True Value 2007 Annual Report Download - page 22

2007 FINANCIAL REPORT | 1
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
($ in thousands)
OVERVIEW
In 2007, True Value Company (“True Value”) passed a significant
milestone in achieving its mission “to be a world-class whole-
saler with a strong retail focus, growing profitably.” True Value
launched Destination True Value (“DTV”) at its fall market in
October. DTV is True Value’s first complete retail store model. It
encompasses not only interior and exterior signage and décor,
but complete merchandise assortments for small, medium and
large format stores. DTV provides the membership with very
clear direction for an updated, on-trend, relevant, and both
male- and female-friendly hardware store. DTV, in conjunction
with company offered financial incentives launched in 2006,
creates True Value’s growth platform for the future. This strategy
is designed to reverse member attrition and to increase the pro-
ductive retail space of member stores. Management launched
the multi-year retail growth program to provide financial incen-
tives for opening additional stores, or expansion or remodeling
of existing stores. These financial incentives obligate the appli-
cable members to adhere to certain retail standards, including
minimum retail square footage per store.
Over the past several 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 passed on to the membership. These increases were
partially offset by declines from net member attrition. In 2007,
Comp Store Sales continued to grow; however, the revenue
impact of net member attrition more than offset the Comp Store
Sales increase. In 2008, management expects to decrease the
level of revenue reduction from net member attrition by open-
ing more new stores and completing more store expansions and
remodels through growth incentives and DTV. However, given
the expected economic environment, comp store sales growth,
if any, will be modest in 2008.
In 2005 and 2006, Net margin was skewed by several unusual
or nonrecurring items. In 2005, True Value recorded an $18,200
arbitration provision related to the E&Y matter (see Note 8,
“Commitments and Contingencies – Claims Against Ernst &
Young LLP,” to the Consolidated Financial Statements) and a
net gain of $8,200 from the sales of a manufacturing facility and
a distribution facility (see Note 13, “Asset Sales” to the Consoli-
dated Financial Statements). In 2006, True Value recorded $5,745
in reductions to arbitration and legal reserves, primarily due to
changes related to the E&Y matter, and $4,166 in one-time net
gains from changes in various employee benefit plans, primarily
the freezing of the qualified pension plan (see Note 11, “Benefit
Plans” to the Consolidated Financial Statements). The following
illustrates Net margin results for the last three years, as reported,
and excluding the above unusual items.
NET MARGIN ($ in millions)
After accounting for the net impact of the unusual or nonrecur-
ring items, Net margin has increased modestly over the last
two years.
Management expects modest Net revenue growth in 2008 and
a slight decline in Net margin due to additional investments in
the business and further fee reductions to members that are
anticipated to more than offset efficiency improvements in the
operations of the business.
Management utilizes a variety of key performance measures to
monitor the financial health and performance of True Value’s
business. These measures are Comp Store Sales and net
member attrition (two drivers of Net revenue), gross margin per-
centage, operational/interest expense and debt levels.
NET REVENUE ($ in millions)
In each of the last four years, True Value has experienced an
increase in Comp Store Sales. Revenue from net member attri-
tion experienced a decline, which partially offset the increase in
Comp Store Sales except for 2007, when the decline in revenue
from net member attrition exceeded the increase in Comp
Store Sales. This was in part due to a change in True Value’s
long-term growth plan to focus primarily on increasing the num-
ber of stores with at least 8,500 square feet of retail space by
adding new stores or expanding existing stores. Management
$80.0
$60.0
$40.0
$20.0
2005 2006 2007
$ 5 7. 6
$72.8
$63.8
$ 4 7. 6
$62.9
As Reported Excluding Unusual or Nonrecurring Items
2004
$2,000
$2,020
$2,040
$2,060
$2,024
$2,043
$2,050
$2,041
2005 2006 2007