True Value 2008 Annual Report Download - page 25

management’s discussion and analysis
of financial condition and results of operation
4 :: TR UE VALUE C OMPAN Y
Partially offsetting the decrease in the Comp Store Sales category
was the first increase in over a decade in the change in partic-
ipating members’ category of $1,868. Sales to new members
increased $43,602, or 2.1%, while sales to terminated mem-
bers declined $41,734, or 2.0%. True Value’s revenue from the
net change in participating stores was favorable primarily as a
result of increased interest in new store openings from current
members along with stores converting from other cooperatives.
True Value’s management attributes these conversions and new
store openings to the rollout of the new DTV store format and
the impact it has on retail sales.
The other revenue category also partially offset the decrease in
the Comp Store Sales category by $10,184. This favorability was
primarily due to the transportation fuel surcharge on product
shipments from True Value’s distribution facilities to the mem-
bers and the increase in the promotional support fee charged
to members for national advertising. The fuel surcharge relates
to the significant 2008 cost increase in diesel fuel and the higher
promotional support fee relates to increased national advertis-
ing spending.
$ Gross
Margin
Gross margin 2008 2007 (Decrease)
For the Year Ended $227,278 $235,117 $(7,839)
Percent to Net Revenue 11.3% 11.5%
Gross margin for the year ended January 3, 2009, decreased by
$7,839, or 3.3%, over the prior year. The gross margin decrease
was primarily driven by lower handled product volume sold
through True Value’s distribution network which drove lower
product margin, outbound freight revenue and rebates and
discounts. Additionally, gross margin was unfavorably impacted
by higher reserves on specific inventory items, increased fuel
costs and higher freight-in expense. These unfavorable year-
to-date decreases were partially offset by both higher handled
product margin rates and the fuel surcharge on handled product
sold through True Value’s distribution network.
Logistics and $ Expense
manufacturing expenses 2008 2007 Increase
For the Year Ended $61,154 $60,218 $936
Percent to Net Revenue 3.0% 3.0%
Logistics and manufacturing expenses increased by $936, or
1.6%, as compared to the prior year. Logistics and manufacturing
expenses increased due to merit increases, higher health ben-
efit expenses and a lower level of warehouse costs capitalized
into inventory, partially offset by efficiencies, lower sales volume
and additional facility lease expense incurred in 2007 that did
not reoccur in 2008.
Selling, general and $ Expense
administrative expenses 2008 2007 (Decrease)
For the Year Ended $96,920 $100,560 $(3,640)
Percent to Net Revenue 4.8% 4.9%
SG&A expenses decreased by $3,640, or 3.6%, as compared to
the prior year. SG&A expenses decreased primarily due to lower
achievement of performance targets resulting in lower incentive
expense of $5,123 and a favorable vacation policy adjustment of
$2,500 in 2008 compared to same period last year. In addition,
DTV model store expenses primarily related to development
and marketing were lower by $2,352. Partially offsetting these
decreases were higher bad debt expense of $2,091 due to
additional reserves on high-risk members, higher salary and
wages of $1,653 primarily related to merit increases, higher health
benefits of $1,609 and the 53rd week of salaries and related
benefits included in True Value’s 2008 fiscal year of $1,256.
Arbitration and litigation $ Expense
provisions/(benefits) 2008 2007 (Decrease)
For the Year Ended $(3,007) $600 $(3,607)
Percent to Net Revenue (0.1%) 0.0%
The year-to-date change in arbitration benefit and litigation was
primarily due to the E&Y Matter. On March 26, 2008, the arbitra-
tion panel in the E&Y matter ordered E&Y to return to True Value
the portion of the original award attributable to expert witness
fees of $3,345 and interest of $142. In addition, True Value incurred
legal costs on a percentage basis of the award of $480.
$ Expense
Interest expense 2008 2007 (Decrease)
Third-parties $5,435 $8,081 $(2,646)
Percent to Net Revenue 0.3% 0.4%
Third-party interest expense decreased by $2,646, or 32.7%, as
compared to last year. This decrease in expense was primarily
due to lower average Bank Facility interest rates of approxi-
mately 2.3%.
$ Net
Margin
Net margin 2008 2007 Increase
For the Year Ended $64,228 $63,767 $461
Percent to Net Revenue 3.2% 3.1%
The 2008 Net margin of $64,228 increased by $461, or 0.7%, from
the 2007 Net margin of $63,767 for reasons as discussed above.
($ in thousands)