Aarons 2007 Annual Report Download - page 26

24
Revenues
The 17.9% increase in total revenues, to $1.327 billion in
2006 from $1.126 billion in 2005, was due mainly to a
$147.6 million, or 17.5%, increase in rentals and fees rev-
enues, plus a $38.9 million increase in non-retail sales. The
$147.6 million increase in rentals and fees revenues was
attributable to a $142.4 million increase from our sales and
lease ownership division, which had a 7.2% increase in same
store revenues during the 24 month period ended December
31, 2006 and added 229 company-operated stores since the
beginning of 2005. The growth in our sales and lease owner-
ship division was augmented by a $5.5 million increase in
revenues in our corporate furnishings division. Additionally,
included in other revenues in 2006 was a $7.2 million gain
from the sale of the assets of our 12 stores located in Puerto
Rico and three additional stores located in the continental
United States. We received $16.0 million in cash proceeds
and disposed of goodwill of $1.0 million in conjunction with
these sales.
The 6.8% increase in revenues from retail sales, to $62.3
million in 2006 from $58.4 million in 2005, was primarily
due to an increase of $3.7 million in the sales and lease
ownership division as a result of the increased demand and
growing store base described above. Retail sales represent
sales of both new and returned rental merchandise.
The 20.9% increase in non-retail sales (which mainly repre-
sents merchandise sold to our franchisees), to $224.5 million
in 2006 from $185.6 million in 2005, was due to the growth
of our franchise operations and our distribution network. The
total number of franchised sales and lease ownership stores
at December 31, 2006 was 441, reflecting a net addition of
84 stores since the beginning of 2005.
The 12.9% increase in franchise royalties and fees, to
$33.6 million in 2006 from $29.8 million in 2005, primarily
reflects an increase in royalty income from franchisees,
increasing 17.6% to $25.4 million in 2006 compared to
$21.6 million in 2005. The increase in royalty income from
franchisees was partially offset by decreased franchise and
financing fee revenues. Revenues increased in this area pri-
marily due to the previously mentioned growth of franchised
stores and an increase in certain royalty rates.
The 103.3% increase in other revenues, to $13.4 million
in 2006 from $6.6 million in 2005, is primarily attributable
to a $7.2 million gain from the sale of the assets of our 12
stores located in Puerto Rico and three additional stores in
the continental United States. In addition, included in other
income in 2005 is $934,000 of proceeds from business
interruption insurance associated with the operations of
hurricane-affected areas and a $565,000 gain on the sale
of our holdings of Rent-Way, Inc. common stock.
With respect to our major operating units, revenues for
our sales and lease ownership division increased 19.5%, to
$1.201 billion for 2006 from $1.005 billion for 2005. This
increase was attributable to the addition of stores and same
store revenue growth described above. The 4.7% increase in
corporate furnishings division revenues, to $123.0 million for
2006 from $117.5 million for 2005, is primarily the result of
improving economic and business conditions.
Cost of Sales
Cost of sales from retail sales increased 5.7% to $41.3
million in 2006 compared to $39.1 million in 2005, with
retail cost of sales as a percentage of retail sales remaining
comparable between the periods.
Cost of sales from non-retail sales increased 19.9%, to
$207.2 million in 2006 from $172.8 million in 2005, and as
a percentage of non-retail sales, decreased slightly to 92.3%
from 93.1%.
Expenses
Operating expenses in 2006 increased $72.4 million to
$579.6 million from $507.2 million in 2005, a 14.3%
increase. As a percentage of total revenues, operating
expenses were 43.7% in 2006 and 45.1% in 2005. Operating
expenses decreased as a percentage of total revenues in
2006 mainly due to the maturing of new company-operated
sales and lease ownership stores and the 7.2% increase in
same store revenues previously mentioned. Additionally,
operating expenses in 2005 included $2.5 million in
expenses, net of $1.9 million of insurance recoveries,
related to losses due to Hurricanes Katrina and Rita.
Depreciation of rental merchandise increased $58.5
million to $364.1 million in 2006 from $305.6 million during
the comparable period in 2005, a 19.1% increase. As a
percentage of total rentals and fees, depreciation of rental
merchandise increased to 36.7% from 36.2% from a year ago.
The increase as a percentage of rentals and fees was primar-
ily due to increased depreciation expense associated with an
increase in 90 day same as cash sales and the early payout of
lease ownership agreements in our sales and lease ownership
division and, to a lesser extent, 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 corporate furnishings division.
Interest expense increased to $9.7 million in 2006
compared with $8.5 million in 2005, a 14.2% increase. The
increase in interest expense was primarily due to higher debt
levels during part of 2006 and, to a lesser extent, higher
interest rates in 2006. Debt levels at December 31, 2006
decreased significantly as a result of debt payments made
with the proceeds of the Company’s 2006 stock offering.
Income tax expense increased $11.7 million to $46.1
million in 2006 compared with $34.3 million in 2005,
representing a 34.2% increase. Aaron Rents’ effective tax
rate was 36.9% in 2006 compared with 37.2% in 2005.
Net Earnings
Net earnings increased $20.6 million to $78.6 million in
2006 compared with $58.0 million in 2005, representing
a 35.6% increase. As a percentage of total revenues, net