Harris Teeter 2007 Annual Report Download - page 16

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Overview
The Company operates primarily in two business segments through two wholly owned subsidiaries:
retail grocery (including real estate and store development activities) – Harris Teeter, and industrial sewing
thread (textile primarily), including embroidery thread and technical textiles – American & Efird. Harris
Teeter operates a regional chain of supermarkets in the Southeastern United States. American & Efird globally
manufactures and distributes sewing thread for the apparel and other markets, embroidery thread and technical
textiles. The Company evaluates the performance of its two businesses utilizing various measures which are
based on operating profit.
During fiscal 2007, Harris Teeter’s market environment continued to be highly competitive, characterized
by competition from other traditional grocery retailers, as well as other competitors including, but not limited
to, discount retailers such as “supercenters” and “club and warehouse store,” specialty supermarkets and drug
stores. Generally, the markets in the southeastern United States continued to experience new store opening
activity and aggressive feature pricing by competitors. In response, Harris Teeter utilizes information gathered
from various sources, including its Very Important Customer (“VIC”) loyalty card program, and works with
suppliers to deliver effective retail pricing and targeted promotional spending programs that drive customer
traffic and create value for Harris Teeter customers. In addition, Harris Teeter differentiates itself from its
competitors with its product assortment, variety and focus on customer service. These efforts have resulted in
overall gains in market share within Harris Teeter’s primary markets. As previously disclosed, Harris Teeter has
accelerated its new store opening program that was initiated in fiscal 2005 with the purchase of six stores from
Winn-Dixie. The accelerated new store activity has utilized the Company’s excess cash, required borrowings
under the Company’s line of credit facility and resulted in higher pre-opening and incremental start-up costs.
During fiscal 2007 Harris Teeter opened 19 new stores, as compared to 16 new stores and 10 new stores during
fiscal 2006 and fiscal 2005, respectively.
Business conditions for A&E’s customers in the textile and apparel industry remain challenging in the
Americas due to the continued shift of apparel sourcing outside the Americas. Additionally, A&E continues
to face increased operating costs and highly competitive pricing in its markets. In response, A&E has focused
on strategic initiatives that enhance its global footprint and diversify its product lines. A&E has completed or
continues to make good progress towards the integration and consolidation of the strategic investments made
since late fiscal 2004, including its 2006 acquisition of TSP Tovarna Sukancev in Trakov d.d. (“TSP”). A&E
also continues to make progress in China by expanding its sales and distribution capabilities to take advantage
of the manufacturing capacity that has been acquired over the last few years. Sales of premium apparel and non-
apparel threads continue to increase in China along with A&E’s expanding customer base in this key market.
Results of Operations
Rental Costs Incurred during a Construction Period
On October 6, 2005, the FASB issued Staff Position (“FSP”) FAS 13-1, “Accounting for Rental Costs
Incurred during a Construction Period.” The FSP generally applies to leases of land or pad leases, including
“cold dark shells” where the Company assumes responsibility for store and site construction. Harris Teeter’s
construction period typically extends for six to nine months. Under this FSP, rental costs that are incurred
during the construction period are recognized as rental expense. Prior to the beginning of the second quarter of
fiscal 2006, the Company capitalized such costs during the construction period. As required by FAS 13-1, the
Company ceased capitalization of construction period rents effective January 2, 2006. Although the guidance
permits retrospective application to prior periods, the Company did not restate prior periods due to the relatively
small percentage of land leases in those periods. Construction period rent required to be expensed as a non-cash
charge is included with the pre-opening costs in the discussion of segment operations under the caption “Harris
Teeter, Retail Grocery Segment” below.