Lowe's 2005 Annual Report Download - page 23

L O W E ’ S ฀ ฀2 0 0 5 ฀ ฀A N N U A L ฀ ฀R E P O R T ฀
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Long-Lived฀Assets
Description฀–฀Losses฀related฀to฀impairment฀of฀long-lived฀assets฀are฀recognized฀
when฀circumstances฀indicate฀the฀carrying฀values฀of฀the฀assets฀may฀not฀be฀
recoverable.฀We฀periodically฀review฀the฀carrying฀value฀of฀long-lived฀assets฀for฀
potential฀impairment.฀When฀we฀commit฀to฀close฀or฀relocate฀a฀store฀location,฀or฀
when฀there฀are฀indicators฀that฀the฀carrying฀value฀of฀a฀long-lived฀asset฀may฀not฀
be฀recoverable,฀we฀evaluate฀the฀carrying฀value฀of฀the฀asset฀in฀relation฀to฀its฀
expected฀undiscounted฀future฀cash฀flows.฀If฀the฀carrying฀value฀of฀the฀asset฀is฀
greater฀than฀the฀expected฀undiscounted฀future฀cash฀flows฀and฀the฀fair฀value฀
of฀the฀asset฀is฀less฀than฀the฀carrying฀value,฀a฀provision฀is฀made฀for฀the฀impair-
ment฀of฀the฀asset฀based฀on฀the฀excess฀of฀carrying฀value฀over฀fair฀value.฀We฀
recorded฀long-lived฀asset฀impairment฀charges฀of฀$16฀million฀during฀2005.฀The฀
net฀carrying฀value฀for฀relocated฀stores,฀closed฀stores฀and฀other฀excess฀prop-
erty฀totaled฀$63฀million฀and฀$56฀million฀at฀February฀3,฀2006฀and฀January฀28,฀
2005,฀respectively.
Judgments฀and฀uncertainties฀involved฀in฀the฀estimate฀–฀Our฀impairment฀loss฀
calculations฀require฀us฀to฀apply฀judgment฀in฀estimating฀asset฀fair฀values฀and฀
future฀cash฀flows,฀including฀estimated฀sales฀and฀earnings฀growth฀rates฀and฀
assumptions฀about฀market฀performance.
Effect฀if฀actual฀results฀differ฀from฀assumptions฀–฀If฀actual฀results฀are฀not฀con-
sistent฀with฀the฀assumptions฀and฀judgments฀used฀in฀estimating฀future฀cash฀
flows฀and฀asset฀fair฀values,฀actual฀impairment฀losses฀could฀vary฀positively฀or฀
negatively฀from฀estimated฀impairment฀losses.
OPERATIONS
The฀following฀table฀sets฀forth฀the฀percentage฀relationship฀to฀net฀sales฀of฀each฀
line฀item฀of฀the฀consolidated฀statements฀of฀earnings,฀as฀well฀as฀the฀percentage฀
change฀in฀dollar฀amounts฀from฀the฀prior฀year.฀This฀table฀should฀be฀read฀in฀con-
junction฀with฀the฀following฀discussion฀and฀analysis฀and฀the฀consolidated฀financial฀
statements,฀including฀the฀related฀notes฀to฀the฀consolidated฀financial฀statements.
฀ ฀ ฀ ฀ ฀ ฀ ฀ Basis฀Point฀ Percentage฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ Increase/฀ Increase/฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ (Decrease)฀ (Decrease)฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ in฀Percentage฀ in฀Dollar฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ of฀Net฀Sales฀ Amounts฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ from฀Prior฀Year1฀ from฀Prior฀Year1
฀ ฀ ฀ ฀ ฀ ฀ ฀ 2005฀vs.฀ 2005฀vs.฀
฀ ฀ ฀ ฀ ฀ 2005฀ 2004฀ 2004฀ 2004
Net฀sales฀ ฀ 100.00%฀ 100.00%฀ N/A฀ 19%
Gross฀margin฀ 34.23฀ 33.61฀ 62฀ 21
Expenses:
Selling,฀general฀฀
฀ and฀administrative฀ 20.84฀ 20.74฀ 10฀ 19
Store฀opening฀costs฀ 0.33฀ 0.34฀ (1)฀ 15
Depreciation฀ 2.27฀ 2.35฀ (8)฀ 14
Interest฀ ฀ ฀ 0.37฀ 0.48฀ (11)฀ (10)
Total฀expenses฀ 23.81฀ 23.91฀ (10)฀ 18
Pre-tax฀earnings฀ 10.42฀ 9.70฀ 72฀ 27
Income฀tax฀provision฀ 4.01฀ 3.73฀ 28฀ 28
Net฀earnings฀ 6.41%฀ 5.97%฀ 44฀ 27%
฀฀฀฀฀ ฀ ฀ Basis฀Point฀ Percentage฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ Increase/฀ Increase/฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ (Decrease)฀ (Decrease)฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ in฀Percentage฀ in฀Dollar฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ of฀Net฀Sales฀ Amounts฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ from฀Prior฀Year฀ from฀Prior฀Year
฀ ฀ ฀ ฀ ฀ ฀ ฀ 2004฀vs.฀ 2004฀vs.
฀ ฀ ฀ ฀ ฀ 2004฀ 2003฀ 2003฀ 2003
Net฀sales฀ ฀ 100.00%฀ 100.00%฀ N/A฀ 18%
Gross฀margin฀ 33.61฀ 31.03฀ 258฀ 28
Expenses:
Selling,฀general฀฀
฀ and฀administrative฀ 20.74฀ 18.09฀ 265฀ 36
Store฀opening฀costs฀ 0.34฀ 0.42฀ (8)฀ (4)
Depreciation฀ 2.35฀ 2.40฀ (5)฀ 16
Interest฀ ฀ ฀ 0.48฀ 0.58฀ (10)฀ (2)
Total฀expenses฀ 23.91฀ 21.49฀ 242฀ 32
Pre-tax฀earnings฀ 9.70฀ 9.54฀ 16฀ 20
Income฀tax฀provision฀ 3.73฀ 3.61฀ 12฀ 22
Earnings฀from฀฀
฀ continuing฀operations฀ 5.97฀ 5.93฀ 4฀ 19
Earnings฀from฀discontinued฀฀
฀ operations,฀net฀of฀tax฀ –฀ 0.05฀ (5)฀ (100)
Net฀earnings฀ 5.97%฀ 5.98%฀ (1)฀ 18%
Other฀Metrics฀ ฀ 2005฀ 2004฀ 2003
Comparable฀store฀sales฀increases2฀ ฀ 6.1%฀ 6.6%฀ 6.7%
Customer฀transactions฀(in฀millions)฀ ฀ 639฀ 575฀ 521
Average฀ticket3฀ ฀ $฀67.67฀ $฀63.43฀ $฀59.21
At฀end฀of฀year:
Number฀of฀stores฀ ฀ 1,234฀ 1,087฀ 952
Sales฀floor฀square฀feet฀(in฀millions)฀ ฀ 140฀ 124฀ 109
Average฀store฀size฀square฀feet฀(in฀thousands)฀ 113฀ 114฀ 114
Return฀on฀beginning฀assets4฀ ฀ 13.1%฀ 11.6%฀ 11.6%
Return฀on฀beginning฀฀
฀ shareholders’฀equity5฀ ฀ 24.0%฀ 21.3%฀ 22.4%
1฀฀฀The฀fiscal฀year฀ended฀February฀3,฀2006฀had฀53฀weeks.฀The฀fiscal฀years฀ended฀January฀28,฀2005฀and฀
January฀30,฀2004฀had฀52฀weeks.
2฀฀฀We฀define฀a฀comparable฀store฀as฀a฀store฀that฀has฀been฀open฀greater฀than฀13฀months.฀A฀store฀that฀฀
is฀identified฀for฀relocation฀is฀no฀longer฀considered฀comparable฀one฀month฀prior฀to฀its฀relocation.฀฀
The฀relocated฀store฀must฀then฀remain฀open฀greater฀than฀13฀months฀to฀be฀considered฀comparable.฀฀
The฀comparable฀store฀sales฀increase฀for฀2005฀included฀in฀the฀preceding฀table฀was฀calculated฀using฀฀
sales฀for฀a฀comparable฀53-week฀period.
3฀฀฀฀We฀define฀average฀ticket฀as฀net฀sales฀divided฀by฀number฀of฀customer฀transactions.
4฀฀฀Return฀on฀beginning฀assets฀is฀defined฀as฀net฀earnings฀divided฀by฀beginning฀total฀assets.
5฀฀฀Return฀on฀beginning฀shareholders’฀equity฀is฀defined฀as฀net฀earnings฀divided฀by฀beginning฀฀
shareholders’฀equity.
Fiscal฀2005฀Compared฀to฀Fiscal฀2004
For฀the฀purpose฀of฀the฀following฀discussion,฀comparable฀store฀sales,฀compara-
ble฀store฀average฀ticket฀and฀comparable฀store฀customer฀transactions฀are฀based฀
on฀comparable฀53-week฀periods.
Net฀sales฀–฀Comparable฀store฀sales,฀our฀ongoing฀store฀expansion฀and฀relo-
cation฀program฀and฀continued฀growth฀in฀our฀three฀specialty฀sales฀initiatives฀
were฀key฀drivers฀of฀our฀sales฀increase฀in฀2005.฀We฀opened฀150฀stores฀in฀
2005,฀including฀three฀relocations,฀and฀ended฀the฀year฀with฀stores฀in฀49฀states,฀
including฀our฀first฀stores฀in฀New฀Hampshire.฀The฀additional฀week฀in฀2005฀
resulted฀in฀approximately฀$750฀million฀in฀sales฀and฀impacted฀2005฀sales฀
growth฀by฀about฀2.1%.