Harris Teeter 2007 Annual Report Download - page 19

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Harris Teeter, Retail Grocery Segment
The following table sets forth the consolidated operating profit components for the Company’s Harris
Teeter supermarket subsidiary for fiscal years 2007, 2006, and 2005. The table also sets forth the percent to sales
and the percentage increase or decrease over the prior year (in thousands):
Fiscal 2007 Fiscal 2006 Fiscal 2005 % Inc. (Dec.)
% to
Sales
% to
Sales
% to
Sales
07 vs
06
06 vs
05
Net Sales . . . . . . . . . . . . . . $ 3,299,377 100.00 $ 2,922,679 100.00 $2,644,976 100.00 12.9 10.5
Cost of Sales . . . . . . . . . . . 2,277,638 69.03 2,025,042 69.29 1,857,129 70.21 12.5 9.0
Gross Profit . . . . . . . . . . . . 1,021,739 30.97 897,637 30.71 787,847 29.79 13.8 13.9
SG&A Expenses . . . . . . . . 867,656 26.30 770,000 26.34 674,267 25.50 12.7 14.2
Operating Profit . . . . . . . . . $ 154,083 4.67 $ 127,637 4.37 $ 113,580 4.29 20.7 12.4
Sales increased 12.9% in fiscal 2007 over fiscal 2006 and 10.5% in fiscal 2006 over fiscal 2005 as a result
of new store activity and comparable store sales gains. During fiscal 2007, the company opened 19 new stores
(two of which were replacements) and closed 7 stores. During fiscal 2006 the company opened 16 new stores
(three of which were replacements and 6 of which were acquired from Winn-Dixie in fiscal 2005) and closed or
divested 9 stores, and during fiscal 2005 the company opened 10 new stores and closed 3 stores. The company
did not open any replacement stores in fiscal 2005. The increase in sales from new stores exceeded the loss
of sales from closed stores by $230.1 million in fiscal 2007, $199.4 million in fiscal 2006 and $55.5 million in
fiscal 2005. Comparable store sales (see definition below) increased 4.87% ($136.4 million) for fiscal 2007 as
compared to increases of 3.20% ($81.8 million) for fiscal 2006 and 3.00% ($73.5 million) for fiscal 2005. The
increase in comparable store sales in fiscal 2007 was driven by higher customer counts and higher average
transaction size and the increase in fiscal 2006 was driven by higher average transaction size. Comparable store
sales are negatively impacted by the company’s strategy of opening additional stores in its core markets that have
proximity to existing stores. Management expects these close proximity stores, and any similar new additions in
the foreseeable future, to have a strategic benefit of enabling Harris Teeter to capture sales and expand market
share as the markets it serves continue to grow.
Harris Teeter considers its reporting of comparable store sales growth to be effective in determining core
sales growth in times of changes in the number of stores in operation, their locations and their sizes. While there
is no standard industry definition of “comparable store sales,” Harris Teeter has been consistently applying the
following definition. Comparable store sales are computed using corresponding calendar weeks to account for
the occasional extra week included in a fiscal year. A new store must be in operation for 14 months before it
enters into the calculation of comparable store sales. A closed store is removed from the calculation in the month
in which its closure is announced. A new store opening within an approximate two-mile radius of an existing
store with the intention of closing the existing store is included as a replacement store in the comparable store
sales measurement as if it were the same store, but only if, in fact, the existing store is concurrently closed. Sales
increases resulting from existing comparable stores that are expanded in size are included in the calculations of
comparable store sales. Comparable store sales for fiscal 2005 was computed on a 52-week basis by subtracting
one week of sales from the fiscal 2004 (a 53-week year) period.
Gross profit for fiscal 2007 and 2006 continued to improve as a result of changes in Harris Teeter’s market
mix and effective retail pricing and targeted promotional spending programs. Harris Teeter has also realized
benefits from the continued emphasis the company places on distribution and store level productivity efforts,
private label branding, assortment and product mix, in addition to volume increases and increased productivity
in the dairy production facility.
SG&A expenses as a percent to sales for fiscal 2007 decreased from fiscal 2006, as a result of the leverage
created through sales gains that apply against fixed costs. Fiscal 2006 SG&A expenses as a percent to sales
increased from fiscal 2005, primarily as a result of increased new store pre-opening costs along with required