Selling, general and administrative ("SG&A") expenses were $123.4 million in fiscal 2001
compared to $115.8 million in fiscal 2000, an increase of $7.6 million, or 6.6%. These expenses
rose for several reasons: approximately 2% higher catalog circulation for the Company's existing
catalogs, the expenses of Rue de France, Inc. which was acquired in April 2000, and increased
costs of operating the Company's website. As a percentage of revenue, SG&A increased from
41.2% in fiscal 2000 to 43.0% in fiscal 2001 primarily because of weaker response to the
Company's catalogs. Specifically, the Company's mailings generated 5% less revenue per catalog
in fiscal 2001 than fiscal 2000, on higher circulation.
The cost of producing, printing and mailing the Company's catalogs represent the single largest
component of SG&A expenses. The Company's paper cost per page increased by approximately
6.6% in fiscal 2001 compared to fiscal 2000, but is expected to be lower for fiscal 2002 due to a
softening paper market. Postal rates, however, are expected to rise. A postal rate increase of 9%
in January 2001 will be followed by another increase in July 2001 of approximately 1.6%. To
mitigate the impact of the postal rate increases, however, the Company made changes to the
weight of the catalogs and adjustments to catalog page counts. Overall, the average cost to
produce and mail a catalog is expected to be slightly lower in fiscal 2002 compared to 2001.
During fiscal 2001, the Company recorded pretax restructuring and other charges aggregating
$2.1 million, which included severance pay for a former officer ($.4 million) and costs of a
restructuring plan ($1.7 million). The restructuring plan (the "Plan") was approved in February
2001 to streamline operations and reduce costs in light of decreased consumer spending and an
uncertain economy. Under the Plan, the Company eliminated approximately 12% of its salaried
workforce and closed its Las Vegas, Nevada Call Center, consolidating these operations into its
National Distribution Center located in Virginia Beach. The costs of the Plan include $.7 million
for employee-related costs (mostly severance pay), $.3 million of asset write-offs from the call
center closure, $.7 million of projected future lease payments and sublease costs for the call
center. No payments under the Plan have been made as of February 24, 2001. The Company
expects to make the remaining severance payments by October 15, 2001. With respect to the
lease costs, the Company currently estimates that it may take in excess of 12 months to enter
into a suitable sublease for the Las Vegas facility. The restructuring and other charges reduced
fiscal 2001 net income by $1.3 million ($.15 per share).
Interest income in fiscal 2001 was $1.5 million compared to $1.2 million in fiscal 2000. The
increase of $.3 million was due primarily to higher interest rates on the Company's cash
investments. Financing expense was $.3 million in both fiscal 2001 and fiscal 2000. There were
no short-term borrowings during fiscal year 2001 or fiscal year 2000.
The Company's unusually high effective income tax rate in fiscal 2001 is primarily due to
recognizing the expiration of charitable contribution tax carryforwards. The Company recorded
additional tax expense of $.8 million related to the expiration of these credits, which reduced
earnings per share by $.09.
16
L I L L I A N V E R N O N
