True Value 2010 Annual Report Download - page 22

MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operation
Financial Report 2010 1
Overview
Fiscal year 2010 was a year of stabilization of comparable store
product sales to members (“Comp Store Sales”) and a transition
to a favorable trend in year-over-year quarterly revenue perfor-
mance. True Value also benefited from continued acceleration
in the roll out of the Destination True Value (“DTV”) retail store
format, further cost control, improved fill rates and a significant
increase in investment spending.
The U.S. economy, while still under pressure, began to show
signs of economic recovery. The unemployment rate declined
modestly, though it remained well over 9% throughout the year.
Consumer spending began to inch up, particularly in the fourth
quarter, though still in a value conscious manner. The growth of
stores converting to the DTV format had an even greater posi-
tive impact on overall sales. All of these factors helped stabilize
Comp Store Sales in 2010. Retail comp store sales of True Value
supplied stock keeping units (“SKU’s”), for the over 1,500 report-
ing members, was up 0.3%. True Value’s total wholesale Comp
Store Sales were up 0.3%, as well. Net revenue for True Value
declined a modest $19,307, or 1.1% to $1,804,018 from $1,823,325
in 2009. The decline was entirely driven by net member attrition.
True Value’s financial position continued to strengthen in 2010,
building on its 2009 improvement. Equity increased and True
Value issued a patronage dividend at a level consistent with the
prior four years. The cash portion of the dividend remained at
2009’s elevated level of 40%. True Value continued to lessen its
dependence on its $250,000 revolving credit facility (“Bank Facil-
ity”). True Value did not use the Bank Facility for 140 days in 2010
compared to 59 days in 2009, and zero days in 2008 and prior
years. Additionally, the average daily borrowings on the Bank
Facility decreased to $15,290 in 2010 from $44,896 in 2009. The
Bank Facility was amended and extended for another five-year
term on November 2, 2010. All in all, True Value has strengthened
its financial position through this difficult economic period.
Armed with a strong financial condition and a focus on its members
and their retail businesses, True Value’s management expanded
its level of support through enhanced programs, new retail tools
and cash flow assistance. A variety of consumer facing initiatives
were developed or launched in 2010, including E-commerce,
on-line circulars, a store-specific customer feedback program as
well as the continued development of the redesigned True Value
Rewards (a customer loyalty program). In addition, management
announced an enhancement to the DTV remodel funding program
in September. Addressing the current void in the small business
lending arena, True Value began offering loans up to 100% of the
costs for approved store remodels. This helped fuel an increase
in the initiation of DTV projects within the membership in the
latter part of the year. In 2010, 892,000 square feet of DTV format
retail space was implemented, as either a remodel, relocation,
expansion or a new store. That was almost double the amount
of DTV square footage implemented in 2009.
True Value’s profit for 2010 was $60,716, down $4,730 or 7.2%
compared to $65,446 in 2009. The entire profit decline was essen-
tially driven by the planned increase in investment spending, as
outlined above. The negative profit impact of $2,778 from the
revenue decline and the increased fuel costs of $1,911 on the
delivery of product sold through the distribution network, that
True Value opted to absorb rather than pass it on to the members,
were mostly offset by expense reductions of $4,559.
Management utilizes a variety of key performance measures to
monitor the financial health and performance of True Value’s
business. These measures are members’ comparable store sales
at retail (“retail comp store sales”), comparable store product
sales to members (“wholesale comp store sales”) and net mem-
ber attrition (drivers of Net revenue), gross margin percentage,
operational/interest expenses and debt levels.
NET REVENUE ($ in millions)
2007 2008 2009 2010
$0
$700
$1,400
$2,100 $2,041 $2,013
$1,804
$1,823
Net revenue declined in 2010 by $19,307, or 1.1%, a significant
improvement from the 9.4% decline in 2009. The largest driver of
the improvement was the stabilization of wholesale comp store
sales, which were up $4,965, or 0.3%. The wholesale comp store
sales performance matched the core domestic members’ retail
comp store sales increase of 0.3%. Both retail and wholesale
comp store sales increased dramatically in the fourth quarter.
While quarterly revenue performance declined in 2009, it reversed
course in 2010. First quarter revenue was down 3.2%, down
2.4% in the second quarter, down 0.4% in the third quarter and
up 2.5% in the fourth quarter of 2010. True Value’s performance
was directionally consistent with the overall U.S. retail results.
($ in thousands)