Lowe's 2002 Annual Report Download - page 6

Our store employees also deserve credit for delivering on several key initiatives that drove gross margin. In 2002 we
challenged our stores to control inventory shrink, and they certainly delivered. Lower shrink results added 28 basis
points to gross margin this year.
In 2002, we implemented new procedures, in conjunction with new technology, that helped simplify the Special
Order and Installed Sales process. These changes created efficiencies for our employees and led to a better experience
for our customers. Technology also played a major role in our new streamlined process to return product to our
vendors. Each of these in-store initiatives helped Lowe’s deliver industry-leading results in 2002, and ultimately led to a
record operating margin of 10.1 percent and a 43.8 percent increase in net earnings to nearly $1.5 billion for the year.
The key to our success is our diligent focus on our customers. We have been listening to and learning from them
for 57 years. And, we have earned their trust.
Much of the uncertainty that weighed on the consumer in 2002 continues into 2003. Geopolitical concerns are
even greater today than in 2002, and consumer confidence is not likely to rebound until some, or all, of those
concerns are resolved or mitigated. Despite the overhanging anxiety, there remain many positive trends for the home
improvement sector both today and in the future.
First, the record strength we saw in the housing market in 2002 continues into 2003. While mortgage rates are
expected to increase slightly from recent record lows, economists at the National Association of Realtors®expect rates
to remain near these lows in 2003, keeping housing affordable and facilitating continued demand.
Supporting that belief, single-family building permits continue to be issued at record levels. As a leading indicator
of future housing starts, this trend indicates a strong pipeline of new homes on the horizon.
The U.S. housing stock continues to appreciate in value. Continued appreciation gives homeowners the comfort to
continue to invest in their homes providing both current enjoyment and the possibility of future appreciation.
That appreciation has given rise to the concern of a housing bubble. However, the median price of homes in the
U.S. has increased for 34 straight years. Demand for housing remains strong while the supply of homes remains steady,
which demonstrates signs of a balanced, stable housing market. As home ownership in the U.S. continues to grow to
record levels, housing values seem to have support.
Opportunities are plentiful for Lowe’s. We’ll continue to add stores across the U.S. in both large and small markets
that are enthusiastically embracing Lowe’s in their communities. At the end of fiscal 2002, only 22 percent of our stores
were in the top 25 markets where nearly 50 percent of the home improvement market potential resides.
We’ll continue to capitalize on that opportunity by adding some 65 percent of our 2003 expansion in the nation’s
100 largest markets. At the same time, smaller markets in the U.S. allow for additional profitable growth. These
smaller-market stores have a reduced capital investment, a lower operating expense structure, and with efficiently
managed inventory utilizing our world-class logistics network, these stores can provide a tremendous return for our
shareholders despite their lower initial sales volumes.
While we’re confident that we have years of new store growth ahead, adding new stores is only part of the story. We
expect continued success in growing our comparable store sales in 2003.
We’re currently conducting tests of an improved Installed Sales model that we’re confident will allow us to continue
to grow this business. The new model strives to enhance customer satisfaction by improving customer interaction
throughout the process. In March, we began rolling out this new program to one district in each region, expanding the
test nationwide. Building on this year’s 50 percent growth, installation services will be a sales driver for years to come.
Our Special Order business continues to grow as well — up 38 percent in 2002. New systems, which streamline
this often-cumbersome process, are the key to continued growth of special orders in the years to come. In 2003, we’ll
4 / 5 LOWE’S COMPANIES, INC. ANNUAL REPORT 2002