Pottery Barn 2009 Annual Report Download - page 44

revenues was primarily driven by impairment charges of $33,995,000 associated with our underperforming retail
stores and the deleverage of our employment costs due to declining sales, partially offset by a $9,350,000
incentive payment received from a landlord to compensate us for terminating a store lease prior to its original
expiration.
In the direct-to-customer channel, selling, general and administrative expenses as a percentage of
direct-to-customer net revenues increased by approximately 120 basis points in fiscal 2008 compared to fiscal
2007. This increase as a percentage of net revenues was primarily driven by the deleverage of our employment
and advertising costs due to declining sales, partially offset by reductions in other general expenses. Although
total advertising costs as a percentage of net revenues increased due to declining sales during fiscal 2008
compared to fiscal 2007, we saw a reduction in catalog advertising expenditures due to our catalog circulation
optimization strategy.
INCOME TAXES
Our effective income tax rate was 35.6% for fiscal 2009, 28.4% for fiscal 2008 and 38.1% for fiscal 2007. The
increase in the effective income tax rate over fiscal 2008 was primarily driven by certain favorable income tax
resolutions during fiscal 2008 that did not recur in fiscal 2009.
We currently expect our fiscal 2010 effective tax rate to be in the range of 37% to 40%. Throughout the year, we
expect that there could be ongoing variability in our quarterly tax rates as changes in the level of earnings can
increase the volatility of our tax rate. Additionally, our quarterly tax rate may continue to experience ongoing
variability as taxable events occur and uncertain tax positions are re-evaluated for changes in events or
circumstances, settlements, or expiration of statutes of limitations.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2010, we held $513,943,000 in cash and cash equivalent funds (the highest cash balance in our
history), the majority of which are held in money market funds and highly liquid U.S. Treasury bills. As is
consistent with our industry, our cash balances are seasonal in nature, with the fourth quarter historically
representing a significantly higher level of cash than other periods.
Throughout the fiscal year, we utilize our cash balances to build our inventory levels in preparation for our fourth
quarter holiday sales. In fiscal 2009, our cash resources were used to fund our inventory and inventory related
purchases, catalog advertising and marketing initiatives, purchases of property and equipment and dividend
payments. In addition, on December 7, 2009, in an effort to reduce interest and other debt-related costs and due to
our significant cash balances on hand, we repaid the remaining outstanding balance on our Mississippi industrial
development bonds in the amount of $13,150,000, without penalty. In addition to the current cash balances on hand,
we have a credit facility that provides for a $300,000,000 unsecured revolving line of credit that may be used for
loans or letters of credit. Prior to April 4, 2011, we may, upon notice to the lenders, request an increase in the credit
facility of up to $200,000,000 to provide for a total of $500,000,000 of unsecured revolving credit. No amounts
were outstanding under the credit facility as of January 31, 2010 or February 1, 2009. Additionally, as of
January 31, 2010, $26,112,000 in issued but undrawn standby letters of credit was outstanding under the credit
facility. Further, as of January 31, 2010, we had four unsecured letter of credit reimbursement facilities for a total of
$125,000,000. As of January 31, 2010, an aggregate of $30,625,000 was outstanding under these letter of credit
facilities, which represent only a future commitment to fund inventory purchases to which we had not taken legal
title. We are currently in compliance with all of our bank covenants and based on our current projections, we expect
to remain in compliance throughout fiscal 2010. We believe our cash on-hand, in addition to our available credit
facilities, will provide adequate liquidity for our business operations over the next 12 months.
In fiscal 2009, net cash provided by operating activities was $490,718,000 compared to net cash provided by
operating activities of $230,163,000 in fiscal 2008. Net cash provided by operating activities in fiscal 2009 was
primarily attributable to a decrease in merchandise inventories due to our inventory reduction initiatives
throughout fiscal 2009, an increase in income taxes payable resulting from an increase in earnings as well as an
increase in accounts payable and accrued salaries, benefits and other expenses due to the timing of expenditures.
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