True Value 2008 Annual Report Download - page 24

management’s discussion and analysis
of financial condition and results of operation
2008 FINAN CIA L REP OR T :: 3
Total Year-End Debt ($ in millions)
Debt, shown above, includes all third-party debt and all sub-
ordinated member debt. At the end of 2007 and 2008, member
debt was larger than all third-party debt. Although total debt
was $14,000 up at the end of 2008, daily average borrowings
on the bank line were $77,863 in 2008, down 9.1% from $85,652
in 2007.
Operations
True Value’s primary source of revenue is derived from the sale
of hardware, paint and paint-related products, and general
merchandise to member stores. These revenues result from
shipments that originate from True Value’s distribution facilities,
as well as from shipments that go direct from True Value’s ven-
dors to member stores. In addition, True Value realizes revenue
for services provided to members primarily related to advertis-
ing and transportation fees.
Costs of revenue include acquisition cost of merchandise (net
of discounts and vendor incentives), warehousing and transpor-
tation costs, manufacturing costs for paint, and costs related to
advertising and other services. Selling, general and administrative
(“SG&A”) costs include headquarter and field personnel expenses,
as well as marketing and information technology costs.
The success of True Value is dependent upon continued sup-
port from its members in the form of purchases of merchandise
and services for their retail and/or industrial distribution outlets.
Risk factors that could have a significant negative effect on True
Value’s profitability include significant declines in membership,
declines in the levels at which members purchase merchandise
and services from True Value, increases in market share of the
various other entities that compete in the hardware industry or
a continued decline in the general U.S. economy.
RESULTS OF OPERATIONS FOR 2008
COMPARED TO 2007
Net Revenue
A reconciliation of Net revenue between 2008 and 2007 follows:
% of
Net 2007 Net
($ in thousands) Revenue Revenue
2007 Results $2,040,602 100.0%
Comp Store Sales:
Warehouse revenue (11,307) (0.6%)
Vendor-direct revenue (24,533) (1.2%)
Paint manufacturing revenue (4,156) (0.2%)
Net Comp Store Sales (39,996) (2.0%)
Change in participating members:
Terminated members:
Warehouse revenue (28,712) (1.4%)
Vendor-direct revenue (10,963) (0.5%)
Paint manufacturing revenue (2,059) (0.1%)
Net terminated members (41,734) (2.0%)
New members:
Warehouse revenue 25,416 1.2%
Vendor-direct revenue 16,838 0.8%
Paint manufacturing revenue 1,348 0.1%
Net new members 43,602 2.1%
Net change in participating members 1,868 0.1%
Other revenue 10,184 0.5%
Total change (27,944) (1.4%)
2008 Results $2,012,658 98.6%
Net revenue for the year ended January 3, 2009 totaled $2,012,658,
a decline of $27,944, or 1.4%, compared to last year. Merchandising
departments with significant decreases included hand and power
tools, seasonal, paint, rental, and electrical and lighting, partially
offset by lumber and building. The reduction in net revenue was
predominately in the Comp Store Sales category of $39,996, or
2.0%. Management attributes this decline to a mild winter season,
a late arrival of spring weather in many areas of the country and
the economic recession, partially offset by a 53rd week of revenue
of approximately $21,000 in True Value’s 2008 fiscal year.
2005 2006 2007 2008
$100
$50
$0
$150
$200 $194
$73
$121
$144
$69
$75
$127
$73
$54
$141
$82
$59
Third-Party Debt Member Debt
($ in thousands)