Express 2014 Annual Report Download - page 33

the store is not productive selling space. Under the latter scenario, the store is excluded from comparable sales
during the construction period only, and is then considered a comparable store when construction is complete.
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 and on a company-
wide basis. Net sales per average gross square foot is determined by dividing net sales (excluding e-commerce
sales and other revenue) for the period by average gross square feet during the period.
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
include 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 related to stores 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. Any marked down merchandise that is not sold is
marked-out-of-stock. We use third-party vendors to dispose of this 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 any
proceeds received from insurance claims and gain/loss on disposal of assets, which are included in other
operating expense, net. These selling, general, and administrative costs include payroll and other expenses related
to operations at our corporate home office, store expenses other than occupancy, and marketing expenses, which
include production, mailing, and print advertising costs among other things. 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 are usually higher in lower volume quarters and lower in
higher volume quarters.
Results of Operations
The table below sets forth the various line items in the Consolidated Statements of Income and Comprehensive
Income as a percentage of net sales for the last three years.
2014 2013 2012
Net sales ................................................. 100% 100% 100%
Cost of goods sold, buying and occupancy costs .................. 69% 68% 66%
Gross profit .............................................. 31% 32% 34%
Selling, general, and administrative expenses .................... 24% 23% 23%
Other operating expense, net ................................. — % — % — %
Operating income .......................................... 6% 10% 12%
Interest expense, net ........................................ 1% 1% 1%
Other income, net .......................................... — % — % — %
Income before income taxes ................................. 5% 9% 11%
Income tax expense ........................................ 2% 3% 4%
Net income ............................................... 3% 5% 6%
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