Lowe's 2005 Annual Report Download - page 25

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Fiscal฀2004฀Compared฀to฀Fiscal฀2003
Net฀sales฀–฀The฀increase฀in฀sales฀in฀2004฀was฀attributable฀to฀our฀ongoing฀
store฀expansion฀and฀relocation฀program฀and฀comparable฀store฀sales฀
increases.฀We฀opened฀140฀stores฀in฀2004,฀including฀four฀relocations,฀adding฀
our฀first฀stores฀in฀Minnesota,฀Wisconsin฀and฀Maine.
฀ The฀comparable฀store฀sales฀increase฀of฀6.6%฀in฀2004฀reflected฀improved฀
sales฀in฀every฀merchandising฀category.฀The฀categories฀that฀performed฀above฀our฀
average฀comparable฀store฀sales฀increase฀for฀the฀year฀included฀millwork,฀rough฀
plumbing,฀lumber,฀building฀materials,฀rough฀electrical,฀hardware,฀outdoor฀power฀
equipment,฀seasonal฀living฀and฀cabinets฀&฀countertops.฀Inflation฀in฀lumber฀and฀
building฀material฀prices฀during฀the฀year฀favorably฀impacted฀comparable฀store฀
sales฀by฀approximately฀150฀basis฀points.฀We฀experienced฀comparable฀store฀
sales฀increases฀in฀every฀product฀category฀and฀all฀geographic฀regions฀due฀in฀
part฀to฀the฀implementation฀of฀our฀merchandising฀and฀operations฀strategies.
฀ Our฀specialty฀sales฀initiatives,฀which฀include฀Installed฀Sales,฀SOS฀and฀
Commercial฀Business฀Customer฀sales,฀also฀contributed฀to฀the฀comparable฀
store฀sales฀increase฀in฀2004.฀We฀completed฀the฀rollout฀of฀the฀new฀Installed฀
Sales฀model฀to฀all฀of฀our฀stores฀during฀2004.฀With฀the฀opportunity฀to฀expand฀
into฀new฀categories฀of฀installation,฀we฀believe฀Installed฀Sales฀will฀continue฀to฀
provide฀an฀area฀of฀future฀sales฀growth.฀We฀also฀experienced฀positive฀results฀
from฀our฀SOS฀initiatives,฀with฀total฀SOS฀sales฀increasing฀approximately฀27%฀in฀
2004.฀Our฀Commercial฀Business฀Customer฀initiative฀also฀performed฀well฀in฀2004,฀
with฀comparable฀store฀sales฀increases฀of฀over฀twice฀the฀company฀average฀and฀
double-digit฀comparable฀store฀sales฀increases฀in฀15฀of฀18฀merchandising฀cat-
egories.฀Our฀relationship฀with฀the฀Commercial฀Business฀Customer฀grew฀across฀
the฀store,฀not฀just฀in฀lumber฀and฀building฀materials.
฀ Average฀ticket฀increased฀$4.22฀or฀7.1%฀from฀$59.21฀in฀2003฀to฀$63.43฀
in฀2004,฀due฀in฀part฀to฀the฀success฀of฀the฀“Up฀the฀Continuum”฀initiative฀as฀well฀as฀
Lowe’s฀credit฀programs.฀Average฀ticket฀for฀comparable฀stores฀increased฀6.3%.
Gross฀margin฀–฀The฀increase฀in฀gross฀margin฀as฀a฀percentage฀of฀sales฀was฀
attributable฀primarily฀to฀the฀implementation฀of฀EITF฀02-16.฀The฀implementation฀
of฀EITF฀02-16,฀which฀resulted฀in฀the฀reclassification฀of฀vendor฀reimbursements฀
for฀cooperative฀advertising฀and฀third-party฀in-store฀service฀costs฀from฀SG&A฀
expense฀to฀a฀reduction฀of฀cost฀of฀sales฀when฀the฀associated฀inventory฀is฀sold,฀
favorably฀impacted฀gross฀margin฀as฀a฀percentage฀of฀sales฀by฀258฀basis฀points฀
for฀2004.฀Excluding฀the฀impact฀of฀the฀implementation฀of฀EITF฀02-16,฀gross฀
margin฀as฀a฀percentage฀of฀sales฀was฀flat฀compared฀to฀2003.฀This฀was฀due฀in฀
part฀to฀unfavorable฀product฀mix฀shifts฀and฀increased฀distribution฀costs.฀The฀
increased฀distribution฀costs฀were฀associated฀with฀the฀R3฀initiative,฀which฀
includes฀adding฀safety฀stock฀to฀our฀distribution฀centers,฀reconfiguring฀racking฀
and฀implementing฀new฀productivity฀standards.฀This฀strategy฀caused฀a฀temporary฀
increase฀in฀our฀distribution฀costs,฀but฀with฀longer-term฀positive฀implications฀for฀
our฀in-stock฀position,฀inventory฀productivity฀and฀SG&A฀leverage.฀Increased฀fuel฀
prices฀also฀contributed฀to฀the฀increase฀in฀distribution฀costs.
SG&A฀–฀The฀increase฀in฀SG&A฀expenses฀as฀a฀percentage฀of฀sales฀from฀2003฀
to฀2004฀was฀due฀primarily฀to฀the฀implementation฀of฀EITF฀02-16,฀as฀previously฀
discussed.฀This฀unfavorably฀impacted฀SG&A฀as฀a฀percentage฀of฀sales฀by฀316฀
basis฀points฀for฀2004.฀This฀was฀partially฀offset฀by฀leverage฀in฀gross฀advertising฀
and฀salaries฀as฀a฀percentage฀of฀sales,฀as฀well฀as฀improvements฀in฀the฀perfor-
mance฀of฀the฀credit฀portfolio฀held฀by฀General฀Electric.
Store฀opening฀costs฀–฀Store฀opening฀costs฀totaled฀$123฀million฀in฀2004฀com-
pared฀to฀$128฀million฀in฀2003.฀These฀costs฀were฀associated฀with฀the฀opening฀
of฀140฀stores฀in฀2004฀(136฀new฀and฀four฀relocated),฀as฀compared฀with฀the฀
opening฀of฀130฀stores฀in฀2003฀(125฀new฀and฀five฀relocated).฀Because฀store฀
opening฀costs฀are฀expensed฀as฀incurred,฀the฀timing฀of฀expenses฀recognized฀
may฀fluctuate฀based฀on฀the฀timing฀of฀store฀openings.฀Store฀opening฀costs฀for฀
stores฀opened฀during฀the฀year฀averaged฀approximately฀$0.9฀million฀per฀store฀
in฀2004฀versus฀approximately฀$1฀million฀per฀store฀in฀2003.
Depreciation฀–฀Depreciation฀leveraged฀five฀basis฀points฀as฀a฀percentage฀of฀
sales฀in฀2004.฀Approximately฀97%฀of฀new฀stores฀opened฀in฀the฀last฀three฀years฀
have฀been฀owned,฀which฀included฀stores฀on฀leased฀land.฀Property,฀less฀accumu-
lated฀depreciation,฀increased฀to฀$13.9฀billion฀at฀January฀28,฀2005,฀compared฀
to฀$11.8฀billion฀at฀January฀30,฀2004.฀The฀increase฀in฀property฀resulted฀primarily฀
from฀our฀store฀expansion฀program฀and฀an฀additional฀$300฀million฀investment฀
in฀information฀technology.
Interest฀–฀Interest฀expense฀decreased฀from฀2003฀due฀to฀lower฀debt฀levels฀
resulting฀from฀scheduled฀debt฀repayments.฀Interest฀expense฀relating฀to฀capital฀
leases฀was฀$38฀million฀for฀2004฀and฀$39฀million฀for฀2003.฀For฀further฀discus-
sion,฀see฀Financial฀Condition,฀Liquidity฀and฀Capital฀Resources.
Income฀tax฀provision฀–฀Our฀effective฀income฀tax฀rates฀were฀38.5%฀and฀37.9%฀
in฀2004฀and฀2003,฀respectively.฀The฀higher฀rate฀in฀2004฀was฀primarily฀the฀
result฀of฀expansion฀into฀states฀with฀higher฀state฀income฀tax฀rates.
FINANCIAL฀CONDITION,฀LIQUIDITY฀AND฀CAPITAL฀RESOURCES
The฀R3฀initiative฀enables฀us฀to฀move฀safety฀stock฀out฀of฀our฀stores฀and฀into฀our฀
RDC฀network.฀During฀2004,฀safety฀stock฀was฀added฀to฀the฀distribution฀network฀
prior฀to฀reducing฀the฀safety฀stock฀in฀the฀stores฀in฀order฀to฀maintain฀service฀levels.฀
This฀resulted฀in฀inventory฀growth฀in฀2004฀that฀outpaced฀sales฀growth.฀However,฀
in฀2005,฀we฀started฀reducing฀safety฀stock฀in฀our฀stores฀and฀began฀to฀realize฀
the฀benefits฀of฀the฀R3฀initiative฀in฀the฀form฀of฀inventory฀leverage฀and฀inventory฀
turn฀improvements.฀As฀a฀result,฀sales฀in฀2005฀increased฀19%,฀including฀the฀
effect฀of฀the฀fifty-third฀week,฀while฀inventory฀growth฀was฀13%.฀We฀expect฀addi-
tional฀inventory฀improvements฀as฀a฀result฀of฀the฀R3฀initiative฀in฀2006.
Cash฀Flows
The฀following฀table฀summarizes฀the฀components฀of฀the฀consolidated฀statements฀
of฀cash฀flows,฀as฀well฀as฀the฀percentage฀change฀in฀cash฀from฀the฀prior฀year.฀
This฀table฀should฀be฀read฀in฀conjunction฀with฀the฀following฀discussion฀and฀
analysis฀and฀the฀consolidated฀financial฀statements,฀including฀the฀related฀notes฀
to฀the฀consolidated฀financial฀statements:
฀Percentage฀฀
฀ Increase/(Decrease)฀฀
฀ in฀Cash฀from฀
฀ Prior฀Year
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ 2005฀vs.฀ 2004฀vs.฀
(In฀millions)฀ ฀ 2005฀ 2004฀ 2003฀ 2004฀ 2003
Net฀cash฀provided฀by฀฀
฀ operating฀activities฀ $฀3,842฀ $฀3,073฀ $฀3,034฀ 25%฀ 1%
Net฀cash฀used฀in฀฀
฀ investing฀activities฀ (3,674)฀ (2,362)฀ (2,487)฀ (56)฀ 5
Net฀cash฀used฀in฀฀
฀ financing฀activities฀ (275)฀ (1,047)฀ (17)฀ 74฀ NM
Net฀(decrease)฀฀
฀ ฀increase฀in฀cash฀฀
and฀cash฀equivalents฀ (107)฀ (336)฀ 530฀ 68฀ (163)
Cash฀and฀cash฀equivalents,฀฀
฀ beginning฀of฀year฀ 530฀ 866฀ 336฀ (39)฀ 158
Cash฀and฀cash฀equivalents,฀฀
฀ end฀of฀year฀ $฀ ฀฀423฀ $฀ ฀฀530฀ $฀ ฀฀866฀ (20%)฀ (39%)
NM:฀Not฀meaningful