Aarons 2015 Annual Report Download - page 59

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In addition, franchisees typically pay a non-refundable initial franchise fee from $15,000 to $50,000 depending upon market size. Franchise fees and area
development fees are generated from the sale of rights to develop, own and operate sales and lease ownership stores. These fees are recognized as income
when substantially all of the Company’s obligations per location are satisfied, generally at the date of the store opening. The Company guarantees certain
debt obligations of some of the franchisees and receives guarantee fees based on the outstanding debt obligations of such franchisees. The Company
recognizes finance fee revenue as the guarantee obligation is satisfied. Refer to Note 9 for additional discussion of the Company’s franchise-related guarantee
obligation.
Franchise fee revenue was $600,000, $1.0 million and $1.7 million; royalty revenue was $57.7 million, $58.8 million and $59.1 million; and finance fee
revenue was $2.9 million, $3.7 million and $5.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. Deferred franchise and area
development agreement fees, included in accounts payable and accrued expenses in the accompanying consolidated balance sheets, were $1.6 million and
$2.8 million at December 31, 2015 and 2014, respectively.
Lease Merchandise
The Company’s lease merchandise consists primarily of furniture, consumer electronics, computers, appliances and household accessories and is recorded at
cost, which includes overhead from production facilities, shipping costs and warehousing costs. The sales and lease ownership stores depreciate merchandise
to a 0% salvage value over the lease agreement period when on lease, generally 12 to 24 months (monthly agreements) or 65 to 104 weeks (weekly
agreements), and generally 36 months when not on lease. The Company’s Progressive division, at which substantially all merchandise is on lease, depreciates
merchandise over the lease agreement period, which is typically over 12 months.
The Company’s policies require weekly lease merchandise counts at its store-based operations, which include write-offs for unsalable, damaged, or missing
merchandise inventories. Full physical inventories are generally taken at the fulfillment and manufacturing facilities one to two times per year, and
appropriate provisions are made for missing, damaged and unsalable merchandise. In addition, the Company monitors lease merchandise levels and mix by
division, store, and fulfillment center, as well as the average age of merchandise on hand. If unsalable lease merchandise cannot be returned to vendors, it is
adjusted to its net realizable value or written off.
All lease merchandise is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise identified is written off. The Company
records lease merchandise adjustments on the allowance method, which estimates the merchandise losses incurred but not yet identified by management as of
the end of the accounting period based on historical write off experience. As of December 31, 2015 and 2014, the allowance for lease merchandise write offs
was $33.4 million and $27.6 million, respectively.
Lease merchandise adjustments totaled $136.4 million, $99.9 million and $58.0 million during the years ended December 31, 2015, 2014 and 2013,
respectively, and are included in operating expenses in the accompanying consolidated statements of earnings.
Retail and Non-Retail Cost of Sales
Included in cost of sales is the net book value of merchandise sold, primarily using specific identification. It is not practicable to allocate operating expenses
between selling and lease operations.
Shipping and Handling Costs
The Company classifies shipping and handling costs as operating expenses in the accompanying consolidated statements of earnings, and these costs totaled
$77.9 million, $81.1 million and $78.6 million in 2015, 2014 and 2013, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising production costs are initially recognized as a prepaid advertising asset and are expensed
when an advertisement appears for the first time. Total advertising costs amounted to $39.3 million, $50.5 million and $43.0 million in 2015, 2014 and 2013,
respectively. These advertising costs are shown net of cooperative advertising considerations received from vendors, substantially all of which represent
reimbursement of specific, identifiable and incremental costs incurred in selling those vendors’ products. The amount of cooperative advertising
consideration netted against advertising expense was $36.3 million, $28.3 million and $25.0 million in 2015, 2014 and 2013, respectively. The prepaid
advertising asset was $900,000 and $1.3 million at December 31, 2015 and 2014, respectively.
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