Lowe's 2010 Annual Report Download - page 25

LOWE’S 2010 ANNUAL REPORT 21
Income tax provision
Our฀effective฀income฀tax฀rate฀was฀37.7%฀in฀2010฀versus฀36.9%฀in฀2009.฀
The฀lower฀effective฀tax฀rate฀in฀2009฀was฀primarily฀due฀to฀certain฀prior฀
year฀favorable฀state฀tax฀settlements,฀which฀decreased฀the฀effective฀tax฀
rate฀by฀approximately฀70฀basis฀points.
Fiscal 2009 Compared to Fiscal 2008
Net sales
Reective฀of฀the฀continued฀challenging฀sales฀environment,฀net฀sales฀
decreased฀2.1%฀to฀$47.2฀billion฀in฀2009.฀Comparable฀store฀sales฀
declined 6.7% in 2009 compared to a decline of 7.2% in 2008. Total
customer transactions increased 3.4% compared to 2008, driven by
our฀store฀expansion฀program.฀However,฀average฀ticket฀decreased฀
5.4%฀to฀$61.66,฀primarily฀as฀a฀result฀of฀fewer฀project฀sales.฀Comparable฀
store customer transactions declined 1.0%, and comparable store
average ticket declined 5.7% compared to 2008.
Customers continued to focus on routine maintenance and repairs
instead฀of฀larger฀discretionary฀projects฀during฀scal฀2009.฀We฀experi-
enced solid sales performance in paint and nursery as a result of the
continued willingness of homeowners to take on smaller do-it-yourself
projects to maintain their homes and improve their outdoor space.
The paint category had positive comparable store sales performance
for each quarter during 2009. Appliances also performed better than
our average comparable store sales change, driven by attractive value
and customers’ willingness to invest in products that increase energy
efficiency. However, certain of our other categories, including home
fashion,฀cabinets฀&฀countertops฀and฀millwork,฀which฀are฀more฀discre-
tionary฀in฀nature,฀experienced฀double-digit฀declines฀in฀comparable฀
store฀sales฀for฀the฀year.฀We฀also฀experienced฀continued฀weakness฀
in other categories, including rough electrical, lumber and outdoor
power฀equipment,฀which฀also฀experienced฀double-digit฀declines฀in฀
comparable store sales driven by comparisons to hurricane-related
spending in 2008.
Due to consumers’ continued hesitancy to take on larger
discretionary฀projects,฀we฀experienced฀higher฀than฀average฀declines฀
within all specialty sales categories during 2009. Special Order Sales had
a 15.8% decline in comparable store sales, due to weakness in cabinets
&฀countertops,฀home฀fashion,฀lighting฀and฀millwork.฀Comparable฀store฀
Installed Sales declined 11.4% for 2009. However, both Special Order
Sales฀and฀Installed฀Sales฀experienced฀sequential฀improvement฀in฀the฀
third quarter of 2009, and positive comparable store sales in the
fourth quarter of 2009, as the economic pressures lessened. Sales
to Commercial Business Customers declined 9.1% in 2009, driven by
continued project delays within the remodel and repair businesses.
฀ From฀a฀geographic฀market฀perspective,฀we฀experienced฀continued฀
pressure from the declining housing market, with the most pronounced
declines in the Mid-Atlantic and Florida markets for the year. Many areas
were impacted by several years of housing pressure as well as the
financial markets. However, we saw evidence of broad-based stabiliza-
tion,฀as฀we฀experienced฀sequential฀improvement฀in฀comparable฀store฀
sales for all 50 states from the third to the fourth quarter, and 26 states
had positive comparable results in the fourth quarter. For 2009, the
northeast and north-central markets performed above the Company
average, and for the fourth quarter of 2009 these areas delivered
positive฀comparable฀store฀sales฀results.฀As฀a฀result,฀we฀experienced฀
a comparable store sales decline of 1.6% for the fourth quarter, compared
to a decline of 6.7% for the year.
Gross margin
For 2009, gross margin of 34.86% represented a 65 basis point increase
from฀2008.฀Margin฀rate฀improvement฀contributed฀approximately฀
52 basis points of this increase, primarily driven by a moderating
promotional environment and decreased seasonal markdowns. The
seasonal฀living฀category฀experienced฀strong฀margin฀increases฀compared฀
to the prior year driven by reduced markdowns as a result of rational-
izing฀purchase฀levels฀earlier฀in฀the฀year.฀The฀ooring฀and฀lighting฀product฀
categories฀also฀experienced฀strong฀improvement฀compared฀to฀the฀prior฀
year driven by the more rational promotional environment and our
decision to not repeat certain prior year promotions. In addition,
margin was positively impacted by lower inventory shrink, which
provided 12 basis points of leverage.
SG&A
The฀increase฀in฀SG&A฀as฀a฀percentage฀of฀sales฀from฀2008฀to฀2009฀was฀
primarily driven by de-leverage of 61 basis points in store payroll. As
sales per store declined, an increased number of stores met the base
stafng฀hours฀threshold,฀which฀increased฀the฀proportion฀of฀xed-to-
total฀payroll.฀We฀also฀experienced฀de-leverage฀of฀approximately฀40฀basis฀
points฀in฀bonus฀expense฀attributable฀to฀higher฀achievement฀against฀
performance targets in 2009. As a result of 2009 performance and
continued฀expansion฀rationalization,฀we฀experienced฀20฀basis฀points฀of฀
de-leverage associated with the write-off of new store projects that we are
no longer pursuing and long-lived asset impairment charges. Employee
insurance costs also de-leveraged 18 basis points as a result of rising
health฀care฀expenses,฀higher฀enrollment฀and฀higher฀administrative฀costs.฀
In 2009, credit programs de-leveraged 16 basis points due to increases
in aged losses and bankruptcies as a result of higher unemployment
and฀credit฀market฀tightening.฀Additionally,฀we฀experienced฀de-leverage฀
of฀approximately฀16฀basis฀points฀in฀xed฀expenses฀such฀as฀property฀
taxes,฀utilities฀and฀rent฀during฀2009฀as฀a฀result฀of฀sales฀declines.฀These฀
changes were offset slightly by leverage of 11 basis points related to
store opening costs associated with the opening of fewer stores in
2009 than in 2008.
Depreciation
Depreciation de-leveraged 23 basis points as a percentage of sales
in 2009. This de-leverage was driven by the comparable store sales
declines and the addition of 62 new stores in 2009. Property, less
accumulated฀depreciation,฀decreased฀to฀$22.5฀billion฀at฀January฀29,฀
2010,฀compared฀to฀$22.7฀billion฀at฀January฀30,฀2009.฀At฀January฀29,฀
2010, and January 30, 2009, we owned 88% of our stores, which
included stores on leased land.
Interest
Net฀interest฀expense฀is฀comprised฀of฀the฀following:
(In millions) 2009 2008
Interest฀expense,฀net฀of฀amount฀capitalized฀ $300฀ $314
Amortization of original issue discount and
loan costs 4 6
Interest income (17) (40)
Interest – net $287 $280
฀ Net฀interest฀expense฀increased฀primarily฀as฀a฀result฀of฀lower฀
interest income due to lower interest rates and lower capitalized interest
associated with fewer stores under construction, partially offset by
lower฀interest฀associated฀with฀favorable฀tax฀settlements฀during฀2009.