Pottery Barn 2007 Annual Report Download - page 38

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emerging brands and expense incurred in connection with the departure of our former Chief Executive Officer,
partially offset by lower incentive compensation compared to fiscal 2005. This increase was further driven by
higher asset disposals related to our information technology systems and higher asset impairment charges related
to our retail stores (including two mid-market Williams-Sonoma Home stores), partially offset by a change in
estimate for recording income associated with unredeemed gift certificates, the settlement of the Visa/
MasterCard litigation and the elimination of expenses associated with the Hold Everything brand.
In the retail channel, selling, general and administrative expenses as a percentage of retail net revenues increased
approximately 10 basis points in fiscal 2006 versus fiscal 2005, primarily driven by an increase in employment
costs associated with the growth in the emerging brands. This increase was partially offset by a change in
estimate for recording income associated with unredeemed gift certificates and a reduction in expense associated
with retail asset impairment charges as compared to prior year, which had higher retail asset impairment charges
associated with the early shutdown of our Hold Everything stores.
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.
INTEREST INCOME AND EXPENSE
Interest income was $5,041,000, $11,810,000 and $5,683,000 in fiscal 2007, fiscal 2006 and fiscal 2005,
respectively, comprised primarily of income from short-term investments classified as cash and cash equivalents.
The decrease in interest income during fiscal 2007 resulted from a decrease in our average cash balances during
fiscal 2007 compared to fiscal 2006.
The increase in interest income in fiscal 2006 compared to fiscal 2005 resulted from an increase in the interest
rates associated with our short term investments as well as higher average cash balances during fiscal 2006
compared to fiscal 2005.
Interest expense was $2,099,000 (net of capitalized interest of $1,389,000), $2,125,000 (net of capitalized interest
of $699,000) and $1,975,000 (net of capitalized interest of $1,200,000) for fiscal 2007, fiscal 2006 and fiscal
2005, respectively. Capitalized interest increased due to an increase in interest expense in fiscal 2007 compared
to fiscal 2006 resulting from borrowings under our credit facility in fiscal 2007.
Interest expense net of capitalized interest increased by $150,000 in fiscal 2006 compared to fiscal 2005,
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.
INCOME TAXES
The effective income tax rate was 38.1% for fiscal 2007 and fiscal 2006 and 38.4% for fiscal 2005. On
January 29, 2007, we implemented FIN 48 which resulted in a negative cumulative adjustment to retained
earnings of $11,684,000 and increased our effective tax rate for fiscal 2007. This increase was primarily offset by
certain income tax benefits that were favorably resolved in fiscal 2007.
We currently expect our fiscal 2008 effective tax rate to be in the range of 38.7% to 39.0%. Throughout the year,
we expect that there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures
are re-evaluated.
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