Aarons 1999 Annual Report Download - page 17

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Income tax expense increased $2.0 million (14.5%) to
$15.7 million compared to $13.7 million. The Company’s
effective tax rate was 38.0% in 1999 compared to 39.0%
in 1998.
As a result, net earnings increased $4.1 million (19.2%)
to $25.6 million for 1999 compared to $21.5 million for the
same period in 1998. As a percentage of total revenues, net
earnings were 5.9% in 1999 and 5.7% in 1998.
Year Ended December 31, 1998 versus Year Ended
December 31, 1997
Total revenues for 1998 increased $68.9 million (22.2%)
to $379.7 million compared to $310.8 million in 1997 due
primarily to a $58.1 million (25.1%) increase in rentals and
fees revenues, plus an $8.3 million (11.4%) increase in sales.
Of this increase in rentals and fees revenues, $46.5 million
(80.0%) was attributable to the Aaron’s Rental Purchase
division. Rentals and fees revenues from the Company’s
rent-to-rent operations increased $11.5 million (10.5%)
during the same period.
Revenues from retail sales increased $4.0 million (6.8%)
to $62.6 million in 1998, from $58.6 million for the same
period last year. This increase was due to increased sales
of both new and rental return furniture in the rent-to-rent
and rental purchase divisions. Non-retail sales, which
primarily represent merchandise sold to Aaron’s Rental
Purchase franchisees, increased $4.4 million (29.8%) to
$19.0 million compared to $14.6 million for the same
period last year. The increased sales are due to the growth
of the franchise operations.
Other revenues for 1998 increased $2.5 million (39.6%)
to $8.8 million compared to $6.3 million in 1997. This
increase was attributable to franchise fee and royalty income
increasing $2.3 million (46.0%) to $7.3 million compared
to $5.0 million last year, reflecting the net addition of 35
new franchised stores in 1998 and increasing operating
revenues at mature franchised stores.
Cost of sales from retail sales increased $2.1 million
(5.0%) to $44.4 million compared to $42.3 million, and
as a percentage of sales, decreased slightly to 70.9% from
72.1% primarily due to product mix. Cost of sales from non-
retail sales increased $4.0 million (29.2%) to $17.6 million
from $13.7 million, and as a percentage of sales, decreased to
92.9% from 93.4%. The decrease in 1998 in cost of sales as
a percentage of sales is due to slightly higher margins on sales
through the Company’s distribution centers.
Operating expenses increased $40.0 million (26.7%) to
$189.7 million from $149.7 million. As a percentage of total
revenues, operating expenses were 50.0% in 1998 and 48.2%
in 1997. Operating expenses increased as a percentage of
total revenues between years primarily due to the Company’s
acquisitions of RentMart Rent-To-Own, Inc. and Blackhawk
Convention Services both in December 1997. The RentMart
stores were relatively immature and had lower revenues
over which to spread expenses and Blackhawk’s convention
furnishings business had higher operating expenses as a
percentage of revenues than traditional rent-to-rent and
rental purchase operations.
Depreciation of rental merchandise increased $18.0
million (25.3%) to $89.2 million, from $71.2 million, and
as a percentage of total rentals and fees, was 30.8% for both
years. Interest expense decreased $160,000 (4.3%) to $3.6
million compared to $3.7 million. As a percentage of total
revenues, interest expense was 0.9% in 1998 compared to
1.2% in 1997.
Income tax expense increased $1.9 million (15.8%) to
$13.7 million compared to $11.8 million. The Company’s
effective tax rate was 39.0% in 1998 compared to 39.2%
in 1997.
As a result, net earnings increased $3.1 million (16.8%)
to $21.5 million for 1998 compared to $18.4 million for the
same period in 1997. As a percentage of total revenues, net
earnings were 5.7% in 1998 and 5.9% in 1997.
Liquidity and Capital Resources
Cash flows from operations for the years ended December
31, 1999 and 1998 were $140.3 million and $120.6 million,
respectively. Such cash flows include profits on the sale of
rental return merchandise. The Company’s primary capital
requirements consist of acquiring rental merchandise for
both rent-to-rent and Company-operated Aaron’s Rental
Purchase stores. As the Company continues to grow, the
need for additional rental merchandise will continue to be
the Company’s major capital requirement. These capital
requirements historically have been financed through bank
credit, cash flow from operations, trade credit, proceeds from
the sale of rental return merchandise and stock offerings.