Aarons 2010 Annual Report Download - page 19

Overview
Aaron’s, Inc. is a leading specialty retailer of consumer electronics,
computers, residential furniture, household appliances and acces-
sories. Our major operating divisions are the Aaron’s Sales & Lease
Ownership Division and the Woodhaven Furniture Industries
Division, which manufactures and supplies the majority of the
upholstered furniture and bedding leased and sold in our stores.
Aaron’s has demonstrated strong revenue growth over the last
three years. Total revenues have increased from $1.593 billion in
2008 to $1.877 billion in 2010, representing a compound annual
growth rate of 8.5%. Total revenues for the year ended December
31, 2010 increased $124.1 million, or 7.1%, over the prior year.
The majority of our growth comes from the opening of new
sales and lease ownership stores and increases in same store revenues
from previously opened stores. We added a net of 67 company-
operated sales and lease ownership stores in 2010. We spend on
average approximately $600,000 to $700,000 in the first year of
operation of a new store, which includes purchases of lease merchan-
dise, investments in leasehold improvements and financing first-year
start-up costs. Our new sales and lease ownership stores typically
achieve revenues of approximately $1.1 million in their third year
of operation. Our comparable stores, open more than three years,
normally achieve approximately $1.4 million in unit revenues, which
we believe represents a higher unit revenue volume than the typical
rent-to-own store. Most of our stores are cash flow positive in the
second year of operations following their openings.
We also use our franchise program to help us expand our sales
and lease ownership concept more quickly and into more areas than
we otherwise would by opening only company-operated stores. Our
franchisees added a net of 67 stores in 2010. We purchased 12 fran-
chised stores during 2010. Franchise royalties and other related fees
represent a growing source of high-margin revenue for us, account-
ing for $59.1 million of revenues in 2010, up from $45.0 million in
2008, representing a compounded annual growth rate of 14.6%.
AARON’S OFFICE FURNITURE CLOSURE. In November 2008,
the Company completed the sale of substantially all of the assets and
the transfer of certain liabilities of its legacy residential rent-to-rent
business, Aaron’s Corporate Furnishings division, to CORT Business
Services Corporation. When the Company sold its rent-to-rent
business, it decided to keep the then 13 Aaron’s Office Furniture
stores, a rent-to-rent concept aimed at the office market. However,
after disappointing results in a difficult environment, in June
2010, the Company announced its plans to close all of the then 12
remaining Aaron’s Office Furniture stores and focus solely on the
Company’s Sales & Lease Ownership business. Since June 2010, the
Company has closed 11 of its Aaron’s Office Furniture stores and
has one remaining store open to liquidate merchandise. As a result,
the Company recorded $9.0 million in 2010 related to the write-
down and cost to dispose of office furniture, estimated future lease
liabilities for closed stores, write-off of leaseholds, severance pay, and
other costs associated with closing the stores and winding down the
division. We do not anticipate incurring significant charges in the
future related to winding down of the division.
STOCK SPLIT. On March 23, 2010, we announced a 3-for-2
stock split effected in the form of a 50% stock dividend on both
Nonvoting Common Stock and Class A Common Stock. New
shares were distributed on April 15, 2010 to shareholders of record
as of the close of business on April 1, 2010. All share and per share
information has been restated for all periods presented to reflect this
stock split.
SAME STORE REVENUES. We believe the changes in same store
revenues are a key performance indicator. The change in same store
revenues is calculated by comparing revenues for the year to revenues
for the prior year for all stores open for the entire 24-month period,
excluding stores that received lease agreements from other acquired,
closed or merged stores.
Key Components of Income
In this management’s discussion and analysis section, we review the
Company’s consolidated results, including the five components of
our revenues, costs of sales and expenses, of which depreciation of
lease merchandise is a significant part.
REVENUES. We separate our total revenues into five components:
lease revenues and fees, retail sales, non-retail sales, franchise royal-
ties and fees, and other revenues. Lease revenues and fees include all
revenues derived from lease agreements from our stores, including
agreements that result in our customers acquiring ownership at the
end of the term. Retail sales represent sales of both new and lease
return merchandise from our stores. Non-retail sales mainly represent
new merchandise sales to our sales and lease ownership division
franchisees. Franchise royalties and fees represent fees from the sale
of franchise rights and royalty payments from franchisees, as well
as other related income from our franchised stores. Other revenues
include, at times, income from gains on asset dispositions and other
miscellaneous revenues.
COST OF SALES. We separate our cost of sales into two compo-
nents: retail and non-retail. Retail cost of sales represents the original
or depreciated cost of merchandise sold through our company-
operated stores. Non-retail cost of sales primarily represents the cost
of merchandise sold to our franchisees.
OPERATING EXPENSES. Operating expenses include personnel
costs, selling costs, occupancy costs, and delivery, among other
expenses.
DEPRECIATION OF LEASE MERCHANDISE. Depreciation of
lease merchandise reflects the expense associated with depreciating
merchandise held for lease and leased to customers by our stores.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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