Supply Chain Metrics That Mater - A Focus on Retail - 25 APR 2018

A Focus on Retail
A Seven-Year View of Progress on Supply Chain Excellence
04/25/2018
By Lora Cecere
Founder and CEO
Supply Chain Insights LLC
and Samuel Borthwick
Research Associate
Supply Chain Insights LLC
Supply Chain Metrics That Matter

Contents
Research
Open Content
Disclosure
Executive Summary
A Closer Look at the Sector
Progress Versus Other Industries
A Closer Look at Retailers’ Growth
Value
Performance
Cash-To-Cash Cycles
Recommendations
Conclusion
Industry Focus
Appendix
Other Reports in This Series
About Supply Chain Insights LLC
About Lora Cecere
About Sam Borthwick
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Research
Supply Chain Metrics That Matter is a series of reports published throughout the year by Supply
Chain Insights LLC. Each report in the series is a deep analysis of supply chain performance within
an industry or sector. This report focuses on the Retail sector for the period of 2010-2016. Here we
analyze the trade-offs to balance growth, profitability, cycles and complexity.
Within the world of supply chain management, each industry is unique. It is dangerous to list them all
in a spreadsheet and declare a supply chain leader. Instead, we believe supply chain excellence
needs to be evaluated based on a balanced portfolio of metrics, over time, within a peer group. In this
series of reports, we analyze the potential of a supply chain peer group and give recommendations
based on general market trends.
Open Content
This report is shared using the principles of Open Content research. It is intended for you to read,
share, and use to improve your supply chain decisions. Please share this data freely within your
company and across your industry. All we ask for in return is attribution when you use the materials in
this report. We publish under the Creative Commons License Attribution-Noncommercial-Share Alike
3.0 United States and you will find our citation policy here.
Disclosure
Your trust is important to us. As such, we are open and transparent about our financial relationships
and our research process. This independent research is 100% funded by Supply Chain Insights.
These reports are intended for you to read, share, and use to improve your supply chain decisions.
Please share this data freely within your company and across your industry. All we ask for in return is
attribution when you use the materials in this report. We publish under the Creative Commons
License Attribution-Noncommercial-Share Alike 3.0 United States and you will find our citation policy
here.

Executive Summary
The last decade, with the evolution of e-commerce and the proliferation of differentiated retail formats,
redefined shopping. In the process, power shifted from the traditional retailer to the consumer with a
focus on value. Consumer insights and the translation of purchase to replenishment strategies
defined success.
Over this same period, retail segments specialized, resulting in very different models. The more
aggressive the alignment of the retail format the better the financial results. As will be seen in this
report, as the segments proliferated the differences in performance in retail, they became more
distinctive. Today, retail is not retail. Each retail segment has a very different pattern of financial
results. Here we share the results of the Apparel, Broadline, Drug, Home Improvement and Food
retailers for the period of 2010-2016.
Table 1. Industry Overview of Trends for the Period of 2010-2016
In general, retailers drove more improvement in supply chain fundamentals than manufacturers.
While the industry talked about collaboration between retailers and manufacturers, there was more
talk than actionable results. In this report, we take a detailed look at elements of the metrics portfolio,
and then wrap up with insights on a cash-to-cash analysis to help the reader understand the retail
segments.

A Closer Look at the Sector
When we first started the research on the Supply Chain Metrics That Matter report series, we
believed that through the combination of an investment in technology, people, and process,
companies could drive improvement in inventory turns and operating margin as shown in Figure 1.
While this is not the case for 90% of companies, as will be seen in this report, several retailers did
drive competitive advantage. This includes Dollar General Corporation, Dollar Tree, Inc., and The
TJX Companies Inc, and Sundrug Company, Ltd.
Figure 1. Driving Performance Improvement
To understand supply chain excellence, let’s look at year-over-year patterns in metric performance as
visualized in orbit charts. Supply chain improvement takes at least three years, and often
performance improvement can take over five years.
To understand the orbit chart methodology, let’s examine Figure 2. Here the performance of Target
Corporation (Target) and Wal-Mart Stores, Inc. (Walmart) is charted year-over-year at the intersection
of inventory turns and operating margin. The patterns are used to define supply chain excellence.
Supply chain leaders make linear progress towards the best scenario, while laggards are unable to
redefine supply chain strategies to drive performance improvements. This is the case for both
retailers. As can be seen in Figure 2, the average operating margin for Target for the period of 2004-

2016 is 7%, while Walmart is lower at 6%. Inventory turns for Target are 6.23 versus 8.11 for
Walmart. Neither of these retail giants were able to power the combination of margin and inventory
through year-over-year execution to the best scenario. Walmart drove a strategy of higher inventory
turns while Target focused on margin. Neither drove success in performance metrics for the period of
2004-2016.
Figure 2. Orbit Chart of Target and Walmart
The patterns tell the story. It is a story of year-over-year metrics changes. The tight pattern of
continuous improvement defines the winner in resiliency, while the upward trend defines
improvement. Both Target and Walmart lack the direction of continuous improvement; however, the
tight coil in their path shows that they are extremely consistent. Both companies are very large and
extremely established, meaning that supply chain improvement will be harder to obtain.

Patterns of supply chain metrics come in many different forms. Note that in Figure 3, CVS Health
Corporation (CVS Pharmacy) is performing at a higher level of value than Walgreens Boots Alliance,
Inc., with an operating margin of 6% and inventory turns of 7.60, but there is a lack of resiliency. The
metrics pattern is more variable in Drug retail than that shown for Broadline retail in Figure 2. In
Figure 3, both retailers are driving inventory improvements, but are unable to drive improvements in
margin.
Figure 3. Orbit Chart of CVS Pharmacy and Walgreens Boots Alliance

In a similar manner, note the patterns of The Home Depot, Inc. (Home Depot) and Lowe's
Companies, Inc (Lowe’s) in Figure 4. While Home Depot shows improvement, both companies show
wide swings on the orbit chart, representing a lack of consistency and the inability to be resilient. It is
common for companies in this industry to have such wide swings due the amount of volatility
associated with the building sector.
Figure 4. Orbit Chart of The Home Depot and Lowe’s Home Improvement

Look at Figure 5 and observe how The Gap, Inc (The Gap, Gap), a leading clothing retailer, has a
tightly coiled pattern. While it made a slight regression from 2004 to 2016, the tightly coiled pattern
shows consistency in execution. This is common for large cap companies with strong cooperate
structure. Abercrombie & Fitch (A&F), on the other hand, has wide swings and is inconsistent in their
practices.
Figure 5. Orbit Chart of Abercrombie & Fitch and The Gap

In Figure 6 both The Kroger Company (Kroger) and Carrefour S.A. (Carrefour) show wide swings and
deviate greatly from their perspective averages. In Food retail, this is common, as consumer demand
is constantly changing, and keeping inventory turns consistent is virtually impossible.
Figure 6. Orbit Chart of Kroger and Carrefour
The takeaway? Each Retail sector is very different. Traditional retail giants are making more
improvement in inventory turns than margin.

Progress Versus Other Industries
The Supply Chains to Admire methodology, and the Supply Chain Metrics That Matter research,
rewards companies that show improvement while outperforming their peer groups. Companies with
tight upward patterns at the intersection of the metrics are highlighted as winners, while companies
with wide swings and backward progression are penalized.
To help companies understand supply chain excellence through the insights of orbit chart
performance, we developed the Supply Chains to Admire analysis. An overview of the methodology is
shared in Figure 7, and the 2017 results are shown in Figure 8, with a more complete analysis
available in the full Supply Chains to Admire 2017 report. In the Retail sector, Dollar General
Corporation, Dollar Tree, Inc., Sundrug Company, Ltd., and TheTJX Companies, Inc. all met the
criteria required to be a winner in the 2017 Supply Chains to Admire.
Figure 7. Overview of the Supply Chains to Admire Analysis

Figure 8. Winners of the 2017 Supply Chains to Admire Analysis

A Closer Look at Retailers’ Growth
The Great Recession affected different types of retailers in different ways. Apparel retailers suffered
during that time as average revenue growth dropped from 17% to 7% (see Table 2). Luxury goods
had less appeal for the value-conscious shopper. As seen in Tables 4 and 5, this is not the case
within Drug and Home Improvement retailers. While the average revenue growth for Broadline
retailers dropped from 15% to 9% during the Great Recession, average growth for Walmart, the
premiere Broadline retailer, only dropped from 10% to 9%. Average growth for Drug retailers dropped
very slightly from 18% to 15% during the recession. The Home Improvement sector was relatively
unaffected by the recession, as average growth dropped from 21% to 20%. Growth in the Food sector
went down from 13% to 5% during the 2004-2016 period. This is surprising because Food retailers
are one of the best equipped sectors to survive tough economic times.
Table 2. Growth and the Supply Chain Index: Apparel Retailers

Table 3. Growth and the Supply Chain Index: Broadline Retailers
Table 4. Growth and the Supply Chain Index: Drug Retailers
Table 5. Growth and the Supply Chain Index: Home Improvement Retailers

Table 6. Growth and the Supply Chain Index: Food Retailers
The Supply Chain Index is a ranking of supply chain improvement—companies are ranked in order of
metrics improvement at dual intersections of inventory turns and operating margin, and return on
invested capital and growth. In many industries, growth and supply chain improvement are tightly
coupled. However, this is not the case in the Retail sector. (For more on the Supply Chain Index,
reference the Appendix.)

Value
Traditional supply chain leaders focus on costs, not on value. One of the reasons is that there is no
industry-standard definition for value. To try to drive change, here we share the results on two value
metrics: market capitalization and Price to Tangible Book Value (PTBV). Overall, for the retail sector,
the PTBV values are low. Note that in Table 10 the average market cap for Home Improvement
retailers decreased by over 66% during the Great Recession.
Table 7. Market Capitalization and Price to Tangible Book Value for Apparel Retailers
Table 8. Market Capitalization and Price to Tangible Book Value for Broadline Retailers

Table 9. Market Capitalization and Price to Tangible Book Value for Drug Retailers
Table 10. Market Capitalization and Price to Tangible Book Value for Home Improvement Retailers
Table 11. Market Capitalization and Price to Tangible Book Value for Food Retailers

Performance
While growth in the Retail sector has dropped at various degrees among its segments, the story in
the rest of the Supply Chain Metrics That Matter in this sector is one of stagnation. There is a slight
improvement on return on invested capital, but by and large, Retail is at a stalemate with only a few
companies able to drive metrics performance.
As you scan Tables 12 through 16 and look at the averages throughout 2004-2016, you will see that
most companies maxed out their supply chain performance with their current infrastructure and will
need to adopt new practices to see additional improvement. The leaders will aggressively adopt new
forms of analytics and drive digital innovation, while the laggards will become great case studies
detailing the failure of supply chain strategies in companies like Designer Shoe Warehouse, Inc.
(DSW), Sears, Roebuck and Company (Sears), and Toys R’ Us. The courage to align retail formats to
buying segments and redefine supply chain strategies drove success.
Table 12. Performance and Improvement for Apparel Retailers

Table 13. Performance and Improvement for Broadline Retailers
Table 14. Performance and Improvement for Drug Retailers
Table 15. Performance and Improvement for Home Improvement Retailers

Table 16. Performance and Improvement for Food Retailers
The most dramatic change for Retail is in the shift of the cash-to-cash metric. When the cash-to-cash
value is low, the need for working capital is reduced. In this period, while most industries improved
cash-to-cash, this was not the case for Retail. This shift for Retail was driven by the shortening of
days of receivables.
Cash-To-Cash Cycles
Cash-to-cash is a compound metric that combines Days of Receivables, Days of Inventory, and Days
of Payables. The formula is:
𝐶𝑎𝑠ℎ − T𝑜 − 𝐶𝑎𝑠ℎ = 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 + 𝐷𝑎𝑦𝑠 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
In Tables 17 through 21, we share the impact of supply chain decisions on the components of cash-
to-cash. While there is some improvement in Drug and Food retailing, most of the improvement is
from financial reengineering via the elongation of payables, versus the improvement of receivables
and inventories.
Table 17. Impact on Cash-to-Cash Elements for Apparel Retailers

Table 18. Impact on Cash-to-Cash Elements for Broadline Retailers
Table 19. Impact on Cash-to-Cash Elements for Drug Retailers
Table 20. Impact on Cash-to-Cash Elements for Home Improvement Retailers
Table 21. Impact on Cash-to-Cash Elements for Food Retailers

Recommendations
In evaluating supply chain performance, it is important to look at trends within a peer group over time.
As can be seen in this report, a retailer is not a retailer, each retail segment operates at a very
different potential. A focus on procurement, cost containment, and continuous improvement drove the
Retail sector. Few companies delivered on a balanced scorecard. As a result, Retail is stuck, and
even going backwards in margin. As companies study supply chain excellence and corporate
performance, we recommend that supply chain leaders:
1) Build a Guiding Coalition to Drive Improvement Based on Industry-Specific Data.
Organizations should benchmark companies within an industry or sector. Each has unique rhythms
and cycles. As a result, supply chain excellence analysis needs to be within an industry.
2) Understand Supply Chain Potential and Orchestrate Trade-offs on the Effective Frontier. The
supply chain is a complex system, with interrelated metrics, with nonlinear relationships. Supply
chain leadership teams should analyze the total portfolio of metrics and study progress at the
intersections of the Effective Frontier (see Figure 7). Growth has the highest correlation to market
capitalization. Companies with higher performance are using more advanced analytics to plan
outcomes and design the supply chain.
Figure 7. The Supply Chain Effective Frontier
3) Apply Systems Theory. Teams should evaluate performance over time to understand
improvement, while realizing they are managing a complex system. The functions should be
aligned to a balanced portfolio of metrics representing the Effective Frontier, while functional

metrics should be focused on improving reliability (e.g., first-pass yield, hands-free orders, and
supplier quality, etc.).
4) Focus on Building Value Networks. While many of these companies could be a powerbroker in
the industry to redefine outside-in processes, all companies are accepting the limitations of the
inside-out supply chain. They operate functional silos with a traditional supply paradigm. The
traditional focus on Lean is not sufficient. This is an opportunity for the industry.
5) Learn from Other Industries. Use a Steady Hand/Focused Leadership to Drive Improvement.
To make the necessary improvements, companies today must move past an “ERP-centric view”
and build outside-in processes with a focus on value-based outcomes. Network design, supply
chain planning, and revenue management are opportunities for process excellence. The Retail
sector should turn to the high-tech industry to benchmark and drive innovation.
Conclusion
The story of the Retail is a story of survival and stagnation. With the rise of Amazon, retailers are
having to adjust to either compete, or work in conjunction with new trading partners in the value chain
and redefine service. To drive growth and better performance on the balance sheet, new forms of
analytics along with blockchain and Internet of Things can redefine supply chain performance; but this
requires companies to realize that traditional processes resulted in stagnation and build a guiding
coalition to aggressively adopt digital strategies.

Industry Focus
To get a flavor for the Retail sector, we combed through annual reports to consolidate supply chain
related trends. This allows the reader to “hear the voice of the industry.” Supply chain and
procurement in Retail are often used interchangeably. Consumer spending is the lifeblood of Retail.
In the annual reports, note the focus on supply, risk management, corporate social responsibility, and
improving procurement processes.
2014
Costco Wholesale Corporation
Fiscal 2014 was a great year for Costco! For the fifth consecutive year, sales and profits increased to record
levels. Sales exceeded $110 billion, and net income totaled $2.06 billion, or $4.65 per share. Our cash flow
was strong; and over $900 million was returned to shareholders in the form of dividends ($584 million) and
share repurchases ($334 million). Significantly, these results were achieved in an increasingly competitive
retail environment. We remain optimistic about Costco’s future and continue to invest heavily in growing our
businesses in the U.S. and around the world. The average annualized sales of the thirty new warehouses
opened during the year was our highest ever – coming in at $108 million per location. Average annual sales of
all (663) warehouses also reached an all-time high – at $164 million per warehouse; and 165 locations
generated annual sales greater than $200 million. Of these, 60 warehouses exceeded $250 million in annual
sales – including two with sales in excess of $400 million! The success of our private label Kirkland
Signature™ products continues in both our domestic and international markets, and now approximates 25% of
our global sales. Some key Kirkland Signature™ introductions this year were in our apparel department –
men’s khaki and five-pocket pants, and a ladies soft shell top. Several new food items were also introduced,
including microwave popcorn, chunk light tuna, organic lemonade, organic honey, organic strawberries, and
lactose-free milk.1
Lowe's Companies, Inc.
In 2014, we delivered another year of solid performance with 4.3 percent comps as our transformation gained
momentum and the housing market and broader economy continued to recover. Sales growth, combined with
our focus on improving productivity and profitability, led to an 18.0 percent increase in net earnings, a 26.6
percent increase in earnings per share and a 243 basis points increase in Return on Invested Capital to 13.9
percent. While we are pleased with the progress we made this year, we seek to improve further. In fact, we
continue to invest in our core U.S. retail business and in adjacent home improvement businesses that position
Lowe’s favorably within a changing home improvement landscape. We have anchored our U.S. strategy in two
key areas that will deliver value to customers, employees and shareholders. First, we are enhancing our
relevance to customers through omni-channel retailing. Customers want to move from channel to channel, and
they want the transition between channels to be simple and seamless. They do not know that the website they
visited was built in Mooresville, NC, that the person addressing their questions on the phone is sitting in our
contact center in Albuquerque, NM, or that the item they just purchased will be shipped from one of our
distribution centers to the Lowe’s store near their home. To the customer, it is all Lowe’s, and we have to be
with them every step of the way—no matter how many steps they take. We have made great progress over the
past few years to meet customers on their terms, whenever and wherever they choose to engage. We expect
to begin rolling out additional omni-channel capabilities in 2015.2
1
Annual Report 2014, January 2015, p. 2, http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-reportsannual, accessed March 19, 2018
2
Lowe’s Never Stop Improving 2014 Annual Report, March 2015, p. 1, http://phx.corporate-ir.net/phoenix.zhtml?c=95223&p=irol-reportsannual,
accessed March 19, 2018

CVS Health Corporation
In July 2014, the Company and Cardinal Health, Inc. (“Cardinal”) established Red Oak Sourcing, LLC (“Red
Oak”), a generic pharmaceutical sourcing entity in which the Company and Cardinal each own 50%. The Red
Oak arrangement has an initial term of ten years. Under this arrangement, the Company and Cardinal
contributed their sourcing and supply chain expertise to Red Oak and agreed to source and negotiate generic
pharmaceutical supply contracts for both companies through Red Oak; however, Red Oak does not own or
hold inventory on behalf of either company. No physical assets (e.g., property and equipment) were
contributed to Red Oak by either company and minimal funding was provided to capitalize Red Oak. The
Company has determined that it is the primary beneficiary of this variable interest entity because it has the
ability to direct the activities of Red Oak. Consequently, the Company consolidates Red Oak in its consolidated
financial statements within the Retail Pharmacy Segment. Revenues associated with Red Oak expenses
reimbursed by Cardinal for the year ended December 31, 2014 and amounts due to Cardinal from Red Oak at
December 31, 2014 were immaterial.3
2015
Costco’s e-commerce business grew over 20% in 2015 to $3.4 billion in sales. We finished the fiscal year with
operations in four countries – the U.S., Canada, U.K. and Mexico – and have since opened an online site in
Korea. During the fiscal year, we upgraded our e-commerce distribution network by adding new depot
distribution points, allowing us to deliver orders faster and reduce shipping costs. We continued to leverage our
inline vendor relationships to enhance our online offerings and prices, with particular success in electronics,
apparel and household goods. We also leveraged our in-location traffic to drive online sales of jewelry, as well
as larger-sized products, such as electronics and appliances, mattresses, exercise equipment and furniture.
Lastly, we expanded our merchandise mix to include additional products in infant care, apparel, health and
beauty aids, and cosmetics. In mainland China, we are selling Costco products on Alibaba’s Tmall site. Two
hundred Costco items, including many Kirkland Signature™ products, are now being offered to online
shoppers in China. In addition, other ecommerce delivery businesses, including Google Express, Instacart,
Boxed, and Jet.com, offer Costco products for delivery through their own online services.4
In terms of expansion, we continued opening new warehouses in 2015 – in the U.S. and globally – both in-fill
and in new markets. Costco’s appeal, strong in North America for many years, has translated very well to the
international marketplace; and international expansion is a key element in our business strategy. For the fiscal
year, 23 new warehouses were opened: twelve in the U.S., one in Canada; and ten in other international
markets, including three new warehouses in Mexico; three in Japan; and one each in the U.K., Korea, Taiwan,
and Australia. These openings brought our total warehouse count at fiscal year-end to 686 warehouses in
operation: 480 in the United States and Puerto Rico; 89 in Canada; 36 in Mexico; 27 in the United Kingdom; 23
in Japan; 12 in Korea; 11 in Taiwan; seven in Australia; and one in Spain.5
We source, stock, and sell products from over 7,000 domestic and international vendors and their ability to
reliably and efficiently fulfill our orders is critical to our business success. We source a large number of those
products from foreign 10 manufacturers with China continuing to be the dominant import source. Financial
instability among key vendors, political instability and labor unrest in source countries or elsewhere in our
3
2014 Annual Report, February 2015, p. 65, http://investors.cvshealth.com/financial-information/annual-report-archive, accessed March 19, 2018
4
Annual Report 2015, December 2015, p. 2, http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-reportsannual, accessed March 19, 2018
5

supply chain, changes in the costs of commodities in our supply chains (fuel, labor and currency exchange
rates), port labor disputes, weather-related events, natural disasters, work stoppages, shipping capacity
restrains, retaliatory trade restrictions imposed by either the United States or a major source country, tariffs,
currency exchange rates and transport availability, capacity and costs are beyond our control and could
negatively impact our business if they seriously disrupted the movement of products through our supply chain
or increased their costs. Additionally, as we add fulfillment capabilities or pursue strategies with different
fulfillment requirements, our network becomes increasingly complex. If our fulfillment network does not operate
properly or if a vendor fails to deliver on its commitments, then we will experience delay in inventory, increased
delivery costs, merchandise out-of-stocks which would negatively affect our results of operations.6
Net revenues for the year increased 10 percent to a record $153 billion, while adjusted earnings per share
(EPS) rose nearly 15 percent to $5.16 on a comparable basis. That excludes amortization, acquisition-related
costs, and a charge related to a disputed 1999 legal settlement in 2015; it excludes amortization and the loss
on the early extinguishment of debt in 2014. Looking back at the steady state targets we introduced in 2010 for
the subsequent five-year period, I am happy to report that the company’s growth hit the higher end of each
target range. Operating profit has risen at a 10 percent compounded annual growth rate (CAGR), while
adjusted EPS has grown at a 14 percent CAGR. CVS Health generated $6.5 billion in free cash flow during
2015 and returned more than $6 billion to shareholders through dividends and share repurchases. Our board
of directors increased our quarterly dividend by 27 percent and approved an additional 21 percent increase for
2016. That marks our 13th consecutive year of increases and keeps us on track to reach a 35 percent dividend
payout ratio target by 2018. We expect to return more than $5 billion to shareholders in 2016 through dividends
and share repurchases.7
Effective January 1, 2015, the Company changed its methods of accounting for “front store” inventories in the
Retail/LTC Segment. Prior to 2015, the Company valued front store inventories at the lower of cost or market
on a first-in, first-out (“FIFO”) basis in retail stores using the retail inventory method and in distribution centers
using the FIFO cost method. Effective January 1, 2015, all front store inventories in the Retail/LTC Segment
have been valued at the lower of cost or market using the weighted average cost method. These changes
affected approximately 36% of consolidated inventories. These changes were made primarily to provide the
Company with better information to manage its retail front store operations and to bring all of the Company’s
inventories to a common inventory valuation methodology. The Company believes the weighted average cost
method is preferable to the retail inventory method and the FIFO cost method because it results in greater
precision in the determination of cost of revenues and inventories at the stock keeping unit (“SKU”) level and
results in a consistent inventory valuation method for all of the Company’s inventories as all of the Company’s
remaining inventories, which consist of prescription drugs, were already being valued using the weighted
average cost method.8
2016
A record $2.65 billion was invested in our business in 2016. Thirty-three warehouses including four relocations
were opened; our depot (distribution) and transportation systems were expanded; numerous remodels and
facilities upgrades were completed; and the upgrading of our IT infrastructure continued. In addition over $1.2
billion was returned to shareholders in the form of dividends ($746 million) and stock buy backs ($486 million).
6
2015 Annual Report, March 2016, p. 1, http://phx.corporate-ir.net/phoenix.zhtml?c=95223&p=irol-reportsannual, accessed March 19, 2018
7
8

Now three months into the new fiscal year, our 2017 plans call for 31 new openings, and extending our global
footprint into two more countries: France and Iceland; bring us to nearly 750 warehouses operating worldwide
by fiscal year end. All told, in fiscal 2017 we plan to open 16 new warehouses in the U.S., eight in Canada and
one in Taiwan, Korea, Japan, Australia, and Mexico; as well as France (near Paris) and Iceland (near
Reykjavik) openings. In 2016, our membership base grew by 7% to nearly 48 million member households,
representing more than 87 million Costco cardholders worldwide. Importantly, member loyalty remained strong
in 2016. Our U.S. and Canada members, representing over 85% of total Company sales, renewed at a 90%
annual rate; and members worldwide at an 88% annual rate. Total membership revenue in 2016 amounted to
$2.6 billion; and our Executive Member program continues to grow. It is now offered in the U.S., Canada,
Mexico, and the U.K., and represents nearly one-third of our member base and two-thirds of total Company
sales. 9
For the fiscal year, total sales grew 10.1 percent driven by comparable sales growth of 4.2 percent, with all
regions and product categories achieving positive comps. Sales growth, combined with our focus on improving
productivity, led to a 21.3 percent increase in Adjusted Diluted Earnings Per Share1 and a 175 basis point
increase in Return on Invested Capital to 15.83 percent1. 10
Economic forecasts for 2017 suggest the outlook for the home improvement industry remains favorable as the
economy continues to be led by growth in consumer spending. The home improvement industry is poised to
grow its share of wallet as a percent of overall consumer spending, given sustained home price recovery and
continued job and income gains. In addition, consumer balance sheets are strong as debt service ratios are
near record lows and access to credit is gradually improving. Along with stronger incomes and rising home
prices, we believe stronger household financial conditions will support discretionary home improvement
spending. These macro factors should continue to contribute to household formation, which will sustain home
buying and related spending as homeowners upgrade and refresh their homes. In 2017, we look to build upon
our strong foundation to better serve the needs of a rapidly changing customer and capitalize on a favorable
macroeconomic backdrop. We are focused on three strategic objectives to drive value for our customers and
shareholders. First, we are dedicated to expanding the reach of home improvement and driving profitable
share gains. We are working to serve more customers - DIY, DIFM, and Pro - more effectively and differentiate
ourselves by establishing market leadership for home improvement project solutions. Second, we are further
adapting to an evolving customer, developing capabilities to anticipate and support their needs. We are
empowering customers across the most relevant moments of their project journey, and we are advancing our
customer service experience capabilities through our omni-channel assets. Finally, we are committed to
generating long-term profitable growth and substantial returns for shareholders. By enhancing our operating
discipline and focus, we are making productivity a core strength for Lowe’s. This commitment will drive focus
and prioritization, allowing for investment in future capabilities to grow the business, maintain our leadership
position, and drive value for shareholders.11
Net revenues for the year increased nearly 16 percent to a record $177 billion, while adjusted earnings per
share (EPS) rose 13 percent to $5.84. The compound annual growth rate in operating profit and adjusted EPS
puts us at the high end of the steady state growth targets we introduced in 2013. We experienced strong
organic prescription growth across the enterprise in 2016, augmented by the Omnicare and Target
9
10
2016 Annual Report, April 2017, p. 1, http://phx.corporate-ir.net/phoenix.zhtml?c=95223&p=irol-reportsannual, accessed March 19, 2018
11
2016 Annual Report, April 2017, p. 17, http://phx.corporate-ir.net/phoenix.zhtml?c=95223&p=irol-reportsannual, accessed March 19, 2018

acquisitions. Moreover, the successful CVS Caremark ® PBM selling season of 2015 led to growth in our
membership base and claims in 2016.12
Before discussing CVS Caremark’s performance, I want to address the ongoing rhetoric around drug pricing.
New launches at elevated price points and increasing prices of older drugs have contributed to a sense that
government interventions are necessary. Some market participants have attempted to paint PBMs as “middle
men” in the pharmacy supply chain, taking outsized profits at the expense of patients and payors. This is
simply not true. PBMs are the solution, not the problem. That’s why both public and private payors continue to
count on PBMs as indispensable partners that help to manage their drug trend. Numerous evaluations from the
Federal Trade Commission, Congressional Budget Office, and other government agencies have consistently
concluded that PBMs operate in a highly efficient market and drive real savings to the health care economy.
And CVS Caremark’s array of cost management solutions have helped to reduce client costs, from an
unmanaged gross trend of 11 percent to a managed trend of only 3.2 percent in 2016. In addition, a recent
industry study showed that every dollar invested in PBM services returned $6 in savings for clients and
members. So, the value of PBMs is quantitatively pretty clear. Now, it is a bigger challenge to negotiate lower
prices when there is basically a single product in a category. So, we will continue to encourage the need to
create competition within therapeutic classes as a solution to reducing the cost of drugs; whether it’s clearing
out the FDA backlog of potential drug approvals, many of which are generics, or increasing the speed to
market of new biosimilar agents.13
12
13

Appendix
The Supply Chain Index is a ranking of supply chain improvement. We find that supply chain leaders
are usually above their peer group in performance, in the upper 2/3 of the Supply Chain Index.
Companies who rank higher than their peer group on the Supply Chain Index are usually driving
improvement but are new at the journey. As a result, the rate of change on supply chain improvement
is quicker than that of a more mature company.
Table A. Performance Factor Analysis on the Supply Chain Index for Apparel Retailers
Table B. Performance Factor Analysis on the Supply Chain Index for Broadline Retailers

Table C. Performance Factor Analysis on the Supply Chain Index for Drug Retailers
Table D. Performance Factor Analysis on the Supply Chain Index for Home Improvement Retailers
Table E. Performance Factor Analysis on the Supply Chain Index for Food Retailers

Other Reports in This Series
These reports, and additional information on the Supply Chain Metrics That Matter methodology, are
available at our Supply Chain Insights website:
Supply Chain Metrics That Matter: A Focus on Semiconductor Companies
Published in April 2018
Supply Chain Metrics That Matter: A Focus on Household, and Beauty, Products Companies (2017)
Published in February 2018
Supply Chain Metrics That Matter: A Focus on Food & Beverage Companies 2017
Published in November 2017
Supply Chain Metrics That Matter: A Focus on Aerospace & Defense Companies 2017
Published in October 2017
Supply Chain Metrics That Matter – A Focus on Auto Parts Companies
Published in September 2017
Supply Chain Metrics That Matter – A Focus on Automotive Companies 2017
Published in August 2017
Supply Chain Metrics That Matter – A Focus on Chemical Companies
Published in July 2017
Supply Chains to Admire 2017
Published in June 2017

About Supply Chain Insights LLC
Founded in February 2012 by Lora Cecere, Supply Chain Insights LLC is in its seventh year of
operation. The Company’s mission is to deliver independent, actionable, and objective advice for
supply chain leaders. If you need to know which practices and technologies make the biggest
difference to corporate performance, we want you to turn to us. We are a company dedicated to this
research. Our goal is to help leaders understand supply chain trends, evolving technologies and
which metrics matter.
About Lora Cecere
Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and
the author of popular enterprise software blog Supply Chain Shaman currently read
by 15,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a a contributor for Forbes. She has written five books. The first book, Bricks
Matter, (co-authored with Charlie Chase) published in 2012. The second book, The
Shaman’s Journal 2014, published in September 2014; the third book, Supply
Chain Metrics That Matter, published in December 2014; the fourth book, The
Shaman’s Journal 2015, published in August 2015, the fifth book, The Shaman’s Journal 2016,
published in June 2016 and the sixth book, The Shaman’s Journal 2017, published in July 2017.
With over 14 years as a research analyst with AMR Research, Altimeter Group, and Gartner
Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has
worked with over 600 companies on their supply chain strategy and is a frequent speaker on the
evolution of supply chain processes and technologies. Her research is designed for the early adopter
seeking first-mover advantage.
About Sam Borthwick
As a Research Associate, Samuel Borthwick analyzes balance sheet and income
statement data for the Supply Chains to Admire Report along with the monthly
Metrics That Matter series. A recent graduate of Purdue University, majoring in
Supply Chain Management, Sam loves data. He lives in Indianapolis, Indiana
where he enjoys playing tennis and spending time with his family.

Supply Chain Metrics That Mater - A Focus on Retail - 25 APR 2018

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