Lowe's 2005 Annual Report Download - page 21

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directional฀signage,฀adding฀more฀product฀selection,฀repainting฀building฀exteriors,฀
and฀re-striping฀parking฀lots.฀Additionally,฀our฀investment฀in฀bilingual฀signage฀
and฀point-of-purchase฀materials฀continues฀to฀attract฀and฀retain฀the฀growing฀
population฀of฀multicultural฀customers.฀We฀invested฀approximately฀$650฀million฀
in฀existing฀stores฀in฀2005.฀
฀ In฀addition฀to฀our฀commitment฀to฀invest฀and฀improve฀our฀stores,฀we฀are฀com-
mitted฀to฀improving฀our฀supply฀chain฀infrastructure฀to฀ensure฀we฀have฀the฀right฀
products,฀in฀the฀right฀stores,฀at฀the฀right฀time.฀Our฀Rapid฀Response฀Replenishment฀
(R3)฀initiative฀allows฀us฀to฀both฀maintain฀and฀improve฀our฀in-stock฀position฀while฀
driving฀greater฀efficiencies฀and฀flexibility฀in฀the฀total฀supply฀chain฀infrastructure.฀
When฀we฀began฀this฀initiative฀in฀2004,฀approximately฀50%฀of฀our฀stock฀product฀
was฀moving฀through฀our฀distribution฀network.฀We฀now฀have฀appliances฀in฀eight฀
regional฀distribution฀centers฀(RDC),฀along฀with฀riding฀mowers,฀lawn฀and฀garden฀
chemicals฀and฀fashion฀plumbing฀items฀moving฀through฀all฀RDCs.฀Today฀about฀
70%฀of฀stock฀product฀flows฀through฀our฀distribution฀network,฀and฀we฀are฀well฀
positioned฀to฀achieve฀our฀goal฀of฀75%฀by฀the฀end฀of฀2006.฀
Indicators฀of฀our฀success฀–฀We฀monitor฀several฀metrics฀to฀measure฀the฀success฀
of฀our฀initiatives.฀These฀metrics฀include฀comparable฀store฀sales,฀average฀ticket฀
and฀customer฀transactions.฀We฀experienced฀a฀comparable฀store฀sales฀increase฀
of฀6.1%฀in฀2005,฀which฀was฀on฀top฀of฀comparable฀store฀sales฀increases฀of฀6.6%฀
in฀2004฀and฀6.7%฀in฀2003.฀This฀reflects฀a฀three-year฀average฀comparable฀store฀
sales฀increase฀of฀6.5%.฀The฀comparable฀store฀sales฀increase฀in฀2005฀was฀
driven฀by฀increases฀in฀both฀average฀ticket฀and฀transactions.฀Average฀ticket฀for฀
comparable฀stores฀increased฀approximately฀6.1%฀in฀2005,฀and฀comparable฀
store฀customer฀transactions฀increased฀slightly.฀We฀believe฀our฀strong฀financial฀
results฀in฀2005,฀as฀evidenced฀by฀these฀metrics,฀indicate฀the฀success฀of฀our฀key฀
initiatives฀and฀the฀progress฀we฀are฀making฀to฀achieve฀our฀vision.฀
Expanding฀Our฀Geographic฀and฀Customer฀Base
Geographic฀expansion฀–฀We฀continue฀to฀pursue฀opportunities฀to฀expand฀our฀
business฀into฀additional฀geographic฀markets,฀customer฀groups฀and฀product฀
categories.฀We฀opened฀150฀stores฀in฀2005฀and฀ended฀the฀year฀with฀1,234฀
stores฀in฀49฀states.฀We฀plan฀to฀open฀155฀stores฀in฀2006,฀increasing฀total฀square฀
footage฀by฀approximately฀12%.฀Approximately฀50%฀of฀these฀stores฀will฀be฀in฀
our฀under-penetrated฀Northeast฀and฀West฀divisions.฀We฀will฀balance฀our฀metro฀
expansion฀with฀the฀opportunities฀presented฀in฀smaller฀markets,฀many฀of฀which฀
are฀ideal฀locations฀for฀our฀94,000-square-foot฀(94K)฀prototype.฀In฀addition,฀in฀
June฀of฀2005,฀we฀announced฀future฀expansion฀into฀Canada,฀with฀plans฀to฀open฀
six฀to฀10฀stores฀in฀the฀Greater฀Toronto฀Area฀in฀2007.
฀ The฀percentage฀of฀our฀stores฀located฀in฀the฀nation’s฀top฀25฀and฀top฀100฀
markets฀is฀increasing฀(28%฀and฀55%,฀respectively,฀at฀the฀end฀of฀2005).฀These฀
markets฀are฀more฀competitive,฀but฀offer฀the฀opportunity฀to฀capture฀significant฀
market฀share฀from฀direct฀competitors฀and฀other฀sales฀channels฀for฀our฀products฀
and฀expanding฀service฀offering.฀More฀than฀35%฀of฀the฀400฀approved฀projects฀
for฀our฀future฀expansion฀are฀located฀in฀the฀nation’s฀top฀25฀markets฀and฀more฀
than฀65%฀are฀located฀in฀the฀nation’s฀top฀100฀markets.฀
฀ We฀also฀continue฀to฀invest฀in฀our฀distribution฀network฀to฀support฀our฀growth,฀
including฀opening฀one฀additional฀regional฀distribution฀center฀during฀2005฀in฀
Plainfield,฀Connecticut.฀At฀February฀3,฀2006,฀we฀owned฀and฀operated฀11฀RDCs.฀
We฀expect฀to฀open฀additional฀RDCs฀in฀Rockford,฀Illinois฀and฀Lebanon,฀Oregon฀
in฀2007.฀In฀addition,฀we฀plan฀to฀expand฀three฀existing฀distribution฀centers฀in฀
Valdosta,฀Georgia;฀Statesville,฀North฀Carolina;฀and฀North฀Vernon,฀Indiana฀by฀
spring฀2006.฀At฀February฀3,฀2006,฀we฀also฀owned฀and฀operated฀10฀flatbed฀
distribution฀centers฀and฀leased฀and฀operated฀two฀flatbed฀distribution฀centers฀
for฀the฀handling฀of฀lumber,฀building฀materials฀and฀other฀long-length฀items.฀We฀
expect฀to฀open฀four฀additional฀flatbed฀distribution฀centers฀in฀2006.
Customer฀base฀expansion฀–฀We฀are฀pursuing฀additional฀opportunities฀for฀
expansion฀of฀our฀customer฀base฀through฀multicultural฀marketing.฀While฀total฀
homeownership฀rose฀to฀approximately฀69%฀in฀2004,฀Hispanic฀homeownership฀
grew฀at฀three฀times฀the฀average฀rate.฀In฀addition,฀over฀the฀next฀10฀years,฀Harvard’s฀
Joint฀Center฀for฀Housing฀estimates฀immigration฀will฀represent฀at฀least฀40%฀of฀
household฀formation.฀Therefore,฀during฀2005,฀we฀continued฀to฀produce฀mar-
keting฀and฀communications฀designed฀to฀reach฀specific฀cultural฀segments฀of฀
the฀population,฀including฀the฀growing฀Hispanic฀and฀African-American฀home฀
improvement฀consumer฀segments.฀Our฀significant฀investment฀in฀bilingual฀
signage฀and฀point-of-purchase฀materials฀continues฀to฀attract฀and฀retain฀the฀
growing฀population฀of฀diverse฀customers.฀We฀also฀provide฀a฀translation฀service฀
via฀telephone฀at฀the฀customer฀service฀desk฀in฀each฀of฀our฀stores,฀making฀com-
munication฀easier฀for฀non-English฀speaking฀customers.
฀ We฀are฀also฀expanding฀our฀business฀by฀growing฀market฀share฀in฀product฀
categories฀previously฀sold฀exclusively฀or฀largely฀through฀other฀sales฀channels,฀
including฀major฀appliances.฀According฀to฀independent฀measures,฀we฀increased฀
our฀unit฀share฀in฀major฀appliances฀by฀130฀basis฀points฀for฀calendar฀year฀2005฀
versus฀calendar฀year฀2004.฀Our฀success฀in฀appliances฀is฀a฀function฀of฀our฀
brand฀selection฀and฀knowledgeable฀sales฀specialists.฀Independent฀research฀
confirms฀we฀are฀experiencing฀similar฀results฀in฀outdoor฀power฀equipment.฀In฀
both฀of฀these฀categories฀in฀2005฀we฀expanded฀our฀line฀of฀brands฀to฀include฀
Samsung฀digital฀kitchen฀appliances฀and฀John฀Deere฀mowers.฀
External฀Factors฀That฀Impact฀Our฀Business
The฀home฀improvement฀market฀is฀large฀and฀fragmented.฀While฀we฀are฀the฀world’s฀
second-largest฀home฀improvement฀retailer,฀we฀have฀captured฀a฀relatively฀small฀
portion฀of฀the฀overall฀home฀improvement฀market.฀We฀estimate฀the฀size฀of฀the฀
U.S.฀home฀improvement฀market฀to฀be฀approximately฀$700฀billion,฀comprised฀of฀
$550฀billion฀of฀product฀demand฀and฀$150฀billion฀for฀the฀installed฀labor฀opportunity.฀
This฀estimate฀includes฀import฀and฀export฀data฀and฀key฀end-use฀markets,฀such฀as฀
residential฀repair฀and฀remodeling,฀and฀nonresidential฀construction฀and฀mainte-
nance.฀This฀data฀also฀captures฀a฀wide฀range฀of฀categories฀relevant฀to฀our฀business,฀
including฀major฀appliances฀and฀garden฀supplies.฀We฀believe฀the฀current฀home฀
improvement฀market฀provides฀ample฀opportunity฀to฀support฀our฀growth฀plans.
฀ As฀we฀continue฀to฀monitor฀economic฀data฀and฀the฀home฀improvement฀
marketplace,฀we฀believe฀there฀will฀be฀continued฀strength฀in฀consumer฀demand฀
for฀the฀products฀and฀services฀we฀offer.฀The฀key฀economic฀indicators฀that฀we฀
monitor฀include฀personal฀income,฀employment฀growth,฀housing฀turnover฀and฀
homeownership฀levels.฀Demographic฀and฀societal฀trends฀also฀remain฀support-
ive฀of฀home฀improvement฀industry฀growth.
•฀฀Personal฀income฀continues฀to฀grow,฀which฀is฀supported฀by฀data฀from฀the฀
February฀2006฀Blue฀Chip฀Economic฀Indicators™,฀which฀forecasts฀real฀
disposable฀income฀growth฀of฀3.4%฀for฀calendar฀2006,฀compared฀with฀
1.4%฀in฀calendar฀2005.฀
•฀฀Employment฀growth฀is฀also฀a฀strong฀indicator฀of฀home฀improvement฀sales.฀
The฀relatively฀low฀unemployment฀rate฀suggests฀Americans฀will฀likely฀be฀
more฀confident฀in฀calendar฀2006฀about฀employment฀prospects฀than฀in฀the฀
past฀several฀years.฀
•฀฀Housing฀turnover฀is฀expected฀to฀continue฀at฀a฀historically฀high฀pace฀accord-
ing฀to฀The฀National฀Association฀of฀Realtors®,฀which฀forecasts฀calendar฀2006฀
housing฀turnover฀to฀be฀the฀third฀strongest฀year฀on฀record.฀
•฀฀Near-record฀U.S.฀homeownership฀levels฀provide฀an฀established฀customer฀base฀
for฀home฀maintenance฀and฀repair฀projects.฀฀The฀vast฀majority฀of฀our฀customers฀
are฀homeowners,฀and฀they฀are฀not฀willing฀to฀let฀what฀is฀often฀their฀most฀valu-
able฀financial฀asset฀deteriorate.฀
฀ Such฀factors฀contribute฀to฀our฀belief฀that฀the฀home฀improvement฀industry฀
will฀continue฀to฀support฀the฀growth฀of฀our฀business.฀