Lowe's 2005 Annual Report Download - page 24

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฀ L O W E ’ S ฀ ฀2 0 0 5 ฀ ฀A N N U A L ฀ ฀R E P O RT
฀ The฀comparable฀store฀sales฀increase฀of฀6.1%฀in฀2005฀was฀on฀top฀of฀com-
parable฀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฀6.1%฀and฀compa-
rable฀store฀customer฀transactions฀increased฀slightly.
฀ We฀experienced฀comparable฀store฀sales฀increases฀in฀every฀product฀category฀
for฀2005.฀The฀categories฀that฀performed฀above฀our฀average฀comparable฀store฀
sales฀increase฀for฀2005฀included฀millwork,฀rough฀plumbing,฀building฀materials,฀
rough฀electrical,฀outdoor฀power฀equipment,฀appliances,฀home฀environment,฀paint,฀
flooring฀and฀cabinets฀&฀countertops.฀In฀addition,฀hardware฀and฀fashion฀plumbing฀
performed฀at฀approximately฀the฀average฀comparable฀store฀sales฀increase.฀
Inflation฀in฀lumber฀and฀building฀materials฀favorably฀impacted฀comparable฀store฀
sales฀for฀2005฀by฀approximately฀50฀basis฀points,฀driven฀by฀gypsum,฀roofing฀and฀
cement฀products.฀We฀also฀continue฀to฀gain฀market฀share฀in฀key฀product฀catego-
ries฀previously฀dominated฀by฀other฀channels฀including฀appliances,฀outdoor฀power฀
equipment฀and฀cabinets฀&฀countertops.
฀ The฀appliance฀category฀delivered฀a฀double-digit฀comparable฀store฀sales฀
increase฀for฀2005.฀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฀selec-
tion฀and฀knowledgeable฀sales฀specialists.฀The฀recent฀introduction฀of฀Samsung฀
digital฀appliances฀is฀evidence฀of฀our฀commitment฀to฀enhance฀our฀brand฀selection฀
and฀competitive฀offering.
฀ We฀experienced฀a฀double-digit฀comparable฀store฀sales฀increase฀for฀2005฀
in฀cabinets฀&฀countertops,฀which฀was฀driven฀by฀emphasis฀on฀our฀product฀offer-
ing,฀as฀well฀as฀our฀focus฀on฀our฀Installed฀Sales฀initiative,฀which฀plays฀a฀key฀role฀
in฀driving฀cabinets฀&฀countertop฀sales.
฀ Outdoor฀power฀equipment฀delivered฀a฀high฀single-digit฀comparable฀store฀
sales฀increase฀for฀the฀year.฀We฀continue฀to฀enhance฀our฀portfolio฀of฀outdoor฀
power฀equipment.฀The฀addition฀of฀John฀Deere฀is฀expected฀to฀increase฀sales฀in฀
this฀category฀and฀provide฀further฀selection฀of฀quality฀products฀for฀our฀customers.฀
According฀to฀independent฀measures,฀we฀increased฀our฀outdoor฀power฀equipment฀
unit฀share฀by฀190฀basis฀points฀for฀calendar฀year฀2005฀versus฀calendar฀year฀2004.
฀ We฀also฀experienced฀comparable฀store฀sales฀increases฀in฀18฀of฀the฀21฀
geographic฀regions.฀We฀continue฀to฀experience฀strong฀sales฀in฀Florida฀and฀the฀
Gulf฀Coast฀regions฀as฀customers฀repair฀the฀damage฀caused฀by฀the฀hurricanes฀
in฀2005฀and฀2004.฀We฀experienced฀comparable฀store฀sales฀decreases฀in฀two฀
Northeastern฀regions฀that฀had฀a฀slow,฀weather-affected฀start฀in฀the฀first฀quarter฀
and฀never฀fully฀recovered.฀In฀addition,฀certain฀areas฀of฀our฀North฀Central฀division฀
suffered฀from฀headline-making฀layoffs฀and฀plant฀closings,฀which฀contributed฀to฀
these฀decreases฀in฀comparable฀store฀sales.฀We฀believe฀that฀our฀stores฀in฀these฀
regions฀will฀experience฀improved฀performance฀in฀2006.
฀ The฀growth฀in฀our฀specialty฀sales฀initiatives,฀which฀include฀Installed฀Sales,฀
Special฀Order฀Sales฀and฀Commercial฀Business฀Customer฀sales,฀also฀drove฀our฀
sales฀increase฀in฀2005.฀Our฀focus฀on฀execution฀under฀our฀Installed฀Sales฀model฀
led฀to฀a฀31%฀increase฀in฀Installed฀Sales฀over฀2004.฀Our฀Installed฀Sales฀consist฀
of฀both฀stock฀and฀special฀order฀product฀for฀which฀we฀arrange฀installation฀for฀
our฀customers.฀Our฀growth฀in฀2005฀was฀driven฀by฀sales฀in฀cabinets฀&฀counter-
tops,฀flooring฀and฀millwork.฀Special฀Order฀Sales฀increased฀25%฀over฀2004.฀We฀
believe฀SOS฀will฀provide฀further฀growth฀opportunity,฀as฀we฀continue฀to฀enhance฀
our฀offering฀to฀meet฀customers’฀desires฀to฀express฀their฀individuality.฀Finally,฀we฀
experienced฀double-digit฀comparable฀store฀sales฀increases฀from฀Commercial฀
Business฀Customers.฀Strengthening฀customer฀relationships,฀supported฀by฀tar-
geted฀marketing฀and฀market-specific฀merchandising฀assortments,฀continue฀to฀
drive฀this฀part฀of฀our฀business.
Gross฀margin฀–฀For฀2005,฀gross฀margin฀of฀34.23%฀represented฀a฀62฀basis฀point฀
increase฀over฀2004.฀Approximately฀40฀basis฀points฀of฀the฀increase฀in฀gross฀margin฀
as฀a฀percentage฀of฀sales฀for฀2005฀was฀due฀to฀the฀impact฀of฀the฀implementation฀
of฀EITF฀02-16,฀which฀reduced฀gross฀margin฀in฀2004฀as฀vendor฀funds฀associated฀
with฀cooperative฀advertising฀and฀in-store฀services฀were฀capitalized฀into฀inventory฀
and฀recognized฀in฀income฀when฀the฀product฀was฀sold.฀The฀increase฀in฀2005฀gross฀
margin฀was฀also฀driven฀by฀growth฀in฀imported฀goods,฀improvements฀in฀inventory฀
shrink฀and฀positive฀sales฀mix฀impact.
SG&A฀–฀The฀increase฀in฀SG&A฀expenses฀as฀a฀percentage฀of฀sales฀from฀2004฀to฀
2005฀is฀primarily฀due฀to฀increased฀401(k)฀performance฀match฀contributions฀as฀
a฀percentage฀of฀sales฀resulting฀from฀our฀increased฀profitability฀in฀2005.฀In฀addi-
tion,฀there฀were฀increases฀as฀a฀percentage฀of฀sales฀in฀store฀remerchandising฀
expense,฀which฀resulted฀from฀our฀continued฀investment฀in฀existing฀stores,฀and฀
rent฀expense,฀as฀we฀continue฀to฀expand฀into฀metropolitan฀markets.฀These฀
increases฀were฀partially฀offset฀by฀a฀decrease฀in฀vendor-provided฀store-service฀
costs฀as฀a฀percentage฀of฀sales.฀Our฀ongoing฀evaluation฀of฀in-store฀vendor฀ser-
vice฀expense฀has฀allowed฀us฀to฀appropriately฀adjust฀the฀level฀of฀vendor฀service฀
in฀our฀stores,฀which฀led฀to฀the฀decrease฀as฀a฀percentage฀of฀sales.฀In฀addition,฀
although฀there฀was฀an฀increase฀in฀advertising฀expense฀compared฀to฀2004,฀we฀
were฀able฀to฀enhance฀messaging฀and฀refine฀our฀marketing฀mix฀to฀make฀our฀
advertising฀programs฀more฀productive,฀thereby฀resulting฀in฀the฀leverage฀of฀
advertising฀expense฀as฀a฀percentage฀of฀sales฀in฀2005.
Store฀opening฀costs฀–฀Store฀opening฀costs,฀which฀include฀payroll฀and฀supply฀costs฀
incurred฀prior฀to฀store฀opening฀as฀well฀as฀grand฀opening฀advertising฀costs,฀are฀
expensed฀as฀incurred฀and฀totaled฀$142฀million฀in฀2005฀compared฀to฀$123฀mil-
lion฀in฀2004.฀These฀costs฀are฀associated฀with฀the฀opening฀of฀150฀stores฀in฀2005฀
(147฀new฀and฀three฀relocated),฀as฀compared฀with฀the฀opening฀of฀140฀stores฀in฀
2004฀(136฀new฀and฀four฀relocated).฀Store฀opening฀costs฀for฀stores฀opened฀dur-
ing฀the฀year฀averaged฀approximately฀$0.9฀million฀per฀store฀in฀2005฀and฀2004.฀
Because฀store฀opening฀costs฀are฀expensed฀as฀incurred,฀the฀timing฀of฀expenses฀
recognized฀may฀fluctuate฀based฀on฀the฀timing฀of฀store฀openings.
Depreciation฀–฀Depreciation฀leveraged฀eight฀basis฀points฀as฀a฀percentage฀of฀
sales฀in฀2005.฀At฀February฀3,฀2006,฀we฀owned฀84%฀of฀our฀stores,฀compared฀to฀
81%฀at฀January฀28,฀2005,฀which฀includes฀stores฀on฀leased฀land.฀Property,฀less฀
accumulated฀depreciation,฀increased฀to฀$16.4฀billion฀at฀February฀3,฀2006,฀com-
pared฀to฀$13.9฀billion฀at฀January฀28,฀2005.฀The฀increase฀in฀property฀resulted฀
primarily฀from฀our฀store฀expansion฀program฀and฀an฀additional฀investment฀in฀
information฀technology.
Interest฀–฀Net฀interest฀expense฀is฀comprised฀of฀the฀following:
(In฀millions)฀ ฀ ฀ ฀ 2005 ฀ 2004
Interest฀expense,฀net฀of฀amount฀capitalized฀ ฀ $฀186฀ $฀172
Amortization฀of฀original฀issue฀discount฀฀
฀ and฀loan฀costs฀ ฀ ฀ 17฀ 20
Interest฀income฀ ฀ ฀ (45)฀ (16)
Net฀interest฀expense฀ ฀ ฀ $ ฀ 158฀ $ ฀ 176
฀ Interest฀expense฀has฀increased฀primarily฀due฀to฀the฀October฀2005฀$1฀bil-
lion฀debt฀issuance,฀partially฀offset฀by฀lower฀interest฀expense฀on฀convertible฀debt฀
due฀to฀conversions฀during฀2005.฀Interest฀expense฀relating฀to฀capital฀leases฀was฀
$39฀million฀for฀2005฀and฀$38฀million฀for฀2004.฀Interest฀income฀has฀increased฀
primarily฀due฀to฀the฀investment฀of฀a฀portion฀of฀the฀proceeds฀from฀the฀October฀
2005฀$1฀billion฀debt฀issuance.฀For฀further฀discussion,฀see฀Financial฀Condition,฀
Liquidity฀and฀Capital฀Resources.
Income฀tax฀provision฀–฀Our฀effective฀income฀tax฀rate฀was฀38.5%฀in฀2005฀
and฀2004.