CarMax 2001 Annual Report Download - page 54

Circuit City Group
The improvement in the gross profit margin from fiscal 1999
to fiscal 2000 primarily reflected the higher percentage of sales
from better-featured products and newer technologies, which
carry higher gross profit margins, and continued improvements
in inventory management partly offset by the strength in per-
sonal computer sales, which carry lower gross margins. In fiscal
2001, the decline in the gross profit margin was limited by
lower personal computer sales and by continued double-digit
sales growth in new technologies and in higher margin cate-
gories where selection was expanded as part of the exit from
the appliance business. The impact of the appliance category
and the high proportion of sales represented by traditional
products more than offset these factors.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 21.7 percent of
sales in fiscal 2001, compared with 19.6 percent of sales in fiscal
2000 and 20.1 percent of sales in fiscal 1999. The fiscal 2001
increase reflects the decline in comparable store sales, $41.9 mil-
lion in remodeling costs for the Florida stores, $30.0 million in
costs related to the partial remodels and $5.0 million in sever-
ance costs associated with the fourth quarter workforce reduc-
tion. Excluding these costs and the estimated sales disruption
during the seven to 10 days of partial remodeling that occurred
primarily in the third quarter, the fiscal 2001 expense ratio would
have been 20.9 percent of sales. The improvement in the expense
ratio from fiscal 1999 to fiscal 2000 primarily reflects leverage
gained from the fiscal 2000 comparable store sales increase.
EXPENSE RATIO COMPONENTS
Fiscal 2001 2000 1999
Circuit City store business ........... 20.9% 19.6% 20.1%
Florida remodel costs ................... 0.4% — —
Partial remodel costs .................... 0.3% — —
Sales disruption impact................ 0.1% — —
Expense ratio ................................. 21.7% 19.6% 20.1%
Interest Expense
Interest expense was relatively unchanged as a percent of sales
across the three-year period at 0.1 percent of sales in fiscal 2001
and fiscal 2000 and 0.2 percent of sales in fiscal 1999. Interest
expense was incurred on allocated debt used to fund store expan-
sion, remodeling and working capital, including inventory.
Income Taxes
The Group’s effective income tax rate was 38.0 percent in fiscal
2001 and fiscal 2000 and 38.1 percent in fiscal 1999.
Earnings from Continuing Operations Before Inter-Group Interest
in the CarMax Group
Earnings from continuing operations before the Inter-Group
Interest in the CarMax Group were $115.2 million in fiscal 2001,
compared with $326.7 million in fiscal 2000 and $235.0 million
in fiscal 1999. Excluding the estimated sales disruption during
the seven to 10 days of partial remodeling, the appliance mer-
chandise markdowns, exit costs, remodel expenses and severance
costs related to the workforce reduction, earnings from continu-
ing operations before the Inter-Group Interest in the CarMax
Group would have been $205.1 million in fiscal 2001.
Net Earnings (Loss) Related to Inter-Group Interest
in the CarMax Group
The net earnings attributed to the Circuit City Group’s Inter-Group
Interest in the CarMax Group were $34.0 million in fiscal 2001,
compared with net earnings of $862,000 in fiscal 2000 and a net
loss of $18.1 million in fiscal 1999.
Earnings from Continuing Operations
Earnings from continuing operations attributed to the Circuit
City Group were $149.2 million in fiscal 2001, $327.6 million in
fiscal 2000 and $216.9 million in fiscal 1999.
Loss from Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would
cease marketing of the Divx home video system and discontinue
operations, but existing, registered customers would be able to
view discs during a two-year phase-out period. The operating
results of Divx and the loss on disposal of the Divx business have
been segregated from continuing operations and reported as sep-
arate line items, after tax, on the Circuit City Group statements of
earnings for the periods presented.
The loss from the discontinued operations of Divx totaled
$16.2 million after an income tax benefit of $9.9 million in fis-
cal 2000 and $68.5 million after an income tax benefit of $42.0
million in fiscal 1999.
In fiscal 2000, the loss on the disposal of the Divx business
totaled $114.0 million after an income tax benefit of $69.9 mil-
lion. The loss on the disposal includes a provision for operating
losses to be incurred during the phase-out period. It also includes
provisions for commitments under licensing agreements with
motion picture distributors, the write-down of assets to net real-
izable value, lease termination costs, employee severance and
benefit costs and other contractual commitments.
Net Earnings
Net earnings attributed to the Circuit City Group were $149.2
million in fiscal 2001, $197.3 million in fiscal 2000 and $148.4
million in fiscal 1999.
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CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT