Aarons 2011 Annual Report Download - page 18

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues
The 7.8% increase in total revenues, to $2.024 billion in 2011
from $1.877 billion in 2010, was due mainly to a $135.2 million,
or 7.5%, increase in revenues from the Sales and Lease Ownership
segment, a $15.6 million increase in revenues from the HomeSmart
segment and a $4.1 million, or 7.0%, increase in revenues from the
Franchise segment.
Sales and Lease Ownership segment revenues increased due
to a 7.2% increase in lease revenues and fees and 7.4% increase
in non-retail sales (which mainly represents merchandise sold to
our franchisees). Lease revenues and fees within the Sales and
Lease Ownership segment increased due to a net addition of 78
Company-operated stores since the beginning of 2010 and a 4.4%
increase in same store revenues. Non-retail sales increased primarily
due to net additions of 116 franchised stores since the beginning
of 2010.
Franchise segment revenues increased due to a $4.0 million, or
8.4%, increase in royalty income from franchisees. Franchise roy-
alty income increased primarily due to the growth in the number
of franchised stores and a 1.3% increase in same store revenues of
existing franchised stores. The total number of franchised sales and
lease ownership stores at December 31, 2011 was 713, reflecting a
net addition of 116 stores since the beginning of 2010.
HomeSmart segment revenues increased to $15.6 million pri-
marily due to the growth in the number of HomeSmart stores to
71, all of which have been added since the beginning of 2010.
The $114.5 million increase in lease revenues and fees and
$26.7 million in non-retail sales was primarily attributable to our
Sales and Lease Ownership segment discussed above. The $4.1 mil-
lion increase in franchise royalties and fees was attributable to our
Franchise segment also discussed above.
The 4.9% decrease in retail sales, to $38.6 million in 2011 from
$40.6 million in the comparable period in 2010, was due primarily
to the closure of the majority of the Aaron’s Office Furniture stores
in 2010.
Other revenues increased 30.5% to $16.8 million in 2011 from
$12.9 million in 2010 due to a $1.1 million increase in gains from
the sales of stores and a $1.2 million increase in interest income
primarily from investment securities. Included in other revenues
in 2011 is a $3.0 million gain from the sales of 25 Sales and Lease
Ownership stores. Included in other revenues in 2010 is a $1.9
million gain on the sales of 11 Sales and Lease Ownership stores.
Costs and Expenses
Non-retail cost of sales increased 6.9%, to $353.7 million in 2011,
from $330.9 million for the comparable period in 2010, and as a
percentage of non-retail sales, decreased to 90.9% in 2011 from
91.3% in 2010.
Operating expenses in 2011 increased $47.3 million to $872.2
million from $824.9 million in 2010, a 5.7% increase. As a per-
centage of total revenues, operating expenses decreased to 43.1% in
2011 from 44.0% in 2010.
We began ceasing the operations of the Aaron’s Office
Furniture division in June of 2010. We closed 14 Aaron’s Office
Furniture stores during 2010 and have one remaining store open
to liquidate merchandise. As a result, in 2010 we recorded $3.3
million in closed store reserves and $4.7 million in lease merchan-
dise write-downs and other miscellaneous expenses, totaling $9.0
million in operating expenses, related to the closures. No operating
expenses related to the closure were recorded in 2011.
The Company recorded $36.5 million in lawsuit expense in
2011. There was no similar charge during 2010.
Depreciation of lease merchandise increased $46.6 million
to $550.7 million in 2011 from $504.1 million during the
comparable period in 2010, a 9.2% increase as a result of higher
on-rent lease merchandise due to the growth of our Sales and Lease
Ownership and HomeSmart segments. As a percentage of total
lease revenues and fees, depreciation of lease merchandise increased
slightly to 36.3% from 36.0% in the prior year.
Interest expense increased to $4.7 million in 2011 compared
with $3.1 million in 2010, a 52.1% decrease. The increase is
directly related to the issuance of our senior unsecured notes on
July 5, 2011.
Income tax expense decreased $2.8 million to $69.6 million in
2011, compared with $72.4 million in 2010, representing a 3.9%
decrease. Our effective tax rate was 38.0% in both 2011 and 2010.
Net Earnings from Continuing Operations
Net earnings decreased $4.6 million to $113.8 million in 2011 com-
pared with $118.4 million in 2010, representing a 3.9% decrease.
Earnings before income taxes decreased $7.4 million, or 3.9%,
primarily due to a $15.7 million, 9.9%, or, decrease in the Sales
and Lease Ownership segment and a $7.0 million decrease in the
HomeSmart segment, offset by a $3.6 million, or 7.9%, increase in
the Franchise segment. As a percentage of total revenues, net earn-
ings from continuing operations were 5.6% and 6.3% in 2011 and
2010, respectively. The decrease in net earnings was primarily the
result of the increase litigation expense, offset by an increase in prof-
itability of new Company-operated sales and lease ownership stores
added over the past several years, contributing to a 4.4% increase in
same store revenues, and a 7.0% increase in franchise royalties and
fees.
Year Ended December 31, 2010 Versus Year Ended
December 31, 2009
The Aaron’s Corporate Furnishings division is reflected as a discon-
tinued operation for all periods presented. The following table shows
key selected financial data for the years ended December 31, 2010
and 2009, and the changes in dollars and as a percentage to 2010
from 2009. For the years ended December 31, 2010 and 2009, the
Company’s Sales and Lease Ownership segment and the Franchise
segment accounted for substantially all of the operations of the
Company and, therefore, unless otherwise noted only the material
changes are discussed within these two segments. The entire produc-
tion of our Manufacturing segment, consisting of our Woodhaven
Furniture Industries operation, is leased or sold through our stores,
and consequently that segment’s revenues and earnings before
income taxes are eliminated through the elimination of intersegment
revenues and intersegment profit.
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