LOWE'S FORM 10-Q 8-3-2007
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the quarterly period ended August 3,
2007
|
Commission
file number 1-7898
|
LOWE'S COMPANIES,
INC.
|
(Exact
name of registrant as specified in its
charter)
|
NORTH
CAROLINA
|
56-0578072
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
1000
Lowe's Blvd., Mooresville, NC
|
28117
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
Registrant's
telephone number, including area code
|
(704)
758-1000
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
CLASS
|
|
OUTSTANDING
AT AUGUST 31, 2007
|
Common
Stock, $.50 par value
|
|
1,478,600,654
|
Item
1. Financial Statements
Lowe's
Companies, Inc.
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
In
Millions, Except Par Value Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
August
3, 2007
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
337
|
|
$
|
316
|
|
$
|
364
|
|
Short-term investments
|
|
|
325
|
|
|
456
|
|
|
432
|
|
Merchandise inventory - net
|
|
|
7,799
|
|
|
7,176
|
|
|
7,144
|
|
Deferred income taxes - net
|
|
|
209
|
|
|
165
|
|
|
161
|
|
Other current assets
|
|
|
181
|
|
|
215
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
8,851
|
|
|
8,328
|
|
|
8,314
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, less accumulated depreciation
|
|
|
19,825
|
|
|
17,321
|
|
|
18,971
|
|
Long-term investments
|
|
|
627
|
|
|
200
|
|
|
165
|
|
Other assets
|
|
|
341
|
|
|
188
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
29,644
|
|
$
|
26,037
|
|
$
|
27,767
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
555
|
|
$
|
-
|
|
$
|
23
|
|
Current maturities of long-term debt
|
|
|
85
|
|
|
32
|
|
|
88
|
|
Accounts payable
|
|
|
4,167
|
|
|
3,629
|
|
|
3,524
|
|
Accrued salaries and wages
|
|
|
371
|
|
|
371
|
|
|
425
|
|
Self-insurance liabilities
|
|
|
726
|
|
|
653
|
|
|
650
|
|
Deferred revenue
|
|
|
819
|
|
|
826
|
|
|
731
|
|
Other current liabilities
|
|
|
1,317
|
|
|
1,151
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,040
|
|
|
6,662
|
|
|
6,539
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding current maturities
|
|
|
4,301
|
|
|
3,410
|
|
|
4,325
|
|
Deferred income taxes - net
|
|
|
628
|
|
|
711
|
|
|
735
|
|
Other long-term liabilities
|
|
|
706
|
|
|
334
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,675
|
|
|
11,117
|
|
|
12,042
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - $5 par value, none issued
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Common stock - $.50 par value;
|
|
|
|
|
|
|
|
|
|
|
Shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
August 3,
2007
|
1,485
|
|
|
|
|
|
|
|
|
|
August 4,
2006
|
1,538 |
|
|
|
|
|
|
|
|
|
February 2,
2007
|
1,525 |
|
742
|
|
|
769
|
|
|
762
|
|
Capital in excess of par value
|
|
|
11
|
|
|
307
|
|
|
102
|
|
Retained earnings
|
|
|
15,210
|
|
|
13,843
|
|
|
14,860
|
|
Accumulated other comprehensive income
|
|
|
6
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
15,969
|
|
|
14,920
|
|
|
15,725
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders'
equity
|
|
$
|
29,644
|
|
$
|
26,037
|
|
$
|
27,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Current and Retained Earnings
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
Millions, Except Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Six
Months
Ended
|
|
|
|
August
3, 2007
|
|
August
4,
2006
|
|
August
3, 2007
|
|
August
4,
2006
|
|
Current
Earnings
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Net
sales
|
|
$
|
14,167
|
|
|
100.00
|
|
$
|
13,389
|
|
|
100.00
|
|
$
|
26,338
|
|
|
100.00
|
|
$
|
25,310
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
9,284
|
|
|
65.53
|
|
|
8,911
|
|
|
66.56
|
|
|
17,195
|
|
|
65.29
|
|
|
16,664
|
|
|
65.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
4,883
|
|
|
34.47
|
|
|
4,478
|
|
|
33.44
|
|
|
9,143
|
|
|
34.71
|
|
|
8,646
|
|
|
34.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
2,839
|
|
|
20.04
|
|
|
2,617
|
|
|
19.54
|
|
|
5,524
|
|
|
20.97
|
|
|
5,083
|
|
|
20.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
opening costs
|
|
|
26
|
|
|
0.18
|
|
|
28
|
|
|
0.21
|
|
|
38
|
|
|
0.14
|
|
|
53
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
332
|
|
|
2.35
|
|
|
283
|
|
|
2.11
|
|
|
656
|
|
|
2.49
|
|
|
557
|
|
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
- net
|
|
|
50
|
|
|
0.35
|
|
|
30
|
|
|
0.23
|
|
|
97
|
|
|
0.37
|
|
|
65
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
3,247
|
|
|
22.92
|
|
|
2,958
|
|
|
22.09
|
|
|
6,315
|
|
|
23.97
|
|
|
5,758
|
|
|
22.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
1,636
|
|
|
11.55
|
|
|
1,520
|
|
|
11.35
|
|
|
2,828
|
|
|
10.74
|
|
|
2,888
|
|
|
11.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
617
|
|
|
4.36
|
|
|
585
|
|
|
4.37
|
|
|
1,070
|
|
|
4.07
|
|
|
1,112
|
|
|
4.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
1,019
|
|
|
7.19
|
|
$
|
935
|
|
|
6.98
|
|
$
|
1,758
|
|
|
6.67
|
|
$
|
1,776
|
|
|
7.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
1,490
|
|
|
|
|
|
1,541
|
|
|
|
|
|
1,500
|
|
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.68
|
|
|
|
|
$
|
0.61
|
|
|
|
|
$
|
1.17
|
|
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
1,518
|
|
|
|
|
|
1,571
|
|
|
|
|
|
1,530
|
|
|
|
|
|
1,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.67
|
|
|
|
|
$
|
0.60
|
|
|
|
|
$
|
1.15
|
|
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$
|
0.08
|
|
|
|
|
$
|
0.05
|
|
|
|
|
$
|
0.13
|
|
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
14,968
|
|
|
|
|
$
|
12,985
|
|
|
|
|
$
|
14,860
|
|
|
|
|
$
|
12,191
|
|
|
|
|
Cumulative
effect adjustment (Note 9)
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
-
|
|
|
|
|
Net
earnings
|
|
|
1,019
|
|
|
|
|
|
935
|
|
|
|
|
|
1,758
|
|
|
|
|
|
1,776
|
|
|
|
|
Cash
dividends
|
|
|
(119
|
)
|
|
|
|
|
(77
|
)
|
|
|
|
|
(194
|
)
|
|
|
|
|
(124
|
)
|
|
|
|
Share
repurchases
|
|
|
(658
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(1,206
|
)
|
|
|
|
|
-
|
|
|
|
|
Balance
at end of period
|
|
$
|
15,210
|
|
|
|
|
$
|
13,843
|
|
|
|
|
$
|
15,210
|
|
|
|
|
$
|
13,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
In
Millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
August
3, 2007
|
|
August
4, 2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,758
|
|
$
|
1,776
|
|
Adjustments to reconcile net earnings to net cash provided
by
|
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
701
|
|
|
591
|
|
Deferred income taxes
|
|
|
3
|
|
|
(34
|
)
|
Loss on disposition/writedown of fixed and other assets
|
|
|
17
|
|
|
5
|
|
Share-based payment expense
|
|
|
45
|
|
|
35
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Merchandise inventory -
net
|
|
|
(655
|
)
|
|
(541
|
)
|
Other operating assets
|
|
|
56
|
|
|
(93
|
)
|
Accounts payable
|
|
|
643
|
|
|
797
|
|
Other operating liabilities
|
|
|
510
|
|
|
68
|
|
Net cash provided by operating activities
|
|
|
3,078
|
|
|
2,604
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(368
|
)
|
|
(228
|
)
|
Proceeds from sale/maturity of short-term investments
|
|
|
524
|
|
|
399
|
|
Purchases of long-term investments
|
|
|
(1,102
|
)
|
|
(225
|
)
|
Proceeds from sale/maturity of long-term investments
|
|
|
589
|
|
|
141
|
|
(Increase) decrease in other long-term assets
|
|
|
(23
|
)
|
|
13
|
|
Fixed assets acquired
|
|
|
(1,698
|
)
|
|
(1,556
|
)
|
Proceeds from the sale of fixed and other long-term assets
|
|
|
26
|
|
|
23
|
|
Net cash used in investing activities
|
|
|
(2,052
|
)
|
|
(1,433
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net increase in short-term borrowings
|
|
|
532
|
|
|
-
|
|
Proceeds from issuance of long-term debt
|
|
|
4
|
|
|
-
|
|
Repayment of long-term debt
|
|
|
(31
|
)
|
|
(16
|
)
|
Proceeds from issuance of common stock under employee stock purchase
plan
|
|
|
40
|
|
|
36
|
|
Proceeds from issuance of common stock from stock options
exercised
|
|
|
43
|
|
|
48
|
|
Cash dividend payments
|
|
|
(194
|
)
|
|
(124
|
)
|
Repurchase of common stock
|
|
|
(1,450
|
)
|
|
(1,226
|
)
|
Excess tax benefits of share-based payments
|
|
|
3
|
|
|
4
|
|
Net cash used in financing activities
|
|
|
(1,053
|
)
|
|
(1,278
|
)
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(27
|
)
|
|
(107
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
364
|
|
|
423
|
|
Cash
and cash equivalents, end of period
|
|
$
|
337
|
|
$
|
316
|
|
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
Note
1: Basis
of Presentation
- The
accompanying consolidated financial statements (unaudited) and notes to
consolidated financial statements (unaudited) are presented in accordance with
the rules and regulations of the Securities and Exchange Commission and do
not
include all the disclosures normally required in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America. The consolidated financial statements
(unaudited), in the opinion of management, contain all adjustments necessary
to
present fairly the financial position as of August 3, 2007 and August 4, 2006,
and the results of operations for the three and six months ended August 3,
2007
and August 4, 2006, and cash flows for the six months ended August 3, 2007
and
August 4, 2006.
These
interim consolidated financial statements (unaudited) should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Lowe's Companies, Inc. (the Company) Annual Report on Form
10-K
for the fiscal year ended February 2, 2007 (the Annual Report). The financial
results for the interim periods may not be indicative of the financial results
for the entire fiscal year.
Certain
prior period amounts have been reclassified to conform to current
classifications.
Note
2: Restricted Investment Balances - Short-term
and long-term investments include restricted balances pledged as collateral
for
letters of credit for the Company’s extended warranty program and for a portion
of the Company’s casualty insurance and installed sales program liabilities.
Restricted balances included in short-term investments were $178 million at
August 3, 2007, $182 million at August 4, 2006, and $248 million at February
2,
2007. Restricted balances included in long-term investments were $102 million
at
August 3, 2007, $27 million at August 4, 2006, and $32 million at February
2,
2007.
Note
3: Property -
Property is shown net of accumulated depreciation of
$6.8 billion at
August
3, 2007, $5.6 billion at August 4, 2006, and $6.1 billion at February 2,
2007.
Note
4: Short-Term Borrowings - On
June
15, 2007, the Company entered into an Amended and Restated Credit Agreement
(Amended Facility) to modify the senior credit facility dated July 30, 2004,
which provided for borrowings of up to $1 billion through July 2009. The Amended
Facility extends the maturity date to June 2012 and provides for borrowings
of
up to $1.75 billion. The Amended Facility is available to support the Company’s
commercial paper and revolving credit programs. Borrowings made are unsecured
and are priced at a fixed rate based upon market conditions at the time of
funding in accordance with the terms of the Amended Facility. The Amended
Facility contains certain restrictive covenants, which include maintenance
of a
debt leverage ratio as defined by the Amended Facility. The Company was in
compliance with those covenants at August 3, 2007. Seventeen banking
institutions are participating in the $1.75 billion Amended Facility. As of
August 3, 2007, there was $555 million outstanding under the commercial paper
program. The weighted-average interest rate on the short-term borrowings was
5.3%.
Note
5: Extended Warranties - Lowe’s
sells separately-priced extended warranty contracts under a Lowe’s-branded
program for which the Company is ultimately self-insured. The Company recognizes
revenue from extended warranty sales on a straight-line basis over the
respective contract term. Extended warranty contract terms primarily range
from
one to four years from the date of purchase or the end of the manufacturer’s
warranty, as applicable. Deferred revenues related to the Company’s extended
warranty sales were $373 million and $273 million at August 3, 2007 and August
4, 2006, respectively. Extended warranty deferred revenue is included in other
long-term liabilities in the accompanying consolidated balance sheets. Changes
in deferred revenue for extended warranty contracts are summarized as
follows:
|
|
Three
Months Ended
|
Six
Months Ended
|
(In
millions)
|
|
|
August
3, 2007
|
|
|
August
4, 2006
|
|
|
August
3, 2007
|
|
|
August
4, 2006
|
|
Extended
warranty deferred revenue,
beginning of period
|
|
$
|
343
|
|
$
|
238
|
|
$
|
315
|
|
$
|
206
|
|
Additions
to deferred revenue
|
|
|
50
|
|
|
43
|
|
|
94
|
|
|
81
|
|
Deferred
revenue recognized
|
|
|
(20
|
)
|
|
(8
|
)
|
|
(36
|
)
|
|
(14
|
)
|
Extended
warranty deferred revenue,
end of period
|
|
$
|
373
|
|
$
|
273
|
|
$
|
373
|
|
$
|
273
|
|
Incremental
direct acquisition costs associated with the sale of extended warranties are
also deferred and recognized as expense on a straight-line basis over the
respective contract term. Deferred costs associated with extended warranty
contracts were $85 million and $64 million at August 3, 2007 and August 4,
2006,
respectively. Extended warranty deferred costs are included in other assets
(non-current) in the accompanying consolidated balance sheets. All other costs,
such as costs of services performed under the contract, general and
administrative expenses and advertising expenses are expensed as
incurred.
The
liability for extended warranty claims incurred is included in self-insurance
liabilities in the accompanying consolidated balance sheets. Changes in the
liability for extended warranty claims are summarized as follows:
|
|
Three
Months Ended
|
Six
Months Ended
|
(In
millions)
|
|
|
August
3, 2007
|
|
|
August
4, 2006
|
|
|
August
3, 2007
|
|
|
August
4, 2006
|
|
Liability
for extended warranty claims,
beginning of period
|
|
$
|
9
|
|
$
|
-
|
|
$
|
10
|
|
$
|
-
|
|
Accrual
for claims incurred
|
|
|
11
|
|
|
2
|
|
|
19
|
|
|
2
|
|
Claim
payments
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(11
|
)
|
|
(2
|
)
|
Liability
for extended warranty claims,
end of period
|
|
$
|
18
|
|
$
|
-
|
|
$
|
18
|
|
$
|
-
|
|
Note
6:
Shareholders’
Equity
- On May
25, 2007, the Company’s Board of Directors authorized up to an additional $3
billion in share repurchases and extended the period of the share repurchase
program through fiscal 2009. The Company repurchased 45.7 million and 38.1
million common shares under the share repurchase program during the first six
months of fiscal 2007 and 2006, respectively. The total cost of the share
repurchases was $1.5 billion (of which $1.2 billion was recorded as a reduction
in retained earnings, after capital in excess of par value was depleted) and
$1.2 billion, respectively. As of August 3, 2007, the Company had remaining
authorization under the share repurchase program of $3.0 billion.
During
the first six months of fiscal 2007, holders of $6 million principal amount,
$4
million carrying amount, of the Company’s convertible notes issued in February
2001 exercised their right to convert the notes into approximately 184,000
shares of the Company’s common stock at the rate of 32.896 shares per note.
During the first six months of fiscal 2006, holders of $107 million principal
amount, $74 million carrying amount, of the Company’s convertible notes issued
in February 2001 exercised their right to convert the notes into 3.5 million
shares of the Company’s common stock at the rate of 32.896 shares per
note.
During
the first six months of fiscal 2007 and 2006, holders of an insignificant number
of the Company’s senior convertible notes issued in October 2001 exercised their
right to convert the notes into shares of the Company’s common stock at the rate
of 34.424 shares per note.
Note
7: Comprehensive
Income -
Comprehensive income represents changes in shareholders’ equity from non-owner
sources and is comprised primarily of net earnings plus or minus unrealized
gains or losses on available-for-sale securities, as well as foreign currency
translation adjustments.
For the
three months ended August 3, 2007, both comprehensive income and net earnings
totaled $1.0 billion. For the three months ended August 4, 2006, both
comprehensive income and net earnings totaled $0.9 billion. For each of the
six
month periods ended August 3, 2007 and August 4, 2006, both comprehensive income
and net earnings totaled $1.8 billion.
Note
8: Accounting for Share-Based Payment - During
the three months ended August 3, 2007, the Company granted under its 2006
Long-Term Incentive Plan an insignificant number of share-based payment awards.
During the six months ended August 3, 2007, the Company granted under its 2006
Long-Term Incentive Plan 1.8 million stock options at an exercise price of
not
less than the closing market price of a share of the Company's common stock
on
the date of grant. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model, which resulted
in a
weighted-average grant date fair value per share of $8.19. The Company
also granted 1.8 million restricted stock awards and 0.6 million
performance-based restricted stock awards with a weighted-average grant date
fair value per share of $31.93 and $32.21, respectively. See Note 9 to the
consolidated financial statements in the Annual Report for additional
information regarding general terms and methods of valuation for stock options
and restricted stock awards.
Performance-based
restricted stock awards are valued at the market price of a share of the
Company’s common stock on the date of grant. In general, these awards vest at
the end of a three-year service period from the date of grant only if the
performance goal specified in the performance-based restricted stock agreement
is achieved. The performance goal is based on targeted Company average return
on
non-cash assets, as such term is defined in the performance-based restricted
stock agreement. These awards are expensed on a straight-line basis over the
requisite service period, based on the probability of achieving the performance
goal. The Company uses historical data to estimate the timing and amount of
forfeitures.
Total
unrecognized share-based payment expense for all share-based payment plans
was
$141 million at August 3, 2007, of which $36 million is expected to be
recognized in 2007, $59 million in 2008, $36 million in 2009 and $10 million
thereafter. This results in these amounts being recognized over a
weighted-average period of 1.2 years.
Note
9: Accounting for Uncertainty in Income Taxes - The
Company adopted Financial Accounting Standards Board (FASB) Interpretation
(FIN)
No. 48, “Accounting for Uncertainty in Income Taxes”,
effective February 3, 2007. As a result of the implementation, the Company
recognized an $8 million net increase to the reserve for uncertain tax
positions. This increase was accounted for as a cumulative effect adjustment and
recognized as a reduction in beginning retained earnings in the consolidated
balance sheet (unaudited). Including the cumulative effect adjustment, the
Company had approximately $214 million of total unrecognized tax benefits
(including penalties and interest) as of February 3, 2007. Of this total, $56
million (net of the federal benefit on state issues) represents the amount
of
unrecognized tax benefits that, if recognized, would favorably impact the
effective income tax rate in any future periods. The remaining $158 million
represents the amount of unrecognized tax benefits for which the ultimate
deductibility is certain, but for which there is uncertainty about the timing
of
deductibility. The timing of such deductibility would not impact the
effective tax rate. The Company does not expect any changes in unrecognized
tax
benefits over the next twelve months to have a significant impact on the results
of operations or the financial position of the Company.
The
Company is subject to U.S. federal and foreign income tax, as well as income
tax
in multiple state and local jurisdictions. The Company has substantially
concluded all U.S. federal income tax matters for fiscal years through 2003.
The
Company has substantially concluded all material state, local, and foreign
income tax matters for fiscal years through 2002.
The
Company includes interest related to tax issues as part of net interest in
the
consolidated financial statements (unaudited). The Company records any
applicable penalties related to tax issues within the income tax provision.
The
Company had $21 million accrued for interest and $7 million accrued for
penalties as of February 3, 2007.
Note
10: Earnings Per Share
- Basic
earnings per share excludes dilution and is computed by dividing the applicable
net earnings by the weighted-average number of common shares outstanding
for the
period. Diluted earnings per share is calculated based on the weighted-average
shares of common stock as adjusted for the potential dilutive effect of
share-based awards and convertible notes as of the balance sheet date. The
following table reconciles earnings per share for the three and six months
ended
August 3, 2007 and August 4, 2006.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
(In
millions, except per share data)
|
|
|
August
3, 2007
|
|
|
August
4, 2006
|
|
|
August
3, 2007
|
|
|
August
4, 2006
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
1,019
|
|
$
|
935
|
|
$
|
1,758
|
|
$
|
1,776
|
|
Weighted-average
shares outstanding
|
|
|
1,490
|
|
|
1,541
|
|
|
1,500
|
|
|
1,549
|
|
Basic
earnings per share
|
|
$
|
0.68
|
|
$
|
0.61
|
|
$
|
1.17
|
|
$
|
1.15
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
1,019
|
|
$
|
935
|
|
$
|
1,758
|
|
$
|
1,776
|
|
Net
earnings adjustment for interest on convertible
notes, net of tax
|
|
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Net
earnings, as adjusted
|
|
$
|
1,020
|
|
$
|
936
|
|
$
|
1,760
|
|
$
|
1,778
|
|
Weighted-average
shares outstanding
|
|
|
1,490
|
|
|
1,541
|
|
|
1,500
|
|
|
1,549
|
|
Dilutive
effect of share-based awards
|
|
|
7
|
|
|
8
|
|
|
9
|
|
|
8
|
|
Dilutive
effect of convertible notes
|
|
|
21
|
|
|
22
|
|
|
21
|
|
|
23
|
|
Weighted-average
shares, as adjusted
|
|
|
1,518
|
|
|
1,571
|
|
|
1,530
|
|
|
1,580
|
|
Diluted
earnings per share
|
|
$
|
0.67
|
|
$
|
0.60
|
|
$
|
1.15
|
|
$
|
1.13
|
|
Stock
options to purchase 8.0 million and 11.6 million shares of common stock for
the
three month periods ended August 3, 2007 and August 4, 2006, respectively,
were
excluded from the computation of diluted earnings per share because their
effect
would have been anti-dilutive. Stock options to purchase 8.0 million and
11.6
million shares of common stock for the six month periods ended August 3,
2007
and August 4, 2006, respectively, were excluded from the computation of diluted
earnings per share because their effect would have been
anti-dilutive.
Note
11: Supplemental Disclosure
Net
interest expense is comprised of the following:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
(In
millions)
|
|
August
3, 2007
|
|
August
4, 2006
|
|
August
3, 2007
|
|
August
4, 2006
|
|
Long-term
debt
|
|
$
|
54
|
|
$
|
42
|
|
$
|
109
|
|
$
|
83
|
|
Capitalized
leases
|
|
|
8
|
|
|
9
|
|
|
16
|
|
|
17
|
|
Interest
income
|
|
|
(13
|
)
|
|
(15
|
)
|
|
(24
|
)
|
|
(27
|
)
|
Interest
capitalized
|
|
|
(4
|
)
|
|
(8
|
)
|
|
(8
|
)
|
|
(13
|
)
|
Other
|
|
|
5
|
|
|
2
|
|
|
4
|
|
|
5
|
|
Interest
- net
|
|
$
|
50
|
|
$
|
30
|
|
$
|
97
|
|
$
|
65
|
|
Supplemental
disclosures of cash flow information:
|
|
Six
Months Ended
|
|
(In
millions)
|
|
August
3, 2007
|
|
August
4, 2006
|
|
Cash
paid for interest, net of amount capitalized
|
|
$
|
121
|
|
$
|
92
|
|
Cash
paid for income taxes
|
|
$
|
876
|
|
$
|
1,272
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Non-cash
fixed asset acquisitions
|
|
$
|
48
|
|
$
|
26
|
|
Conversions
of long-term debt to equity
|
|
$
|
4
|
|
$
|
74
|
|
Note
12: Recent Accounting Pronouncements - In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value Measurements.” SFAS No. 157 provides a single
definition of fair value, together with a framework for measuring it, and
requires additional disclosure about the use of fair value to measure assets
and
liabilities. SFAS No. 157 also emphasizes that fair value is a market-based
measurement, not an entity-specific measurement, and sets out a fair value
hierarchy with the highest priority being quoted prices in active markets.
Under
SFAS No. 157, fair value measurements are required to be disclosed by level
within that hierarchy. SFAS No. 157 is effective for financial statements
issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company is currently evaluating the effect of SFAS
No.
157 on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with
an option to measure many financial instruments and certain other items at
fair
value, including available-for-sale securities previously accounted for under
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities.” Under SFAS No. 159, unrealized gains and losses on items for which
the fair value option has been elected will be reported in earnings at each
subsequent reporting period. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
effect of SFAS No. 159 on its consolidated financial statements.
In
June
2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue
No.
06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards.” EITF 06-11 states that an entity should recognize a realized tax
benefit associated with dividends on nonvested equity shares, nonvested equity
share units and outstanding equity share options charged to retained earnings
as
an increase in additional paid in capital. The amount recognized in additional
paid in capital should be included in the pool of excess tax benefits available
to absorb potential future tax deficiencies on share-based payment awards.
EITF
06-11 should be applied prospectively to income tax benefits of dividends
on
equity-classified share-based payment awards that are declared in fiscal
years
beginning after December 15, 2007. The Company does not expect the adoption
of
EITF 06-11 to have a material impact on its consolidated financial
statements.
To
the
Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville,
North Carolina
We
have
reviewed the accompanying consolidated balance sheets of Lowe’s Companies, Inc.
and subsidiaries (the “Company”) as of August 3, 2007 and August 4, 2006, and
the related consolidated statements of current and retained earnings for
the
fiscal three and six-month periods then ended, and of cash flows for the
fiscal
six-month periods ended August 3, 2007 and August 4, 2006. These interim
financial statements are the responsibility of the Company’s
management.
We
conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It
is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based
on
our reviews, we are not aware of any material modifications that should be
made
to such consolidated interim financial statements for them to be in conformity
with accounting principles generally accepted in the United States of
America.
We
have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet
of
the Company as of February 2, 2007, and the related consolidated statements
of
earnings, shareholders’ equity, and cash flows for the year then ended (not
presented herein); and in our report dated April 3, 2007, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet
of
Lowe’s Companies, Inc. and subsidiaries as of February 2, 2007 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/
DELOITTE & TOUCHE LLP
Charlotte,
North Carolina
September
5, 2007
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This
discussion and analysis summarizes the significant factors affecting our
consolidated operating results, liquidity and capital resources during the
three
and six month periods ended August 3, 2007 and August 4, 2006. This discussion
and analysis should be read in conjunction with the consolidated financial
statements and notes to the consolidated financial statements that are included
in our Annual Report on Form 10-K for the fiscal year ended February 2, 2007
(the Annual Report), as well as the consolidated financial statements
(unaudited) and notes to the consolidated financial statements (unaudited)
contained in this report.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
following discussion and analysis of the financial condition and results
of
operations are based on the consolidated financial statements (unaudited)
and
notes to consolidated financial statements (unaudited) contained in this
report
that have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and do not include all the disclosures
normally required in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America. The preparation of these financial statements requires us to make
estimates that affect the reported amounts of assets, liabilities, sales
and
expenses, and related disclosures of contingent assets and liabilities. We
base
these estimates on historical results and various other assumptions believed
to
be reasonable, all of which form the basis for making estimates concerning
the
carrying values of assets and liabilities that are not readily available
from
other sources. Actual results may differ from these estimates.
Our
significant accounting polices are described in Note 1 to the consolidated
financial statements presented in the Annual Report. Our critical accounting
policies and estimates are described in Management’s Discussion and Analysis of
Financial Condition and Results of Operations in the Annual Report. Our
significant and critical accounting policies have not changed significantly
since the filing of our Annual Report.
OPERATIONS
The
following tables set forth the percentage relationship to net sales of each
line
item of the consolidated statements of earnings, as well as the percentage
change in dollar amounts from the prior period. These tables should be read
in
conjunction with the following discussion and analysis and the consolidated
financial statements (unaudited), including the related notes to the
consolidated financial statements (unaudited).
|
|
Three
Months Ended
|
|
Basis
Point Increase / (Decrease) in Percentage of Net Sales from
Prior
Period
|
|
Percentage
Increase / (Decrease) in Dollar Amounts from Prior
Period
|
|
|
|
|
August
3, 2007
|
|
|
August
4, 2006
|
|
|
2007
vs. 2006
|
|
|
2007
vs. 2006
|
|
Net
sales
|
|
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
|
|
5.8
|
%
|
Gross
margin
|
|
|
34.47
|
|
|
33.44
|
|
|
103
|
|
|
9.1
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
20.04
|
|
|
19.54
|
|
|
50
|
|
|
8.5
|
|
Store
opening costs
|
|
|
0.18
|
|
|
0.21
|
|
|
(3
|
)
|
|
(5.7
|
)
|
Depreciation
|
|
|
2.35
|
|
|
2.11
|
|
|
24
|
|
|
17.6
|
|
Interest
- net
|
|
|
0.35
|
|
|
0.23
|
|
|
12
|
|
|
65.4
|
|
Total
expenses
|
|
|
22.92
|
|
|
22.09
|
|
|
83
|
|
|
9.8
|
|
Pre-tax
earnings
|
|
|
11.55
|
|
|
11.35
|
|
|
20
|
|
|
7.6
|
|
Income
tax provision
|
|
|
4.36
|
|
|
4.37
|
|
|
(1
|
)
|
|
5.3
|
|
Net
earnings
|
|
|
7.19
|
%
|
|
6.98
|
%
|
|
21
|
|
|
9.0
|
%
|
|
|
Six
Months Ended
|
|
Basis
Point Increase / (Decrease) in Percentage of Net Sales from Prior
Period
|
|
Percentage
Increase / (Decrease) in Dollar Amounts from Prior
Period
|
|
|
|
August
3, 2007
|
|
August
4, 2006
|
|
2007
vs. 2006
|
|
2007
vs. 2006
|
|
Net
sales
|
|
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
|
|
4.1
|
%
|
Gross
margin
|
|
|
34.71
|
|
|
34.16
|
|
|
55
|
|
|
5.7
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
20.97
|
|
|
20.09
|
|
|
88
|
|
|
8.7
|
|
Store
opening costs
|
|
|
0.14
|
|
|
0.20
|
|
|
(6
|
)
|
|
(27.9
|
)
|
Depreciation
|
|
|
2.49
|
|
|
2.20
|
|
|
29
|
|
|
17.7
|
|
Interest
- net
|
|
|
0.37
|
|
|
0.26
|
|
|
11
|
|
|
48.1
|
|
Total
expenses
|
|
|
23.97
|
|
|
22.75
|
|
|
122
|
|
|
9.7
|
|
Pre-tax
earnings
|
|
|
10.74
|
|
|
11.41
|
|
|
(67
|
)
|
|
(2.1
|
)
|
Income
tax provision
|
|
|
4.07
|
|
|
4.39
|
|
|
(32
|
)
|
|
(3.8
|
)
|
Net
earnings
|
|
|
6.67
|
%
|
|
7.02
|
%
|
|
(35
|
)
|
|
(1.0
|
)%
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
Other
Metrics
|
|
August
3, 2007
|
|
August
4, 2006
|
|
August
3, 2007
|
|
August
4, 2006
|
|
Comparable
store sales changes (1)
|
|
|
(2.6
|
)%
|
|
3.3
|
%
|
|
(4.4
|
)%
|
|
4.4
|
%
|
Customer
transactions (in millions)
|
|
|
207
|
|
|
191
|
|
|
385
|
|
|
359
|
|
Average
ticket (2)
|
|
$
|
68.47
|
|
$
|
70.21
|
|
$
|
68.35
|
|
$
|
70.46
|
|
At
end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores
|
|
|
1,424
|
|
|
1,281
|
|
|
|
|
|
|
|
Sales
floor square feet (in millions)
|
|
|
162
|
|
|
145
|
|
|
|
|
|
|
|
Average
store size square feet (in thousands) (3)
|
|
|
113
|
|
|
113
|
|
|
|
|
|
|
|
(1) We
define a comparable store as a store that has been open longer than 13 months.
A
store that is identified for relocation is no longer considered comparable
one
month prior to its relocation. The relocated store must then remain open
longer
than 13 months to be considered comparable.
(2)
We
define average ticket as net sales divided by number of customer
transactions.
(3) We
define average store size square feet as sales floor square feet divided
by the
number of stores open at the end of the period.
The
sales
environment remained challenging in the second quarter of fiscal 2007 as
home
improvement consumers hesitated to take on larger discretionary projects.
However, the core of our business remained relatively strong as our employees
helped consumers maintain their largest financial asset. Despite the current
operating environment, we continued to capture market share and gained a
full
percentage point of unit market share for the total store in the second calendar
quarter, according to third-party estimates. While we cannot control the
macro
environment, we are continually focused on executing and delivering great
service in our stores in order to capture market share.
Regardless
of the sales environment, our goal is always to improve our stores, our
merchandising, our distribution systems and most importantly our service
to
customers. We are balancing our goal of delivering results in the current
operating environment with maintaining our commitment to manage the business
for
the long-term.
We
continue to make significant investments in our existing store base through
the
delivery of better merchandise, improved store layouts and more efficient
product adjacencies. As part of this ongoing effort, we have completed 128
major
remerchandising projects and reset over 400,000 bays in our stores over the
last
12 months. These investments ensure that our stores remain bright, clean
and
easy to shop. Additionally, we are constantly reviewing our approach and
looking
for process improvements, while ensuring our efforts are driving adequate
returns and resulting in minimal customer disruption.
We
have a
state-of-the-art distribution infrastructure and supply chain, but we are
also
continually working to improve these processes. Recent examples include our
successful Rapid Response Replenishment (R3) and Execution Excellence (E2)
initiatives, and we have future projects planned that will improve customer
service and increase efficiency at the same time. In a difficult sales
environment, our supply chain infrastructure allows us to better manage
inventory and react to opportunities as demand patterns change across the
country.
We
continue to measure customers’ perceptions of service with our
“Customer-Focused” program. This program measures each store’s performance
relative to five key components of customer satisfaction, which include selling
skills, delivery, installed sales, checkout and phone answering. Our second
quarter 2007 results showed continued improvement over the second quarter
of
2006. Additionally, our consumer research organization conducts a quarterly
survey to measure customer perceptions on 28 different attributes versus
our
competition. We have seen a positive trend in this survey over the past several
years, and our most recent survey completed in July 2007 suggests that customers
continue to view Lowe’s in a more positive light.
Net
Sales - The
increase in sales for both the quarter and six months ended August 3, 2007
was
driven by our store expansion program, which added 143 new stores during
the
last four quarters. However, a challenging sales environment led to a decline
in
comparable store sales of 2.6% for the quarter and 4.4% for the first half
of
2007. Total customer transactions increased 8.5% compared to the second quarter
of 2006, while average ticket decreased 2.5% to $68.47. Comparable store
customer transactions increased fractionally compared to the second quarter
of
2006, while comparable store average ticket decreased 3.0%. The reductions
in
average ticket drove our decline in comparable store sales, and are a reflection
of fewer project sales, a decrease in hurricane rebuilding efforts and deflation
in lumber and plywood prices. We expect some of these pressures to ease in
the
coming months, specifically as we cycle the two year anniversary of the 2005
hurricane season and experience reduced pressure from lumber and plywood
deflation.
We
experienced comparable store sales increases in six of our 20 product categories
in the second quarter of 2007. The categories that performed above our average
comparable store sales change for the second quarter included nursery, lawn
& landscape products, rough plumbing, paint, hardware, fashion plumbing,
lighting, flooring and appliances. Despite the external pressures that affected
the total home improvement market, we continued to gain unit market share
in 15
of our 20 product categories during the second calendar quarter, according
to
independent third-party measures.
We
continued to see the impact of the correction in the housing market in the
second quarter of 2007, and while we are not directly at risk with regard
to
sub-prime mortgage lending, we continue to watch the impact of that fallout
closely. Most of these housing-related factors have been regional, and the
impact on our business has also been regional as evidenced by positive
comparable store sales in 12 of our 22 regions in the second quarter of 2007.
As
we monitor our performance, we see a disproportionate negative impact in
those
markets where housing was most inflated during the past several years. Our
stores in the regions that span California, Florida and the Gulf Coast
experienced double digit
declines
in comparable store sales for the second quarter of 2007. While showing signs
of
improvement over the first quarter of 2007, our stores in the Northeast
continued to experience comparable store sales declines in the second quarter
of
2007. However,
many markets in the Central U.S., including Texas, Oklahoma, the Ohio Valley
and
some of the Mid-Atlantic states, did not experience the same unsustainable
growth in home prices over the past several years. Our stores in those markets
have continued to experience solid sales results over the past several quarters,
and many posted positive comparable store sales in the second
quarter.
As
we had
seen for the past few quarters, consumers remained cautious about taking
on
larger discretionary projects, including many projects offered through our
Installed Sales and Special Order Sales programs. As a result, sales in these
programs fell short of our average comparable store sales change, particularly
in California and Florida. Weakness in Installed Sales and Special Order
Sales
was offset somewhat by relative strength in our Commercial Business Customer
sales. In the second quarter of 2007, our Commercial Business Customer sales
significantly outperformed the Company’s average sales growth, driven by
positive comparable store sales in many of our merchandise categories for
these
customers.
Gross
Margin - Gross
margin as a percentage of sales increased 103 basis points over the second
quarter of 2006. The increase was primarily driven by a more rational
promotional environment relative to the prior year, changes in our strategy
for
flowing seasonal goods and a larger proportion of imported goods. Our new
transload and coastal holding facilities allowed us to better manage seasonal
imported product and successfully flow product to areas with the greatest
known
demand to avoid some of the markdown pressures that are always a part of
the
seasonal business. We also experienced a 16 basis point positive impact
associated with the mix of products sold and a five basis point reduction
in
inventory shrink as a percentage of sales. Additionally, gross margin declined
32 basis points in the second quarter of 2006 as a result of the promotional
environment, providing easier year-over-year comparisons.
The
increase in gross margin as a percentage of sales for the first six months
of
2007 compared to 2006 was attributable to the increase in gross margin in
the
second quarter of 2007.
SG&A
-
SG&A de-leveraged 50 basis points in the second quarter of 2007 versus the
prior year, driven by de-leverage of 57 basis points in store payroll as
a
result of the weak sales environment. Our stores utilized our staffing model
and
maintained base coverage, which created short-term pressure on earnings but
in
the long-term ensures that we maintain the high service levels that customers
have come to expect from Lowe’s. In addition, rent, property taxes and other
fixed expenses de-leveraged due to the comparable store sales decline. This
de-leverage was offset by leverage in advertising, store services and bonus
expenses in the second quarter.
The
increase in SG&A as a percentage of sales for the first six months was
similarly driven by de-leverage in operating salaries and fixed expenses,
such
as rent, property taxes and utilities, as a result of softer sales. This
was
also partially offset by leverage in advertising, bonus and store services
expenses.
Store
Opening Costs - Store
opening costs, which include payroll and supply costs incurred prior to store
opening as well as grand opening advertising costs, totaled $26 million and
$28
million in the second quarters of 2007 and 2006, respectively. Because store
opening costs are expensed as incurred, the timing of expense recognition
fluctuates based on the timing of store openings. We opened 26 stores (24
new
and two relocated) in the second quarter of 2007, compared to the opening
of 24
stores (23 new and one relocated) in the second quarter of 2006. Store opening
costs for stores opened during the quarter averaged approximately $0.8 million
per store in the second quarter of 2007 and approximately $1.0 million in
the
second quarter of 2006.
The
decrease in average opening costs per store was driven by higher average
payroll
costs in the second quarter of 2006 resulting from stores opening in higher
cost
markets.
Store
opening costs of $38 million and $53 million for the first six months of
2007
and 2006, respectively, were associated with the opening of 41 stores in
2007
(39 new and two relocated), compared to 48 stores in 2006 (47 new and one
relocated).
Store
opening costs for stores opened during the first six months of 2007 averaged
approximately $0.8 million per store compared to approximately $1.1 million
for
stores opened in the first six months of 2006. The decrease in average opening
costs per store was driven by higher average payroll costs in the first half
of
2006 resulting from stores opening in higher cost markets.
Depreciation
-
The
de-leverage in depreciation for the three and six month periods ended August
3,
2007, was driven by the opening of 143 new stores over the past four quarters
and negative comparable store sales. At August 3, 2007, we owned 86% of
our
stores, compared to 84% at August 4, 2006, which includes stores on leased
land.
Property, less accumulated depreciation, totaled $19.8 billion at August
3,
2007, an increase of 14.5% from $17.3 billion at August 4, 2006. This increase
resulted primarily from our store expansion program.
Interest
- The
de-leverage in interest expense for the three and six month periods ended
August
3, 2007, was primarily due to additional expense as a result of the October
2006
$1 billion debt issuance and short-term borrowings outstanding in the first
half
of 2007.
Income
Tax Provision - Our
effective income tax rate was 37.7% and 37.8% for the three and six month
periods ended August 3, 2007, respectively, and 38.5% for both the three
and six
month periods ended August 4, 2006. Our effective income tax rate was 37.9%
for
fiscal 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary sources of liquidity are cash flows from operating activities and
our
$1.75 billion senior credit facility that expires in July 2012. Net cash
provided by operating activities totaled $3.1 billion and $2.6 billion
for the
six month periods ended August 3, 2007 and August 4, 2006. The change in
cash
flows from operating activities was primarily the result of the timing
of cash
payments.
The
primary component of net cash used in investing activities continues to
be
opening new stores, investing in existing stores through resets and
remerchandising, and investing in our distribution center and information
technology infrastructure. Cash acquisitions of fixed assets were $1.7
billion
and $1.6 billion for the six month periods ended August 3, 2007 and August
4,
2006, respectively. At August 3, 2007, we operated 1,424 stores in 49 states
with 162 million square feet of retail selling space, representing an 11%
increase over the retail selling space at August 4, 2006.
Net
cash used in financing activities was $1.1 billion and $1.3 billion for
the six
month periods ended August 3, 2007 and August 4, 2006, respectively. The
change
in cash flows from financing activities was primarily the result of an
increase
in short-term borrowings, partially offset by increased share repurchases
compared to the first half of 2006 and an increase in the amount of dividends
paid per share from $0.08 in the first half of fiscal 2006 to $0.13 in
the first
half of fiscal 2007. The
ratio
of debt to equity plus debt was 23.6%, 18.7% and 22.0% as of August 3,
2007,
August 4, 2006 and February 2, 2007, respectively.
Our
initial 2007 capital forecast was $4.6 billion, inclusive of approximately
$300
million of lease commitments, resulting in a planned net cash outflow of
$4.3
billion in 2007. As of the end of the second quarter of 2007, we expect
that net cash outflows will be $4.0 billion to $4.1 billion, versus the
forecasted amount of $4.3 billion. Approximately 80% of this expected commitment
is for store expansion and new distribution centers. Expansion plans for
2007 consist of 150 to 160 stores, including three relocations of older
stores,
increasing our total sales floor square footage by approximately 11% for
the
year. Approximately 99% of the 2007 projects will be owned, which includes
approximately 28% that will be ground-leased properties.
As
of
August 3, 2007, we owned and operated 13 regional distribution centers
(RDCs).
We opened a new RDC in Rockford, Illinois in the first quarter of 2007
and
opened a new RDC in Lebanon, Oregon in the second quarter of 2007. We are
planning to open an additional RDC in fiscal 2008. As of August 3, 2007,
we also operated 14 flatbed distribution centers (FDCs) for the handling
of
lumber, building materials and other long-length items. We owned 12 and
leased two of these FDCs. We opened a new FDC in Port of Stockton, California
in
the first quarter of 2007. We expect to open an additional FDC in fiscal
2008.
On
June
15, 2007, we entered into an Amended and Restated Credit Agreement (Amended
Facility) to modify the senior credit facility dated July 30, 2004, which
provided for borrowings of up to $1 billion through July 2009. The Amended
Facility extends the maturity date to June 2012 and provides for borrowings
of
up to $1.75 billion. The Amended Facility is available to support our commercial
paper and revolving credit programs. Borrowings made are unsecured and
are
priced at a fixed rate based upon market conditions at the time of funding
in
accordance with the terms of the Amended Facility. The Amended Facility
contains
certain restrictive covenants, which include
maintenance
of a debt leverage ratio as defined by the Amended Facility. We were in
compliance with those covenants at August 3, 2007. Seventeen banking
institutions are participating in the $1.75 billion Amended Facility. As
of
August 3, 2007, we had $555 million outstanding under our commercial paper
program. The weighted-average interest rate on the short-term borrowings
was
5.3%.
From
their issuance through the end of the second quarter of 2007, principal amounts
of $973 million, or approximately 97%, of our February 2001 convertible notes
had converted from debt to equity. Of this total, $0.4 million and $42 million
in principal amounts were converted in the second quarters of 2007 and 2006,
respectively, and $6 million and $107 million in principal amounts were
converted in the six month periods ending August 3, 2007 and August 4, 2006,
respectively.
Holders
of the senior convertible notes, issued in October 2001, may convert their
notes
into 34.424 shares of the company’s common stock only if: the closing share
price of the company’s common stock reaches specified thresholds, or the credit
rating of the notes is below a specified level, or the notes are called for
redemption, or specified corporate transactions representing a change in
control
have occurred. There is no indication that we will not be able to maintain
the
minimum investment grade rating. From their issuance through the end of the
second quarter of 2007, an insignificant amount of the senior convertible
notes
had converted from debt to equity. During the fourth quarter of 2006 and
first
quarter of 2007, our closing share prices reached the specified threshold
such
that the senior convertible notes became convertible at the option of each
holder into shares of common stock in the first and second quarters of 2007.
Through August 3, 2007, holders could elect to convert each such note into
34.424 shares of common stock. During the second quarter of 2007, our closing
share prices again reached the specified threshold such that the senior
convertible notes would become convertible at the option of each holder into
shares of common stock in the third quarter of 2007. Cash interest payments
on
the senior convertible notes ceased in October 2006. We may redeem for cash
all
or a portion of the notes at any time, at a price equal to the sum of the
issue
price plus accrued original issue discount on the redemption date.
Our
debt
ratings at August 3, 2007, were as follows:
Current
Debt Ratings
|
|
|
S&P
|
|
|
Moody’s
|
|
|
Fitch
|
|
Commercial
paper
|
|
|
A1
|
|
|
P1
|
|
|
F1+
|
|
Senior
debt
|
|
|
A+
|
|
|
A1
|
|
|
A+
|
|
Outlook
|
|
|
Stable
|
|
|
Stable
|
|
|
Stable
|
|
We
believe that net cash provided by operating activities and financing activities
will be adequate for our expansion plans and other operating requirements
over
the next 12 months. However, the availability of funds at favorable rates
through the issuance of commercial paper and new debt could be adversely
affected due to a debt rating downgrade, a deterioration of certain financial
ratios, or unfavorable credit market conditions. There are no provisions
in any
agreement that would require early cash settlement of existing debt or leases
as
a result of a downgrade in our debt rating or a decrease in our stock price.
During
the first six months of 2007, we repurchased 45.7 million shares under the
share
repurchase program at a total cost of $1.5 billion. On May 25, 2007, the
Board
of Directors authorized up to an additional $3 billion in share repurchases
and
extended the period of the share repurchase program through fiscal 2009.
As of
August 3, 2007, we had remaining authorization of $3.0 billion.
OFF-BALANCE
SHEET ARRANGEMENTS
Other
than in connection with executing operating leases, we do not have any
off-balance sheet financing that has, or is reasonably likely to have, a
material, current or future effect on our financial condition, cash flows,
results of operations, liquidity, capital expenditures or capital
resources.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
We
adopted FIN 48, “Accounting for Uncertainty in Income Taxes”, effective February
3, 2007. As of the date of adoption, our reserve for uncertain tax positions
(including penalties and interest) was approximately $214 million. In the
six
months ended August 3, 2007, the reserve for uncertain tax positions decreased
$65 million (including penalties and interest), offset by an adjustment
to
deferred taxes of $69 million. At August 3, 2007, approximately $5 million
of
the reserve for uncertain tax positions (including penalties and interest)
was
classified as a current liability. At this time, we are unable to make a
reasonably reliable estimate of the timing of payments in individual years
beyond 12 months due to uncertainties in the timing of the effective settlement
of tax positions.
There
have been no other material changes in our contractual obligations and
commercial commitments other than in the ordinary course of business since
the
end of fiscal 2006. Refer to the Annual Report for additional information
regarding our contractual obligations and commercial commitments.
COMPANY
OUTLOOK
Third
Quarter
As
of
August 20, 2007, the
date
of
our
second quarter 2007 earnings release, we
expected to open 40 stores during the third quarter of fiscal 2007, which
ends
on November 2, 2007, reflecting square footage growth of approximately
10%.
Total sales were expected to increase 7% to 8%. Comparable store sales
were
expected to be approximately flat. We expected diluted earnings per share
of
$0.43 to $0.45. All comparisons are with the third quarter of fiscal
2006.
Fiscal
2007
As
of
August 20, 2007, the
date
of our second quarter 2007 earnings release, we
expected to open 150 to 160 stores during fiscal 2007, which ends on February
1,
2008, reflecting total square footage growth of approximately 11%. Total
sales
were expected to increase approximately 6% for the year. Comparable store
sales
were expected to decline approximately 2%. We expected diluted earnings
per
share of $1.97 to $2.01. All comparisons are with fiscal 2006.
FORWARD-LOOKING
STATEMENTS
This
Form
10-Q contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). All statements other
than
those reciting historic fact are statements that could be "forward-looking
statements" under the Act. Such forward-looking statements are found in,
among
other places, "Management's Discussion and Analysis of Financial Condition
and
Results of Operations." Statements containing words such as "expects," "plans,"
"strategy," "projects," "believes," "opportunity," "anticipates," "desires,"
and
similar expressions are intended to highlight or indicate "forward-looking
statements." Although we believe that the expectations, opinions, projections,
and comments reflected in our forward-looking statements are reasonable,
we can
give no assurance that such statements will prove to be correct. A wide variety
of potential risks, uncertainties, and other factors could materially affect
our
ability to achieve the results expressed or implied by our forward-looking
statements including, but not limited to, changes in general economic
conditions, such as interest rate and currency fluctuations, higher fuel
and
other energy costs, slower growth in personal income, declining housing
turnover, the availability of mortgage financing, inflation or deflation
of
commodity prices and other factors which can negatively affect our customers,
as
well as our ability to: (i) respond to a greater or longer than expected
downturn in the housing industry and the level of repairs, remodeling, and
additions to existing homes, as well as general reduction in commercial building
activity; (ii) secure, develop, and otherwise implement new technologies
and
processes designed to enhance our efficiency and competitiveness; (iii) attract,
train, and retain highly-qualified associates; (iv) locate, secure, and
successfully develop new sites for store development particularly in major
metropolitan markets; (v) respond to fluctuations in the prices and availability
of services, supplies, and products; (vi) respond to the growth and impact
of
competition; (vii) address legal and regulatory developments; and (viii)
respond
to unanticipated weather conditions that could adversely affect sales. For
more
information about these and other risks and uncertainties that we are exposed
to, you should read the "Risk Factors" included in our Annual Report on Form
10-K to the United States Securities and Exchange Commission and the description
of material changes, if any, in those "Risk Factors" included in our Quarterly
Reports on Form 10-Q.
The
forward-looking statements contained in this Form 10-Q are based upon data
available as of the date of this report or other specified date and speak
only
as of such date. We expressly disclaim any obligation to update or revise
any
forward-looking statement, whether as a result of new information, change
in
circumstances, future events, or otherwise.
The
Company's market risk has not changed materially since February 2, 2007.
The
Company's management, with the participation of the Chief Executive Officer
and
Chief Financial Officer, has evaluated the effectiveness of the Company’s
“disclosure controls and procedures”, (as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, (the “Exchange Act”)). Based upon their evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of August 3, 2007,
the
Company’s disclosure controls and procedures were effective for the purpose of
ensuring that the information required to be disclosed in the reports that
the
Company files or submits under the Exchange Act with the Securities and Exchange
Commission (the “SEC”) (1) is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and (2) is
accumulated and communicated to the Company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.
In
addition, no change in the Company’s internal control over financial reporting
occurred during the fiscal quarter ended August 3, 2007 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Item
1A. - Risk Factors
There
have been no material changes in our risk factors from those disclosed in
our
Annual Report on Form 10-K.
Issuer
Purchases of Equity Securities
|
(In
millions, except average
price
paid per share)
|
|
|
Total
Number of Shares Purchased (1)
|
|
|
Average
Price Paid
per
Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or Programs
|
|
|
Dollar
Value of Shares that May Yet Be Purchased Under the Plans or
Programs(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
5, 2007 - June 1, 2007
|
|
|
2.8
|
|
$ |
32.60
|
|
|
2.8
|
|
$ |
3,699
|
|
June
2, 2007 - July 6, 2007
|
|
|
20.9
|
|
|
31.56
|
|
|
20.9
|
|
|
3,039
|
|
July
7, 2007 - August 3, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of August 3, 2007
|
|
|
23.7
|
|
$ |
31.68
|
|
|
23.7
|
|
$ |
3,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
During
the second quarter of fiscal 2007, the Company repurchased an aggregate
of
23,672,289 shares of its common stock pursuant to the share repurchase
program (the Program). The total number of shares purchased also
includes a nominal amount of shares repurchased from employees to
satisfy
the exercise price of certain stock option
exercises.
|
(2) |
On
May 25, 2007, the Company’s Board of Directors authorized up to an
additional $3 billion in share repurchases and extended the period
of the
Program through fiscal 2009. The Company will continue implementing
the
Program through purchases made from time to time either in the open
market
or through private transactions, in accordance with SEC regulations.
|
(a) The
annual meeting of shareholders was held on May 25, 2007.
(b) Directors
elected at the meeting were: David W. Bernauer, Leonard L. Berry, Dawn E.
Hudson
and Robert A. Niblock.
Incumbent
Directors whose terms expire in subsequent years are: Robert A. Ingram, Robert
L. Johnson, Richard K. Lochridge, Peter C. Browning, Marshall O. Larsen,
Stephen
F. Page and O. Temple Sloan, Jr.
(c) The
matters voted upon at the meeting and the results of the voting were as
follows:
(1) Election
of Directors:
|
CLASS
|
TERM
EXPIRING
|
FOR
|
WITHHELD
|
David
W. Bernauer
|
III
|
2010
|
1,383,825,554
|
15,246,097
|
Leonard
L. Berry
|
III
|
2010
|
1,383,144,672
|
15,926,979
|
Dawn
E. Hudson
|
III
|
2010
|
1,380,377,184
|
18,694,466
|
Robert
A. Niblock
|
III
|
2010
|
1,379,073,800
|
19,997,851
|
(2) Approval
of the amendment to the Lowe’s Companies, Inc. Employee Stock Purchase
Plan:
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
1,189,377,335
|
12,492,132
|
10,580,409
|
186,621,774
|
(3) Ratification
of Appointment of Deloitte & Touche LLP as the Company’s Independent
Registered Public Accounting Firm for the 2007 Fiscal
Year:
FOR
|
AGAINST
|
ABSTAIN
|
1,383,109,442
|
7,045,810
|
8,916,398
|
(4)
Shareholder
proposal entitled “Qualifications for Director
Nominees”:
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
26,224,676
|
1,173,875,046
|
12,348,754
|
186,623,174
|
(5)
Shareholder
proposal entitled “Wood Procurement
Report”:
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
63,139,722
|
1,045,095,560
|
104,217,995
|
186,618,374
|
(6)
Shareholder
proposal entitled “Elect Each Director
Annually”:
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
873,516,609
|
327,134,050
|
11,791,298
|
186,629,694
|
(7)
Shareholder
proposal regarding Executive Severance Agreements:
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
350,935,022
|
845,965,176
|
15,548,240
|
186,623,214
|
(8)
Shareholder
proposal entitled “Pay-for-Superior-Performance Proposal”:
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
272,875,833
|
923,222,276
|
16,350,368
|
186,623,174
|
Exhibit
10.1 - Lowe’s
Companies, Inc. Amended and Restated Credit Agreement Dated June 15,
2007
Exhibit
12.1 - Statement
Re Computation of Ratio of Earnings to Fixed Charges
Exhibit
15.1 - Deloitte & Touche LLP Letter Re Unaudited Interim Financial
Information
Exhibit
31.1 - Certification Pursuant to Rules 13a-14(a) and 15d-14(a) Under the
Securities Exchange Act of 1934, as Amended
Exhibit
31.2 - Certification Pursuant to Rules 13a-14(a) and 15d-14(a) Under the
Securities Exchange Act of 1934, as Amended
Exhibit
32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit
32.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
LOWE'S
COMPANIES, INC.
|
|
|
|
September 5,
2007
Date
|
|
/s/Matthew
V. Hollifield
Matthew
V. Hollifield
Senior
Vice President and Chief Accounting
Officer
|
Exhibit
No.
|
|
Description
|
|
|
|
10.1
|
|
Lowe’s
Companies, Inc. Amended and Restated Credit Agreement Dated June
15,
2007
|
|
|
|
12.1
|
|
Statement
Re Computation of Ratio of Earnings to Fixed Charges
|
|
|
|
15.1
|
|
Deloitte
& Touche LLP Letter Re Unaudited Interim Financial
Information
|
|
|
|
31.1
|
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) Under the Securities
Exchange
Act of 1934, as Amended
|
|
|
|
31.2
|
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities
Exchange
Act of 1934, as amended
|
|
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|