Aarons 2001 Annual Report Download - page 17

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MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year Ended December 31, 2001 versus Year Ended
December 31, 2000
Total revenues for 2001 increased $43.8 million (8.7%)
to $546.7 million compared to $502.9 million in 2000 due
primarily to a $43.5 million (12.1%) increase in rentals and fees
revenues, plus a $714,000 (1.1%) increase in non-retail sales.
Of this increase in the rentals and fees revenues, $62.7 million
was attributed to the Aaron’s Sales & Lease Ownership division
which added 101 Company-operated stores in 2001, offset by
a $19.2 million decrease in the Company’s rent-to-rent division.
Revenues from retail sales decreased $1.9 million (3.1%)
to $60.5 million in 2001, from $62.4 million for the same
period last year. Non-retail sales, which primarily represent
merchandise sold to Aaron’s Sales & Lease Ownership fran-
chisees, increased $714,000 (1.1%) to $66.2 million compared
to $65.5 million for the same period last year. The increased
sales are due to the growth of the franchise operations.
Other revenues for 2001 increased $1.5 million (9.8%) to
$16.6 million compared to $15.1 million in 2000. This increase
was attributable to franchise fee and royalty income increasing
$1.2 million (10.0%) to $13.6 million compared to $12.4 mil-
lion last year, reflecting the net addition of 16 new (including
3 acquired) franchised stores in 2001 and improved operating
revenues at mature franchised stores.
Cost of sales from retail sales decreased $169,000 (.4%) to
$44.0 million compared to $44.2 million, and as a percentage
of sales, increased to 72.7% from 70.7% primarily due to
product mix. Cost of sales from non-retail sales increased
$1.0 million (1.6%) to $62.0 million from $61.0 million, and
as a percentage of sales, increased to 93.6% from 93.1%.
The decreased margins on non-retail sales was primarily the
result of slightly lower margins on certain products sold
to franchisees.
Operating expenses increased $49.1 million (21.6%) to
$276.7 million from $227.6 million. As a percentage of total
revenues, operating expenses were 50.6% in 2001 and 45.3%
in 2000. Operating expenses increased as a percentage of total
revenues between years primarily due to the costs associated
with the acquisition and accelerated start-up costs of sales
and lease ownership locations formerly operated by one of
the nation’s largest furniture retailers along with other new
store openings. In addition, the Company recorded non-cash
charges of $5.6 million related to the future real estate lease
obligations of closed rent-to-rent stores and the write down
of inventory and other assets within the rent-to-rent division.
Depreciation of rental merchandise increased $17.2 million
(14.3%) to $137.9 million, from $120.7 million, and as a
percentage of total rentals and fees increased to 34.2% from
33.5% in 2000. The increase as a percentage of rentals and
fees is primarily due to a greater percentage of the Company’s
rentals and fees coming from the Aaron’s Sales & Lease
Ownership division which depreciates its rental merchandise
at a faster rate than the rent-to-rent division.
Interest expense increased $633,000 (11.3%) to $6.3
million compared to $5.6 million. As a percentage of total
revenues, interest expense was 1.1% in 2001 and 2000.
The Company manages its exposure to changes in short-
term interest rates, particularly to reduce the impact on its
floating-rate term notes, by entering into interest rate swap
agreements. The counterparties to these contracts are high
credit quality commercial banks. Consequently, credit risk,
which is inherent in all swaps, has been minimized to a large
extent. Interest expense is adjusted for the differential to be
paid or received as interest rates change. The level of floating-
rate debt fixed by swap agreements was $60 million at
December 31, 2001 and the Company does not expect a
significant change in this amount in 2002. Accordingly, the
Company does not believe it has material exposure of poten-
tial, near-term losses in future earnings, and/or cash flows from
reasonably possible near-term changes in market rates.
Income tax expense decreased $9.1 million (54.8%) to $7.5
million compared to $16.6 million. The Company’s effective tax
rate was 37.9% in both 2001 and 2000.
As a result, net earnings decreased $14.9 million (54.8%) to
$12.3 million for 2001 compared to $27.3 million for the same
period in 2000. As a percentage of total revenues, net earnings
were 2.3% in 2001 and 5.4% in 2000. The decrease in net
earnings is primarily the result of start-up expenses associated
with the 101 new store openings, as compared to just 32
stores opened in the prior year, and non-cash charges asso-
ciated with the rent-to-rent division.
Year Ended December 31, 2000 versus Year Ended
December 31, 1999
Total revenues for 2000 increased $65.6 million (15.0%)
to $502.9 million compared to $437.4 million in 1999 due
primarily to a $41.7 million (13.1%) increase in rentals and
fees revenues, plus a $20.1 million (44.3%) increase in non-
retail sales. Of this increase in rentals and fees revenues,
$37.7 million was attributable to the Aaron’s Sales & Lease
Ownership division. Rentals and fees revenues from the
Company’s rent-to-rent operations increased $4.0 million
during the same period.
Revenues from retail sales increased $121,000 (.2%) to
$62.4 million in 2000, from $62.3 million for the same period
last year. Non-retail sales, which primarily represent merchan-
dise sold to Aaron’s Sales & Lease Ownership franchisees,
increased $20.1 million (44.3%) to $65.5 million compared
to $45.4 million for the same period last year. The increased
sales are due to the growth of the franchise operations.
Other revenues for 2000 increased $3.6 million (31.4%) to
$15.1 million compared to $11.5 million in 1999. This increase
was attributable to franchise fee and royalty income increasing
$3.3 million (36.3%) to $12.4 million compared to $9.1 million
last year, reflecting the net addition of 38 new franchised
stores in 2000 and improved operating revenues at mature
franchised stores.
Cost of sales from retail sales decreased $1.1 million (2.4%)
to $44.2 million compared to $45.3 million, and as a percent-
age of sales, decreased to 70.7% from 72.6% primarily due to
product mix. Cost of sales from non-retail sales increased $18.5
million (43.7%) to $61.0 million from $42.5 million, and as a
percentage of sales, decreased to 93.1% from 93.5%. The
increased margins on non-retail sales was primarily the result of
slightly higher margins on certain products sold to franchisees.
Operating expenses increased $25.7 million (12.7%) to
$227.6 million from $201.9 million. As a percentage of total