Aarons 2012 Annual Report Download - page 41

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31
Year Ended December 31, 2011 Versus Year Ended December 31, 2010
Sales and Lease Ownership. Sales and Lease Ownership segment revenues increased due to a 7.5% increase in lease
revenues and fees and 7.4% increase in non-retail sales. Lease revenues and fees within the Sales and Lease Ownership
segment increased due to a net addition of 78 Company-operated stores since the beginning of 2010 and a 4.4% increase
in same store revenues. Non-retail sales increased primarily due to net additions of 116 franchised stores since the
beginning of 2010.
Sales and Lease Ownership segment revenues include a $3.0 million gain from the sales of 25 Sales and Lease
Ownership stores in 2011 and a $1.9 million gain on the sales of 11 Sales and Lease Ownership stores in 2010. The
Company has classified gains from the sales of Sales and Lease Ownership stores as ―Other‖ revenues in the
Company’s consolidated statements of earnings.
HomeSmart. HomeSmart segment revenues increased to $15.6 million due to the growth in the number of HomeSmart
stores to 71, all of which have been added since the beginning of 2010.
Franchise. Franchise segment revenues increased largely due to a $4.0 million, or 8.4%, increase in royalty income
from franchisees. Franchise royalty income increased due to the growth in the number of franchised stores and a 1.3%
increase in same store revenues of existing franchised stores. The total number of franchised sales and lease ownership
stores at December 31, 2011 was 713, reflecting a net addition of 116 stores since the beginning of 2010.
Other. Other segment revenues decreased $7.0 million mainly due to a $7.9 million decrease in the Aaron’s Office
Furniture division revenues due to the closure of 14 stores during 2010.
Costs and Expenses
Year Ended December 31, 2012 Versus Year Ended December 31, 2011
Retail cost of sales. Retail cost of sales decreased $1.0 million, or 4.5%, to $21.7 million in 2012, from $22.7 million
for the comparable period in 2011, and as a percentage of retail sales, decreased to 56.5% from 59.0% due to a change
in the mix of products.
Non-retail cost of sales. Non-retail cost of sales increased 10.1%, to $389.4 million in 2012, from $353.7 million for
the comparable period in 2011, and as a percentage of non-retail sales, increased to 91.4% in 2012 from 90.9% in 2011.
Operating expenses. Operating expenses in 2012 increased $83.6 million to $952.3 million from $868.7 million in
2011, a 9.6% increase. As a percentage of total revenues, operating expenses decreased to 42.8% in 2012 from 43.1%
in 2011.
Lawsuit (income) expense. Litigation expense decreased $72.0 million due to the accrual of $36.5 million in the twelve
months ended December 31, 2011, followed by a reversal of the accrual of $35.5 million in the year ended December
31, 2012 related to the Alford v. Aaron Rents, Inc. et al case previously discussed. Based on the judgment in the June
14, 2011 jury verdict (as reduced by the court), the Company recorded a charge of $36.5 million in the second quarter of
2011, which represented an accrual for the judgment and associated legal fees and expenses of $41.5 million, less
insurance coverage of $5.0 million. On March 26, 2012, following the court’s ruling that the verdict would not be
sustained, the Company entered into a settlement agreement in the amount of $6.0 million. The Company recognized
$35.5 million of income related to the reversal of the lawsuit accrual in the first quarter of 2012.
Retirement/separation charges. Retirement/separation charges of $10.4 million represent costs associated with the
retirement of the Company’s founder and former Chairman of the Board in 2012, while in 2011 the Company incurred
$3.5 million in separation costs related to the departure of the Company’s former Chief Executive Officer.
Depreciation of lease merchandise. Depreciation of lease merchandise increased $53.9 million to $604.7 million in
2012 from $550.7 million during the comparable period in 2011, a 9.8% increase as a result of higher on-rent lease
merchandise due to the growth of our Sales and Lease Ownership and HomeSmart segments. Levels of merchandise on
lease remained consistent year over year, resulting in idle merchandise representing approximately 6% of total
depreciation expense in 2012 and 2011. As a percentage of total lease revenues and fees, depreciation of lease
merchandise decreased slightly to 36.1% from 36.3% in the prior year.