True Value 2007 Annual Report Download - page 23

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2 | TRUE VALUE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
($ in thousands)
believes this will help improve the consistency of consumers’
in-store experience and associated brand value. Management
expects a significant increase in the revenue from new store
openings in 2008 based on the backlog of new stores in process
at the end of 2007. The following charts illustrate the recent
trends of these two elements of product revenue performance.
% CHANGE IN COMP STORE PRODUCT SALES
% REVENUE DECLINE FROM NET MEMBER
ATTRITION
In regard to the level of patronage from True Value members in
2007, approximately one quarter of the stores accounted for
less than 5% of Net revenue. This relationship has been fairly
consistent over the last several years. If True Value were to expe-
rience a significant level of attrition in this quartile of current
members, the financial impact would be insignificant.
GROSS MARGIN %
A key driver of True Value’s profitability is its overall Gross mar-
gin percentage. The Gross margin percentage has steadily
improved since 2004 and is attributable to the net effect of ven-
dor line reviews for hardware products. Vendor line reviews
result in improved product assortment, enhanced wholesale
and retail pricing, increased product sourcing from China and
the continued shifting in the mix 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)
A key focus of management is to continue to reduce True Value’s
cost structure. Management’s actions have included staffing
reductions, debt refinancing and logistics and manufacturing
efficiency improvements. The efficiency improvements made in
2007 were more than offset by inflation and the investments
True Value made in its business to establish the growth platform
for the future. True Value management estimates stable expense
levels in 2008 resulting from further expense reduction, offset
by incremental expense for development of core information
technology systems and retail standards initiatives.
TOTAL YEAR-END DEBT ($ in millions)
Operating and interest expenses include logistics and manufacturing, selling, general and
administrative, member interest and third-party interest expenses.
2004
0%
1.0%
2.0%
3.0%
2.1% 2.2%
1.6%
1.1%
2005 2006 2007
2004
10.0%
10.5%
11.0%
11.5%
12.0%
10.9%
11.3% 11.3%
11.5%
2005 2006 2007
2004
$100
$125
$150
$175
$200
$179 $176
$168 $173
2005 2006 2007
-3.0%
-2.0%
-1.0%
0.0%
-1.9%
-1.0% -1.0% -1.2%
2004 2005 2006 2007
2004
$50
$0
$100
$150
$200
$250
$170
$80
$69
$73
$90 $75 $54
$73
$121
$194
$144
$127
2005 2006 2007
Third-Party Debt Member Debt