Aarons 2014 Annual Report Download - page 46

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36
Year Ended December 31, 2013 Versus Year Ended December 31, 2012
Depreciation of lease merchandise. Depreciation of lease merchandise increased $26.5 million to $628.1 million during 2013
from $601.6 million during the comparable period in 2012, or 4.4%, as a result of higher on-rent lease merchandise due to the
growth of the Company’s Sales and Lease Ownership and HomeSmart segments. Levels of merchandise on lease decreased,
resulting in idle merchandise representing approximately 7% of total depreciation expense in 2013 as compared to
approximately 6% in 2012. As a percentage of total lease revenues and fees, depreciation of lease merchandise remained
consistent at 35.9% in both periods.
Retail cost of sales. Retail cost of sales increased $2.7 million, or 12.5%, to $24.3 million in 2013, from $21.6 million for the
comparable period in 2012, and as a percentage of retail sales, increased to 59.5% from 56.2% due to a change in the mix of
products.
Non-retail cost of sales. Non-retail cost of sales decreased $49.8 million, or 12.9%, to $337.6 million in 2013, from
$387.4 million for the comparable period in 2012, and as a percentage of non-retail sales, remained consistent at approximately
91% in both periods.
Operating expenses. Operating expenses increased $70.1 million, or 7.4%, to $1.0 billion in 2013 from $952.6 million for the
comparable period in 2012. As a percentage of total revenues, operating expenses increased to 45.8% in 2013 from 43.0% in
2012 due to increased personnel, advertising and facility rent costs incurred to support continued revenue and store growth;
increased lease merchandise adjustments; and a decrease in non-retail sales due to less demand for products by franchisees.
Retirement and vacation charges. Retirement and vacation charges during 2013 were $4.9 million due primarily to the
retirement of the Company’s Chief Operating Officer and a change in the Company’s vacation policies. Retirement and
vacation charges during 2012 were $10.4 million associated with the retirement of the Company’s founder and Chairman of the
Board.
Legal and regulatory (income) expense. Regulatory expense during 2013 was $28.4 million relating to a then-pending
regulatory investigation by the California Attorney General into the Company’s leasing, marketing and privacy practices. Refer
to Note 8 to the Company’s consolidated financial statements for further discussion of this regulatory investigation. Legal and
regulatory income during 2012 was $35.5 million and represents the reversal of an accrual in the first quarter of 2012 related to
the settlement of a lawsuit.
Other Operating Expense (Income), Net
Other operating expense (income), net consists of gains or losses on sales of Company-operated stores and delivery vehicles,
impairment charges on assets held for sale and gains or losses on other dispositions of property, plant and equipment.
Information about the components of other operating expense (income), net is as follows:
Year Ended December 31,
(In Thousands) 2014 2013 2012
Gains on sales of stores and delivery vehicles $ (2,793) $ (2,728) $ (3,545)
Impairment charges and losses on asset dispositions 1,617 4,312 1,310
Other Operating Expense (Income), Net $(1,176) $ 1,584 $ (2,235)
In 2014, other operating income, net of $1.2 million included charges of $477,000 related to the impairment of various land
outparcels and buildings that the Company decided not to utilize for future expansion and $762,000 related to the loss on sale
of the RIMCO net assets. In addition, the Company recognized gains of $1.7 million from the sale of six Aaron's Sales & Lease
Ownership stores during 2014.
In 2013, other operating expense, net of $1.6 million included charges of $3.8 million related to the impairment of various land
outparcels and buildings that the Company decided not to utilize for future expansion and the net assets of the RIMCO
operating segment (principally consisting of lease merchandise, office furniture and leasehold improvements) in connection
with the Company's decision to sell the 27 Company-operated RIMCO stores. In addition, the Company recognized gains of
$833,000 from the sale of two Aaron's Sales & Lease Ownership stores during 2013.
In 2012, other operating income, net of $2.2 million included gains $2.0 million from the sale of four stores.