Circuit City 2008 Annual Report Download - page 28

Table of Contents
loss and negative cash flow. The actions taken resulted in a charge to earnings of approximately $1.7 million. The Company expects to realize
savings of approximately $2.6 million annually.
Sales increased in all three reporting business segments and in both geographies during 2007 over 2006. The growth in Technology Products
sales was driven primarily by increased internet and retail store sales, private label product sales and expanded product offerings. The growth in
Industrial Products sales resulted from the Company increasing its market share through competitive pricing advantages and increased internet
sales. The growth in North American sales reflected the above factors in both segments. The growth in European sales was driven by strong
business to business gains and by the effect of a weaker US dollar. Exchange rates positively impacted the European sales comparison by
approximately $78 million in 2007 as compared to 2006. Excluding the movements in foreign exchange rates, European sales would have
increased 12% from the prior year. Sales as measured in local currencies increased in all of the European markets we served in 2007. Sales in
our Software segment were not material in 2007 and 2006 due to early stage of operations.
GROSS MARGIN
Consolidated gross margin remained consistent year over year at 15.3%, although in the fourth quarter of 2008 the Company’s gross margin
declined to 14.4% as the Company lowered certain product prices and offered freight incentives in order to gain market share and respond to
competitive pricing pressures. Gross margin is dependent on variables such as product mix, vendor price protection and other sales incentives,
competition, pricing strategy, cooperative advertising funds required to be classified as a reduction of cost of sales, freight discounting and other
variables, any or all of which may result in fluctuations in gross margin.
Gross margin increased 70 basis points during 2007 over 2006, due primarily to decreased competitive pricing pressures in the Technology
Products segment .
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased in 2008 over 2007 primarily as a result of the increase in sales volume, added personnel,
facility and other operating costs associated with the CompUSA acquisition, as well as increased accounting, auditing, legal and professional
expenses and reorganization charges incurred in our Software segment. Significant expense increases include approximately $27.0 million of
increased sales and other salaries and related costs related to the increased sales volume; rent and real estate tax increases of $10.6 million; $5.8
million of increased professional and telephone/computer maintenance costs; and $4.3 million of increased credit card fees. CompUSA
operations accounted for $23.6 million of these cost increases. Included in 2007 is a gain of approximately $2.4 million from a lawsuit that was
settled favorably.
Selling, general and administrative expenses increased in 2007 over 2006 primarily as a result of the increase in sales volume as well as
increased accounting, auditing, legal and consulting costs related to the Company being subject to Sarbanes Oxley section 404 requirements.
Significant expense increases include approximately $26 million of increased internet advertising costs, $8 million of increased sales salaries
related to the increased sales volume and an increase in other salaries and related costs of approximately $15 million due to increased staff in
areas such as finance, marketing and information technology.
INTEREST AND OTHER INCOME
AND INTEREST EXPENSE
Interest expense was $.3 million, $1.0 million and $1.7 million in 2008, 2007 and 2006. Interest expense decreased in 2008 and 2007 as a result
of decreased short-term borrowings in the United Kingdom and the Netherlands. The extinguishment of mortgage debt related to our Georgia
warehouse sale in the first quarter of 2006 also contributed to the decreased interest expense. Interest and other income, net was $2.0 million,
$5.5 million and $9.5 million in 2008, 2007 and 2006. The increase in other income in 2006 mainly resulted from the gain on sale of the Georgia
location.
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