Home Shopping Network 2008 Annual Report Download - page 27

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24
HSN
HSN gross profit margin was 32.4% for 2008, a 151 bp decrease from 2007. The decline in the gross profit
margin was primarily the result of the product mix shift (principally from a product mix shift from jewelry and fashion
to electronics, housewares, health and fitness), increased promotional activity in fashion and, to a lesser extent, jewelry
and increased shipping and handling costs. The increase in shipping and handling costs is due to the product mix shift,
fuel and other surcharges and annual rate increases. In a conscious effort to grow and maintain customer share in an
increasingly competitive marketplace, HSN did not pass along all of these cost increases to its customers. In August
2008, HSN selectively implemented price increases in shipping and handling charges to help offset a portion of the cost
increases.
Gross profit margin in 2007 decreased 155 bp to 33.9% from 35.4% in the prior year, primarily due to an
increase in inventory reserves, a shift in mix to lower gross margin products, an increase in shipping and handling
costs and the effect of merchandise liquidation and markdowns. Higher return rates negatively impact both revenue
and gross margins as higher returns result in higher warehouse processing costs and higher inventory markdowns for
goods that are not resalable at full retail price.
Cornerstone
Gross profit margin for Cornerstone was 40.6% in 2008 as compared to 44.0% in the previous year. The
decrease in the gross profit margin was principally due to an increase in promotional pricing and clearance activity
and an increase in net shipping costs. Shipping and handling costs grew at a faster rate than revenue primarily due to
increased fuel surcharges charged by Cornerstone’s shipping partners and a shift in product mix to heavier
merchandise. The decrease in the 2007 gross profit margin to 44.0% from 44.8% in the prior year was mainly
attributable to the additional shipping and handling costs.
Selling and Marketing Expense
2008
%
Change 2007
%
Change 2006
HSN
270,016
$
(1%)
272,896
$
5%
260,794
$
As a percentage of HSN net sales
14%
(62 bp)
14%
58 bp
14%
Cornerstone
297,289
$
(8%)
323,015
$
0%
324,203
$
As a percentage of Cornerstone net sales
34%
250 bp
32%
(81 bp)
33%
HSNi
567,305
$
(5%)
595,911
$
2%
584,997
$
As a percentage of HSNi net sales 20% (40 bp) 20% 16 bp 20%
Year Ended December 31,
(Dollars in thousands)
Selling and marketing expense consists primarily of advertising and promotional expenditures,
compensation and other employee-related costs (including stock-based compensation) for personnel engaged in
customer service, sales and merchandising functions and on-air distribution costs. Advertising and promotional
expenditures primarily include catalog production and distribution costs and online marketing, including fees paid to
search engines and third party distribution partners.
HSNi’s selling and marketing expense in 2008 decreased $28.6 million from 2007. This decrease is
primarily due to the $29.1 million reduction in catalog costs at Cornerstone and a $11.1 million decrease in on-air
distribution costs at HSN, partially offset by an increase of $12.5 million in compensation and other
employee-related costs. Catalog costs decreased primarily due to a 19% planned reduction in catalog circulation.
The decrease in on-air distribution costs is primarily due to a $5.0 million adjustment upon settlement of certain key
contract conditions with a vendor which affected a previously recorded accrued liability, elimination of distribution