Lowe's 2006 Annual Report Download - page 2

Letter to Shareholders
In scal 2006, Lowe’s celebrated
its 60th year of serving customers.
From humble beginnings as a single hardware
and general merchandise store in North Wilkesboro,
North Carolina, this year, our 210,000 employees at nearly 1,400 stores in 49 states
delivered solid results in a challenging operating environment.
e year started strong with solid 4%
comparable store sales growth in the rst
half, but the sales environment deterio-
rated more quickly than we had forecasted,
and our second half comp sales declined
4.6%. We nished the year with a at comp
overall. ree primary factors drove the
slowdown in sales.
First, contrary to many forecasts, 2006
had an unusually mild hurricane season
(thankfully so). As we cycled the rebuild-
ing eorts from the record damage
caused by Katrina, Rita and Wilma in
the back half of 2006, our comp sales in
many parts of the Gulf Coast and Florida
turned from a double-digit increase to a
double-digit decrease essentially over-
night. Our stores and employees are still
actively involved in the rebuilding eorts
in those areas, but sales in comp stores
were down from the prior year. In addi-
tion to providing high-quality products for repair and improve-
ment of homes, as one example of our continuing eorts to
serve customers in aected areas, we partnered with designer
Marianne Cusato to develop and oer aordable house plans
we call Lowe’s Katrina Cottages®. We are the exclusive retailer
for these building plans and the associated materials needed
for construction. Lowe’s Katrina Cottages combine great style
and function with easy construction and aordability and oer
the exibility to expand in the future. Moreover, they are
designed to meet hurricane codes, as well as the International
Building Code. You can nd additional
details about Lowe’s Katrina Cottages
at www.Lowes.com/katrinacottage.
Second, deation in lumber and ply-
wood, driven in part by cycling against
the elevated demand and prices associ-
ated with last year’s hurricanes, impacted
our sales results in 2006. Unit sales in
lumber and plywood were essentially at
year-over-year, but comp sales were down
signicantly, due to deation.
And third, and certainly the most
widely discussed, the housing environ-
ment declined more quickly than we
and others expected. At the beginning
of scal 2006, in many markets, includ-
ing areas of the Northeast, southern
Florida and the west coast, there were
clear structural drivers suggesting a
pullback in housing-related demand.
at evidence led us to estimate housing
turnover would decline in 2006 as these once-hot markets
cooled. What was more dicult to anticipate was the pullback
in home improvement demand that we experienced in many
unaected markets, where housing dynamics remain solid, but
consumers chose to delay home improvement projects due to
the well-publicized reports of a slowing housing market and
declining home values.
As the year progressed, housing turnover slowed more
quickly and deeply than we originally anticipated. at rapid
decline also pressured home prices as speculative demand
Robert A. Niblock
Chairman of the Board and
Chief Executive Ocer