Aarons 2015 Annual Report Download - page 40

As a percentage of total revenues, operating expenses decreased to 42.7% in 2015 from 45.7% in 2014, generally as a result of the Company's price increases,
inventory reduction, and cost initiatives. Operating margin improvements also relate to the continued growth of Progressive, which has lower operating
expenses as a percentage of total revenues than the Company’s traditional lease-to-own business because it does not have store operations.
Year Ended December 31, 2014 Versus Year Ended December 31, 2013
Operating expenses increased $209.1 million, or 20.4%, to $1.2 billion in 2014 from $1.0 billion for the comparable period in 2013 due primarily to the
consolidation of Progressive's results from operations from the April 14, 2014 acquisition date. Progressive's personnel costs, lease merchandise write-offs,
and bad debt expense were $30.2 million, $40.9 million, and $60.5 million, respectively, in 2014 from that date.
As a percentage of total revenues, operating expenses decreased to 45.7% in 2014 from 45.8% in 2013, generally as a result of the Company's price increases,
inventory reduction, and cost initiatives.
Other Costs and Expenses
Year Ended December 31, 2015 Versus Year Ended December 31, 2014
Depreciation of lease merchandise. Depreciation of lease merchandise increased $280.0 million, or 30.0%, to $1.2 billion during 2015 from $932.6 million
during 2014. The Aaron's core business has continued to reduce inventory, while levels of merchandise on lease have remained consistent year over year,
resulting in idle merchandise representing approximately 6% of total depreciation expense in 2015 and 2014. As a percentage of total lease revenues and
fees, depreciation of lease merchandise increased to 45.2% from 42.0% in the prior year, primarily because of Progressive's continued growth relative to our
core business. Progressive's depreciation as a percentage of lease revenues is higher than the core business because, among other factors, its merchandise has a
shorter average life on lease and a higher rate of early buyouts.
Retail cost of sales. Retail cost of sales decreased $3.5 million, or 14.3%, to $21.0 million in 2015 from $24.5 million for the comparable period in 2014, and
as a percentage of retail sales, remained consistent at 64.0% in both periods.
Non-retail cost of sales. Non-retail cost of sales increased $21.7 million, or 6.6%, to $351.8 million in 2015, from $330.1 million for the comparable period
in 2014, and as a percentage of non-retail sales, decreased to 90.2% from 90.8%.
Financial advisory and legal costs. Financial advisory and legal costs of $13.7 million were incurred during 2014 related to addressing now-resolved
strategic matters, including an unsolicited acquisition offer, two proxy contests and shareholder proposals.
Restructuring expenses. In connection with the Company’s July 15, 2014 announced closure of 44 Company-operated stores and restructuring of its home
office and field support, charges of $9.1 million were incurred in 2014 and principally consist of contractual lease obligations, the write-off and impairment
of property, plant and equipment and workforce reductions.
Retirement charges. Retirement charges of $9.1 million were incurred during 2014 due to the retirements of both the Company’s Chief Executive Officer and
Chief Operating Officer in 2014.
Progressive-related transaction costs. Financial advisory and legal costs of $6.6 million were incurred in 2014 in connection with the April 14, 2014
acquisition of Progressive.
Regulatory income. Regulatory income of $1.2 million in 2014 was recorded as a reduction in previously recognized regulatory expense upon the resolution
of the regulatory investigation by the California Attorney General.
Year Ended December 31, 2014 Versus Year Ended December 31, 2013
Depreciation of lease merchandise. Depreciation of lease merchandise increased $304.5 million, or 48.5%, to $932.6 million during 2014 from
$628.1 million during the comparable period in 2013 due primarily to the consolidation of Progressive's results from operations from the April 14, 2014
acquisition date. Levels of merchandise on lease for the Aaron's core business remained generally consistent year over year, resulting in idle merchandise
representing approximately 6% of total depreciation expense in 2014 as compared to approximately 7% in 2013. As a percentage of total lease revenues and
fees, depreciation of lease merchandise increased to 42.0% from 35.9% in the prior year, primarily due to the inclusion of Progressive's results of operations
from the April 14, 2014 acquisition date. Progressive's inclusion increased depreciation as a percentage of lease revenues because, among other factors, its
merchandise has a shorter average life on lease, as well as a higher rate of early buyouts, than our traditional lease-to-own business.
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