Lumber Liquidators 2007 Annual Report Download - page 44

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Operating Income. Operating income increased $3.2 million, or 18%, to $21.4 million in 2006, principally
as a result of the $24.0 million increase in gross profit that was partially offset by a $20.8 million increase in
SG&A expenses principally due to the following factors:
• Advertising expenses increased $8.7 million, or 32%, in 2006 primarily due to the expansion of our
national advertising campaign through television, radio and sports, as well as increased costs relating to
online advertising and direct mail programs. As a percentage of net sales, advertising expenses
declined to 10.9% in 2006 from 11.3% in 2005, principally due to our ability to leverage our national
advertising over increased net sales across all our sales channels.
• Salaries, commissions and benefits increased $6.1 million, or 26%, in 2006 primarily due to an
increase in the store support infrastructure principally in the second half of 2006, including the hiring
of our new chief executive officer and other executives and operational managers. As a percentage of
net sales, salaries, commissions and benefits paid to our employees declined to 8.9% in 2006 from
9.6% in 2005, principally due to our ability to leverage our store support infrastructure over increased
net sales, although several of the additional costs were not recognized over the full year.
• Occupancy costs increased $2.3 million, or 28%, in 2006 principally due to 16 new stores opened in
2006 and the full-year impact of 19 stores opened in 2005. As a percentage of net sales, occupancy
costs decreased to 3.1% in 2006 from 3.3% in 2005.
• Professional expenses increased $0.8 million to support enhanced financial reporting, legal and
regulatory compliance, internal controls and corporate governance functions.
• Stock-based compensation expense decreased due to lower current-year expense associated with the
Variable Plan, which was partially offset by expense related to stock options granted in 2006.
As a percentage of net sales, operating income declined to 6.4% in 2006 from 7.4% in 2005. This decrease
was primarily due to the decline in gross margin, partially offset by a decline in SG&A expenses as a percentage
of net sales to 26.7% in 2006 from 27.7% in 2005.
Net Income. Net income increased $2.2 million to $12.9 million in 2006 from $10.7 million in 2005, but
declined as a percentage of net sales to 3.9% in 2006 from 4.4% in 2005. Our effective income tax rate was
approximately 38.8% for 2006 compared to 39.3% for 2005, reflecting slight variances in state income tax rates.
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