Lowe's 2006 Annual Report Download - page 3

waned, housing supply grew, and homebuyers, as well as home
improvement consumers, became cautious about spending.
We will continue to monitor closely both the structural drivers
of demand and the mindset of the home improvement consumer
through 2007.
Even though our sales fell far short of our plan, solid cost
controls allowed our earnings per share to land only 2.5% below
the midpoint of our initial forecast. Cost controls included the
rationalization of promotional advertising, initiatives to better
manage self-insurance costs and diligent allocation of payroll dol-
lars, but we were cautious to maintain stang levels that would
ensure a consistent high level of service in our stores. In addition,
cally cut spending to maintain earnings, or we could invest
through the cycle to improve our business and capture market
share. Our approach is, and will continue to be, to invest. at
doesn’t mean we haven’t redoubled our evaluation of every
expense, but we also see opportunity to gain market share by
ensuring we provide customers with great products and great
service.
As part of that investment for the future, our store expansion
continues. In 2006, we added 155 new stores around the country,
and we’ll add another 150 to 160 in 2007. We see the opportunity
for more than 2,000 stores in North America with our current pro-
totypes, and as we identify new ways to serve home improvement
Letter to Shareholders
trimline
Financial Highlights
IN M ILL IONS, EXCEP T PE R SHA RE DATA
Increase
Over Fiscal Fiscal
2005 20061 20051
Net Sales 8.5% $46,927 $43,243
Gross Margin 32 bps2 34.5% 34.2%
Pre-Tax Earnings 11.2% $ 4,998 $ 4,496
Earnings Per Share
Basic Earnings Per Share 13.5% $ 2.02 $ 1.78
Diluted Earnings Per share 15.0% $ 1.99 $ 1.73
Cash Dividends Per Share 63.6% $ 0.18 $ 0.11
1Fiscal 2005 contained 53 weeks vs. 52 weeks in scal 2006
2Basis points
it has long been a part of the Lowe’s culture to
have a large component of total compensation
based on performance. e theory is obvious – if
employees are compensated based on the suc-
cess of their store, or their product category,
or the success of the company as a whole, they
have incentive to drive performance and
higher returns for our shareholders. is year,
as we fell short of many of the goals we set at
the beginning of the year, we paid out far less
incentive compensation than in 2005.
Despite the challenges of 2006, we made
great progress on many initiatives and had
some notable successes. According to indepen-
dent third-party estimates, Lowe’s gained unit
market share in all 20 of our product catego-
ries during the calendar year. ese share gains
are a clear indication that despite a cautious
home improvement consumer, Lowe’s con-
tinues to be the store-of-choice for many.
As I see it, we had two choices as we entered
this period of slower sales. We could dramati-
customers, that number could rise. is year, we will also open
our rst stores outside of the United States with stores in Toronto,
Canada. Over time, we feel we have the opportunity for up to 100
stores in Canada. Adding to our expansion opportunities outside
the U.S., in January we announced our plans to open three to ve
stores in Monterrey, Mexico in 2009.
We will also continue our commitment to invest in our
existing stores to keep them fresh and up-to-date. We spent
more than $650 million on existing stores in 2006 to improve
their look and shopability. We’ll spend an estimated $1.3 billion
more over the next two years to drive sales and ensure our stores
remain the easiest and most enjoyable to shop in the industry.
Our greatest hurdle in continuing to grow is ensuring we have the
right people in place to continue delivering the in-store experience
that customers have come to expect. I am condent Lowe’s has one
of the deepest benches in all of retail. at depth runs from the store
associate level, to our store managers, and all the way to our senior
management team. e depth at the executive level was evident in
2006, as Larry Stone was promoted to President and Chief Operat-
ing Ocer. At the same time, Nick Canter moved from his role as
head of our operations organization to lead our Merchandising
teams, and Mike Brown was promoted to Executive Vice President
of Store Operations. ese senior executives will use their vast expe-
rience to ensure Lowe’s is well positioned for our next 60 years.