Aaron’s shakeup a sign of tough times

Though the economy is perking up for many Americans, Aaron’s customers — who often have little or no credit — are falling behind.

That has hurt Aaron’s, which reported a 2.8 percent drop in foot traffic in the second quarter, despite a promotion giving away furnishings on daytime TV personality Wendy Williams’ show. Revenue was up in the quarter, but profit dropped 67 percent. Full-year 2013 profit tumbled 30 percent while revenue edged up 1 percent.

Aaron’s, which has 13,000 employees and more than 2,100 stores around the country, is not alone. Rival Rent-A-Center also has seen profit and foot traffic fall in its U.S. stores, though it fares better when its Mexican business is factored in.

And retailers that share Aaron’s customer base, such as Wal-Mart, also have struggled. Discounter Dollar General is considering buying rival Family Dollar as both feel the squeeze.

“It’s no secret that the low-to-middle income households have been under pressure,” Robert Straus, an analyst with Gilford Securities, said, blaming the challenges on higher food costs and gas prices.

Aaron’s sales grew during the recession as the economy pushed customers through its doors.

But the growth waned as the economy began a slow recovery. Under Allen, Aaron’s sought to broaden its base by appealing to middle class consumers. Franchisees complained the strategy, which included a higher pricing structure, turned off the traditional base.

Allen inherited other troubles, including a $95 million sexual harassment lawsuit against a store manager that the company ultimately settled for $6 million, along with allegations the company spied on customers through rented computers. In the latter case Aaron’s did not admit guilt but agreed to stop monitoring unless asked for technical help by customers. It also was investigated by the California attorney general’s office for its business practices.

The company was the target of an unsolicited $2.3 billion takeover bid by its second-largest shareholder, Florida private equity firm Vintage Capital Management, earlier this year.

At the company’s national managers meeting in Kissimmee, Fla., in March, Allen was forced to walk back a number of changes the company had undertaken after franchisees threatened to mutiny, with some calling for his resignation.

A day after that gathering, Allen told a full meeting of Aaron’s employees, store operators and franchisees that the company faced a mountain of problems when he took over. Allen, who led Delta from 1987-97 before being forced into early retirement there, had been on Aaron’s board before becoming its CEO.

The job came open when Aaron’s founder Charlie Loudermilk Sr. retired.

Allen, who is 72, beat back Vintage Capital Management’s takeover attempt when he announced that Aaron’s had purchased Utah-based Progressive Finance, an online lender, for $700 million. The move made an Aaron’s takeover more expensive and put it out of reach of Vintage.

He and the board later struck a deal to nominate Vintage’s leader, Brian Kahn, to the board.

The company’s largest shareholder, at about 11 percent, is Fidelity Management and Research, owner of mutual fund company Fidelity Investments.

Loudermilk, who retired as chairman in September 2012, is the largest shareholder among Aaron’s insiders.

Duffy Heath, president of the Aaron’s Franchisee Association, said he sent Allen an email praising his guidance after the news broke Wednesday.

“I told him that he had left the company stronger than he found it,” he said. “He has positioned us for a brighter future.”

Allen’s departure isn’t the only boardroom change.

Chief Operations Officer Dave Buck announced his retirement in July while John Schuerholz, president of the Atlanta Braves, said later in the month that he was leaving the board of directors after eight years.

“It’s obviously been a challenging year at Aaron’s with the potential takeover, lawsuits, franchisee demands and disappointing earnings,” said Gary Lee, president and chief executive officer of InReality, a customer experience and design firm. “As the company seeks a new leader, it’s also an excellent time to evaluate the customer experience of shopping at Aaron’s and how to better connect with consumers in and out of their stores.”