The Motley Fool Previous Page

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

Mark Lin
January 22, 2014

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.