Aarons 2012 Annual Report Download - page 36

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Aaron’s, Inc. (“we”, “our”, “us”, “Aaron’s” or the “Company”) is a leading specialty retailer of consumer electronics,
computers, residential furniture, household appliances and accessories. Our major operating divisions are the Aaron’s
Sales & Lease Ownership division, the HomeSmart division and the Woodhaven Furniture Industries division, which
manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in our stores.
Aaron’s has demonstrated strong revenue growth over the last three years. Total revenues have increased from $1.876
billion in 2010 to $2.223 billion in 2012, representing a compound annual growth rate of 8.9%. Total revenues for the
year ended December 31, 2012 increased $200.3 million, or 10%, over the prior year.
The majority of our growth comes from the opening of new sales and lease ownership stores and increases in same store
revenues from previously opened stores. We added a net of 93 Company-operated sales and lease ownership stores in
2012. We spend on average approximately $700,000 to $800,000 in the first year of operation of a new store, which
includes purchases of lease merchandise, investments in leasehold improvements and financing first-year start-up costs.
Our new sales and lease ownership stores typically achieve revenues of approximately $1.1 million in their third year of
operation. Our comparable stores open more than three years normally achieve approximately $1.4 million in revenues,
which we believe represents a higher unit revenue volume than the typical rent-to-own store. Most of our stores are
cash flow positive in the second year of operations.
We also use our franchise program to help us expand our sales and lease ownership concept more quickly and into more
areas than we otherwise would by opening only Company-operated stores. Our franchisees added a net of 36 stores in
2012. We purchased 21 franchised stores during 2012. Franchise royalties and other related fees represent a growing
source of high margin revenue for us, accounting for $66.7 million of revenues in 2012, up from $59.1 million in 2010,
representing a compounded annual growth rate of 6.2%.
Aaron’s Office Furniture Closure. In November 2008, the Company completed the sale of substantially all of the assets
and the transfer of certain liabilities of its legacy residential rent-to-rent business, Aaron’s Corporate Furnishings
division. When the Company sold its rent-to-rent business, it decided to keep the then 13 Aaron’s Office Furniture
stores, a rent-to-rent concept aimed at the office market. However, after disappointing results in a difficult environment,
in June 2010 the Company announced its plans to close all of the then 12 remaining Aaron’s Office Furniture stores and
focus solely on the Company’s sales and lease ownership business. As of December 31, 2011, the Company had closed
11 of its Aaron’s Office Furniture stores and had one remaining store open to liquidate merchandise. The Company
recorded $9.0 million in 2010 related to the write-down and cost to dispose of office furniture, estimated future lease
liabilities for closed stores, write-off of leaseholds, severance pay, and other costs associated with closing the stores.
The Company did not incur any significant charges in 2011 or 2012 related to winding down the division.
Stock Split. On March 23, 2010, we announced a 3-for-2 stock split effected in the form of a 50% stock dividend on our
Common Stock. New shares were distributed on April 15, 2010 to shareholders of record as of the close of business on
April 1, 2010. All share and per share information has been restated for all periods presented to reflect this stock split.
Dual Class Unification. In December 2010, the Company’s shareholders approved the unification of our prior
nonvoting Common Stock and voting Class A Common Stock into a single class. Effective December 10, 2010, the
two classes were combined into a single voting class now known simply as our Common Stock.
Same Store Revenues. We believe the changes in same store revenues are a key performance indicator. The change in
same store revenues is calculated by comparing revenues for the year to revenues for the prior year for all stores open
for the entire 24-month period, excluding stores that received lease agreements from other acquired, closed or merged
stores.