PROFIT DRIVERS OF OUR BUSINESS
We grow our profits by continuously working to grow sales and to improve our relative profitability. We also grow our profits by allowing our inherent profitability to shine through – we refer to this as the 'pathway to profit'. The distinction is important.
We achieve improvements in our relative profitability by increasing our gross margin, by structurally lowering our operating expenses, or both. We advance on the 'pathway to profit' by increasing the average store size (measured in terms of monthly sales), and by allowing the changing store mix to improve our profits. This is best explained by comparing the varying profitability of our 'traditional' stores in the table below. The average store size for the group, and the average age, number of stores, and pre-tax earnings data by store size for the third quarter of 2012, 2011, and 2010, respectively, were as follows:
|Sales per Month||Average Age (Years)||Number of Stores||Percentage of Stores||Pre-Tax Earnings Percentage|
|Three months ended September 30, 2012||Average store sales = $88,337|
|$0 to $30,000||4.2||252||9.5%||-14.2%|
|$30,001 to $60,000||7.3||795||30.0%||12.7%|
|$60,001 to $100,000||10.0||767||28.9%||22.2%|
|$100,001 to $150,000||12.0||420||15.8%||25.7%|
|Strategic Account/Overseas Store||111||4.2%|
|Three months ended September 30, 2011||Average store sales = $82,724|
|$0 to $30,000||3.5||319||12.4%||-12.6%|
|$30,001 to $60,000||7.0||816||31.8%||13.3%|
|$60,001 to $100,000||9.4||712||27.7%||22.4%|
|$100,001 to $150,000||11.7||375||14.6%||26.5%|
|Strategic Account/Overseas Store||87||3.4%|
|Three months ended September 30, 2010||Average store sales = $71,603|
|$0 to $30,000||3.8||414||16.9%||-11.0%|
|$30,001 to $60,000||6.8||893||36.4%||13.2%|
|$60,001 to $100,000||9.4||590||24.1%||22.7%|
|$100,001 to $150,000||11.8||322||13.1%||26.0%|
|Strategic Account/Overseas Store||71||2.9%|
|Note – Amounts may not foot due to rounding difference.|
When we originally announced the 'pathway to profit' strategy in 2007, our goal was to increase our pre-tax earnings, as a percentage of sales, from 18% to 23%. This goal was to be accomplished by slowly moving the mix from the first three categories ($0 to $30,000, $30,001 to $60,000, and $60,001 to $100,000, these groups represented 76.5% of our store base in the first three months of 2007, the last quarter before we announced the 'pathway to profit') to the last three categories ($60,001 to $100,000, $100,001 to $150,000, and over $150,000, these groups represented 56.3% of our store base in the third quarter of 2012) and by increasing the average store sales to approximately $125,000 per month. The weak economic environment in 2009 caused our average store size to decrease, and consequently lowered our level of profitability; however, subsequent to this period we improved our gross margin and structurally lowered our operating expenses. This improvement allowed us to amplify the 'pathway to profit' and effectively lowered the average store size required to hit our 23% goal. Today we believe we can accomplish our 'pathway to profit' goal with an average store size of approximately $100,000 to $110,000 per month.
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