by calling its customers a few days before their payments are due. Customers are reminded to pay on time or renew the lease agreements for an extended period if needed.  

The key difference between Aaron's and Conn's is that Aaron's doesn't evaluate the credit scores of its sales and lease ownership customers. In contrast, Conn's actively manages its credit risk by segmenting its customers based on their credit worthiness. Customers with credit scores above 650 have access to low- or no-interest financing options on selected products, while those with credit scores between 550 and 650 are offered fixed-term, fixed-payment installment terms for their purchases. Customers who don't qualify for either are advised to use the rent-to-own payment option.

Foolish final thoughts
Credit, particularly in-house credit, is an important marketing tool for hard-goods retailers because it stimulates greater brand loyalty and higher average ticket sizes. Of the three hard-goods retailers, Conn's stands out for its long-standing in-house credit program (45 years) and customer segmentation underwriting process.

Furthermore, Conn's has greater discretion over the extension of its consumer credit with its in-house credit program. In contrast, third-party financial institutions are likely to restrict credit to consumers if capital markets deteriorate.

Looking for great growth investments?
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2804432, ~/Articles/ArticleHandler.aspx, 9/3/2015 7:28:45 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Mark Lin

Mark is a private value investor and is the author of website which uses a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders.

Today's Market

updated Moments ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:04 PM
AAN $37.23 Up +0.07 +0.19%
Aaron's, Inc. CAPS Rating: ****
CONN $28.05 Down -0.45 -1.58%
Conn's, Inc. CAPS Rating: **
HGG $4.92 Up +0.05 +1.03%
hhgregg CAPS Rating: *