GNC 2009 Annual Report Download - page 54

Table of Contents
Cost of Sales
Consolidated cost of sales, which includes product costs, costs of warehousing, distribution and occupancy costs, increased $42.9 million, or
4.4%, to $1,026.4 million for the year ended December 31, 2007 compared to $983.5 million for the same period in 2006. Consolidated cost of
sales, as a percentage of net revenue, was 66.1% for each of the years ended December 31, 2007 and 2006.
Product costs. Product costs increased $35.4 million, or 4.8%, to $768.2 million for the year ended December 31, 2007 compared to
$732.8 million for the same period in 2006. This increase is primarily due to increased sales volumes at the retail stores partially offset by
increased vendor support. Consolidated product costs, as a percentage of net revenue, were 49.5% for the year ended December 31, 2007
compared to 49.3% for the year ended December 31, 2006. Included in product costs was $15.5 million of non-cash expense from amortization
of inventory step up to fair value due to the Merger.
Warehousing and distribution costs. Warehousing and distribution costs increased $1.7 million, or 3.1%, to $54.2 million for the year ended
December 31, 2007 compared to $52.5 million for the same period in 2006. This increase was attributable to higher third party shipping and fuel
costs and increased supply costs. Consolidated warehousing and distribution costs, as a percentage of net revenue, were 3.5% for each of the
years ended December 31, 2007 and 2006.
Occupancy costs. Occupancy costs increased $5.8 million, or 2.9%, to $204.0 million for the year ended December 31, 2007 compared to
$198.2 million for the same period in 2006. This increase was the result of higher lease-related costs of $9.1 million, which was the result of
normal increases in lease related costs and the addition of 44 corporate stores since December 31, 2006, and increased utility costs of
$0.5 million, which were partially offset by a reduction in depreciation expense of $3.8 million. Consolidated occupancy costs, as a percentage
of net revenue, were 13.1% for the year ended December 31, 2007 compared to 13.3% for the year ended December 31, 2006. Included in
occupancy costs was $0.1 million of income related to lease adjustments to fair value as a result of the Merger.
Selling, General and Administrative ("SG&A") Expenses
Our consolidated SG&A expenses, including compensation and related benefits, advertising and promotion expense, other selling, general
and administrative expenses, and amortization expense, increased $0.3 million, or 0.1%, to $404.2 million, for the year ended December 31,
2007 compared to $403.9 million for the same period in 2006. These expenses, as a percentage of net revenue, were 26.1% for the year ended
December 31, 2007 compared to 27.1% for the year ended December 31, 2006.
Compensation and related benefits. Compensation and related benefits decreased $0.7 million, or 0.3%, to $260.1 million for the year ended
December 31, 2007 compared to $260.8 million for the same period in 2006. Decreases occurred in incentive accruals and payments of
$8.9 million and, in 2006, we paid $19.1 million in discretionary payments to our employee option holders. These decreases were offset by
Merger-related costs and normal operating increases. Increases occurred in the following areas due to merger-related costs: (1) $3.8 million of
non-cash stock based compensation generated as a result of the cancellation of all stock options at the merger date; (2) $9.6 million in
accelerated discretionary payments made to vested option holders and includes the associated payroll taxes; and (3) $1.9 million in incentives
related to the sale of the Company. Additionally, operating increases occurred in the following areas: (1) $5.8 million of increased wages in our
stores to support the higher sales and the 44 new locations added since December 31, 2006; (2) $3.6 million in increased health care costs; (3)
$2.2 million in workers compensation expense; and (4) other compensation and related benefits accounts of $0.4 million.
Advertising and promotion. Advertising and promotion expenses increased $4.8 million, or 9.4%, to $55.5 million for the year ended
December 31, 2007 compared to $50.7 million during the same period in 2006. Advertising expense increased as a result of an increase in print
and television advertising of $2.4 million, an increase in website advertising of $0.8 million, a reduction in contributions from our domestic
franchisees to our national ad fund of $0.8 million, and increase in other advertising related expenses of $0.8 million.
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