Restoration Hardware 2012 Annual Report Download - page 116

employees of $1.3 million, and (iv) $4.8 million of legal and other professional fees incurred in connection with
the investigation conducted by the special committee of the board of directors relating to Mr. Friedman and our
subsequent remedial actions. Selling, general and administrative expenses for fiscal 2011 included a $6.4 million
non-cash compensation charge related to the repayment of loans to Mr. Friedman from Home Holdings through
the reclassification by Home Holdings of certain pre-Reorganization ownership units in Home Holdings held by
Mr. Friedman at that time.
The increase in selling, general and administrative expenses, excluding the one-time and non-cash
compensation items mentioned above, was primarily related to advertising and marketing costs associated with
increased catalog circulation, an increase in employment costs, an increase in credit card fees increased due to
growth in revenues and an increase in occupancy costs.
Excluding the one-time and non-cash compensations items mentioned above, selling, general and
administrative expenses were 31.8% of net revenues in fiscal 2012 compared to 33.7% of net revenues in fiscal
2011. The improvement in selling, general and administrative expenses as a percentage of net revenues was
primarily driven by reductions in employment costs, professional fees and occupancy costs, in each case as a
percentage of net revenues, due to leverage on the fixed portion of these expenses. These reductions were
partially offset by an increase in advertising and marketing costs associated with increased catalog circulation.
Interest expense
Interest expense was $5.8 million in fiscal 2012 compared to $5.1 million in fiscal 2011. This increase was
primarily due to the higher interest rate under the modified revolving line of credit agreement entered into in
August 2011, higher borrowings under the revolving line of credit, as well as interest related to the term loan
entered into in January 2012.
Income tax expense (benefit)
Income tax benefit increased $63.1 million to a $62.0 million benefit in fiscal 2012 compared to an expense
of $1.1 million in fiscal 2011. Our effective tax rate was 82.9% in fiscal 2012 compared to 5.2% in fiscal 2011.
The increase in the tax benefit was primarily attributable to the reversal of the U.S. valuation allowance against
our net deferred tax assets, resulting in a $57.2 million benefit in our provision for income taxes. By the end of
fiscal 2012, our U.S. operations achieved a position of cumulative profits (adjusted for permanent differences)
for the most recent three-year period. We concluded that this record of cumulative profitability in recent years,
coupled with our business plan for profitability in future periods, provided assurance that our future tax benefits
are more likely than not to be realized. Accordingly, in the fourth quarter of fiscal 2012, we released all of our
U.S. valuation allowance against net deferred tax assets.
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