Circuit City 2005 Annual Report Download - page 22

21.1% to $1.08 billion from $893 million in 2003. This increase was largely a result of our successful internet-based
marketing initiatives directed primarily at our consumer customers and reflected by an increase in our internet-related
sales of approximately $109 million. Although our internet-related sales are not exclusively made to consumers, we
believe that a large majority of these sales are made to consumers. With the United States economy improving after
several years of softness, we also had strong growth in our industrial product sales in 2004. Sales of industrial products
increased 14.9% to $151.6 million from $131.9 million last year, representing 9% of the overall increase in North
American sales. European sales, stated in US dollars, increased 10.2% to $695.7 million for 2004 (representing 36.1%
of worldwide sales) compared to $631.0 million (representing 38.1% of worldwide sales) in 2003. Movements in
foreign exchange rates positively impacted European sales for 2004 by approximately $70.0 million. If currency
exchange rates for 2003 had prevailed in 2004, however, European sales would have decreased 1.1% from the prior
year. Continued weakness in demand for information technology products from business customers in Europe and the
effect of exchange rate movements on product pricing in certain European markets for products whose cost is U.S.
dollar based, resulted in decreased local currency denominated sales.
GROSS PROFIT
Gross profit, which consists of net sales less product cost, shipping, assembly and certain distribution center
costs, was $307.3 million, or 14.5% of net sales, for the year ended December 31, 2005, compared to $286.5 million or
14.9% of net sales in 2004 and $264.9 million, or 16.0% of net sales, in 2003. Our gross profit ratio declined in 2005
primarily as a result of approximately $7 million of increased costs for warehouse staff and supplies related to
increased activity levels from the prior year. These increased costs were partially offset by favorable changes in product
mix. Improvement in our gross profit ratio in North America was partially offset by a continued decline in our gross
profit ratio in Europe. Our gross profit ratio declined in 2004 from 2003 as a result of increased pricing pressures on
our computer business both in North America and Europe. The decline was partially offset by improved margins on
industrial products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $268.3 million, or 12.7% of net sales, for the year ended
December 31, 2005, $260.1 million, or 13.5% of net sales, for 2004, and $251.5 million, or 15.2% of net sales, in 2003.
Selling, general and administrative expenses increased $8.2 million, or 3.2%, in 2005 from a year ago as a result of
$3.8 million of increased credit card fees related to the increased sales volume, increased legal and professional fees of
$2.0 million related to the restatement of the 2004 and 2003 financial statements and $3.8 million of increased foreign
exchange expenses. These increases were partially offset by increased funding of advertising expenses from vendors.
The increase from 2003 to 2004 of $8.7 million, or 3.4%, resulted from approximately $10 million of increased costs in
Europe from the effects of changes in foreign exchange rates and $4 million of higher credit card processing fees from
the higher sales volume in 2004. The increase was partially offset through restructuring actions taken, reducing our
employee count in the United States and lowering salary expense and related benefit costs by $6 million in 2004.
RESTRUCTURING AND OTHER CHARGES
During the year ended December 31, 2005, we incurred $4.2 million of restructuring and other charges. These
costs were primarily related to further restructuring actions undertaken in Europe during the year as a result of
continuing decline in profitability. The costs were comprised primarily of staff severance expense related to the
elimination of approximately 240 positions, which is expected to result in approximately $6.0 million in future annual
savings.
We incurred $7.4 million of restructuring and other charges in 2004. In the first quarter of 2004 we implemented
a plan to streamline the activities of our United States computer businesses’ back office and warehouse operations,
resulting in the elimination of approximately 200 jobs. We incurred $3.7 million of restructuring costs associated with
this plan, including $3.2 million for staff severance and benefits for terminated employees and $0.5 million of non-
cash
costs for impairment of the carrying value of fixed assets. We recorded $0.6 million of additional costs in 2004 related
to facility exit costs for our 2003 plan to consolidate United States warehouse locations. We also implemented several
cost reduction plans in Europe during 2004, including a consolidation of United Kingdom sales offices which resulted
in the elimination of 50 jobs. We incurred $2.5 million of restructuring charges for facility exit costs and workforce
reductions in connection with these actions and $0.5 million of additional costs resulting from adjustments to our