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Good times are bad times for pawnshops

Establishments seeking to revamp their image

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The traditional pawnshop is on borrowed time.

For years, these establishments have been trying to break away from their image — seedy, back-alley storefronts where the desperate and the delinquent exchange their valuables for cash. To some extent, the shops have succeeded in getting their message across, in many cases because they have remade themselves: Many pawnshops today are part of publicly held chains and operate out of spruced-up premises, sometimes in relatively affluent neighborhoods. The aim is to appeal to the same customers who shop at retailers such as Wal-Mart Stores Inc. and Kmart Corp.

But they remain, after all, pawnshops, and they aren't flourishing in the New Economy. Analysts and executives say the current 4 percent national unemployment rate has dried up the core pawning business as fewer people need to swap gold watches and diamond rings for quick cash to make car payments, pay telephone bills and cover other debts. Some chains have posted hefty losses, and Wall Street has cashed in its tickets for the once-highflying companies.

"Who would believe you'd spend the majority of your life hoping for an economy like this one, only to end up in an industry that doesn't need it?" marvels Scott Williamson, executive vice president of First Cash Financial Services Inc. of Arlington, Texas, a chain of 147 pawn and check-cashing shops.

Absent the hard times that stock their shelves and swell their coffers, pawnshops are trying new tactics to keep afloat. First Cash, for example, has considered a number of ventures to boost its lean profits, including selling prepaid phone cards and liability auto insurance in its outlets. Neither of those operations has been put into effect, but the chain has expanded territorially — including internationally. Last year, it opened five stores in Mexico, and it plans to open five to 10 more there in the next 18 months. First Cash also launched a retail Web site displaying 250,000 items, including sewing machines, vacuum cleaners and lamps, that it acquired when the owners failed to reclaim them.

Many pawn chains are trying to find a way to take advantage of the good times that have depressed their traditional business. Some offer more mainstream financial services to appeal to customers who have steady jobs, like high-interest payday advances or loans. The pawnshop makes the loan and collects a predated personal check from the customer to be cashed on or after payday.

Such loans are convenient for customers — no credit checks and no collateral — but pawnshops have learned they can easily get burned. Defaults run as high as 25 percent, industry executives say. The typical gambit is that customers have closed their checking accounts before payday, making the check held by the pawnshop worthless.

Some pawn chains have tried opening small check-cashing kiosks in gas stations and supermarkets. The booths attract some people who would not ordinarily go into a pawnshop but who lack checking or savings accounts. But fees are small, and the business is labor-intensive since the booth must be staffed. Cash America International Inc., the largest pawn chain with 500 locations, last year sold a 45 percent stake in its Mr. Payroll Corp. to Wells Fargo Bank NA after the 137 or so manned kiosks racked up losses.

Cash America, based in Fort Worth, Texas, rolled out a subsidiary last year that rents tires to drivers through a weekly payment program. The tire business was a move to help the company's sagging profits, says Bill White, a Cash America vice president. "We have not seen growth over the last few years," he says. Indeed, Cash America last month posted a second-quarter loss of $7.5 million, compared with earnings of $1.9 million in the year-ago quarter.

Since a large part of the pawning business is getting rid of huge inventories of defaulted items such as bicycles and antiques, some companies are looking to online auctioneers like eBay Inc. and Pawnbroker.com Inc. for help. U.S. Pawn Inc., a Westminster, Colo., pawn concern with 13 stores that reported slim profit this year, says about half of the company's revenue comes from the resale of gold earrings, necklaces and other items left as collateral on loans.

"The potential in e-tailing exists for pawnshops," said Chief Executive Charles Van Gundy in a recent interview after announcing his resignation, effective Dec. 31.

For several years, pawnshops have been under some scrutiny for selling handguns. Congress last year kept provisions in the Brady Bill that require more paperwork and checks on gun pawns. Pawnshop owners had been lobbying Congress to repeal the measure.

The checks have slowed the sale of handguns. Now many pawnshops are considering halting handgun sales altogether. And some that already limit handgun sales, like U.S. Pawn, are considering similar moves for rifles and shotguns.

To further distance themselves from their past, some chains are also opening stores in more affluent areas to attract customers with more disposable income. Most have also refurbished old shops with bright lighting, prominent signage and wide aisles.

But despite the changes, analysts say many people still harbor misconceptions that pawnshops are places of iniquity frequented by thieves. On the contrary, says Dennis Telzrow, an analyst at the investment firm Hoak Breedlove Wesneski in Dallas, "the majority of people who use pawnshops are upstanding citizens who just don't have the money to spend on the things they need."

Via The Associated Press