Circuit City 2011 Annual Report Download - page 26

CHANNEL SALES:
The worldwide business to business channel sales increase resulted primarily from the Industrial Products segment’s additional product lines and the
addition of business to business sales personnel in both the Technology Products and Industrial Products segments. On a constant currency basis,
worldwide business to business channel sales grew 9.7%.
The worldwide consumer-channels, defined as revenues from retail stores, consumer websites, inbound call centers and television shopping channels,
decline resulted primarily from decreased European and North American unassisted web and television shopping sales. On a constant currency basis,
worldwide consumer channel sales declined 7.4%.
2010 versus 2009:
The growth in Technology Products sales in 2010 compared to 2009 was driven by increased business to business and consumer channel sales
worldwide as a result of improved global economic conditions, the expansion of the number of retail stores in the United States and Canada and the
continued sales contribution from our Circuit City and WStore Europe SA (“WStore”) acquisitions in 2009. On a constant currency basis, excluding
the impact of the WStore acquisition on results, Technology Product sales would have grown 7.9% or $230.6 million. North American Technology
Products sales increased 8.2% in 2010 compared to 2009 benefiting from increased retail and internet sales in the consumer channel, the result of
opening seven retail stores in 2010 and the Circuit City acquisition in 2009. On a constant currency basis, North American sales would have grown
8.9%. The movement in the exchange rates positively impacted sales by approximately $19.9 million. European sales grew primarily from an increase
in business to business sales. On a constant currency basis, European sales would have increased 29.6%. Movement in foreign exchange rates
negatively impacted sales by approximately $52.9 million. Industrial Products sales increased 27.5% compared to 2009 because of improved
economic conditions in North America in 2010 resulting in increased demand for the segment’s various products as well as an increase in the number
of products offered on its websites and in its catalogs. On a constant currency basis and excluding the WStore acquisition, worldwide business to
business channel sales increased 18.1% and worldwide consumer-channel sales increased 2.4% in 2010 compared to 2009. The Company announced
plans to exit its Software solutions segment during the second quarter of 2009. Substantially all of the third party business activities of ProfitCenter
Software had ended as of December 31, 2009. Current and prior year results for this segment are now included in Corporate and other.
GROSS MARGIN
The consolidated gross margin increase in 2011 is due to changes in the segment and channel mix, with Industrial Products sales, which are typically
higher margin than Technology Products, contributing a larger percentage to gross profit dollars. Modest improvements in our freight margin in
Technology Products contributed to the improved margin from our ongoing freight and logistics initiatives. 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 to cost of sales, freight discounting and other variables, any or all of which may result in fluctuations in gross margin .
The consolidated gross margin decrease in 2010 was due to lower product prices; freight discounts on the Company’s North American websites and
start up costs related to the new distribution center in North America partially offset by improvement in gross margin in Europe and in Industrial
Products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The selling, general and administrative expenses increase in 2011 primarily resulted from the increased sales volume, increases in facility and other
operating costs related to the retail stores being opened a full year compared to 2010 and hiring of additional sales personnel. Selling, general and
administrative costs as a percent of sales increased 80 basis points compared to 2010. Significant expense increases include approximately $21.4
million of increased payroll, and related costs due to additional sales personnel and additional retail stores operating for the full year of 2011 compared
to 2010, additional rent and related costs of approximately $2.8 million and $10.1 million of increased internet, store space ads advertising and reduced
cooperative advertising funding on catalogs, offset by decreased spending on catalogs compared to 2010. The Company incurred approximately $2.8
million of additional depreciation and amortization compared to 2010 due to significant additions to our second distribution center, expenditures in our
retail stores and amortization of intangible assets.
The selling, general and administrative expenses increase in 2010 primarily resulted from increased sales volume and increased facility and other
operating costs related to opening additional retail stores. Selling, general and administrative costs as a percent of sales declined as sales grew at a
faster rate than costs. Retail expansion in the United States and the inclusion of WStore results for a full year were primary drivers of the cost increases
in 2010. Significant expense increases include approximately $24.1 million of increased payroll, $8.5 million of increased internet advertising
expenses, $5.6 million of increased rent and related expenses primarily related to retail stores, $2.8 million of increased credit card fees, $2.5 million
of additional depreciation and amortization expense offset by approximately $9.7 million of increased vendor consideration related to advertising
expenses. Also included in 2009 is a gain of approximately $1.8 million from a lawsuit that was settled favorably.
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