Restoration Hardware 2014 Annual Report Download - page 57

Interest expense
Interest expense was $17.6 million in fiscal 2014 and consisted of interest of $8.0 million non-cash
amortization of the convertible senior notes debt discount, $5.5 million related to accounting for build-to-suit
lease transactions under ASC 840, interest incurred under our revolving line of credit of $3.1 million, which
includes standby and letter of credit interest, amortization of debt issuance costs and deferred financing fees of
$1.3 million, interest of $0.9 million for notes payable for share repurchases and interest related to capital lease
agreements of $0.4 million. In addition, we capitalized interest expense of $1.6 million for capital projects in
fiscal 2014.
Interest expense was $5.7 million in fiscal 2013 and consisted of interest incurred under our revolving line
of credit of $4.6 million, which includes standby and letter of credit interest, interest of $1.1 million related to
accounting for build-to-suit lease transactions under ASC 840, amortization of deferred financing fees of $0.7
million, interest on capital leases of $0.1 million and interest of $0.1 million for notes payable for share
repurchases. In addition, we capitalized interest expense of $0.9 million for capital projects in fiscal 2013.
Income tax expense
Income tax expense was $57.2 million in fiscal 2014 compared to $30.9 million in fiscal 2013. Our effective
tax rate was 38.58% in fiscal 2014 compared to 62.96% in fiscal 2013. The decrease in the effective tax rate in
fiscal 2014 was primarily due to the fact that the effective tax rate in fiscal 2013 was significantly impacted by
our reporting a net loss before income taxes, non-deductible stock-based compensation and other non-deductible
expenses.
Fiscal 2013 Compared to Fiscal 2012
Net revenues
Net revenues increased $357.9 million, or 30.0%, to $1,551.0 million in fiscal 2013 compared to $1,193.0
million in fiscal 2012. We had 70 and 71 retail stores open at February 1, 2014 and February 2, 2013,
respectively. Stores sales increased $175.1 million, or 27.2%, to $818.4 million in fiscal 2013 compared to
$643.3 million in fiscal 2012. Direct sales increased $182.8 million, or 33.3%, to $732.6 million in fiscal 2013
compared to $549.7 million in fiscal 2012. Comparable brand revenue growth was 31% in fiscal 2013 compared
to 28% in fiscal 2012. We believe that the increase in comparable brand revenue was due primarily to a favorable
reaction to our merchandise assortment, including the expansion of existing product categories, and the
introduction of new product categories.
Gross profit
Gross profit increased $120.4 million, or 27.6%, to $556.9 million in fiscal 2013 from $436.4 million in
fiscal 2012. As a percentage of net revenues, gross margin decreased 0.7% to 35.9% of net revenues in fiscal
2013 from 36.6% of net revenues in fiscal 2012.
In fiscal 2012, we incurred a $3.3 million charge related to increased tariff obligations of one of our foreign
suppliers following the U.S. Department of Commerce’s review of the anti-dumping duty order on wooden
bedroom furniture from China for the period from January 1, 2011 through December 31, 2011. Excluding the
impact associated with this obligation, gross margin decreased 1.0% to 35.9% of net revenues in fiscal 2013 from
36.9% in fiscal 2012. This decrease was primarily driven by strategic pricing on new product introductions and
changes in product mix. In addition, gross profit as a percentage of net revenues decreased due to increased
freight costs resulting from a larger percentage of furniture sales during the period, which incur higher shipping
costs than our other products. These decreases in gross profit as a percentage of net revenues were partially offset
by improvement in store occupancy costs from improved leverage on the fixed portion of such costs.
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