Express 2010 Annual Report Download - page 54

2010, we began including e-commerce sales in our comparable sales results and adjusted comparable sales
figures retroactively back to the second quarter of 2009. A store is not considered a part of the comparable sales
base if the square footage of the store changed by more than 20% due to remodel or relocation activities. As we
continue to increase our store count, we expect that non-comparable sales will begin to contribute more to our
total net sales than they currently do. We also review sales per gross square foot, average unit retail price, units
per transaction, dollars per transaction, traffic, and conversion, among other things, to evaluate the performance
of individual stores. We also review sales per gross square foot on a company-wide basis.
Gross Profit. Gross profit is equal to net sales minus cost of goods sold, buying and occupancy costs. Gross
margin measures gross profit as a percentage of net sales. Cost of goods sold, buying and occupancy costs
includes the direct cost of purchased merchandise, inventory shrinkage, inventory adjustments, inbound freight to
our distribution center, outbound freight to get merchandise from our distribution center to stores, merchandising,
design, planning and allocation and manufacturing/production costs, occupancy costs related to store operations
(such as rent and common area maintenance, utilities, and depreciation on assets), and all logistics costs
associated with our e-commerce business.
Our cost of goods sold, buying and occupancy costs increase in higher volume quarters because the direct cost of
purchased merchandise is tied to sales. Buying and occupancy costs are largely fixed and do not necessarily
increase as volume increases. Changes in the mix of our products, such as changes in the proportion of
accessories, which are higher margin, may also impact our overall cost of goods sold, buying and occupancy
costs. We review our inventory levels on an on-going basis in order to identify slow-moving merchandise and
generally use markdowns to clear such merchandise. The timing and level of markdowns are driven primarily by
seasonality and customer acceptance of our merchandise. We use third-party vendors to dispose of
marked-out-of-stock merchandise which, in turn, is sold to third-party discounters. The primary drivers of the
costs of individual goods are raw materials, labor in the countries where our merchandise is sourced, and
logistics costs associated with transporting our merchandise.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses include all
operating costs not included in cost of goods sold, buying and occupancy costs, with the exception of costs such
as advisory fees incurred prior to our IPO, proceeds received from insurance claims, and gain/loss on disposal of
assets, which are included in other operating expense, net. These costs include payroll and other expenses related
to operations at our corporate home office, store expenses other than occupancy, and marketing expenses, which
primarily include production, mailing, and print advertising costs. With the exception of store payroll and
marketing, these expenses generally do not vary proportionally with net sales. As a result, selling, general, and
administrative expenses as a percentage of net sales is usually higher in lower volume quarters and lower in
higher volume quarters.
Other Operating Expense, Net. Other operating expense, net includes proceeds received from insurance claims
and gain/loss on disposal of assets. Other operating expense, net also includes advisory fees paid under the terms
of the Advisory Agreement with Golden Gate (“Advisory Agreement”) and the Limited Liability Company
Agreement with Limited Brands (“LLC Agreement”) , respectively, for the periods in which these fees were
incurred. See Note 6 to our Consolidated Financial Statements. In connection with the IPO and Reorganization,
the Advisory Agreement and the LLC Agreement were terminated effective May 12, 2010, and, therefore, we no
longer incur costs related to these agreements.
Other Factors Affecting Our Results
Certain important factors impacted the results presented in this “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” including (1) our transition from a division of Limited Brands to
a stand-alone private company and then to a public company as a result of the IPO, (2) our change in tax status as
a result of the Reorganization, and (3) the prepayment of the 13.5% Topco Term B Loan (“Term B Loan”) and
14.5% Topco Term C Loan (“Term C Loan”), collectively referred to as the “Topco credit facility” in connection
with the IPO and the Senior Notes offering.
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