Aarons 2005 Annual Report Download - page 21

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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Expenses
The 22.3% increase in 2005 operating expenses was due
primarily to the growth of our sales and lease ownership
division described above. Operating expenses for the year also
included the write-off of $4.4 million of rental merchandise and
property destroyed or severely damaged by Hurricanes Katrina
and Rita, of which approximately $1.9 million is expected to
be covered by insurance proceeds. The net pre-tax expense
recorded for the year for these damages was $2.5 million.
As a percentage of revenues, operating expenses increased
to 45.1% in 2005 compared to 43.8% in 2004.
The 20.6% increase in depreciation of rental merchandise
was driven by the growth of our sales and lease ownership
division described above. As a percentage of total rentals and
fees, depreciation of rental merchandise decreased slightly to
36.2% in 2005 from 36.5% in 2004.
The 57.4% increase in interest expense is primarily a result
of higher debt levels, which increased by 82.6% at December
31, 2005 compared to December 31, 2004, coupled with
increasing rates on our revolving credit facility, partially
offset by a shift of our borrowings to a new private placement
financing in 2005 which had lower rates.
The reduction in the effective tax rate to 37.2% in 2005
compared to 37.7% in 2004 is due to lower state income taxes,
including adjustments resulting from favorable state income
allocations in connection with the Company’s filing of its 2004
tax return. The tax provision reflects the year-to-date effect of
such adjustments.
Net Earnings
The 10.2% increase in net earnings was primarily due to
the maturation of new Company-operated sales and lease
ownership stores added over the past several years contributing
to an 8.3% increase in same store revenues, and a 17.5%
increase in franchise fees, royalty income, and other related
franchise income. As a percentage of total revenues, net earn-
ings decreased to 5.2% in 2005 from 5.6% in 2004 primarily
related to increased expenses in 2005 and merchandise losses
due to Hurricanes Katrina and Rita, as well as a $3.4 million
after-tax gain in 2004 on the sale of Rainbow Rentals, Inc.
common stock.
Year Ended December 31, 2004 Versus Year Ended December 31, 2003
The following table shows key selected financial data for the years ended December 31, 2004 and 2003, and the changes in
dollars and as a percentage to 2004 from 2003.
Year Ended Year Ended Increase/ % Increase/
December 31, December 31, (Decrease) in Dollars (Decrease) to
(In Thousands) 2004 2003 to 2004 from 2003 2004 from 2003
REVENUES:
Rentals and Fees $694,293 $553,773 $140,520 25.4%
Retail Sales 56,259 68,786 (12,527) (18.2)
Non-Retail Sales 160,774 120,355 40,419 33.6
Franchise Royalties and Fees 25,093 19,328 5,765 29.8
Other 10,061 4,555 5,506 120.9
946,480 766,797 179,683 23.4
COSTS AND EXPENSES:
Retail Cost of Sales 39,380 50,913 (11,533) (22.7)
Non-Retail Cost of Sales 149,207 111,714 37,493 33.6
Operating Expenses 414,518 344,884 69,634 20.2
Depreciation of Rental Merchandise 253,456 195,661 57,795 29.5
Interest 5,413 5,782 (369) (6.4)
861,974 708,954 153,020 21.6
EARNINGS BEFORE INCOME TAXES 84,506 57,843 26,663 46.1
INCOME TAXES 31,890 21,417 10,473 48.9
NET EARNINGS $ 52,616 $ 36,426 $ 16,190 44.4%