Lowe's 2005 Annual Report Download - page 5

GREAT STORES GREAT HOMES 3
We are committed to investing in
our Big 3 sales initiatives to ensure
we continue to meet customers’
needs, and we’re confi dent these
programs will help drive our
future performance.
In 2005, we leveraged a strong sales
environment to deliver record profi ts,
as net earnings grew 27 percent over
fi scal 2004. Our annual operating
margin exceeded 11 percent for the
fi rst time in Lowe’s history and gross
margin of 34.2 percent increased
62 basis points over fiscal 2004.
As we continue to enhance our offering, we are keenly aware of demographic and societal trends
shaping the needs and desires of homeowners and the professionals who provide service to them.
Our Big 3 sales initiatives of Installed Sales, Special Order Sales (SOS), and sales to the Commercial
Business Customer (CBC) are no exception. These well-defi ned and ever-improving initiatives are
not new for Lowe’s, nor are the trends driving their success. They continue to align with customer
needs, drive traffi c, grow average ticket and deliver comp sales above the company average.
Fiscal 2005 represented the fi rst year that our new Installed Sales model was fully implemented in all
stores and supported by a national advertising campaign. With a focus on execution and a continued
demand for products such as cabinets, countertops, fl ooring and millwork, Installed Sales increased
31 percent to $2.6 billion in fi scal 2005. Installed Sales is driven by the changing preferences of
many consumers, who are moving from do-it-yourself (DIY), to do-it-for-me (DIFM) customers due
to time-pressed schedules, a growing desire for projects requiring highly-skilled labor, and the
convenience of one-stop shopping that Lowe’s provides. We believe the relevant market for Installed
Sales represents a $150 billion opportunity in labor alone. As the market continues to shift from
DIY to DIFM, we are well positioned to leverage our Installed Sales model and serve the changing
needs of customers.
Driven by our efforts to improve selection and simplify the process for customers purchasing special
order products, sales in this category grew 25 percent in fi scal 2005 to $3.9 billion. Customers want
to express their individuality throughout their homes, and we continue to enhance our merchandise
selection to meet their needs. Our special order offering includes hundreds of thousands of addi-
tional products that can be selected and ordered at any of our stores. Special Order Sales remain
a tremendous growth opportunity as we continue to utilize advancements in technology to improve
our presentation of special order merchandise and streamline the ordering and delivery process.
Sales to the Commercial Business Customer represent approximately 25 percent of our total sales,
and this segment posted another year of strong growth in fi scal 2005. Our focus remains on reach-
ing out to repair and remodelers, professional tradespeople and property management professionals
who visit Lowe’s for the convenient one-stop shopping experience we offer. The foundation of our
success with these customers is our ability to offer great service, everyday low prices, professional
quality products and a knowledgeable sales team.
We are committed to investing in our Big 3 sales initiatives to ensure we continue to meet customers’
needs, and we’re confi dent these programs will help drive our future performance. As a result, we
recently created a new position, senior vice president of specialty sales, responsible for defi ning the
strategies to grow our installed, special order and commercial sales businesses.
In 2005, we leveraged a strong sales environment to deliver record profi ts, as net earnings grew
27 percent over fi scal 2004. Our annual operating margin exceeded 11 percent for the fi rst time in
Lowe’s history and gross margin of 34.2 percent increased 62 basis points over fi scal 2004. These
fi nancial benchmarks demonstrate our commitment to controlling costs and our ability to drive oper-
ational effi ciencies throughout our organization. Longer term, we expect annual operating margin
improvement of approximately 20 to 30 basis points per year, which will come from many sources
including increased global sourcing of product, new technology, leveraging vendor services and
effi ciencies gained from our Rapid Response Replenishment distribution initiative, or R3.
The implementation of R3 progressed during the year as we continued to enhance our distribution
capabilities in support of our growing footprint of stores. R3 is designed to better leverage our
industry-leading distribution and logistics infrastructure with three well-defi ned objectives. First and
foremost, the goal of R3 is to improve customer service by ensuring we have the right product, in
the right store, at the right time. The second goal is to improve total supply chain profi tability, and