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%
Over $150,000 15.1 305 11.5% 29.4%
Strategic Account/Overseas Store   111 4.2%  
Company Total   2,650 100.0% 21.9%
         
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%
Over $150,000 14.9 257 10.0% 28.5%
Strategic Account/Overseas Store   87 3.4%  
Company Total   2,566 100.0% 21.4%
         
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%
Over $150,000 15.6 163 6.6% 27.7%
Strategic Account/Overseas Store   71 2.9%  
Company Total   2,453 100.0% 20.0%
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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