Lowe's 2005 Annual Report Download - page 20

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฀ L O W E ’ S ฀ ฀2 0 0 5 ฀ ฀A N N U A L ฀ ฀R E P O RT
This฀discussion฀and฀analysis฀summarizes฀the฀significant฀factors฀affecting฀our฀
consolidated฀operating฀results,฀financial฀condition,฀liquidity฀and฀capital฀resources฀
during฀the฀three-year฀period฀ended฀February฀3,฀2006฀(our฀fiscal฀years฀2005,฀
2004,฀and฀2003).฀Fiscal฀year฀2005฀contains฀53฀weeks฀of฀operating฀results฀
compared฀to฀fiscal฀years฀2004฀and฀2003฀which฀contain฀52฀weeks.฀Unless฀
otherwise฀noted,฀all฀references฀herein฀for฀the฀years฀2005,฀2004฀and฀2003฀
represent฀the฀fiscal฀years฀ended฀February฀3,฀2006,฀January฀28,฀2005฀and฀
January฀30,฀2004,฀respectively.฀This฀discussion฀should฀be฀read฀in฀conjunction฀
with฀the฀consolidated฀financial฀statements฀and฀notes฀to฀the฀consolidated฀
financial฀statements฀included฀in฀this฀annual฀report.
฀ During฀the฀fourth฀quarter฀of฀fiscal฀2003,฀we฀sold฀26฀commodity-focused฀
locations฀operating฀under฀The฀Contractor฀Yard฀name฀(the฀“Contractor฀Yards”).฀
This฀sale฀was฀effected฀to฀allow฀us฀to฀continue฀to฀focus฀on฀our฀retail฀and฀com-
mercial฀business.฀In฀accordance฀with฀Statement฀of฀Financial฀Accounting฀
Standards฀(SFAS)฀No.฀144,฀“Accounting฀for฀the฀Impairment฀or฀Disposal฀of฀
Long-Lived฀Assets,”฀we฀have฀reported฀the฀results฀of฀operations฀of฀the฀Contractor฀
Yards฀in฀discontinued฀operations฀for฀fiscal฀year฀2003.
EXECUTIVE฀OVERVIEW
Our฀vision฀is฀to฀be฀our฀customers’฀first฀choice฀for฀home฀improvement฀in฀each฀
and฀every฀market฀we฀serve.฀This฀focus฀on฀the฀customer฀drives฀our฀operational,฀
merchandising,฀marketing฀and฀distribution฀initiatives฀and฀helps฀fuel฀growth฀in฀
our฀existing฀stores.฀฀
฀ We฀are฀also฀focused฀on฀expanding฀our฀share฀of฀the฀home฀improvement฀
market฀through฀geographic฀expansion฀and฀the฀expansion฀of฀our฀customer฀
base,฀and฀we฀believe฀that฀providing฀excellent฀customer฀service฀is฀imperative฀฀
to฀our฀future฀growth.฀
฀ Following฀is฀a฀summary฀of฀certain฀key฀initiatives฀that฀we฀believe฀will฀allow฀
us฀to฀achieve฀our฀vision฀and฀expand฀our฀share฀of฀the฀home฀improvement฀market.฀
Focusing฀on฀Our฀Customers฀
Customer฀service฀–฀Having฀the฀right฀foundation฀of฀talented฀and฀tenured฀
employees฀is฀integral฀to฀providing฀excellent฀customer฀service฀and฀fueling฀our฀
growth฀strategy.฀To฀ensure฀our฀success,฀we฀continue฀to฀implement฀training฀and฀
development฀programs฀for฀our฀store฀employees฀to฀help฀better฀serve฀our฀cus-
tomers.฀We฀also฀continue฀to฀enhance฀our฀staffing฀model฀to฀optimize฀store฀labor,฀
while฀positioning฀more฀sales฀people฀in฀the฀aisles฀to฀take฀care฀of฀customers.
Meeting฀customers’฀specific฀needs฀–฀We฀are฀focusing฀on฀our฀customers฀by฀pro-
viding฀the฀products฀and฀services฀they฀want.฀Over฀the฀last฀five฀years,฀we฀have฀
moved฀beyond฀merely฀sourcing,฀stocking฀and฀selling฀products฀to฀consumers฀
for฀their฀home฀repair฀and฀improvement฀needs.฀We฀have฀become฀an฀integrated฀
provider฀of฀home฀repair฀and฀improvement฀solutions.฀We฀help฀customers฀plan฀
home฀repair฀and฀improvement฀projects฀using฀automated฀systems฀to฀identify฀
the฀products฀needed฀for฀the฀project,฀sell฀those฀products฀to฀the฀customer,฀and฀
arrange฀for฀installation฀at฀the฀customer’s฀home.฀We฀evaluate฀the฀demographics฀
of฀our฀markets฀and฀obtain฀customer฀feedback฀to฀identify฀areas฀where฀we฀can฀
provide฀products฀or฀services฀to฀specifically฀meet฀customers’฀needs.฀Our฀“Big฀3”฀
sales฀initiatives฀are฀designed฀to฀meet฀specific฀needs฀of฀customers฀and฀have฀
helped฀bring฀more฀customers฀into฀our฀stores,฀delivering฀comparable฀store฀
sales฀results฀that฀are฀well฀above฀our฀overall฀company฀average.
฀ Installed฀Sales฀–฀As฀baby฀boomers฀shift฀to฀do-it-for-me฀(DIFM)฀from฀do-it-
yourself฀(DIY),฀the฀opportunity฀for฀continued฀growth฀in฀Installed฀Sales฀increases.฀
To฀capitalize฀on฀the฀growing฀DIFM฀segment,฀we฀will฀continue฀to฀expand฀installation฀
services฀such฀as฀roofing,฀window฀replacements,฀fencing฀and฀siding฀to฀meet฀
customer฀demand.฀To฀meet฀the฀needs฀of฀the฀DIFM฀customer,฀we฀are฀testing฀and฀
evaluating฀an฀in-home฀sales฀model฀that฀is฀staffed฀with฀in-market฀sales฀teams฀
who฀have฀expertise฀in฀evaluating฀and฀pricing฀installed฀projects฀at฀a฀customer’s฀
home.฀Our฀initial฀results฀are฀favorable฀and฀we฀will฀continue฀to฀evaluate฀this฀pro-
gram฀during฀2006.฀Sales฀of฀installed฀products฀and฀services฀were฀$2.6฀billion฀in฀
2005,฀a฀31%฀increase฀over฀the฀previous฀year.
฀ Special฀Order฀Sales฀(SOS)฀–฀Customers฀want฀to฀express฀their฀individuality฀
through฀their฀homes,฀and฀as฀a฀result,฀we฀continue฀to฀enhance฀our฀special฀order฀
product฀offering.฀We฀are฀making฀the฀SOS฀process฀easier฀for฀customers฀by฀
enhancing฀ordering฀systems฀storewide,฀providing฀easy-to-use฀customer฀inter-
faces,฀integrated฀design฀tools,฀and฀electronic฀product฀catalogs.฀Employees฀uti-
lized฀our฀electronic฀catalog฀program฀to฀process฀over฀70%฀of฀our฀Special฀Order฀
Sales฀last฀year.฀This฀allows฀us฀to฀add฀more฀product฀choices฀and฀reduces฀paper-
work฀for฀our฀stores,฀which฀increases฀the฀accuracy฀of฀the฀ordering฀process.฀
Special฀Order฀Sales,฀which฀have฀some฀degree฀of฀overlap฀with฀Installed฀Sales,฀
were฀$3.9฀billion฀in฀2005,฀a฀25%฀increase฀over฀the฀prior฀year.฀
฀ Commercial฀Business฀Customer฀(CBC)฀–฀Over฀25%฀of฀our฀total฀sales฀in฀
2005฀were฀to฀Commercial฀Business฀Customers,฀a฀category฀including฀repair฀
and฀remodelers,฀property฀management฀professionals,฀and฀a฀variety฀of฀pro-
fessional฀trades฀people.฀Our฀concerted฀effort฀to฀build฀strong฀relationships฀with฀
these฀customers฀and฀to฀staff฀our฀stores฀with฀well-trained฀commercial฀sales฀
specialists฀is฀leading฀to฀increasing฀sales฀of฀products฀throughout฀the฀store.฀In฀
2005,฀we฀completed฀the฀rollout฀of฀the฀Regional฀Commercial฀Sales฀Manager฀
(RCSM)฀program.฀The฀RCSM฀teaches,฀trains฀and฀shares฀best฀practices฀throughout฀
our฀stores.฀The฀RCSM฀also฀ensures฀consistent฀execution฀of฀our฀lead฀manage-
ment฀process฀and฀delivery฀programs.฀Our฀commercial฀sales฀desk฀is฀staffed฀with฀
trained฀commercial฀sales฀specialists฀who฀provide฀the฀service฀and฀knowledge฀
that฀commercial฀customers฀require฀and฀continue฀to฀build฀strong฀relationships฀
with฀these฀customers.฀
Everyday฀Low฀Prices฀(EDLP)฀–฀We฀know฀that฀providing฀Everyday฀Low฀Prices฀is฀
important฀to฀customers.฀Our฀promise฀to฀customers฀is฀if฀they฀find฀a฀lower฀every-
day฀or฀advertised฀price฀on฀an฀identical฀stock฀product฀at฀a฀local฀competitor,฀we฀
will฀not฀only฀match฀that฀price,฀but฀we฀will฀beat฀it฀by฀10฀percent.฀To฀maintain฀our฀
EDLP฀strategy฀and฀offer฀the฀high-quality฀products฀that฀customers฀demand,฀our฀
merchants฀are฀constantly฀working฀with฀our฀vendors฀to฀develop฀new฀and฀inno-
vative฀products฀for฀our฀customers.฀We฀also฀use฀our฀Global฀Sourcing฀offices฀
to฀assist฀us฀in฀sourcing฀products฀that฀offer฀design฀exclusivity฀and฀allow฀us฀to฀
develop฀our฀own฀proprietary฀brands.฀This฀gives฀us฀an฀opportunity฀to฀reduce฀
inventory฀costs฀and฀at฀the฀same฀time฀gives฀us฀more฀control฀over฀product฀qual-
ity.฀In฀2005,฀imports฀grew฀at฀almost฀twice฀the฀rate฀of฀our฀total฀sales฀increase.฀
We฀expect฀imports฀to฀continue฀to฀grow.
Investing฀in฀our฀infrastructure฀–฀In฀order฀to฀provide฀customers฀with฀a฀more฀
inviting฀shopping฀experience,฀during฀2005฀we฀continued฀our฀history฀of฀invest-
ing฀in฀our฀existing฀stores.฀This฀includes฀relamping฀our฀stores฀at฀regular฀intervals฀
to฀ensure฀they฀remain฀bright,฀adding฀new฀displays,฀improving฀point-of-sale฀and฀
Management’s฀Discussion฀and฀Analysis฀
of฀Financial฀Condition฀and฀Results฀of฀Operations