Neiman Marcus 2008 Annual Report Download - page 29

Table of Contents
• Inventory costs—We utilize the retail method of accounting. Under the retail inventory method, the valuation of
inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio, for various
groupings of similar items, to the retail value of our inventories. The cost of the inventory reflected on the consolidated
balance sheet is decreased by charges to cost of goods sold at the time the retail value of the inventory is lowered
through the use of markdowns. Hence, earnings are negatively impacted when merchandise is marked down. With the
introduction of new fashions in the first and third fiscal quarters and our emphasis on full-price selling in these quarters,
a lower level of markdowns and higher margins are characteristic of these quarters.
• Buying costs—Buying costs consist primarily of salaries and expenses incurred by our merchandising and buying
operations.
• Occupancy costs—Occupancy costs consist primarily of rent, property taxes and operating costs of our retail,
distribution and support facilities. A significant portion of our buying and occupancy costs are fixed in nature and are not
dependent on the revenues we generate.
• Delivery and processing costs—Delivery and processing costs consist primarily of delivery charges we pay to third-
party carriers and other costs related to the fulfillment of customer orders not delivered at the point-of-sale.
Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise
we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we
earn in connection with the sales of the vendor's merchandise. These allowances result in an increase to gross margin when we earn
the allowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we pay to
acquire the merchandise. These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are
sold. We received vendor allowances of $107.7 million, or 3.0% of revenues, in fiscal year 2009, $109.6 million, or 2.4% of revenues,
in fiscal year 2008 and $96.1 million, or 2.2% of revenues, in fiscal year 2007. The amounts of vendor allowances we received did not
have a significant impact on the year-over-year change in gross margin during fiscal years 2009, 2008 or 2007.
Changes in our COGS as a percentage of revenues can be affected by the following factors:
• our ability to order an appropriate amount of merchandise to match customer demand and the related impact on the level
of net markdowns incurred;
• customer acceptance of and demand for the merchandise we offer in a given season and the related impact of such
factors on the level of full-price sales;
• factors affecting revenues generally, including pricing strategies, product offerings and other actions taken by
competitors;
• changes in occupancy costs primarily associated with the opening of new stores or distribution facilities; and
• the amount of vendor reimbursements we receive during the fiscal year.
Selling, general and administrative expenses (excluding depreciation) (SG&A). SG&A principally consists of costs related
to employee compensation and benefits in the selling and administrative support areas, advertising and catalog costs and insurance and
long-term benefits expenses. A significant portion of our selling, general and administrative expenses are variable in nature and are
dependent on the revenues we generate.
Advertising costs incurred by our Specialty Retail segment consist primarily of print media costs related to promotional
materials mailed to our customers, while advertising costs incurred by our Direct Marketing operation relate to the production,
printing and distribution of our print catalogs and the production of the photographic content on our websites, as well as online
marketing costs. We receive advertising allowances from certain of our merchandise vendors. Substantially all the advertising
allowances we receive represent reimbursements of direct, specific and incremental costs that we incur to promote the vendor's
merchandise in connection with our various advertising programs, primarily catalogs and other print media. As a result, advertising
allowances are recorded as a reduction of our advertising costs when earned. Advertising allowances aggregated approximately $65.7
million, or 1.8% of revenues, in fiscal year 2009, $75.7 million, or 1.6% of revenues, in fiscal year 2008 and $63.4 million, or 1.4% of
revenues, in fiscal year 2007.
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