After clicking the Rename menu item, A text box will appear over the selected user's name. Typing a new name will rename them on your contact list (This will only be renamed for you, and not for anyone else). To ensure the new name is used, press Enter. If you want to cancel the rename, press Escape (Esc)
To reset a user to their default name, rename them to nothing, and their name will be reset.
You can also rename a user by selecting them in the list, and pressing F2 on the keyboard.