True Value 2007 Annual Report Download

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TRUE VALUE COMPANY 2007 ANNUAL REPORT

Table of contents

  • Page 1
    T R U E VA L U E C O M PA N Y 2 0 0 7 A N N U A L R E P O R T

  • Page 2
    T R U E VA L U E C O M PA N Y 3 | 2 0 0 7 ANNUAL R E PO RT

  • Page 3
    ... continue to build and strengthen the True Value brand, we're ensuring our retailers a solid position in the hardware industry for years to come. By working together and putting retail success at the heart of everything we do, we are committed to help make every True Value the best hardware store in...

  • Page 4
    ...Value brand and providing effective local marketing solutions that drive traffic, sales and loyalty. The co-op provides members with regionalized circulars, loyalty marketing through True Value Rewards® and the Marketing Planning Tool to build annual marketing plans. > Price: Demonstrating a value...

  • Page 5
    ... retail sales. In 2007 we added 108 new stores in the United States. Our international business also grew with a handled increase of 13 percent out of warehouse. Twelve existing international members opened new stores, another four members completed major expansions or remodels and three new members...

  • Page 6
    .... To date, more than 1,600 members have implemented the program and experienced an average increase of 2 percentage points in their gross margin. In 2007, True Value continued the simplified ordering system rollout to create a more efficient ordering process. Now retailers can view all open orders...

  • Page 7
    ... of products falling. Improvements to Certified True Blue allow members to expand their assortments based on what's relevant in their market, which translates into increased retail sales and a more compelling shopping experience. To continue building on our commitment to exemplary service, upon...

  • Page 8
    ..., True Value introduced a new online ad builder for turnkey, point-and-click development of local newspaper ads and ï¬,yers. These marketing tools make retailers even more compelling in their local market. To reach a new segment of younger customers, True Value expanded into Internet search-engine...

  • Page 9
    ...the True Value corporate management team. Judging was based on each store's success with the five P's of retailing. Thirteen stores - one from each retail region - were awarded the coveted title. The winners were recognized at the 2008 Spring Market and publicized in a national press release. Jerry...

  • Page 10
    ... the retail hardware industry for years to come. While the layout, color palette, overall lighting and product assortments have been refreshed, the most important constants remain. Behind the doors of each True Value location is a store that reï¬,ects the independence of each of our members. Their...

  • Page 11
    Doug Christener, North Liberty True Value, North Liberty, Iowa FLEXIBILITY A consistent shopping experience helps retailers deliver on customer expectations. It also re- energizes the True Value brand. But the local markets we serve also look to our stores to provide product assortments that meet ...

  • Page 12
    ... center is designed to inspire shoppers and engage DIY enthusiasts. 6 POWER TOOLS True Value's great selection of tools is available in "plug and play" assortments. This allows retailers to pick and choose the right brands for their local markets and meet customer needs. 3 DECORATIVE HARDWARE...

  • Page 13
    ...remodeling or opening a new store, retailers can focus on changes that impact their customers' overall shopping experience. According to Bill Johnson, Johnson's True Value, Groton, Conn., "In six weeks and with no major hiccups along the way, True Value helped remodel our existing location into what...

  • Page 14
    ..., True Value is working to decrease distribution and transportation expenses, improve its inventory capacity and forge stronger supplier relationships to ensure retailers have the right products at the right time. Whether it's stronger marketing plans, adding top national brands or developing a new...

  • Page 15
    ... 2006, its inaugural year. The growth proves these training tools continue to be an important asset to members. " TO DIFFERENTIATE FROM OUR LOCATION THAT SERVES A CONTRACTOR BASE, WE BUILT OUR SECOND STORE USING THE DESTINATION TRUE VALUE FORMAT. THE STORE ENVIRONMENT, LAYOUT AND ASSORTMENTS HELPED...

  • Page 16
    ... Yuma, Ariz., is a shining example. This past year, True Value's Southwest Lumber sponsored a project to build the largest children's playground in its hometown of Yuma. The store donated lumber, building supplies, screws and tarps to the project. But the real nuts and bolts of the project were the...

  • Page 17
    ... True Value embodies the spirit that's deeply rooted in community retailing. The store recently celebrated its 30th anniversary in Buffalo Grove, Ill., and the Zimmermann family (pictured above) was honored with the 2007 Golden Bison Award from the local village board in recognition of the members...

  • Page 18
    ... the co-op's 60th year in business, we're moving full speed on the road to growth. Like our ® retailers, True Value is committed to delivering superior customer service. With a strong brand and locations that strive to be "the best hardware store in town," True Value will continue to hold a solid...

  • Page 19
    ..., Marketing Cathy Anderson, Senior Vice President, Human Resources and General Counsel Fred Kirst, Vice President, Retail and Specialty Businesses Don Deegan, Vice President, Corporate Controller Steve Poplawski, Senior Vice President, Logistics and Supply Chain Management Leslie Weber, Senior...

  • Page 20
    T R U E VA L U E C O M PA N Y 8600 W. Bryn Mawr Ave. | Chicago, IL 60631-3505 | 773.695.5000 www.truevaluecompany.com © 2008 True Value Company 1 | 2 0 0 7 ANNUAL R E PO RT

  • Page 21
    T R U E VA L U E C O M PA N Y 2 0 0 7 F I N A N C I A L R E P O R T

  • Page 22
    ... years, with the exception of 2007, True Value's Net revenue growth has primarily resulted from increases in comparable store product sales to members ("Comp Store Sales"). Primary drivers of Comp Store Sales increases include new products and assortments, and the effects of vendor price increases...

  • Page 23
    ... of product shipped to the members from low gross margin vendor direct sales to higher gross margin sales through True Value's distribution network. OPERATING AND INTEREST EXPENSES ($ in millions) $200 $179 $175 $176 $168 $173 2004 2005 2006 2007 $150 % REVENUE DECLINE FROM NET MEMBER ATTRITION...

  • Page 24
    ... 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 vendors to member stores. In addition, True Value...

  • Page 25
    ... The business policy changes, which reduced the members' cost of doing business with True Value, include full credit on Policy A returned goods, free freight on promotional orders placed in the early order windows and co-op reimbursement for True Value produced circulars. Logistics and manufacturing...

  • Page 26
    ... revenue Paint manufacturing revenue Net Comp Store Sales Change in participating members: Terminated members: Warehouse revenue Vendor-direct revenue Paint manufacturing revenue Net terminated members New members: Warehouse revenue Vendor-direct revenue Paint manufacturing revenue Net new members...

  • Page 27
    ... were lower by $2,658. The development expense was favorable mainly due to lower store merchandising program expenses related to paint and tool shops, lower retail system software expense and lower new store design layout, signage and fixture costs. Arbitration and litigation provisions/(benefits...

  • Page 28
    ... receivable, inventory and accounts payable is at the end of the calendar year. Cash needed to meet accounts payable obligations will be provided by cash generated from collections of accounts receivable and from future sales of inventory. True Value used cash for investing activities in 2007 and...

  • Page 29
    ... or intense competition from chain stores, discount stores, home centers and warehouse stores. Included in the accounts receivable amounts at December 29, 2007, was $31,122 for receivables from True Value Vendors, primarily related to unpaid amounts for annual rebate programs which are based on...

  • Page 30
    ...) $ (460) $ (660) $ 660 2007 2006 Measurement Date Weighted average assumptions: Discount rate Lump sum rate 12/29/2007 12/30/2006 6.00% 5.00% 5.75% 5.50% The assumptions used to determine True Value's net periodic pension cost for all plans were as follows for the years ended: December 29...

  • Page 31
    ...position of True Value Company and its subsidiaries at December 29, 2007 and December 30, 2006, and the results of their operations and their cash ï¬,ows for each of the three years in the period ended December 29, 2007 in conformity with accounting principles generally accepted in the United States...

  • Page 32
    ... that involves management or other employees who have a significant role in True Value's internal control over financial reporting. TRUE VALUE COMPANY Lyle G. Heidemann President and Chief Executive Officer Date: March 5, 2008 David A. Shadduck Senior Vice President and Chief Financial Officer...

  • Page 33
    ... of our Board of Directors. True Value's management, based on their assessment, has concluded that, as of December 29, 2007, True Value's internal control over financial reporting was effective. TRUE VALUE COMPANY Lyle G. Heidemann President and Chief Executive Officer Date: March 5, 2008...

  • Page 34
    ... liabilities and deferred credits: Long-term debt including notes and capital lease obligations, less current maturities Deferred gain on sale leaseback Other long-term liabilities Redeemable nonqualified Class B nonvoting common stock, $100 par value; 186,156 and 195,374 shares issued and fully...

  • Page 35
    ..., For the Years Ended 2007 2006 2005 Net revenue Cost of revenue Gross margin Operating expenses: Logistics and manufacturing expenses Selling, general and administrative expenses Arbitration and litigation provisions/(benefits) (Gain)/loss on sale of assets Other income, net Operating income...

  • Page 36
    ... payable Proceeds from/(payment of) real estate mortgage Increase/(decrease) in revolving credit facility, net Proceeds from sale of Redeemable Class A common stock and subscriptions receivable Purchase of Class A and Class B common stock Increase in non-interest-bearing retail growth notes Net...

  • Page 37
    ... statement No. 158 Total pension liability adjust Balances at and for the year ended December 30, 2006 Net margin Reclass stock presented for redemptions to liabilities Amortization of deferred patronage Patronage dividend Class B stock applied against loss allocation Class A stock purchases Pension...

  • Page 38
    ... provide interest-free loans to members to open new stores or make store expansions. The loans are for a period of ten years and are generally repaid through the members' non Class B common stock portion of the annual patronage dividend. True Value discounts the loan amount using market rates at the...

  • Page 39
    ...each reporting unit (Hardware and Paint manufacturing). This test is completed annually unless significant events necessitate a more frequent test. The test completed at December 29, 2007, used a discount rate of 10% and assumed a modest revenue increase in future years. Rates used to discount cash...

  • Page 40
    ..., True Value's management believes that its allowance for doubtful accounts is adequate with respect to member credit risks. Also, the Certificate of Incorporation and By-Laws specifically provide that True Value may set off its obligation to make any payment to a member for such member's stock...

  • Page 41
    ... LIBOR or prime at True Value's option, plus in either case, an additional amount of interest determined based on a performance-based pricing grid. As of December 29, 2007 and December 30, 2006 this interest rate was 6.5% and 7.2%, respectively. The average all-in rate charged for use of the Bank...

  • Page 42
    ... board of directors. Prior experience indicates that the maturities of a significant portion of the notes due within one year are often extended at the option of the member, for a three-year period, at interest rates established by True Value and substantially equivalent to competitive market rates...

  • Page 43
    ... costs and real estate taxes due to the lessor, where applicable. Capitalized leases expire at various dates and generally provide for purchase options but not renewals. Purchase options provide for purchase prices at either fair market value or a stated value, which is related to the lessor's book...

  • Page 44
    ... is determined annually on the first business day of the year based on the five-year U.S. Treasury bill rate plus 1.0%. For notes issued in 2006, 2007 and 2008 the rate was 5.30%, 5.68% and 4.28%, respectively. In accordance with True Value's By-Laws, True Value first reduces its aggregate stock...

  • Page 45
    ... patronage dividend for the year. True Value's By-Laws and the Internal Revenue Service (the "IRS") require that the payment of at least 20% of patronage dividends be in cash. True Value paid the remainder through the issuance of True Value's Redeemable qualified Class B nonvoting common stock...

  • Page 46
    ... condition, results of operations or cash ï¬,ows of True Value. 9. INCOME TAXES Income tax expense consisted of the following for fiscal years: ($ in thousands) 2007 2006 2005 Current: Federal State Foreign Total current Deferred: Federal State Foreign Total deferred $ - 29 - 29 $ - 54 - 54...

  • Page 47
    ... 30, December 31, ($ in thousands) 2007 2006 2005 Distribution of annual patronage dividend: Patronage dividend payable in cash Issuance of subordinated promissory notes Issuance of Redeemable Class B non-voting common stock Reduction of Loss allocation accounts Total $17,392 8,857 $15,713...

  • Page 48
    ... return on assets Employer contributions Benefit payments Settlements Fair value of plan assets at end of year Reconciliation of funded status: Funded status Items not yet recognized as a component of net pension cost: Prior Service Cost: Prior year balance Current year amortization Current year...

  • Page 49
    ... used to determine True Value's net periodic pension cost for all plans were as follows for the years ended: December 29, December 30, December 31, 2007 2006 2005 Measurement Date 12/30/2006 12/31/2005 12/31/2004 Weighted average assumptions: Discount rate Expected return on assets Rate...

  • Page 50
    ...2010 2011 2012 2013 - 2017 $9,174 8,682 8,299 7,791 7,291 30,484 The assumptions used to determine True Value's pension obligations for all plans were as follows for the years ended: December 29, December 30, 2007 2006 Weighted average assumptions: Discount rate Lump sum rate 6.00% 5.00% 5.75...

  • Page 51
    ...Chicago, Illinois, oil-based paint manufacturing facility to a third party for a purchase price of $10,125. True Value recorded a net gain of $9,080 on the sale. 13. SEGMENT INFORMATION True Value is principally engaged as a wholesaler of hardware and related products and is a manufacturer of paint...

  • Page 52
    ... as follows: ($ in thousands) As of and for the year ended December 29, 2007 Paint Manufacturing and Distribution Consolidated Totals Hardware Net sales to external customers Interest expense Depreciation and amortization Segment net margin Identifiable segment assets Expenditures for long-lived...

  • Page 53
    8600 W. Bryn Mawr Ave. | Chicago, IL 60631-3505 | 773.695.5000 www.truevaluecompany.com © 2008 True Value Company