Harris Teeter 2008 Annual Report Download - page 23

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evaluates its existing store operations in regards to its overall business strategy and from time to time will close
or divest older or underperforming stores. In addition, management continues to evaluate Harris Teeter’s capital
expenditures during these times of economic uncertainty and adjusts its strategic plan accordingly.
The new store program for fiscal 2009 anticipates the continued expansion of Harris Teeter’s existing
markets, including the Washington, D.C. metro market area which incorporates northern Virginia, the District of
Columbia, southern Maryland and coastal Delaware. Real estate development by its nature is both unpredictable
and subject to external factors including weather, construction schedules and costs. Any change in the amount
and timing of new store development would impact the expected capital expenditures, sales and operating
results.
Startup costs associated with opening new stores under Harris Teeter’s store development program can
negatively impact operating margins and net income. In the current competitive environment, promotional costs
to maintain market share could also negatively impact operating margins and net income in future periods. The
continued execution of productivity initiatives implemented throughout all stores, maintaining controls over
waste, implementation of operating efficiencies and effective merchandising strategies will dictate the pace at
which Harris Teeter’s operating results could improve, if at all.
A&E has been able to diversify its customer base, product mix and geographical locations through
acquisitions and joint venture agreements completed in recent years. In addition, A&E continues to increase its
investment in China and India to support the rapidly growing apparel production in these regions and to become
more Asian-centric. A&E will find it difficult to generate significant improvements in profitability in the absence
of a more favorable retail environment. A&E management continues to focus on providing best-in-class service
to its customers and expanding its product lines throughout A&E’s global supply chain. In addition, management
continues to evaluate ways to further rationalize A&E’s U.S. operations and to evaluate its structure to best
position A&E to take advantage of opportunities available through its enhanced international operations.
The Company’s management is cautious in its expectations for fiscal 2009 due to the current economic
environment and its impact on our customers. The Company will continue to refine its merchandising strategies
to respond to the changing shopping demands as a result of the challenging economic environment. The retail
grocery market remains intensely competitive and the textile and apparel environment faces additional challenges
during this recessionary period. Further operating improvement will be dependent on the Company’s ability
to increase Harris Teeter’s market share, rationalize A&E’s operations, offset increased operating costs with
additional operating efficiencies, and to effectively execute the Company’s strategic expansion plans.
Capital Resources and Liquidity
The Company is a holding company which, through its wholly-owned operating subsidiaries, Harris
Teeter and A&E, is engaged in the primary businesses of retail grocery and the manufacturing and distribution
of industrial thread, technical textiles and embroidery thread, respectively. The Company has no material
independent operations, nor material assets, other than the investments in its operating subsidiaries, as well
as investments in certain fixed assets, cash equivalents and life insurance contracts to support corporate-wide
operations and benefit programs. The Company provides a variety of services to its subsidiaries and is dependent
upon income and upstream dividends from its operating subsidiaries. There are no restrictions on the subsidiary
dividends, which have historically been determined as a percentage of net income of each subsidiary.
The Company’s principal source of liquidity has been cash generated from operating activities and
borrowings available under the Company’s credit facility. During fiscal 2008, the net cash provided by operating
activities was $227.2 million, compared to $212.6 million during fiscal 2007 and $159.7 million during fiscal
2006. Investing activities during fiscal 2008 required net cash of $226.2 million compared to $204.8 million
during fiscal 2007 and $229.2 million during fiscal 2006. Capital spending has been financed by cash provided
by operating activities along with borrowings under the Company’s credit facility. Financing activities for
fiscal 2008 provided $2.0 million of cash and included an additional $38.0 million of borrowings under the
Company’s credit facility ($100 million term loan less net reduction on revolver borrowings of $62.0 million) and