"Sometime we have to stop and say, it's time to cut bait"
Wayland Russell
Rainbow CEO

Rainbow Rentals once dominated the high end of Rent to Own. "The Million Dollar Store" of the past is no more. While 87 of the chains 125 locations still exceed $900,000 in annual revenue, an amount only dreamt of by most companies, Rainbow has been unable to duplicate it's million dollar model since 1999, forcing the company to re-think everything from customer service to it's custom of not charging fees.

Increased competition from Rent a Center who, in the words of Rainbow CEO Wayland Russell, "is everywhere", combined with mismanagement, lack of a consistent plan, and store level turnover at unacceptably high rates have stunted the company's growth. CEO Russell stated that the company, while profitable, "is stuck in neutral."

Rainbow has announced several initiatives since 1999 to regain market share and cut expenses. While expenses have been successfully reduced, attempts to raise revenue at new stores opened in the past 3 years have failed. Acquisitions continue to outperform new store openings, causing some to question Rainbow's management methods.

Too many plans and not enough action have taken their toll on investor patience. Investor angst showed through during the recent earnings conference call. CEO Wayland Russell commented that Rainbow had probably held on to past mistakes too long. He added that at some point "We have to get going or get gone." One investor responded, "How much time are you giving yourself to perform before you get gone?" Several analysts seemed more interested in Rainbow's value as a potential acquisition by competitors than the companies future performance. Aaron Rents owns 8% of Rainbow stock and has long been a suitor. Rainbow's large footprint, high volume stores have much in common with Aarons.

Company officials admit holding on to unprofitable locations too long. Based on comments made during the earnings call, 15 to 20 of the company's 125 stores are not meeting expectations. Rainbow chief financial officer Michael Pechia said stores that continue to be a drag on earnings are being looked at for consolidation or closure.

Rainbow put all new store openings on hold until 2004 in an attempt to stop the bleeding before any further expansion.

There were bright spots in the most recent quarter. Rainbow gained in both customer count and units on rent. Unlike competitor Rent a Center, Rainbow reported no impact on customer count or BOR as a result of the child tax credits. Rainbow store managers contacted by upper management reported that customers receiving a check were primarily spending the money on school supplies, not rental. Aaron Rents also reports no impact.

Although customer count is up, the average revenue per agreement is down. Rainbow heavily discounted used merchandise in Q3 to make room for new merchandise in Q4. The company's target idle inventory is 180 units per store. Currently, the company is averaging slightly better than goal at 160-170 units per location. Used merchandise makes up about half of idle inventory.

Rainbow's transition to digital is well underway. The company has not purchased analog in over 12 months, and has focused on flat screens since late 2002.

Turnover is traditionally high in retail. The relationship that develops between a rent to own customer and store level management can make high turnover a location killer. Rainbow currently has 80 manager trainees in the pipeline and, in the words of  CEO Wayland Russell, "We are recruiting talent from every one of our major competitors right now.

Rainbow's strategic 3 year plan will be compete in November. The company plans to reinstate it's new store opening plan sometime in 2004.