Pottery Barn 2004 Annual Report Download - page 19

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During fiscal 2004, we also continued to improve our pre-tax operating margin, increasing from 9.3% in 2003 to
9.9% in 2004. This increase in the pre-tax operating margin was the result of several successful operational
initiatives, including:
• A reduction in shipping costs as a percentage of net revenues driven by the ongoing consolidation of
freight providers, the in-sourcing of line-haul management in the furniture delivery network, and the
strategic positioning of our coastal distribution centers in the proximity of our customer-base;
• A reduction in telecommunication expenses driven by the renegotiation of our company-wide vendor
agreements; and
• A reduction in corporate overhead expenses as a percentage of net revenues due to strong expense
management initiatives, primarily in employment and employment-related expenses.
During 2004, we made progress in building our infrastructure to support the growth of our core and emerging
brands. In the information technology area, we entered into two strategic vendor partnerships with IBM: one to
host and manage our data center and one to host our e-commerce websites. These agreements were entered into
in order to more cost-effectively manage our information technology infrastructure, while at the same time,
enhancing the functionality of our e-commerce websites. We also continued to invest in our new direct-to-
customer order management and inventory management systems, which are currently in beta testing in our Hold
Everything brand. These multi-phase, multi-year technology initiatives are at the heart of our long-term efforts to
drive increased sales and reduced costs through productivity and operational efficiency.
In the area of inventory management and distribution operations, we increased our distribution center leased
square footage, in part by opening our first east coast distribution center in Cranbury, New Jersey. We also made
progress on our “weeks of supply” inventory management initiative, which resulted in a reduction in the base
levels of our inventory due to more efficiently flowing merchandise through the supply chain. The sustainable
benefit of this initiative, however, will not be realized until we implement our new merchandising systems in
2006.
As we enter 2005, we will continue to focus on our three long-term strategic initiatives: driving profitable top-
line sales growth; increasing pre-tax operating margin; and enhancing shareholder value.
To drive profitable top-line sales growth, we expect to add 26 net new retail locations, increase catalog
circulation, expand customer contacts through electronic direct marketing, and intensify the marketing support
behind our bridal and gift registry businesses. In our emerging brands, we plan to focus on executing initiatives
that we believe will build brand awareness and enhance customer access to the brands. In PBteen in 2005, we
plan to increase catalog circulation and expand our successful on-line marketing initiatives. We also plan to drive
aggressive name capture programs to expand our teen affinity database. In West Elm, we plan to increase catalog
circulation and open seven new retail stores. We continue to believe that West Elm has the potential to be our
largest brand, if we can successfully evolve the merchandising strategy, broaden the overall consumer appeal,
and capture the mind share of the large consumer segment that West Elm targets. In Williams-Sonoma Home in
2005, we plan to increase catalog circulation, add catalog ordering functionality to the current e-catalog website,
and open three new prototype stores in the third quarter. We believe that the retail launch in Williams-Sonoma
Home is strategic to expanding the multi-channel reach of the brand due to the customer’s desire to interact with
the product and fully experience the design authority of the brand. In Hold Everything, we plan to significantly
refine our catalog circulation strategy, expand our on-line marketing initiatives, and open two additional
prototype stores. We also plan to introduce new merchandise assortments throughout the year that will reflect the
lifestyle transition of the brand, including a significantly enhanced assortment in furniture, casual upholstery,
textiles, lighting, and tabletop.
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