Aarons 2014 Annual Report Download - page 45

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35
Franchise. Franchise segment revenues increased $1.9 million to $68.6 million primarily due to an increase in royalty income
from franchisees. Franchise royalty income increased due to the net addition of 68 franchised stores since the beginning of
2012 and a 1.5% increase in same store revenues of existing franchised stores.
Other. Revenues in the Other segment are primarily revenues attributable to (i) the RIMCO segment, (ii) leasing space to
unrelated third parties in the corporate headquarters building, (iii) the Aaron's Office Furniture division through the date of sale
in August 2012 and (iv) several minor unrelated activities.
Costs and Expenses
Year Ended December 31, 2014 Versus Year Ended December 31, 2013
Depreciation of lease merchandise. Depreciation of lease merchandise increased $304.5 million, or 48.5%, to $932.6 million
during 2014 from $628.1 million during the comparable period in 2013. Levels of merchandise on lease relative to total lease
merchandise for the Aaron's core business were consistent year over year, resulting in idle merchandise representing
approximately 6% of total depreciation expense in 2014 as compared to 7% in 2013. As a percentage of total lease revenues
and fees, depreciation of lease merchandise increased to 41.4% from 35.9% in the prior year, primarily due to the inclusion of
Progressive’s results of operations from the April 14, 2014 acquisition date. Progressive’s inclusion increased depreciation as a
percentage of lease revenues due to, among other factors, their merchandise having a shorter average life on lease, as well as a
higher rate of early buyouts, than our traditional lease-to-own business.
Retail cost of sales. Retail cost of sales increased $223,000, or .9%, to $24.5 million in 2014 from $24.3 million for the
comparable period in 2013, and as a percentage of retail sales, increased to 64.0% from 59.5% due to increased discounting of
pre-leased merchandise.
Non-retail cost of sales. Non-retail cost of sales decreased $7.5 million, or 2.2%, to $330.1 million in 2014, from
$337.6 million for the comparable period in 2013, and as a percentage of non-retail sales, remained consistent at approximately
91% in both periods.
Operating expenses. Operating expenses increased $239.3 million, or 23.4%, to $1.3 billion in 2014, from $1.0 billion for the
comparable period in 2013 due primarily to the consolidation of Progressive’s results from operations from the April 14, 2014
acquisition date. As a percentage of total revenues, operating expenses increased to 46.3% in 2014 from 45.8% in 2013 due to
increased personnel, advertising and facility rent costs in Aaron's core business.
Financial advisory and legal costs. Financial advisory and legal costs of $13.7 million were incurred during 2014 related to
addressing now-resolved strategic matters, including an unsolicited acquisition offer, two proxy contests and shareholder
proposals.
Restructuring expenses. In connection with the Company’s July 15, 2014 announced closure of 44 Company-operated stores,
restructuring charges of $9.1 million were incurred during in 2014. The restructuring was completed during the third quarter of
2014 and total restructuring charges were principally comprised of contractual lease obligations, the write-off and impairment
of property, plant and equipment and workforce reductions.
Retirement and vacation charges. Retirement charges of $9.1 million were incurred during 2014 due to the retirements of both
the Company’s Chief Executive Officer and Chief Operating Officer in 2014. Retirement and vacation charges during 2013
were $4.9 million primarily due to the retirement of the Company’s Chief Operating Officer and a change in the Company’s
vacation policies.
Progressive-related transaction costs. Financial advisory and legal fees of $6.6 million were incurred in 2014 in connection
with the April 14, 2014 acquisition of Progressive.
Legal and regulatory (income) expense. Regulatory income of $1.2 million in 2014 was recorded as a reduction in previously
recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General into the
Company’s leasing, marketing and privacy practices. During 2013, regulatory expenses of $28.4 million were incurred related
to the then-pending regulatory investigation by the California Attorney General. Refer to Note 8 to the Company’s consolidated
financial statements for further discussion of this regulatory investigation.