True Value 2008 Annual Report Download - page 23

management’s discussion and analysis
of financial condition and results of operation
2 :: TR UE VALUE C OMPAN Y
exceeded lost Revenue from terminated stores. The Comp Store
Sales reduction of 2.1% was primarily driven by a softer winter
season in January and February, a late arrival of spring season in
much of the country and the U.S. economic recession. Inflationary
product price increases, a fuel surcharge and an additional week
of revenue partially offset the seasonal and economic volume
reductions. The extra week was the result of True Value’s reporting
calendar. Fiscal year 2007 was a 52-week reporting year and 2008
was a 53-week year. True Value’s fiscal year ends on the Saturday
closest to the 31st of December. Excluding the impact of the 53rd
week, Comp Store Sales were down 3.3% in 2008.
True Value experienced a significant improvement in net mem-
ber attrition in 2008. While the number of participating stores
decreased to 5,140 from 5,424 at the end of 2007, revenue from
new stores exceeded lost revenue from terminated stores for the
first time in over a decade. This was primarily due to the rollout
of DTV and a change in True Value’s long-term growth plan to
focus on increasing retail square footage by adding new stores
or expanding existing stores consistent with DTV standards.
Management believes both will help improve the consistency of
consumers’ in-store experience and associated brand value.
In regard to the level of patronage from True Value members in
2008, approximately one quarter of the stores accounted for less
than 5% of Net revenue. This relationship has been fairly consis-
tent over the last several years. If True Value were to experience
a significant level of attrition in this quartile of current members,
the financial impact would be insignificant.
In 2009, management expects to offset the level of revenue reduc-
tion from net member attrition by opening more new stores and
completing more store expansions and remodels through DTV
growth incentives. However, given the uncertainty of the depth
and length of the current economic recession, Comp Store Sales
are expected to continue to decline slightly.
Gross Margin %
A key driver of True Value’s profitability is its overall Gross margin
percentage. The Gross margin percentage has remained fairly
steady since 2005. The 20 basis point decline in the 2008 Gross
margin percentage compared to 2007 was primarily driven by
higher absorption of transportation costs and higher reserves
on specific inventory items.
Operating and Interest Expenses ($ in millions)
A key focus of management is to continue to hold the line on
True Value’s cost structure. Management’s actions have included
staffing reductions, debt refinancing and logistics and manufac-
turing efficiency improvements. The efficiency improvements
made in 2008 related to increased throughput efficiencies of the
Regional Distributions Centers (RDCs), lower labor and benefit
costs, and lower average interest rates.
2005 2006 2007 2008
10.8%
10.4%
10.0%
11.2%
11.6%
11.3% 11.3%
11.5%
11.3%
Operating and interest expenses include logistics and manufacturing, selling, general and
administrative, member interest and third-party interest expenses.
2005 2006 2007 2008
$150
$125
$100
$175
$200
$176
$168 $173 $168
($ in thousands)