Pottery Barn 2006 Annual Report Download - page 41

In the direct-to-customer channel, selling, general and administrative expenses as a percentage of
direct-to-customer net revenues decreased by approximately 10 basis points in fiscal 2006 compared to fiscal
2005. This decrease was primarily driven by a rate decrease in advertising costs resulting from the elimination of
unproductive catalog circulation in the Hold Everything brand, the recording of income associated with
unredeemed gift certificates resulting from a change in estimate and a greater percentage of total company net
revenues being generated in the e-commerce channel, which incurs advertising expense at a lower rate than the
company average. This decrease was partially offset by reduced catalog productivity in the Pottery Barn brand as
well as an increase in employment costs.
Fiscal 2005 vs. Fiscal 2004
Selling, general and administrative expenses increased by $129,216,000, or 13.4%, over fiscal 2004. Including an
approximate $9,000,000 charge associated with transitioning the merchandising strategies of our Hold
Everything brand into our other existing brands, selling, general and administrative expenses expressed as a
percentage of net revenues increased to 30.8% in fiscal 2005 from 30.6% in fiscal 2004. This 20 basis point
increase as a percentage of net revenues was primarily due to higher catalog advertising expenses and other
general expenses, partially offset by rate reductions in employee benefit costs. Increased paper costs across all
brands drove the majority of the catalog advertising expense increase. The increase in other general expenses was
primarily due to asset impairment costs associated with the early shutdown of our Hold Everything stores as a
result of transitioning the merchandising strategies of our Hold Everything brand into our other existing brands.
In the retail channel, selling, general and administrative expenses as a percentage of retail net revenues increased
approximately 50 basis points in fiscal 2005 versus fiscal 2004, primarily driven by an increase in other general
expenses due to asset impairment costs associated with the early shutdown of our Hold Everything stores as a
result of transitioning the merchandising strategies of our Hold Everything brand into our other existing brands,
in addition to higher catalog advertising expenses. Increased paper costs drove the majority of the catalog
advertising expense increase. This rate increase was partially offset by rate reductions in employee benefit costs.
In the direct-to-customer channel, selling, general and administrative expenses as a percentage of
direct-to-customer net revenues increased by approximately 40 basis points in fiscal 2005 compared to fiscal
2004. This rate increase was primarily driven by higher catalog advertising expenses resulting from increased
paper costs across all brands, and an increase in other general expenses, including asset impairment costs as a
result of transitioning the merchandising strategies of our Hold Everything brand into our other existing brands.
INTEREST INCOME AND EXPENSE
Interest income was $11,810,000, $5,683,000 and $1,939,000 in fiscal 2006, fiscal 2005 and fiscal 2004,
respectively, comprised primarily of income from short-term investments classified as cash and cash equivalents.
The increase in interest income during fiscal 2006 resulted from an increase in the interest rates associated with
these short-term investments as well as higher cash balances during fiscal 2006 compared to fiscal 2005.
Interest expense was $2,125,000 (net of capitalized interest of $699,000), $1,975,000 (net of capitalized interest
of $1,200,000) and $1,703,000 (net of capitalized interest of $1,689,000) for fiscal 2006, fiscal 2005 and fiscal
2004, respectively. Interest expense increased by $150,000 in fiscal 2006, primarily due to a reduction in
capitalized interest, partially offset by lower interest expense in fiscal 2006 as a result of the repayment of the
outstanding balance on our senior notes in August 2005 and the repayment of certain capital lease obligations in
late 2005 and early 2006.
Interest expense increased by $272,000 in fiscal 2005, primarily due to interest expense associated with our
Mississippi industrial development bonds issued in June 2004, partially offset by lower interest expense incurred
on our senior notes as a result of the repayment of our outstanding balance in August 2005.
INCOME TAXES
Our effective tax rate was 38.1% for fiscal 2006 and 38.4% for fiscal 2005 and fiscal 2004. Our fiscal 2006 tax
rate decreased primarily due to certain income tax benefits that were favorably resolved under audit in fiscal
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Form 10-K