Neiman Marcus 2007 Annual Report Download - page 35

Table of Contents
The net increase in COGS as a percentage of revenues in fiscal year 2008 was primarily due to decreased margins generated
by both our Specialty Retail stores and Direct Marketing operations of approximately 1.1% of revenues. The increase in COGS as a
percentage of revenues reflects the lower level of customer demand we experienced in fiscal year 2008. As a result, we generated a
lower level of full-price sales in fiscal year 2008 and incurred higher markdowns and sales promotions costs to liquidate on-hand
inventories held in excess of sales trends. In addition, our Direct Marketing operations realized lower margins on delivery and
processing revenues as a result of discounted and free shipping promotions.
Selling, general and administrative expenses (excluding depreciation). SG&A expenses were 22.7% of revenues in fiscal
year 2008 compared to 23.1% of revenues in the prior fiscal year.
The net decrease in SG&A expenses as a percentage of revenues in fiscal year 2008 of approximately 0.4% of revenues was
primarily due to:
• Lower payroll costs, including estimated annual incentive compensation, of approximately 0.4% of revenues; and
• a decrease in marketing and advertising costs of approximately 0.2% of revenues incurred by Direct Marketing primarily due
to higher internet revenues, which have a lower expense to revenue ratio than catalog revenues.
These decreases in SG&A expenses, as a percentage of revenues, were partially offset by:
• higher benefits expenses of approximately 0.2% of revenues reflecting increases in long-term benefits; and
• a higher level of advertising and promotions costs of approximately 0.1% of revenues incurred by our Specialty Retail stores
during fiscal year 2008 in connection with 1) the celebration of the 100th anniversary of Neiman Marcus in October 2007 and
2) promotional events and activities conducted to facilitate the sell-through of on-hand inventories held in excess of sales
trends.
Income from credit card program. We earned HSBC Program Income of $65.7 million, or 1.4% of revenues, in fiscal year
2008 compared to $65.7 million, or 1.5% of revenues, in fiscal year 2007.
Depreciation expense. Depreciation expense was $148.4 million, or 3.2% of revenues, in fiscal year 2008 compared to
$136.5 million, or 3.1% of revenues, in fiscal year 2007.
Amortization expense. Amortization of intangible assets (customer lists and favorable lease commitments) aggregated $72.2
million, or 1.6% of revenues, in fiscal year 2008 compared to $72.3 million, or 1.6% of revenues, in fiscal year 2007.
Other (income) expense, net. Other income, net was $1.2 million in fiscal year 2008 and was comprised of a pension
curtailment gain offset by an impairment charge for the Horchow tradename. In the first quarter of fiscal year 2008, we recorded a
one-time pension curtailment gain of $32.5 million, or 0.7% of revenues, as a result of our decision to freeze certain Pension and
SERP benefits as of December 31, 2007. In the fourth quarter of fiscal year 2008, we recorded a $31.3 million, or 0.7% of revenues,
pretax impairment charge related to the writedown to fair value of the net carrying value of the Horchow tradename based upon lower
revenues and royalty rate expectations with respect to the Horchow brand in light of current operating performance and future
operating expectations.
Other expense, net was $1.3 million in fiscal year 2007 and was comprised of income related to proceeds received from an
investment and gift card breakage, net of an impairment charge for the Horchow tradename. In the first quarter of fiscal year 2007, we
received consideration aggregating $4.2 million, or 0.1% of revenues, in connection with the merger of Wedding Channel.com, in
which we held a minority interest, and The Knot. We accounted for our investment in Wedding Channel.com under the cost method.
In prior years, we had previously reduced our carrying value of this investment to zero.
In the fourth quarter of fiscal year 2007, we recorded $6.0 million, or 0.1% of revenues, of other income for the breakage on
gift cards we previously sold and issued. The income was recognized based upon our analysis of the aging of these gift cards, our
determination that the likelihood of future redemption was remote and our determination that such balances were not subject to
escheatment laws applicable to our operations. Prior to the fourth quarter of fiscal year 2007, we had not recognized breakage on gift
cards pending, among other things, our final determination of the applicable escheatment laws applicable to our operations. Gift card
breakage during fiscal year 2008 was not significant.
In the fourth quarter of fiscal year 2007, we recorded a $11.5 million, or 0.3% of revenues, pretax impairment charge
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