: EarthWear Clothiers - McGraw-Hill Ryerson

Management’s Discussion and Analysis: Results of Operations for 2002
Compared to 2001
The company planned 2002 to be a transitional year in which it reduced unprofitable mailings,
reduced expenses, and liquidated excess inventory to prepare for new merchandise
offerings. Sales declined 3.8 percent but net income
increased 54 percent.
Net Sales Decreased by 3.8 Percent Net sales for
the year totalled $857 million, compared to $891 million
in 2001. The sales decrease in 2002 was anticipated
and was due to a planned reduction in catalogue
pages mailed during the year and lower inventory
levels. Lower inventory levels throughout the year
resulted in a first-time fulfilment rate of 87 percent.
Sales for the international segment of the business
were down slightly from the prior year. Internet sales more than doubled during 2002.
Inventory Declined by 26.2 Percent Our inventory balance at the end of the year 2002 was
$105.4 million down 26.2 percent from the 2001 ending inventory of $142.8 million. We
entered the holiday season with lower inventory levels and were unable to fill orders at our
usual seasonal rate in the fourth quarter.
Gross Profit Margin Gross profit for 2002 was $385.1 million, or 44.9 percent of net sales,
compared with $400.9 million, or 45.0 percent of net sales for 2001. During the first three
quarters of 2002, gross profit margin was running lower than 2001 due primarily to a higher
level of sales of liquidated merchandise. In the fourth quarter, gross profit margin improved
due to a lower level of liquidations.
Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A)
decreased 5.3 percent in 2002 to $335 million, compared with $354 million in 2001. As a percentage
of sales, SG&A was 39 percent in 2002 compared to 39.7 percent in the prior year.
The decrease was due primarily to a reduction in the number of catalogue pages mailed and
higher sales per page. The total number of catalogues mailed in 2002 decreased by 9 percent
from the prior year, while the number of pages decreased by about 15 percent.
Utilization of Credit Lines Decreased Because of lower inventory levels throughout the
year, borrowings under our short-term lines of credit decreased, reducing interest expense
by $3.8 million from 2001. With more cash to invest our interest income increased to $5 million
in 2002. Our lines of credit peaked at $34.5 million in October 2002 compared with a
peak of $167 million in 2001. At December 31, 2002, we had short-term debt outstanding for
foreign subsidiaries of $7.6 million and no long-term debt.
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