Express 2011 Annual Report Download - page 42

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 and company-owned outlet
stores to dispose of marked-out-of-stock merchandise. 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 excess proceeds received from the
settlement of insurance claims and gain/loss on disposal of assets. Other operating expense, net previously
included 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”) for the
periods in which these fees were incurred. See Note 7 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, (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, respectively, and (4) the repurchase of $49.2 million of Senior Notes and
the prepayment of the Opco Term Loan.
Stand-alone Private and Public Company Costs. During our transition from a division of Limited Brands, a
public company, to a stand-alone private company, we incurred one-time costs related to the establishment of
infrastructure associated with information technology, tax, risk management, internal audit, treasury, real estate,
and benefits administration. As a result of the IPO, we incur additional legal, accounting, and other expenses that
we did not incur as a private company, including costs associated with public company reporting and corporate
governance requirements. These requirements include compliance with the Sarbanes-Oxley Act of 2002 as well
as other rules implemented by the SEC and applicable stock exchange rules.
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