Aarons 2002 Annual Report Download - page 17

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year ended December 31, 2002 Versus Year Ended
December 31, 2001
REVENUES
Total revenues for the year ended 2002 increased $94 million
to $640.7 million compared to $546.7 million in 2001, a 17.2%
increase. The increase was due mainly to a $55.8 million, or 13.8%,
increase in rentals and fees revenues, plus a $22.8 million, or
34.4%, increase in non-retail sales. Our rentals and fees revenues
include all revenues derived from rental agreements from our sales
and lease ownership and rent-to-rent stores, including agreements
that result in our customers acquiring ownership at the end of the
term of the rental agreements. The increase in rentals and fees
revenues was attributable to a $77.3 million increase from our sales
and lease ownership division, which had an average increase of
13% in same store revenues for the year ended 2002 and added
149 Company-operated stores since the beginning of 2001. The
growth in our sales and lease ownership division was offset by a
$21.5 million decrease in rental revenues in our rent-to-rent division.
The decrease in rent-to-rent division revenues is primarily the
result of our decision to close, merge, or sell 29 under-performing
stores since the beginning of 2001, as well as a decline of same
store revenues.
Revenues from retail sales increased $12.2 million to $72.7
million in 2002 from $60.5 million in 2001 due to an increase of
$20.8 million in the sales and lease ownership division offset by a
decrease of $8.6 million in our rent-to-rent division. Retail sales
represent sales of both new and rental return merchandise. Non-
retail sales, which primarily represent merchandise sold to our
franchisees, increased 34.4% to $89 million in 2002 from $66.2
million in 2001. The increased sales reflect the growth of our
franchise operations.
Other revenues, which include franchise fee and royalty income
and other miscellaneous revenues, for the year ended December
31, 2002 increased $3.2 million to $19.8 million compared with
$16.6 million in 2001, a 19.5% increase. This increase was attri-
butable to franchise fee and royalty income increasing $3 million,
or 21.8%, to $16.6 million compared with $13.6 million last year,
reflecting the net addition of 23 franchised stores in 2002 and
improved operating revenues at older franchised stores.
With respect to our major operating units, revenues for our
sales and lease ownership division increased $121 million to
$501.4 million in 2002 compared with $380.4 million last year,
a 31.8% increase. This increase was attributable to the store
additions and same store revenue growth described above. Rent-
to-rent division revenues for 2002 decreased 20% to $119.9 million
from $150 million in 2001, due primarily to the closing or other
disposition of under-performing stores and same store revenue
decline previously described.
COST OF SALES
Cost of sales from retail sales increased $9.9 million or 22.4%,
to $53.9 million in 2002 compared to $44 million in 2001, and as a
percentage of sales, increased to 74.1% from 72.7%. The increase
in retail cost of sales as a percentage of sales was primarily due to
a slight decrease in margins in both the rent-to-rent and sales and
lease ownership divisions in 2002 along with lower margins on
retail sales from our newly acquired Sight & Sound stores. Cost
of sales from non-retail sales increased $20.4 million to $82.4
million in the 2002 from $62 million in 2001, and as a percentage
of sales, decreased to 92.6% from 93.6%. The increased margins
on non-retail sales were primarily the result of higher margins on
certain products sold to franchisees.
EXPENSES
Operating expenses in 2002 increased $16.7 million to $293.3
million from $276.7 million in 2001, a 6% increase. As a percentage
of total revenues, operating expenses were 45.8% in 2002 and
50.6% in 2001. Operating expenses decreased in 2002 as a per-
centage of total revenues primarily due to higher costs in 2001
associated with the acquisition of sales and lease ownership store
locations formerly operated by one of the nation’s largest furniture
retailers along with other new store openings coupled with non-
cash charges of $5.6 million related to the rent-to-rent division.
In addition, we discontinued amortizing goodwill in 2002 in
connection with the adoption of a new accounting standard.
This adoption had the effect of eliminating amortization expense
of $1.1 million in 2002 compared with 2001.
Depreciation of rental merchandise increased $24.8 million to
$162.7 million in 2002 from $137.9 million during 2001, an 18%
increase. As a percentage of total rentals and fees, depreciation of
rental merchandise increased to 35.4% from 34.2% in 2001. The
increase as a percentage of rentals and fees reflects a greater
percentage of our rentals and fees revenues coming from our
sales and lease ownership division, which depreciates its rental
merchandise at a faster rate than our rent-to-rent division.
On January 1, 2002, we began depreciating sales and lease
ownership merchandise upon the earlier to occur of its initial
lease to a customer or twelve months after it is acquired from the
vendor. Previously, we began depreciating sales and lease owner-
ship merchandise as soon as it was delivered to our stores from our
distribution centers. This change in accounting method increased
net earnings by approximately $3 million, or $.14 per diluted
common share in 2002.
Interest expense decreased $1.5 million to $4.8 million in 2002
compared with $6.3 million in 2001, a 23.8% decline. As a per-
centage of total revenues, interest expense decreased to 0.7% in
2002 from 1.1% in 2001. The decrease in interest expense as a
percentage of total revenues was primarily due to lower debt
levels in 2002.
Income tax expense increased $8.7 million to $16.2 million in
2002 compared with $7.5 million in 2001, representing an 115.6%
increase due to the higher pre-tax earnings. Aaron Rents’ effective
tax rate was 37.1% in 2002 compared with 37.9% in 2001, pri-
marily due to lower non-deductible expenses.
NET EARNINGS
As a result, net earnings increased $15.1 to $27.4 million in
2002 compared with $12.3 million last year representing a 122.4%
increase. As a percentage of total revenues, net earnings were
4.3% in 2002 and 2.3% in 2001. The increase in net earnings was
primarily due to the non-cash charges of $5.6 million incurred in
the third quarter of 2001 along with the maturing 101 Company-
operated sales and lease ownership stores added in 2001, and a
13% increase in same store revenue growth, coupled with the
change in our rental merchandise depreciation method and the
non-amortization of goodwill. In addition, the Company experi-
enced higher than usual operating expenses in 2001 associated
with the addition of 101 Company-operated stores.