Restoration Hardware 2012 Annual Report Download - page 118

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Selling, general and administrative expenses
Selling, general and administrative expenses increased $54.7 million, or 19.9%, to $329.5 million in fiscal
2011 compared to $274.8 million in fiscal 2010. Selling, general and administrative expenses in fiscal 2011
included $1.3 million of unfavorable impact due to purchase accounting compared to $1.6 million of unfavorable
impact due to purchase accounting in fiscal 2010. Excluding the effect of purchase accounting adjustments, the
increase in selling, general and administrative expenses was primarily related to an increase in employment costs
associated with the growth of our operations, a $6.4 million compensation charge related to the repayment of
loans between Mr. Friedman and Home Holdings via the reclassification by Home Holdings of Mr. Friedman’s
pre-Reorganization ownership units, an increase in advertising and marketing costs associated with increased
circulated catalog pages, an increase in management fees to Catterton, Tower Three and Glenhill and an increase
in credit cards fees due to the growth in sales revenues. During fiscal 2011, we closed four retail store locations
in advance of the related lease termination dates resulting in a charge of $3.2 million. In addition, in fiscal 2011
we recorded a $1.6 million restructuring charge associated with our Shanghai office, increased travel-related
expenses and an increase in retail store pre-opening expenses.
Selling, general and administrative expenses were 34.4% of net revenues in fiscal 2011 compared to 35.5%
of net revenues in fiscal 2010. Selling, general and administrative expenses as a percentage of net revenues
included 0.1% of unfavorable impact of purchase accounting in fiscal 2011 compared to 0.2% of unfavorable
impact of purchase accounting in fiscal 2010. The improvement in selling, general and administrative expenses
excluding the effect of purchase accounting adjustments was driven largely by increased net revenues during
fiscal 2011 compared to fiscal 2010, which resulted in a reduction of employment costs, a reduction in
advertising and marketing costs, as well as a reduction in professional fees, in each case as a percentage of net
revenues. These reductions were partially offset by an increase in costs as a percentage of net revenues related to
corporate office costs, due in part to the restructuring charge associated with our Shanghai office and pre-opening
expenses related to new retail store locations we opened in fiscal 2011, as well as an increase in occupancy
expense as a percentage of net revenues primarily related to the closure of four retail store locations prior to the
related lease termination dates.
Interest expense
Interest expense increased $1.9 million to $5.1 million in fiscal 2011 compared to $3.2 million in fiscal
2010. This increase was primarily due to the higher interest rate under the modified revolving line of credit
agreement entered into in August 2011, as well as an increase in the amount of borrowings under the revolving
line of credit in fiscal 2011 as compared to fiscal 2010 primarily due to increased inventory levels.
Income tax expense
Income tax expense increased $0.4 million to $1.1 million in fiscal 2011 compared to $0.7 million in fiscal
2010. Our effective tax rate was 5.2% for fiscal 2011 compared to (10.8)% for fiscal 2010. The increase in our
tax expense was primarily due to an increase in taxable income for state and foreign jurisdictions. The state
taxable income was primarily generated as a result of certain states disallowing the utilization of net operating
loss carryovers.
Quarterly Results and Seasonality
The following table sets forth our historical quarterly consolidated statements of income for each of the last
eight fiscal quarters ended through February 2, 2013. This quarterly information has been prepared on the same
basis as our annual audited financial statements and includes all adjustments that we consider necessary to
present fairly the financial information for the fiscal quarters presented. The quarterly data should be read in
conjunction with our consolidated financial statements and the related notes included in Item 8—Financial
Statements and Supplementary Data.
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