True Value 2009 Annual Report Download - page 17

Management’s Discussion and Analysis
of Financial Condition and Results of Operation
2 True Value Company
In regard to the level of patronage from True Value members in
2009, approximately one quarter of the stores accounted for less
than 5% of Net revenue. This relationship has been fairly consis-
tent over the last several years. If True Value were to experience
a significant level of attrition in this quartile of current mem-
bers, the financial impact would be insignificant. Historically,
the majority of True Value’s terminated stores have been from
this member quartile.
In 2010, management expects to partially offset the level of rev-
enue reduction from net member attrition by opening more new
stores and completing more store expansions and remodels
through DTV growth incentives. However, given the uncertainty
of the depth and length of the current economic recession, it is
difficult to predict total revenue for 2010.
GROSS MARGIN %
A key driver of True Value’s profitability is its overall Gross margin
percentage. The 80 basis point increase in the 2009 Gross mar-
gin percentage compared to 2008 was primarily driven by True
Value no longer absorbing a portion of the product delivery costs
to the members in 2009 and lower sales of color centers result-
ing in a lower amount of subsidy to the members.
OPERATING AND INTEREST EXPENSES ($ in millions)
A key focus of management is to continue to hold the line on True
Value’s cost structure. Management’s actions have included staff-
ing reductions, debt refinancing and logistics and manufacturing
efficiency improvements. The efficiency improvements made in
2009 related to increased throughput efficiencies of the Regional
Distributions Centers (RDCs), lower labor and benefit costs, and
lower average interest rates, as well as tighter costs control in
light of the economic recession.
TOTAL YEAREND DEBT ($ in millions)
Debt, shown above, includes all third-party debt and all subordi-
nated member debt. In 2009, from mid November through the
end of the fiscal year, True Value had no outstanding borrow-
ings on the bank line. Daily average borrowings on the bank line
declined to $44,896, down $32,967 or 42.3%, from $77,863 in 2008.
OPERATIONS
True Value’s primary source of revenue is derived from the 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 ven-
dors to member stores. In addition, True Value realizes revenue
for services provided to members primarily related to advertis-
ing and transportation fees.
Costs of revenue include acquisition cost of merchandise (net of
discounts and vendor incentives), warehousing and transportation
costs, manufacturing costs for paint, purchasing, and costs related
to advertising and other services. Selling, general and adminis-
trative (“SG&A”) costs include headquarter and field personnel
expenses, as well as marketing and information technology costs.
The success of True Value is dependent upon continued sup-
port from its members in the form of purchases of merchandise
and services for their retail and/or industrial distribution outlets.
Risk factors that could have a significant negative effect on True
Value’s profitability include significant declines in membership,
declines in the levels at which members purchase merchandise
and services from True Value, increases in market share of the
various other entities that compete in the hardware industry or
a continued decline in the general U.S. economy.
2006 2007 2008 2009
11.2%
10.7%
10.2%
11.7%
12.2%
11.3% 11.3%
11.5%
12.1%
Operating and interest expenses include logistics and manufacturing, selling, general and
administrative (excluding 2008 arbitration gain of $3,007 and 2006 arbitration and litigation
gains of $5,745), member interest and third-party interest expenses.
2006 2007 2008 2009
$150
$125
$100
$175
$200
$167.9 $173.8 $168.2
$157.9
2006 2007 2008 2009
$100
$50
$0
$150
$200
$144.5
$69.6
$74.9
$127.1
$72.6
$54.5
$141.2
$121.5
$82.0
$97.5
$59.2
$24.0
Third-Party Debt Member Debt
($ in thousands)