Home Shopping Network 2010 Annual Report Download - page 27

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Table of Contents
HSN
Gross profit for HSN increased 4% to $709.2 million in 2010 from $678.7 million in the prior year. Gross profit margin declined 29 basis
points to 33.5% from 33.8% in the prior year. The slight decline in the gross profit margin was primarily attributable to a decrease in net
shipping margins primarily due to a product mix shift towards electronics, partially offset by improved product margins due to less promotional
activity in the first half of the year. Gross profit margin was also negatively impacted by increased inventory reserves as a result of a higher
inventory balance.
Gross profit for HSN increased 7% to $678.7 million in 2009 from $633.2 million in the prior year. Gross profit margin improved 145
basis points to 33.8% from 32.4% in the prior year. The improvement in the gross profit margin was primarily attributable to improved product
margins due to less promotional activity, lower procurement costs and warehouse productivity improvements. Gross profit margin also benefited
from a reduction in inventory reserves due to lower aged inventory levels.
Cornerstone
Gross profit for Cornerstone increased 16% in 2010 to $351.8 million from $302.6 million in the prior year. Gross profit margin declined
86 basis points to 39.9% from 40.8% in the previous year. The decrease in the gross profit margin was primarily due to increased rates for
inbound and outbound shipping services for larger package deliveries (as a result of increased global demand for shipping services and the
expiration of favorable shipping contracts in place during 2009) and increased promotional activity to drive demand, partially offset by leverage
over warehousing costs due to the revenue growth and warehouse efficiencies.
Gross profit for Cornerstone decreased 14% in 2009 to $302.6 million from $352.2 million in the prior year. Gross profit margin improved
16 basis points to 40.8% from 40.6% in the prior year. The increase in the gross profit margin was principally due to lower shipping and
fulfillment costs (Cornerstone had negotiated favorable shipping rates with its common carriers in 2009) and improved return rates, offset
slightly by promotional pricing in the first half of the year.
Selling and Marketing Expense
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 2010 increased 6% or $31.1 million and was 18.0% of net sales as compared to 18.5% in 2009.
The increase in the expense is primarily due to increased catalog production and distribution costs associated with an 11% increase in catalog
circulation, an increase in compensation and other employee-related costs primarily due to increased headcount, an increase in on-
air distribution
costs and strategic investments in brand and event marketing at HSN. The increase in on-air distribution costs was primarily due to HSN2,
HSN’s second television shopping channel that debuted in August 2010.
24
Year Ended December 31,
2010
Change
2009
Change
2008
(Dollars in thousands)
HSN
$
289,676
5%
$
275,296
2%
$
270,016
As a percentage of HSN net sales
13.7
%
(2 bp)
13.7
%
(9 bp)
13.8
%
Cornerstone
$
249,013
7%
$
232,273
(22%)
$
297,289
As a percentage of Cornerstone net sales
28.3
%
(305 bp)
31.3
%
(298 bp)
34.3
%
HSNi
$
538,689
6%
$
507,569
(11%)
$
567,305
As a percentage of HSNi net sales
18.0
%
(48 bp)
18.5
%
(163 bp)
20.1
%