Pottery Barn 2007 Annual Report Download - page 36

Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do
not include non-occupancy related costs associated with our distribution network in cost of goods sold. These
costs, which include distribution network employment, third party warehouse management and other
distribution-related administrative expenses, are recorded in selling, general and administrative expenses.
Within our reportable segments, the direct-to-customer channel does not incur freight-to-store or store occupancy
expenses, and typically operates with lower markdowns and inventory shrinkage than the retail channel.
However, the direct-to-customer channel incurs higher customer shipping, damage and replacement costs than
the retail channel.
Fiscal 2007 vs. Fiscal 2006
Cost of goods sold increased by $168,737,000, or 7.5%, in fiscal 2007 over fiscal 2006. Cost of goods sold as a
percentage of net revenues increased to 61.1% in fiscal 2007 from 60.1% in fiscal 2006. This 100 basis point
increase as a percentage of net revenues was primarily driven by increased markdowns, higher cost of
merchandise sold due to increased raw material costs and higher inventory-related costs, including costs
associated with the start-up of a new returns processing operation, partially offset by fixed occupancy expense
leverage generated by incremental net revenues during the additional week in fiscal 2007 and the elimination of
cost of goods sold associated with the Hold Everything brand, including expense associated with the Hold
Everything transition.
In the retail channel, cost of goods sold as a percentage of retail net revenues increased 140 basis points during
fiscal 2007 compared to fiscal 2006. This was primarily driven by increased markdowns, higher cost of
merchandise sold due to increasing raw material costs and higher inventory-related costs. This increase was
further driven by increased occupancy costs primarily resulting from the retail rollout of our emerging brands.
This was partially offset by the elimination of cost of goods sold associated with the Hold Everything brand,
including expense associated with the Hold Everything transition, and the leverage on fixed occupancy expenses
provided by the incremental net revenues generated during the additional week in fiscal 2007.
In the direct-to-customer channel, cost of goods sold as a percentage of direct-to-customer net revenues increased
by 30 basis points during fiscal 2007 compared to fiscal 2006. This was primarily driven by increased
markdowns, higher cost of merchandise sold due to increasing raw material costs and higher inventory-related
costs, including costs associated with the start-up of a new returns processing operation. This was partially offset
by the elimination of cost of goods sold associated with the Hold Everything brand.
Fiscal 2006 vs. Fiscal 2005
Cost of goods sold increased by $136,761,000, or 6.5%, in fiscal 2006 over fiscal 2005. Including expense of
approximately $5,000,000 associated with transitioning the merchandising strategies of our Hold Everything
brand into our other existing brands and the implementation of FASB Staff Position (“FSP”) FAS 13-1
“Accounting for Rental Costs Incurred During a Construction Period,” cost of goods sold as a percentage of net
revenues increased to 60.1% in fiscal 2006 from 59.4% in fiscal 2005. This 70 basis point increase as a
percentage of net revenues was primarily driven by retail occupancy expense deleverage and increased
markdowns in the Pottery Barn brand. The occupancy cost deleverage was primarily driven by the retail rollout
of our emerging brands, in addition to higher retail occupancy costs in our core brands. This increase was further
driven by the implementation of FSP FAS 13-1. These costs were partially offset, however, by the elimination of
fixed occupancy and all other cost of goods sold associated with the Hold Everything brand.
In the retail channel, cost of goods sold as a percentage of retail net revenues increased 130 basis points during
fiscal 2006 compared to fiscal 2005. This was driven by retail occupancy expense deleverage and increased
markdowns in the Pottery Barn brand. The occupancy expense deleverage was primarily driven by the retail
rollout of our emerging brands, in addition to higher retail occupancy costs in our core brands. This increase was
further driven by the implementation of FSP FAS 13-1. These costs were partially offset, however, by the
elimination of fixed occupancy and all other cost of goods sold associated with the Hold Everything brand.
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