Aarons 2006 Annual Report Download - page 22

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REVENUES
The 18.9% increase in total revenues, to $1.126 billion in
2005 from $946.5 million in 2004, is primarily attributable
to continued growth in our sales and lease ownership division,
from both the opening and acquisition of new company-operated
stores and improvement in same store revenues. Revenues for our
sales and lease ownership division, including sales to franchisees,
increased $173.7 million to $1.005 billion in 2005 compared
with $831.1 million in 2004, a 20.9% increase. This increase was
attributable to an 8.3% increase in same store revenues and the
addition of 248 company-operated sales and lease ownership
stores since the beginning of 2004.
The 21.7% increase in rentals and fees revenues, to $845.2
million in 2005 from $694.3 million in 2004, was attributable
to a $143.1 million increase from our sales and lease ownership
division related to the growth in same store revenues and the
increase in the number of stores described above. Rental revenues
in our corporate furnishings division increased $7.7 million, or
10.1%, to $83.7 million in 2005 from $76.0 million in 2004 as
a result of generally improved economic conditions.
The 3.7% increase in revenues from retail sales, to $58.4
million in 2005 from $56.3 million in 2004, was primarily due to
a $1.5 million increase from our corporate furnishings division as
a result of generally improved economic conditions.
The 15.5% increase in non-retail sales in 2005 reflects the
significant growth of our franchise operations. The total number
of franchised stores at December 31, 2005 was 392, reflecting a
net addition of 105 since the beginning of 2004.
Franchise royalties and fees increased to $29.8 million in 2005
from $25.3 million in 2004, a 17.9% improvement. The increase
primarily reflects an increase in royalty income from franchisees,
increasing $3.8 million to $21.6 million in 2005 compared to
$17.8 million in 2004, with increased franchise and financing fee
revenues comprising the majority of the remainder. Revenue
increased in this area primarily due to the previously mentioned
growth of stores and an increase in certain royalty rates.
The 33.6% decrease in other revenues, to $6.6 million in
2005 from $9.9 million in 2004, is primarily attributable to
recognition of a $5.5 million gain in 2004 on the sale of our
holdings of Rainbow Rentals, Inc. common stock in connection
with that company’s merger with Rent-A-Center, Inc., partially
offset by the recognition of a $565,000 gain in 2005 on the sale
of our holdings of Rent-Way, Inc. common stock. In addition,
included in other income in 2005 is $934,000 of proceeds from
business interruption insurance associated with the operations
of hurricane-affected areas.
With respect to our major operating units, revenues for our
sales and lease ownership division increased 20.9%, to $1.005
billion for 2005 from $831.1 million for 2004. This increase
was attributable to the addition of stores and same store
revenue growth described above. The 8.3% increase in corporate
furnishings division revenues, to $117.5 million for 2005 from
$108.5 million for 2004, is primarily the result of economic
and business conditions.
COST OF SALES
Retail cost of sales decreased 0.8%, to $39.1 million in 2005
from $39.4 million in 2004, with retail cost of sales as a per-
centage of retail sales decreasing to 66.9% in 2005 from 70.0%
in 2004, primarily due to higher margins on certain retail sales
in our sales and lease ownership division.
Cost of sales from non-retail sales increased to $172.8 million
in 2005 from $149.2 million in 2004, a 15.8% increase, following
the increase in non-retail sales described above, with the margin
on non-retail sales remaining comparable between the periods.
EXPENSES
Operating expenses increased 22.3% to $507.2 million in 2005
from $414.5 million in 2004. The increase 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 was 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,
to $305.6 million in 2005 from $253.5 million in 2004, 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.
Interest expense increased 57.4% to $8.5 million in 2005
from $5.4 million in 2004, primarily as 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
Net earnings increased to $58.0 million in 2005 from $52.6
million in 2004, a 10.2% improvement. The increase 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 17.9%
increase in franchise fees, royalty income, and other related
franchise income. As a percentage of total revenues, net earnings
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.