Circuit City 1999 Annual Report Download - page 11

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales increased by $318.8 million or 22.2% to $1.75 billion in 1999 from $1.44 billion in 1998. This increase was primarily attributable to
increased demand for the Company's PC's, increased revenue from relationship marketing sales and the inclusion of sales from Simply
Computers Ltd. ("Simply") since its acquisition at the beginning of February 1999. Sales from the Company's North American operations
increased 12.7% to $1.26 billion in 1999 from $1.12 billion in 1998. European sales increased to $491.1 million in 1999 (including
approximately $110 million from Simply) from $314.4 million in 1998, an increase of 56.2%. The effect of changes in exchange rates on
European sales for the year was not significant.
Gross profit, which consists of net sales less product, shipping, assembly and certain distribution center costs, increased by $26.0 million or
9.0% to $314.5 million in 1999 from $288.5 million in 1998. Gross profit margin decreased to 17.9% in 1999 from 20.1% in 1998. The
decrease in gross profit margin resulted from a continuing shift in product mix, reflecting a greater percentage of PCs (which typically have a
lower gross profit margin percentage than many of the Company's other products) and increased relationship marketing sales. Industry-wide
shortages in certain key PC components also resulted in increased costs. The relatively lower sales contribution from higher-margin industrial
products continues to affect gross margin percentage unfavorably.
A portion of the decline in gross profit margin has been offset by the continued decline of selling, general and administrative expenses as a
percentage of net sales. While selling, general and administrative expenses increased by $30.5 million or 13.6% to $254.7 million in 1999 from
$224.2 million in 1998, as a percentage of net sales they decreased to 14.5% in 1999 from 15.6% in 1998. The decrease as a percentage of net
sales was primarily attributable to reduced catalog costs in North America as a result of the increased efficiencies from larger average order
sizes, vendor supported advertising, continued expense control and the leveraging of selling, general and administrative expenses over a larger
sales base.
Income from operations decreased by $4.5 million or 7.0% to $59.8 million in 1999 from $64.3 million in 1998. Income from operations as a
percentage of net sales decreased to 3.4% from 4.5% in 1998.
Interest income decreased to $1.2 million in 1999 from $3.2 million in 1998 primarily due to lower levels of investments in short-term
securities.
The effective tax rate in 1999 increased to 40.5% from 38.5% in 1998 as a result of higher state and local taxes in the United States and a
change in the relative income earned in foreign locations.
As a result of the factors discussed above, net income decreased $5.2 million or 12.7% to $36.0 million in 1999.
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 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
mix of income earned in foreign countries.