Circuit City 1998 Annual Report Download - page 13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table represents the Company's consolidated statement of income data expressed as a percentage of net sales for the three most
recent fiscal years:
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales of $1.44 billion in 1998 were $290.3 million or 25.3% higher than the $1.15 billion reported in 1997. The increase was attributable to
higher demand for PCs, improved productivity in relationship marketing and the full year effect of the inclusion of sales from Midwest Micro
Corp., acquired at the end of the third quarter of 1997. The Company also began to benefit from orders received through its various Internet
web-sites. Sales attributable to the Company's North American operations increased 28.1% to $1.12 billion in 1998 from $875.2 million in
1997. European sales increased to $314.4 million in 1998 from $270.2 million in 1997, an increase of 16.3%. Movements in foreign exchange
rates had an immaterial effect on the European sales comparison.
Gross profit, which consists of net sales less product, shipping and certain distribution center costs, increased by $23 million or 8.7% to $288.6
million in 1998 from $265.5 million in 1997. Gross profit margin decreased to 20.1% in 1998 from 23.2% in 1997. Gross profit margin on PCs
improved in the current year. With sales of PCs representing an increasing proportion of the Company's sales and with margins that are lower
than on other products, they have the effect of decreasing the overall gross profit margin. The decrease in the gross profit margin was also due
to increased sales of brand name computer related products, which typically have lower gross profit margins, and the relatively lower sales
contribution of higher-margin industrial products.
Selling, general and administrative expenses totaled $224.2 million, or 15.6% of net sales in 1998 compared to $206.3 million, or 18.0% of net
sales in 1997. This improvement resulted from a focus on controlling expenses and improved productivity from the Company's relationship
marketing staff and offset a large portion of the gross profit margin decline.
Income from operations increased by $5.1 million or 8.6% to $64.3 million in 1998 from $59.3 million in 1997. Income from operations
decreased as a percentage of net sales to 4.5% in 1998 from 5.2% in 1997.
Interest income decreased $0.2 million to $3.0 million in 1998 from $3.2 million in 1997 as a result of lower interest rates. Interest expense
increased to $0.5 million in 1998 from $0.4 million in 1997.
The effective tax rate increased to 38.5% in 1998 from 37.5% in 1997 as a result of a higher effective state income tax rate and a change in the
relative income earned in foreign countries. As a result of the foregoing, net income increased $2.4 million, or 6.3%, to $41.3 million in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased by $233.5 million or 25.6% to $1.15 billion in 1997 from $911.9 million in 1996. The increase was primarily attributable to
(i) an increase in revenue from the Company's major account sales program, (ii) the inclusion of sales from Midwest Micro since its acquisition
at the end of September 1997, (iii) an increase in the sales of brand name and private label PCs and notebook computers and (iv) an increased
average order value resulting from increased offerings and sales of brand name products. Sales attributable to the Company's North American
operations increased 29.1% to $875.2 million in 1997 from $677.8 million in 1996. European sales increased to $270.2 million in 1997 from
$234.1 million in 1996, an increase of 15.4%. In local currencies without foreign exchange rate effects, European sales increased 21.3%.
Gross profit, which consists of net sales less product, shipping and certain distribution center costs, increased by $15.9 million or 6.4% to
$265.5 million in 1997 from $249.6 million in 1996. Gross profit margin decreased to 23.2% in 1997 from 27.4% in 1996. The decrease in
gross profit margin was primarily due to (i) the Company's strategic decision to increase the proportion of net sales attributable to brand name
products, particularly PCs, notebook computers, computer related products and hardware which typically have lower gross profit margin
percentages than many of the Company's other products, (ii) the increase in the proportion of sales from the Company's major account sales
group which generally sells to larger customers at discounted prices, and (iii) increased shipping and other costs associated with the United
Parcel Service labor action in August 1997.
A significant portion of this decline in gross profit margin has been offset by the continued decline in selling, general and administrative
1998 1997 1996
---- ---- ----
Net sales..................................................... 100.0% 100.0% 100.0%
Gross profit.................................................. 20.1 23.2 27.4
Selling, general and administrative expenses.................. 15.6 18.0 19.8
Income from operations........................................ 4.5 5.2 7.6
Interest income............................................... .2 .3 .3
Interest expense.............................................. .1
Income taxes.................................................. 1.8 2.0 3.0
Net income.................................................... 2.9 3.4 4.8