Circuit City 2000 Annual Report Download - page 14

Increased technical support and service costs also contributed to the lower margin. Gross profit margin in the North
American computer products business declined by approximately 3 percentage points on the lower sales volume and
gross profit margin in Europe declined by 1.5 percentage points. The market for computer products is subject to intense
price competition, which the Company anticipates will continue to have a negative impact on gross margins. Gross
profit margins on industrial product sales remained consistent in 2000 from 1999 and 1998, but the lower sales
contribution of these higher-margin products negatively impacted the Company's overall gross profit margin. Gross
profit 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $270.9 million, or 16.1% of net sales in 2000, compared to
$254.7 million, or 14.5% of net sales in 1999. This resulted from higher personnel and related costs in both North
America and Europe, reflecting the increase in the worldwide relationship marketing sales force and higher bad debt
expense. These expense increases were partially offset by lower advertising costs associated with catalog mailings as
the Company's focus continues to shift to relationship sales. The Company decreased its staffing levels in areas other
than relationship marketing during the year to adjust to the lower level of incoming business. For the year ended
December 31, 1999, selling, general and administrative expenses increased by $30.5 million or 13.6% to $254.7
million 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, expense control and
the leveraging of selling, general and administrative expenses over a larger sales base.
INCOME (LOSS) FROM OPERATIONS
The Company incurred a loss from operations for the year ended December 31, 2000 of $61.0 million compared
to an operating profit of $59.8 million in the year-ago period. The operating loss resulted from the decline in gross
profit and increase in selling, general and administrative expenses. During the second quarter of 2000, the Company
sold its internet auction subsidiary, EZBid Inc., and closed a small software sales subsidiary, which together eliminate
approximately $5 million in operating losses on an annualized basis. Operating income in Europe, which increased to
$17.3 million from $10.5 million a year ago, was adversely affected by $1.5 million, due to the stronger dollar in
relation to major European currencies. Income from operations decreased by $4.5 million or 7.0% to $59.8 million in
1999 from $64.3 million in 1998.
INTEREST AND OTHER INCOME/INTEREST EXPENSE
Interest expense increased to $4.4 million in 2000 from $0.5 million in 1999 and 1998 due to increased
borrowings under the Company's credit facilities. The weighted average interest rate on short-term borrowings was
7.9% in 2000 and 8.2% in 1999. Interest and other income decreased from $3.2 million in 1998, to $1.2 million in 1999
and $0.1 million in 2000 primarily due to lower levels of investments in short-term securities as a result of less cash
available for investment.
INCOME TAXES
Income taxes in 2000 consist of income tax benefits for net operating loss carrybacks, reduced by foreign
income taxes paid or payable. No tax benefit was recorded for state and local net operating loss carryforwards. 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.
NET INCOME (LOSS)
As a result of the above, the net loss for 2000 was $40.8 million, or $1.19 per basic and diluted share, compared
to net income of $36.0 million, or $1.01 per basic and diluted share, in 1999 and $41.3 million, or $1.11 per basic and