Lowe's 2005 Annual Report Download - page 6

Robert A. Niblock
Chairman of the Board, President and Chief Executive Offi cer
Letter to
Our Shareholders
As we have been for the past
60 years, Lowe’s is ready
for the opportunities ahead.
By anticipating consumers’
needs, we will continue to
operate great stores with the
products, services, and solu-
tions to help our customers
create great homes.
4 GREAT STORES GREAT HOMES
third is to better leverage inventory. As we enter 2006, with the majority of the R3 implementation
behind us, we have improved our replenishment process and can now more effi ciently distribute
product at the rate of sales. We reduced the amount of product sent directly to our stores from ven-
dors with ineffi cient less-than-truckload shipments and increased the volume of product channeled
through our 11 regional distribution centers.
When we began this initiative about two years ago, approximately 50 percent of stock product was
moving through our distribution network. At the end of fi scal 2005, that amount had increased to
nearly 70 percent, with the majority of product traveling in full truckloads. This shift gives us more
control over our inventory so we can better serve the needs of our stores and our customers. We’ll
continue to increase the number of items fl owing through our distribution network this year and are
well positioned to achieve our goal of moving 75 percent of stock merchandise through our network
by the end of fi scal 2006.
As we plan for our future growth, we have confi dence in the internal initiatives that continue to create
sales momentum and drive operational effi ciencies in our business. In addition, our optimistic out-
look is supported by demographic trends and economic indicators that point to sustained strength
in consumer demand for the products and services we offer.
Importantly, the vast majority of our customers are homeowners, and U.S. homeownership is near
record levels, providing an established customer base for home maintenance and repair projects.
In addition, demographic shifts in the U.S. are increasing the number of consumers entering
the housing market. Members of Generation X are buying homes at a younger age than their
parents and have shown a strong desire to personalize and upgrade features in their homes.
The emergence of the Echo Boomers, sometimes referred to as Generation Y, is expected to have
a similar positive effect on our business. Echo Boomers are 72 million strong and, with the infl ux
of immigration, are likely to be the largest generation in American history. Much of this group is
just beginning to enter homeownership and the housing market will begin seeing the impact from
this generation as early as 2007.
Also driving the U.S. homeownership trend is continued immigration and the rising number of
minorities living the American dream of owning their home. With our commitment to multicultural
marketing and staffi ng, we are well positioned to appeal to this growing population.
Three primary economic metrics that we monitor as drivers for the home improvement industry are
personal income, employment and housing turnover. Personal income continues to grow, and the
February 2006 Blue Chip Economic IndicatorsTM forecast real personal income growth of 3.4 percent
for 2006 compared with 1.4 percent in 2005. Employment growth, which is a strong indicator of
home improvement sales, is encouraging and provides stability for American consumers. Housing
turnover is expected to continue at a historically high pace, according to The National Association
of RealtorsSM, which forecasts 2006 housing turnover to be the third strongest year on record. We
follow these metrics closely, and collectively we believe they indicate a favorable climate for the
home improvement industry.
These favorable trends, combined with great service, compelling stores and a proven growth strategy
give us confi dence in our continued success. As we have been for the past 60 years, Lowe’s is ready
for the opportunities ahead. By anticipating consumers’ needs, we will continue to operate great
stores with the products, services, and solutions to help our customers create great homes.