True Value 2010 Annual Report Download - page 23

MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operation
2 True Value Company
% CHANGE IN COMP STORE PRODUCT SALES
2007 2008 2009 2010
-8.0%
-4.0%
0%
4.0%
1.1%
-2.1%
0.3%
-7.4%
% REVENUE INCREASE/DECREASE FROM
NET MEMBER ATTRITION
2007 2008 2009 2010
-3.0%
-1.5%
0%
1.5%
-1.2%
0.1%
-1.2%
-2.5%
True Value’s 2010 net member attrition was unfavorable by 1.2%
and was the driver of the revenue decline. The number of partici-
pating stores decreased to 4,701 from 4,905 at the end of 2009,
driving revenue from terminated stores to exceed revenue from
new stores. The negative revenue impact from the net change
in participating stores was in line with management’s expecta-
tions and was less than half of the 2009 decrease. Management
attributes this decline in net member attrition to the continued
difficult overall U.S. economic conditions for small businesses.
In regard to the level of patronage from True Value members
in 2010, 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
experience a significant level of attrition in this quartile of current
members, the financial impact would be insignificant. Historically,
the majority of True Value’s terminated stores have been from
this member quartile.
In 2011, management expects both retail and wholesale comp
store sales to increase due to relatively slow growth in the U.S.
economy, further acceleration in DTV store remodel activity and
an increase in inflation, particularly in the latter half of the year.
This is expected to be partially offset by the revenue impact of
continued unfavorable net member attrition comparable to the
2010 levels.
GROSS MARGIN %
2007 2008 2009 2010
10.2%
10.7%
11.2%
11.7%
12.2%
11.5%
11.3%
12.0%
12.1%
A key driver of True Value’s profitability is its overall Gross margin
percentage. The 10 basis point decrease in the 2010 Gross margin
percentage compared to 2009 was primarily driven by a reduction
in rebates and discounts resulting from lower purchases of inven-
tory relative to the level of purchases in 2009. Raw margin rates for
both handled and direct sales were comparable between years.
OPERATING AND INTEREST EXPENSES ($ in millions)
2007 2008 2009 2010
$100
$125
$150
$175
$200
$174.1 $168.5
$157.6
$158.3
Operating and interest expenses include logistics and manufacturing, selling, general and
administrative (excluding 2008 arbitration gain of $3,007), member interest and third-party
interest expenses.
A key focus of management is to continue to hold the line on True
Value’s cost structure. Over the years, management’s actions have
included staffing reductions, debt refinancing and logistics and
manufacturing efficiency improvements. The efficiency improve-
ments made in 2010 related to increased throughput efficiencies
of the Regional Distributions Centers (RDCs), increased process
efficiencies at the paint manufacturing facility, lower overall cor-
porate staffing levels, as well as tighter cost control in light of
the economic environment and related revenue decline. In 2010,
Selling, General and Administrative (“SG&A”) expense declined
$176 even though strategic investment spending specific to
SG&A increased $3,300. A reduction in bad debt expense was
a key element of the offsetting departmental expense savings.
($ in thousands)