WeightWatchers 2007 Annual Report Download - page 49

Other revenue, comprised primarily of licensing revenues and our publications, was $80.2 million for fiscal
2007, an increase of $11.9 million, or 17.4%, from $68.3 million for fiscal 2006. Global licensing revenues
increased 21.4%, or $10.4 million, with increases in both existing and new licenses.
Franchise royalties were $12.0 million in NACO and $5.0 million internationally for fiscal 2007. As a result
of our recent acquisitions, total franchise royalties were down 11.1% to $17.0 million from $19.2 million in the
prior year. On a comparable basis, excluding lost royalties from recent acquisitions, franchise royalties rose
13.6%.
Cost of revenues was $653.3 million for fiscal 2007, an increase of $96.2 million or 17.3%, from $557.1
million for fiscal 2006. Gross profit margin of 55.5% of sales for the year increased 70 basis points from 54.8%
of sales in the prior year. The margin expansion was derived primarily from higher meeting fees per attendee, a
result of Monthly Pass in NACO, a price increase in the U.K. and price increases in a few Continental European
markets, and from growth in the licensing business.
Marketing expenses for fiscal 2007 increased $46.4 million, or 29.2%, to $205.3 million from $158.9
million for fiscal 2006. A significant portion of the increase resulted from additional television advertising. In the
U.S., WeightWatchers.com began advertising on television for the first time this year, with its national television
advertising campaigns. For NACO, Continental Europe and the U.K., we increased our level of television
advertising and experienced higher production costs as a result. We also invested more heavily in other non-TV
media and direct mail for the NACO business and online advertising in the WeightWatchers.com business as
compared to the prior year. As a percentage of net revenues, marketing expenses were 14.0% for fiscal 2007, as
compared to 12.9% in the prior year.
Selling, general and administrative expenses were $173.0 million for fiscal 2007 as compared to $137.3
million for fiscal 2006, an increase of $35.7 million. As a percentage of net revenues, selling, general and
administrative expenses were slightly above the prior year level, at 11.8% for fiscal 2007, as compared to 11.1%
in the same period last year. This year’s selling, general and administrative expense has been impacted by our
ongoing technology investment in upgrading our systems, both office and meeting room, by employment related
expenses, in particular to build our Continental Europe and marketing infrastructures, and to a lesser extent by
costs associated with our franchise acquisitions.
Operating income was $435.6 million for fiscal 2007, an increase of $55.6 million, or 14.6%, from $380.0
million for fiscal 2006. The operating income margin for fiscal 2007 was 29.7%, a decrease of 110 basis points
from 30.8% for the prior year, primarily as a result of our higher marketing expense.
Interest expense increased $59.8 million to $109.3 million for fiscal 2007, as compared to $49.5 million for
fiscal 2006, while the average effective interest rate declined slightly. The increase in interest expense was
primarily the result of higher debt outstanding. We raised our debt level in the first quarter of fiscal 2007 to
finance the repurchase of 19.1 million of our shares (as further explained in “Liquidity and Capital Resources–
Stock Transactions”).
In connection with the refinancing of the WW.com Credit Facilities and the WWI Credit Facility (as further
explained in “Item 6. Selected Financial Data—Items Affecting Comparability—Debt Refinancing”), we
recorded a charge of $3.0 million in the first quarter of fiscal 2007 relating to the write-off of the deferred
financing costs associated with this WeightWatchers.com debt and of $1.3 million in the second quarter of fiscal
2006 for early extinguishment of debt relating to WWI. These charges represented the write-off of a portion of
deferred financing costs associated with this old debt.
Our effective tax rate for fiscal 2007 was 38.4%, as compared to 36.5% for fiscal 2006. In fiscal 2006, we
recognized a tax benefit of $6.3 million by reversing tax reserves which, due to the resolution of certain tax
matters were no longer necessary, partially offset by adjustments to our tax valuation allowance for foreign tax
net operating loss carryforwards.
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