CDW 2004 Annual Report Download - page 27

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In general, the average selling price of most of our product categories decreased in 2004 from 2003. This
decrease in average selling price is a trend experienced across our industry. Such decreases require us to
generate more orders and sell more units in order to maintain or increase the level of sales.
Gross profit increased 29.1% to $870.1 million in 2004, compared to $673.8 million in 2003. As a
percentage of net sales, gross profit was 15.2% in 2004, compared to 14.4% in 2003. The increase in the gross
profit percentage was primarily due to an increase in vendor volume rebates, an increase in cooperative
advertising funds classified as a reduction of cost of sales, and an increase in net service contract revenue.
Vendor volume rebates increased due to achieving goals set by our vendor partners. Cooperative advertising
funds classified as a reduction of cost of sales increased due to a higher level of cooperative advertising funds
received from our vendors and the classification of a higher percentage of these funds as a reduction of cost of
sales rather than as a reduction of advertising expense in 2004. The increase in net service contract revenue is
due to higher sales of products accounted for on a net basis, such as warranties and software assurance
products.
Our objective for gross profit as a percentage of net sales is between 14.50% and 15.25%. The gross profit
margin depends on various factors, including vendor rebate and inventory price protection programs,
cooperative advertising funds classified as a reduction of cost of sales, product mix, including third party
services, pricing strategies, market conditions, and other factors, any of which could result in changes in gross
margins from recent experience.
Selling and administrative expenses increased 18.9% to $386.6 million in 2004, compared to $325.2
million in 2003, while decreasing as a percentage of net sales to 6.7% versus 7.0% in 2003. Included in selling
and administrative expenses in 2004 and 2003 were $3.9 million and $20.2 million of transaction and
integration expenses related to the Micro Warehouse transactions. The primary drivers of the increase in
selling and administrative expenses are discussed below.
x Payroll costs increased $51.1 million, primarily due to our continued investment in our sales force and
increases in administrative areas to support a larger and growing business. Our sales force increased
from 1,924 at December 31, 2003, to 2,012 at December 31, 2004. Our sales force consists of account
managers (including field sales representatives) as well as product category specialists who provide
consultation in areas requiring technical or specialized product expertise such as networking, security,
data storage, and volume software licensing. Payroll costs for 2004 and 2003 also included $1.5
million and $4.9 million, respectively, of expenses for former Micro Warehouse employees
performing transition services.
x Employee-related costs (which include items such as profit sharing, incentive awards, and insurance)
increased $5.4 million, primarily due to increased insurance costs resulting from higher insurance
rates, higher medical and prescription expenses and coverage for a larger number of coworkers. In
2003, employee-related costs included $1.6 million of employee benefits related to the Micro
Warehouse transactions.
x Occupancy costs increased $4.7 million, primarily due to additional office facilities for our locations
on the East coast. We also incurred expenses, such as duplicate rents, while we transitioned some
locations to new office facilities. Occupancy costs for 2004 and 2003 included $0.8 and $0.7 million,
respectively, of facility expenses related to the Micro Warehouse transactions.
x Other selling and administrative costs increased $0.3 million. Other selling and administrative costs for
2004 and 2003 included $1.6 million and $13.0 million, respectively, of costs related to the Micro
Warehouse transactions. Excluding these costs, the increase in other selling and administrative costs is
primarily due to increased administrative expenses required to support a larger business, such as
professional fees, telephone expenses, and travel and entertainment expenses. The $1.6 million of
costs related to the Micro Warehouse transactions in 2004 included $2.0 million for an increase in the
reserve for equipment purchased from Micro Warehouse in its Wilmington, Ohio distribution center