Aarons 2014 Annual Report Download - page 64

54
Franchise agreement fee revenue was $1.0 million, $1.7 million and $2.4 million; royalty revenue was $58.8 million,
$59.1 million and $56.5 million; and finance fee revenue was $3.7 million, $5.1 million and $4.9 million for the years ended
December 31, 2014, 2013 and 2012, respectively. Deferred franchise and area development agreement fees, included in
accounts payable and accrued expenses in the accompanying consolidated balance sheets, were $2.8 million and $3.4 million at
December 31, 2014 and 2013, respectively.
Sales Taxes
The Company presents sales net of related taxes for its traditional rent-to-own (“core”) business. Progressive presents lease
revenues on a gross basis with sales taxes included. For the year ended December 31, 2014, the amount of Progressive sales tax
recorded as lease revenues and fees and operating expenses was $30.2 million.
Lease Merchandise
The Company’s lease merchandise consists primarily of furniture, consumer electronics, computers, appliances and household
accessories and is recorded at cost, which includes overhead from production facilities, shipping costs and warehousing costs.
The sales and lease ownership stores depreciate merchandise over the lease agreement period, generally 12 to 24 months
(monthly agreements) or 60 to 120 weeks (weekly agreements) when on lease and 36 months when not on lease, to a 0%
salvage value. The Company’s Progressive division depreciates merchandise over the lease agreement period, which is typically
over 12 months, while on lease.
The Company’s policies require weekly lease merchandise counts at its store-based operations, which include write-offs for
unsalable, damaged, or missing merchandise inventories. Full physical inventories are generally taken at the fulfillment and
manufacturing facilities two to four times per year, and appropriate provisions are made for missing, damaged and unsalable
merchandise. In addition, the Company monitors lease merchandise levels and mix by division, store, and fulfillment center, as
well as the average age of merchandise on hand. If unsalable lease merchandise cannot be returned to vendors, it is adjusted to
its net realizable value or written off.
All lease merchandise is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise identified is
written off. The Company records lease merchandise adjustments on the allowance method, which estimates the merchandise
losses incurred but not yet identified by management as of the end of the accounting period based on historical write off
experience. As of December 31, 2014 and 2013, the allowance for lease merchandise write offs was $27.6 million and
$8.3 million, respectively. Lease merchandise write-offs totaled $99.9 million, $58.0 million and $54.9 million during the years
ended December 31, 2014, 2013 and 2012, respectively, substantially all of which are included in operating expenses in the
accompanying consolidated statements of earnings.
Retail and Non-Retail Cost of Sales
Included in cost of sales is the net book value of merchandise sold, primarily using specific identification. It is not practicable to
allocate operating expenses between selling and lease operations.
Shipping and Handling Costs
The Company classifies shipping and handling costs as operating expenses in the accompanying consolidated statements of
earnings, and these costs totaled $81.1 million, $78.6 million and $74.9 million in 2014, 2013 and 2012, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising production costs are expensed when an advertisement
appears for the first time. Such advertising costs amounted to $50.5 million, $43.0 million and $36.5 million in 2014, 2013 and
2012, respectively. These advertising expenses are shown net of cooperative advertising considerations received from vendors,
substantially all of which represents reimbursement of specific, identifiable and incremental costs incurred in selling those
vendors’ products. The amount of cooperative advertising consideration netted against advertising expense was $28.3 million,
$25.0 million and $31.1 million in 2014, 2013 and 2012, respectively. The prepaid advertising asset was $1.3 million and
$2.4 million at December 31, 2014 and 2013, respectively.
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are more fully described in Note 11. The Company
estimates the fair value for the options granted on the grant date using a Black-Scholes-Merton option-pricing model and
accounts for stock-based compensation under the fair value recognition provisions codified in ASC Topic 718, Stock