Aarons 2002 Annual Report Download - page 5

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merchandise to stores. Under the new
method, depreciation begins once the
merchandise goes out on initial lease.
This change in accounting method
increased 2002 net earnings by approxi-
mately $.14 per diluted share. Also dur-
ing 2002, the Company adopted SFAS
No. 142 which eliminated the amortiza-
tion of goodwill, having the effect of
increasing net earnings for the year by
$.03 per diluted share. In addition, the
new Sight & Sound stores reduced net
earnings by approximately $.06 per
diluted share during the year.
Some investors question the Company’s
exposure to a weak economy. Aaron
Rents, over its 48 years, has proven to
be recession-resistant and our Aaron’s
Sales & Lease Ownership business con-
tinues to reflect that characteristic. Not
only are Aaron’s customers normally in
the market for necessities rather than
for discretionary furnishings, but the
sales and lease ownership program also
captures revenue from individuals who
would in many cases not qualify for
traditional credit financing. It should be
noted, however, that our rent-to-rent
business has become increasingly depen-
dent upon corporate spending patterns.
We are optimistic that when the general
corporate environment improves, we
will see stronger revenue and earnings
contributions from this business.
MacTavish Furniture Industries, the
Company’s manufacturing division with
10 facilities in four states, posted a
record year of production in 2002,
manufacturing more than $55 million
(at cost) in furniture for our stores. In
addition, we now operate 11 distribu-
tion centers in the Aaron’s Sales & Lease
Ownership division, having added four
new locations in 2002 (in Arizona,
Tennessee, Oklahoma, and Puerto
Rico). We continue to believe that ver-
tical integration is a strategic advantage,
enabling our stores to offer rapid
delivery of a full product line to our
customers and allowing our stores to
operate with lower inventory levels.
Our nimble manufacturing operation
enables us to respond quickly to
changes in demand and styling with the
result of better service to our customers.
The Company’s financial strength was
substantially improved in 2002. A June
secondary offering of 1,725,000 shares
of Common Stock generated net pro-
ceeds of $34.1 million and a private
placement of $50 million in senior
unsecured notes was completed in
August. At year-end, there was minimal
bank debt outstanding under our $110
million revolving credit facility. With
our debt to capital ratio very low, the
Company has the financial strength to
achieve our expansion goals for the
foreseeable future.
During the year Ray M. Robinson was
elected to our Board of Directors, filling
a vacancy created by the resignation of
J. Rex Fuqua. Mr. Robinson is the
President of AT&T, Southern Region,
and brings a strong operating perspec-
tive to our Board. Mr. Fuqua served on
the Board for nearly eight years, and we
For the year, consolidated revenues
increased 17% to $640.7 million com-
pared to $546.7 million in 2001.
Systemwide revenues, which includes
the revenues of franchised stores,
advanced to $874.7 million, a 19%
increase over 2001. Net earnings for the
year were $27.4 million versus $12.3 mil-
lion last year. Diluted earnings per share
were $1.29 for 2002 compared to $.61 per
diluted share a year ago. Same store rev-
enues for Aaron’s Sales & Lease Owner-
ship stores opened for the entire year in
both 2002 and 2001 increased 13%.
Over the last few years we have dramat-
ically increased the number of Aaron’s
Sales & Lease Ownership stores, taking
advantage of opportunities in the mar-
ketplace. This aggressive new store
growth began to show positive results
during 2002 as these stores grew in rev-
enues and earnings. Start-up expenses
for these stores reduced pre-tax earn-
ings by approximately $7 million or $.20
per diluted share in 2002, a dramatic
reduction from the $14 million or $.42
per diluted share impact in 2001. As a
group, the stores opened during 2001
turned profitable in early 2003 and we
project substantial earnings contribu-
tions in future years as maturation of
these and other stores continues. At the
end of 2002, over 30% of our sales and
lease ownership stores were less than
two years old.
Effective January 1, 2002, the Company
changed its method of depreciating
merchandise in the Aaron’s Sales &
Lease Ownership division. Formerly
depreciation was tied to the delivery of