Circuit City 2004 Annual Report Download - page 15

100,000 products and continuously update our product offerings to address the needs of our customers, which include
large, mid-
sized and small businesses, educational and government entities as well as individual consumers. Computers
and computer related products account for more than 90% of our net sales, and, as a result, we are dependent on the
general demand for information technology products.
The market for computer products is subject to intense price competition and is characterized by narrow gross
profit margins. Distribution of information technology products is working capital intensive, requiring us to incur
significant costs associated with the warehousing of many products, including the costs of leasing warehouse space,
maintaining inventory and inventory management systems, and employing personnel to perform the associated tasks.
We supplement our product availability by maintaining relationships with major distributors, utilizing a combination of
stocking and drop-ship fulfillment.
After poor economic and market conditions in the prior two fiscal years, we experienced improved economic
conditions and increased sales and profitability in North America in 2004. In response to the economic conditions over
those past two years, we implemented a plan in the first quarter of 2004 to streamline our United States computer
business. This plan consolidated duplicative back office and warehouse operations, which we expect will result in
annual savings of approximately $8 million excluding severance and other restructuring costs of approximately $3
million recognized in fiscal 2004. Economic conditions in Europe have not yet recovered and performance in those
markets continues to be negatively impacted with reduced information technology spending. With evidence of a
prolonged economic downturn, we took measures to align our cost structure with expected potentially lower revenues
and decreasing gross margins. We implemented several cost reduction plans in Europe during 2004 and, in January
2005, we announced additional actions to increase efficiency and profitability in our United Kingdom operation.
The primary component of our operating expenses historically has been employee related costs, which includes
items such as wages, commissions, bonuses, and employee benefits. We have made substantial reductions in our
workforce and closed or consolidated several facilities over the past several years. This resulted in reducing selling,
general and administrative expenses from 16.5% of net sales in 2002 to 13.5% of net sales in 2004. We will continue to
monitor our costs and evaluate the need for additional actions.
The discussion of our results of operations and financial condition that follows will provide information that will
assist in understanding our financial statements, the factors that we believe may affect our future results and financial
condition as well as information about how certain accounting principles and estimates affect the consolidated financial
statements. This discussion should be read in conjunction with the consolidated financial statements included herein.
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Results of Operations
We had net income of $10.2 million for the year ended December 31, 2004 and $3.2 million for the year ended
December 31, 2003. For the year ended December 31, 2002, we had a net loss of $58.4 million, after recording a
cumulative effect of a change in accounting principle of $51 million, net of tax, to reflect the impairment of the entire
carrying amount of goodwill.
The following table represents our consolidated statement of operations data expressed as a percentage of net
sales for our three most recent fiscal years:
2004
2003 20
---- ----
--
Net sales 100.0%
100.0% 100.
Gross profit 14.9%
16.0% 17.
Selling, general and administrative expenses 13.5%
15.2% 16.
Restructuring and other charges 0.4%
0.1% 1.
Goodwill impairment 0.2%
Income (loss) from operations 1.0%
0.6% (0.5
Interest expense 0.2%
0.1% 0.