Rent-a-Center to Pay $3.6 Million to Settle Class Action
Rent-a-Center will pay about $3.6 million to settle a class action suit alleging the chain tried to inflate its stock price in 2001 to complete a secondary stock offering. Terry Walker sued the chain in U.S. District Court, Texarkana, Tex., in 2002, on behalf of those who had bought stock April 25 to Oct. 8, 2001.
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The suit alleged that in April 2001 RAC highlighted a “record” first-quarter performance for revenue and earnings, failing to note that expenses were rising “dramatically.” RAC sold 3.2 million shares in a secondary offering that became effective May 25, 2001, raising $136 million. Among those involved in the secondary offering was RAC’s late CEO Ernest Talley, who sold 1.7 million shares, grossing $72 million, the suit said. Two months after the offering was completed, RAC warned of “significant decreases” in third- and fourth-quarter earnings due to rising expenses, the suit said.
Meanwhile, total RAC debt will rise about $20 million in the fourth quarter to $920 million it as works out settlements in two other suits. It will pay about $109.3 million to settle a suit alleging it violated a New Jersey law capping annual interest charged on installment purchases. RAC also will pay $9.6 million to the California Consumer Protection Division to create a restitution fund to settle an inquiry into cash prices set for the chain’s club program, it said.
RAC will pay $85.8 million cash and $23.5 million in legal fees to settle a four-year legal battle in New Jersey that ended this year when the U.S. Supreme Court rejected the chain’s petition for review (CED Feb 6 p4). RAC had contested a New Jersey Supreme Court finding that the state Retail Installment Sales and Consumer Fraud Act, which caps at 30 percent yearly interest on installment deals, applies to the company. The New Jersey decision reversed a lower court dismissal of a 2003 lawsuit by Hilda Perez, who alleged she paid $8,000 at about 80 percent interest on a TV, furniture, a washing machine and other appliances.
The California fund will be available to customers who have bought new memberships in RAC’s Preferred Customer Club since Nov. 1, 2004. RAC also will pay $750,000 in penalties. The agreement was sparked by an amendment to the California Rental Purchase Act clarifying the setting of cash prices, RAC said. The law took affect Jan. 1. A California attorney general’s inquiry stemmed from a class action suit filed in 2002 by Benjamin Griego in Superior Court.
RAC also came to terms with five affiliated ColorTyme franchisees ending franchise agreements covering 65 stores. ColorTyme got a $3.9 million payment to cover future royalties owed the group under the franchise contracts. It reduced third-quarter earnings 4 cents a share.
Meanwhile, RAC third-quarter net income grew to $25.27 million from $25.24 million, as total revenue jumped to $709.7 million from $587.1 million, due mainly to last year’s acquisition of Rent Way stores. Revenue from rentals and fees increased to $631.1 million from $532.2 million, while merchandise sales jumped to $53.5 million from $36.3 million. Franchisee sales rose to $7.3 million from $6.7 million, but royalty income and fees from the agreement increased to $5 million from $1.2 million. The royalty income rise was tied to a $3.9 million settlement with the five ColorTyme franchisees. RAC opened 10 stores during the quarter and consolidated 24 into existing locations, ending the quarter with 3,361 company- owned locations.
RAC added financial services, including payday loans, to 61 locations, ending the quarter with 282. Its Cash Advantage financial services business posted a loss of a “little more than” eight to 10 cents per share third quarter, causing the chain to slow expansion plans to include 40 new locations in the fourth quarter, CEO Mark Speese said. Cash Advantage is expected to come to 200 more RAC locations in 2008 as it posts a five- to six-cent per share loss, he said. RAC ended the quarter with 30,000 to 40,000 fewer items rented than forecast, costing it about $4 million in monthly revenue, company officials said. The shortfall was due to a “very challenging business environment” as a sluggish economy hit RAC customers, Speese said. To spur rentals, RAC launched a “Worry Free Guarantee” promotion in late September that offers customers a chance to return a product after a week if not satisfied. RAC also will match prices offered elsewhere, company officials said.