lowesform10q10312008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended October 31,
2008
|
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ______
to ______
|
|
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)
|
|
|
(704)
758-1000 |
|
(Registrant's
telephone number, including area code)
|
|
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.
x Yes o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o Yes
x No
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 NOVEMBER 28, 2008
|
Common
Stock, $.50 par value
|
|
1,469,449,361
|
LOWE’S
COMPANIES, INC.
-
INDEX -
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PART I - Financial
Information
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Page
No.
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Item
1.
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Financial
Statements
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3
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4
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5
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6 -
11
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12
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Item
2.
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13
- 20
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Item
3.
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20
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Item
4.
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20
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PART II - Other
Information
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Item
1A.
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21
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Item
6.
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21
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22
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23
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Part
I - FINANCIAL INFORMATION
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Item
1. Financial Statements
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Lowe's
Companies, Inc.
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In
Millions, Except Par Value Data
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(Unaudited)
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(Unaudited)
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October
31, 2008
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November
2, 2007
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February
1, 2008
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Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current
assets:
|
|
|
|
|
|
|
|
|
|
|
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Cash
and cash equivalents
|
|
$
|
322
|
|
$
|
336
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|
$
|
281
|
|
Short-term
investments (includes $33 million of trading
|
|
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|
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|
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securities
at October 31, 2008)
|
|
|
445
|
|
|
231
|
|
|
249
|
|
Merchandise
inventory - net
|
|
|
8,327
|
|
|
7,775
|
|
|
7,611
|
|
Deferred
income taxes - net
|
|
|
230
|
|
|
241
|
|
|
247
|
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Other
current assets
|
|
|
197
|
|
|
193
|
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298
|
|
|
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Total
current assets
|
|
|
9,521
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|
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8,776
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|
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8,686
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Property,
less accumulated depreciation
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22,602
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20,755
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21,361
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Long-term
investments
|
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|
466
|
|
|
333
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|
509
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Other
assets
|
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|
440
|
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|
325
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|
313
|
|
|
|
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|
|
|
|
|
|
|
|
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Total
assets
|
|
$
|
33,029
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$
|
30,189
|
|
$
|
30,869
|
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Liabilities
and shareholders' equity
|
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Current
liabilities:
|
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Short-term
borrowings
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$
|
249
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$
|
16
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$
|
1,064
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Current
maturities of long-term debt
|
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34
|
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35
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40
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Accounts
payable
|
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4,831
|
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3,895
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3,713
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Accrued
compensation and employee benefits
|
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|
516
|
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512
|
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|
467
|
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Self-insurance
liabilities
|
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|
723
|
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|
653
|
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|
671
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Deferred
revenue
|
|
|
748
|
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|
793
|
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|
717
|
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Other
current liabilities
|
|
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1,330
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1,288
|
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1,079
|
|
|
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Total
current liabilities
|
|
|
8,431
|
|
|
7,192
|
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|
7,751
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Long-term
debt, excluding current maturities
|
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5,044
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5,580
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5,576
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Deferred
income taxes - net
|
|
|
751
|
|
|
615
|
|
|
670
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Other
liabilities
|
|
|
846
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748
|
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774
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Total
liabilities
|
|
|
15,072
|
|
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14,135
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14,771
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Shareholders'
equity:
|
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Preferred
stock - $5 par value, none issued
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-
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-
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-
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Common
stock - $.50 par value;
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Shares
issued and outstanding
|
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October 31,
2008
1,467 |
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November 2,
2007 1,470 |
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February 1,
2008 1,458 |
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734
|
|
|
735
|
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|
729
|
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Capital
in excess of par value
|
|
|
215
|
|
|
20
|
|
|
16
|
|
Retained
earnings
|
|
|
17,012
|
|
|
15,281
|
|
|
15,345
|
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Accumulated
other comprehensive (loss) income
|
|
|
(4)
|
|
|
18
|
|
|
8
|
|
|
|
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|
|
|
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|
|
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|
Total
shareholders' equity
|
|
|
17,957
|
|
|
16,054
|
|
|
16,098
|
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Total
liabilities and shareholders' equity
|
|
$
|
33,029
|
|
$
|
30,189
|
|
$
|
30,869
|
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|
Lowe's Companies,
Inc.
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In
Millions, Except Per Share Data
|
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|
Three
Months Ended
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|
Nine
Months Ended
|
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|
October
31, 2008
|
|
|
November
2, 2007
|
|
|
October
31, 2008
|
|
|
November
2, 2007
|
|
Current Earnings
|
|
|
Amount
|
Percent
|
|
|
Amount
|
Percent
|
|
|
Amount
|
Percent
|
|
|
Amount
|
Percent
|
|
Net sales
|
|
$
|
11,728
|
100.00
|
|
$
|
11,565
|
100.00
|
|
$
|
38,246
|
100.00
|
|
$
|
37,904
|
100.00
|
|
|
|
|
|
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|
|
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|
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|
Cost
of sales
|
|
|
7,743
|
66.02
|
|
|
7,601
|
65.73
|
|
|
25,113
|
65.66
|
|
|
24,798
|
65.42
|
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Gross margin
|
|
|
3,985
|
33.98
|
|
|
3,964
|
34.27
|
|
|
13,133
|
34.34
|
|
|
13,106
|
34.58
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
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|
|
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|
Selling,
general and administrative
|
|
|
2,726
|
23.23
|
|
|
2,503
|
21.63
|
|
|
8,464
|
22.13
|
|
|
8,026
|
21.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
opening costs
|
|
|
31
|
0.27
|
|
|
41
|
0.36
|
|
|
70
|
0.18
|
|
|
79
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
385
|
3.29
|
|
|
340
|
2.94
|
|
|
1,142
|
2.99
|
|
|
995
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
- net
|
|
|
65
|
0.56
|
|
|
50
|
0.43
|
|
|
210
|
0.55
|
|
|
148
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,207
|
27.35
|
|
|
2,934
|
25.36
|
|
|
9,886
|
25.85
|
|
|
9,248
|
24.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
|
778
|
6.63
|
|
|
1,030
|
8.91
|
|
|
3,247
|
8.49
|
|
|
3,858
|
10.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
290
|
2.47
|
|
|
387
|
3.35
|
|
|
1,214
|
3.17
|
|
|
1,457
|
3.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
488
|
4.16
|
|
$
|
643
|
5.56
|
|
$
|
2,033
|
5.32
|
|
$
|
2,401
|
6.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
1,459
|
|
|
|
1,470
|
|
|
|
1,456
|
|
|
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.33
|
|
|
$
|
0.44
|
|
|
$
|
1.40
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
1,464
|
|
|
|
1,497
|
|
|
|
1,473
|
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per
share
|
|
$
|
0.33
|
|
|
$
|
0.43
|
|
|
$
|
1.38
|
|
|
$
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per
share
|
|
$
|
0.085
|
|
|
$
|
0.080
|
|
|
$
|
0.250
|
|
|
$
|
0.210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
16,648
|
|
|
$
|
15,210
|
|
|
$
|
15,345
|
|
|
$
|
14,860
|
|
|
Cumulative
effect adjustment1
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8)
|
|
|
Net
earnings
|
|
|
488
|
|
|
|
643
|
|
|
|
2,033
|
|
|
|
2,401
|
|
|
Cash
dividends
|
|
|
(124)
|
|
|
|
(118)
|
|
|
|
(366)
|
|
|
|
(312)
|
|
|
Share
repurchases
|
|
|
-
|
|
|
|
(454)
|
|
|
|
-
|
|
|
|
(1,660)
|
|
|
Balance
at end of period
|
|
$
|
17,012
|
|
|
$
|
15,281
|
|
|
$
|
17,012
|
|
|
$
|
15,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 The
Company adopted FIN 48, "Accounting for Uncertainty in Income Taxes",
effective February 3, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lowe's
Companies, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
Millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
October
31, 2008
|
|
November
2, 2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings
|
$
|
2,033
|
|
$
|
2,401
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
1,232
|
|
|
1,069
|
|
Deferred
income taxes
|
|
99
|
|
|
(42)
|
|
Loss
on property and other assets
|
|
48
|
|
|
33
|
|
Loss
on redemption of long-term debt
|
|
8
|
|
|
-
|
|
Share-based
payment expense
|
|
79
|
|
|
69
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
Merchandise
inventory - net
|
|
(725)
|
|
|
(630)
|
|
Other
operating assets
|
|
77
|
|
|
43
|
|
Accounts
payable
|
|
1,124
|
|
|
368
|
|
Other
operating liabilities
|
|
383
|
|
|
474
|
|
Net
cash provided by operating activities
|
|
4,358
|
|
|
3,785
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
Purchases
of short-term investments
|
|
(179)
|
|
|
(592)
|
|
Proceeds
from sale/maturity of short-term investments
|
|
265
|
|
|
853
|
|
Purchases
of long-term investments
|
|
(1,097)
|
|
|
(1,286)
|
|
Proceeds
from sale/maturity of long-term investments
|
|
837
|
|
|
1,057
|
|
Increase
in other long-term assets
|
|
(53)
|
|
|
(20)
|
|
Property
acquired
|
|
(2,539)
|
|
|
(2,912)
|
|
Proceeds
from sale of property and other long-term assets
|
|
26
|
|
|
51
|
|
Net
cash used in investing activities
|
|
(2,740)
|
|
|
(2,849)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Net
decrease in short-term borrowings
|
|
(786)
|
|
|
(9)
|
|
Proceeds
from issuance of long-term debt
|
|
13
|
|
|
1,294
|
|
Repayment
of long-term debt
|
|
(564)
|
|
|
(89)
|
|
Proceeds
from issuance of common stock under employee stock purchase
plan
|
|
39
|
|
|
40
|
|
Proceeds
from issuance of common stock from stock options exercised
|
|
94
|
|
|
58
|
|
Cash
dividend payments
|
|
(366)
|
|
|
(312)
|
|
Repurchase
of common stock
|
|
(8)
|
|
|
(1,950)
|
|
Excess
tax benefits of share-based payments
|
|
1
|
|
|
4
|
|
Net
cash used in financing activities
|
|
(1,577)
|
|
|
(964)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
41
|
|
|
(28)
|
|
Cash
and cash equivalents, beginning of period
|
|
281
|
|
|
364
|
|
Cash
and cash equivalents, end of period
|
$
|
322
|
|
$
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lowe's Companies,
Inc.
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 October 31, 2008 and
November 2, 2007, and the results of operations for the three and nine months
ended October 31, 2008 and November 2, 2007, and cash flows for the nine months
ended October 31, 2008 and November 2, 2007.
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 1, 2008 (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. The previous accrued salaries and wages caption was
replaced with a new caption, accrued compensation and employee benefits, on the
consolidated balance sheets. As part of this, certain prior period
amounts were reclassified from other current liabilities into accrued
compensation and employee benefits.
Note 2: Fair Value Measurements
- Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,”
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. FASB Staff Position (FSP) FAS 157-2,
“Effective Date of FASB Statement No. 157” delayed the effective date for one
year for all nonrecurring fair value measurements of nonfinancial assets and
liabilities. As a result, the Company’s adoption of SFAS No. 157,
effective February 2, 2008, is currently limited to financial assets and
liabilities measured at fair value and other nonfinancial assets and liabilities
measured at fair value on a recurring basis. The Company elected a
partial deferral under the provisions of FSP FAS 157-2 related to the
measurement of fair value used when evaluating long-lived assets for impairment
and liabilities for exit or disposal activities.
SFAS No.
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS No. 157 establishes a
three-level hierarchy, which encourages an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value. The three levels of the hierarchy are defined as
follows:
|
•
|
|
Level
1 – inputs to the valuation techniques that are quoted prices in active
markets for identical assets or
liabilities
|
|
•
|
|
Level
2 – inputs to the valuation techniques that are other than quoted prices
but are observable for the assets or liabilities, either directly or
indirectly
|
|
•
|
|
Level
3 – inputs to the valuation techniques that are unobservable for the
assets or liabilities
|
The
effect of partially adopting this standard did not result in changes to the
valuation techniques the Company had previously used to measure the fair value
of its financial assets and liabilities. Therefore, the primary
impact to the Company upon partial adoption of SFAS No. 157 was expanded fair
value measurement disclosure.
The
Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities,” effective February 2, 2008. 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 are
reported in earnings at each reporting period. Certain pre-existing
financial
instruments
included in long-term investments in the consolidated balance sheet, for which
the fair value option has been elected upon the adoption of SFAS No. 159, will
now be reported as trading securities under SFAS No. 115. For the
three and nine months ended October 31, 2008, unrealized losses on those trading
securities were $8 million and $11 million, respectively, and were included in
selling, general and administrative (SG&A) expense. Cash flows
from purchases, sales and maturities of trading securities continue to be
included in cash flows from investing activities on the consolidated statements
of cash flows because the nature and purpose for which the securities were
acquired has not changed as a result of the SFAS No. 159
election. The adoption of SFAS No. 159 did not have a material impact
on the Company’s consolidated financial statements.
The
following table presents the Company’s financial assets measured at fair value
on a recurring basis as of October 31, 2008, classified by SFAS No. 157
fair value hierarchy:
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
Significant
Other Observable Inputs
|
|
Significant
Unobservable Inputs
|
|
(In
millions)
|
|
October
31, 2008
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Short-term
investments
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
$
|
412
|
$
|
122
|
$
|
290
|
$
|
-
|
|
Trading
securities
|
|
33
|
|
33
|
|
-
|
|
-
|
|
Long-term
investments
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
466
|
|
-
|
|
466
|
|
-
|
|
Total
investments
|
$
|
911
|
$
|
155
|
$
|
756
|
$
|
-
|
|
When
available, quoted prices are used to determine fair value. When
quoted prices in active markets are available, investments are classified within
Level 1 of the fair value hierarchy. The Company’s Level 1
investments primarily consist of investments in money market and mutual
funds. When quoted prices in active markets are not available, fair
values are determined using pricing models and the inputs to those pricing
models are based on observable market inputs in active markets. The
inputs to the pricing models are typically benchmark yields, reported trades,
broker-dealer quotes, issuer spreads and benchmark securities, among
others. The Company’s Level 2 investments primarily consist of
investments in municipal obligations.
Note 3: 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 $227 million at October 31, 2008, $154 million at
November 2, 2007, and $167 million at February 1, 2008. Restricted
balances included in long-term investments were $119 million at October 31,
2008, $128 million at November 2, 2007, and $172 million at February 1,
2008.
Note 4: Property - Property is
shown net of accumulated depreciation of $8.5 billion at October 31, 2008,
$7.1 billion at November 2, 2007, and $7.5 billion at February 1,
2008.
Note 5: Short-Term Borrowings -
The Company has a $1.75 billion senior credit facility that expires in
June 2012. The senior credit facility supports the Company’s
commercial paper and revolving credit programs. Borrowings made under the
senior credit facility 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
senior credit facility. The senior credit facility contains certain
restrictive covenants, which include maintenance of a debt leverage ratio as
defined by the senior credit facility. The Company was in compliance
with those covenants at October 31, 2008. Eighteen banking institutions
are participating in the senior credit facility. As of October 31, 2008,
there was $60 million outstanding under the commercial paper program and the
weighted-average interest rate on the outstanding commercial paper was
1.03%. As of November 2, 2007, there were no outstanding borrowings under
the senior credit facility or under the commercial paper program. As
of February 1, 2008,
there was
$1.0 billion outstanding under the commercial paper program and the
weighted-average interest rate on the outstanding commercial paper was
3.92%.
The
Company has a Canadian dollar (C$) denominated credit agreement in the amount of
C$200 million that expires in January 2009. The agreement was
established for the purpose of funding the construction of retail stores and for
working capital and other general corporate purposes in
Canada. 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 credit agreement. The credit agreement contains certain
restrictive covenants, which include maintenance of a debt leverage ratio as
defined by the credit agreement. The Company was in compliance with
those covenants at October 31, 2008. Three banking institutions are
participating in the credit agreement. As of October 31, 2008, there
was C$200 million or the equivalent of $165 million outstanding under the credit
agreement and the weighted-average interest rate on the short-term borrowings
was 3.18%. As of November 2, 2007, there were no borrowings
outstanding under the credit agreement. As of February 1, 2008, there
was C$60 million or the equivalent of $60 million outstanding under the credit
agreement and the weighted-average interest rate on the short-term borrowings
was 5.75%.
The
Company also has a C$ denominated credit facility in the amount of C$50 million,
which provides revolving credit support for the Company’s Canadian
operations. This uncommitted facility provides the Company with the
ability to make unsecured borrowings, which are priced at a fixed rate based
upon market conditions at the time of funding in accordance with the terms of
the credit facility. As of October 31, 2008, there was C$29 million
or the equivalent of $24 million outstanding under the credit facility and the
weighted-average interest rate on the short-term borrowings was
2.90%. As of November 2, 2007, there was C$15 million or the
equivalent of $16 million outstanding under the credit facility and the
weighted-average interest rate on the short-term borrowings was
4.84%. As of February 1, 2008, there were no borrowings outstanding
under the credit facility.
Note 6: Long-Term Debt - On June
30, 2008, the Company redeemed for cash approximately $19 million principal
amount, $14 million carrying amount, of its convertible notes issued in February
2001, which represented all remaining notes outstanding of such issue, at a
price equal to the sum of the issuance price plus accrued original issue
discount of such notes as of the redemption date ($730.71 per note).
During 2008, prior to the redemption, holders of an insignificant number of
notes exercised their right to convert their notes into shares of the Company’s
common stock at the rate of 32.896 shares per note. During the first
nine months of 2007, holders of $18 million principal amount, $13 million
carrying amount, of notes issued in February 2001 exercised their right to
convert the notes into approximately 591,000 shares of the Company’s common
stock at the rate of 32.896 shares per note.
On June
25, 2008, the Company completed a single open market repurchase of approximately
$187 million principal amount, $164 million carrying amount, of its senior
convertible notes issued in October 2001 at a price of $875.73 per note.
The Company subsequently redeemed on June 30, 2008 for cash approximately $392
million principal amount, $343 million carrying amount, of its senior
convertible notes issued in October 2001, which represented all remaining notes
outstanding of such issue, at a price equal to the sum of the issuance price
plus accrued original issue discount of such notes as of the redemption date
($875.73 per note). During 2008, prior to the redemption, as well as
during the first nine months of 2007, holders of an insignificant number of
notes exercised their right to convert their notes into shares of the Company’s
common stock at the rate of 34.424 shares per note.
Upon
redemption of these convertible notes, the Company recognized in SG&A
expense a loss of approximately $8 million related to the unamortized debt
issuance costs and underwriting discounts.
Note 7: 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. Extended warranty deferred revenue is included in
other liabilities (non-current) in the accompanying consolidated balance
sheets. Changes in deferred revenue for extended warranty contracts
are summarized as follows:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
(In
millions)
|
|
October
31, 2008
|
|
November
2, 2007
|
|
October
31, 2008
|
|
November
2, 2007
|
Extended
warranty deferred revenue, beginning of period
|
|
$
|
456
|
|
|
$
|
373
|
|
|
$
|
407
|
|
|
$
|
315
|
|
Additions
to deferred revenue
|
|
|
45
|
|
|
|
42
|
|
|
|
150
|
|
|
|
136
|
|
Deferred
revenue recognized
|
|
|
(32)
|
|
|
|
(23)
|
|
|
|
(88)
|
|
|
|
(59)
|
|
Extended
warranty deferred revenue, end of period
|
|
$
|
469
|
|
|
$
|
392
|
|
|
$
|
469
|
|
|
$
|
392
|
|
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. Unamortized deferred costs associated with
extended warranty contracts were $116 million and $88 million at October 31,
2008 and November 2, 2007, respectively, and 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
|
|
Nine
Months Ended
|
(In
millions)
|
|
October
31, 2008
|
|
November
2, 2007
|
|
October
31, 2008
|
|
November
2, 2007
|
Liability
for extended warranty claims, beginning of period
|
|
$
|
17
|
|
|
$
|
18
|
|
|
$
|
14
|
|
|
$
|
10
|
|
Accrual
for claims incurred
|
|
|
15
|
|
|
|
17
|
|
|
|
40
|
|
|
|
36
|
|
Claim
payments
|
|
|
(13)
|
|
|
|
(9)
|
|
|
|
(35)
|
|
|
|
(20)
|
|
Liability
for extended warranty claims, end of period
|
|
$
|
19
|
|
|
$
|
26
|
|
|
$
|
19
|
|
|
$
|
26
|
|
Note 8: Shareholders’ Equity - No
common shares were repurchased under the share repurchase program during the
first nine months of fiscal 2008. The Company repurchased 62.3
million common shares under the share repurchase program during the first nine
months of fiscal 2007. The total cost of the share repurchases was
$2.0 billion (of which $1.7 billion was recorded as a reduction in retained
earnings, after capital in excess of par value was depleted). As of
October 31, 2008, the Company had remaining authorization through 2009 under the
share repurchase program of $2.2 billion.
Note 9: Comprehensive Income -
Comprehensive income represents changes in shareholders’ equity from non-owner
sources and is comprised of net earnings plus or minus unrealized gains or
losses on available-for-sale securities and foreign currency translation adjustments. For
the three months ended October 31, 2008, both comprehensive income and net
earnings totaled $0.5 billion. For the three months ended November 2,
2007, comprehensive income totaled $0.7 billion and net earnings totaled $0.6
billion. For the nine months ended October 31, 2008, both
comprehensive income and net earnings totaled $2.0 billion. For the
nine months ended November 2, 2007, both comprehensive income and net earnings
totaled $2.4 billion.
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 of the balance sheet
date, as adjusted for the potential dilutive effect of share-based awards and
convertible notes. The following table reconciles earnings per share
for the three and nine months ended October 31, 2008 and November 2,
2007.
|
|
Three Months
Ended
|
|
|
|
Nine
Months Ended
|
|
(In
millions, except per share data)
|
|
October
31, 2008
|
|
|
November
2, 2007
|
|
|
|
October
31, 2008
|
|
|
November
2, 2007
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
488
|
|
|
$
|
643
|
|
|
$
|
2,033
|
|
|
$
|
2,401
|
|
Weighted-average
shares outstanding
|
|
|
1,459
|
|
|
|
1,470
|
|
|
|
1,456
|
|
|
|
1,490
|
|
Basic
earnings per share
|
|
$
|
0.33
|
|
|
$
|
0.44
|
|
|
$
|
1.40
|
|
|
$
|
1.61
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
488
|
|
|
$
|
643
|
|
|
$
|
2,033
|
|
|
$
|
2,401
|
|
Net
earnings adjustment for interest on convertible notes, net of
tax
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Net
earnings, as adjusted
|
|
$
|
488
|
|
|
$
|
643
|
|
|
$
|
2,035
|
|
|
$
|
2,403
|
|
Weighted-average
shares outstanding
|
|
|
1,459
|
|
|
|
1,470
|
|
|
|
1,456
|
|
|
|
1,490
|
|
Dilutive
effect of share-based awards
|
|
|
5
|
|
|
|
7
|
|
|
|
6
|
|
|
|
8
|
|
Dilutive
effect of convertible notes
|
|
|
-
|
|
|
|
20
|
|
|
|
11
|
|
|
|
21
|
|
Weighted-average
shares, as adjusted
|
|
|
1,464
|
|
|
|
1,497
|
|
|
|
1,473
|
|
|
|
1,519
|
|
Diluted
earnings per share
|
|
$
|
0.33
|
|
|
$
|
0.43
|
|
|
$
|
1.38
|
|
|
$
|
1.58
|
|
Stock
options to purchase 19.4 million and 7.9 million shares of common stock were
excluded from the computation of diluted earnings per share because their effect
would have been anti-dilutive for the three months ended October 31, 2008 and
November 2, 2007, respectively. Stock options to purchase 17.8
million and 7.9 million shares of common stock were excluded from the
computation of diluted earnings per share because their effect would have been
anti-dilutive for the nine months ended October 31, 2008 and November 2, 2007,
respectively.
Note
11: Supplemental Disclosure
Net
interest expense is comprised of the following:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
October
31, 2008
|
|
|
November
2, 2007
|
|
|
October
31, 2008
|
|
|
November
2, 2007
|
|
Long-term
debt
|
|
$
|
73
|
|
|
$
|
65
|
|
|
$
|
219
|
|
|
$
|
174
|
|
Short-term
borrowings
|
|
|
2
|
|
|
|
3
|
|
|
|
9
|
|
|
|
4
|
|
Capitalized
leases
|
|
|
7
|
|
|
|
8
|
|
|
|
24
|
|
|
|
24
|
|
Interest
income
|
|
|
(11)
|
|
|
|
(10)
|
|
|
|
(32)
|
|
|
|
(34)
|
|
Interest
capitalized
|
|
|
(10)
|
|
|
|
(22)
|
|
|
|
(25)
|
|
|
|
(30)
|
|
Other
|
|
|
4
|
|
|
|
6
|
|
|
|
15
|
|
|
|
10
|
|
Interest
- net
|
|
$
|
65
|
|
|
$
|
50
|
|
|
$
|
210
|
|
|
$
|
148
|
|
Supplemental
disclosures of cash flow information:
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
October
31, 2008
|
|
|
November
2, 2007
|
|
Cash
paid for interest, net of amount capitalized
|
|
$
|
287
|
|
|
$
|
199
|
|
Cash
paid for income taxes
|
|
$
|
952
|
|
|
$
|
1,336
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
Non-cash
property acquisitions
|
|
$
|
185
|
|
|
$
|
125
|
|
Conversions
of long-term debt to equity
|
|
$
|
1
|
|
|
$
|
13
|
|
Note 12: Recent Accounting
Pronouncements - In June 2008, the Financial Accounting Standards Board
(FASB) issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities”. FSP
EITF 03-6-1 addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and affects entities
that accrue cash dividends on share-based payment awards during the awards’
service period when the dividends do not need to be returned if the employees
forfeit the awards. FSP EITF 03-6-1 states that all outstanding
unvested share-based payment awards that contain rights to nonforfeitable
dividends participate in undistributed earnings with common shareholders and,
therefore, need to be included in the earnings allocation in computing earnings
per share under the two-class method. FSP EITF 03-6-1 is effective
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company does not expect the adoption of FSP
EITF 03-6-1 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 October 31, 2008 and November 2, 2007,
and the related consolidated statements of current and retained earnings for the
fiscal three and nine-month periods then ended, and of cash flows for the fiscal
nine-month periods ended October 31, 2008 and November 2, 2007. These
consolidated interim financial statements are the responsibility of the
Company’s management.
We
conducted our reviews in accordance with the 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 1, 2008, and the related consolidated statements of
earnings, shareholders’ equity, and cash flows for the fiscal year then ended
(not presented herein); and in our report dated April 1, 2008, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet of the
Company as of February 1, 2008 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
December
2,
2008
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 nine month periods ended October 31, 2008 and November 2,
2007. 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 1, 2008 (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 the 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.
EXECUTIVE
OVERVIEW
The third
quarter of 2008 continued to be a difficult operating environment for our
industry due to numerous external factors weighing on home improvement
sales. The pressures on the consumer have intensified as unemployment
has risen, equity markets have declined, and concerns about the broader economy
have grown. These factors, combined with falling home prices and
tight credit markets, suggest continued pressure on home improvement consumers
in the near term. We continue to see the greatest sales weakness in
bigger ticket discretionary products, and the weakness is most pronounced in
areas hardest hit by the housing slowdown. In contrast, hurricane
preparation and recovery spending had a positive impact on comparable store
sales in the third quarter. Also, our outdoor categories benefited
from more seasonable weather as compared to last year’s drought conditions in
many parts of the U.S. However, since the balance of the
macro-economic factors that impact our business remains unfavorable, we will
continue to take a cautious approach to ensure that we are well positioned to
capitalize on opportunities as they develop.
Despite
the challenging sales environment and soft demand for discretionary projects, we
continue to gain market share, which is a function of our commitment to service
and our ability to capitalize on the evolving competitive
landscape. According to third-party estimates, we gained unit market
share in 13 of our 20 product categories in the third calendar quarter versus
the same period last year. We continue to use our rolling 18-month
promotional calendar to support our marketing program that highlights basic home
improvement projects that consumers are doing to maintain their
homes. We remain focused on our Everyday Low Price strategy, which we
will continue to emphasize going forward. We strive to balance our
cost cutting efforts with our commitment to customer service. Our
third quarter customer focus scores show an improvement in customer service and
satisfaction, even though we were reducing payroll in response to decreased
sales.
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
|
|
|
October
31, 2008
|
|
November
2, 2007
|
|
2008
vs. 2007
|
|
2008
vs. 2007
|
|
Net
sales
|
100.00
|
%
|
100.00
|
%
|
N/A
|
|
1.4
|
%
|
Gross
margin
|
33.98
|
|
34.27
|
|
(29)
|
|
0.5
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
23.23
|
|
21.63
|
|
160
|
|
8.9
|
|
Store
opening costs
|
0.27
|
|
0.36
|
|
(9)
|
|
(23.5)
|
|
Depreciation
|
3.29
|
|
2.94
|
|
35
|
|
13.5
|
|
Interest -
net
|
0.56
|
|
0.43
|
|
13
|
|
30.0
|
|
Total
expenses
|
27.35
|
|
25.36
|
|
199
|
|
9.3
|
|
Pre-tax
earnings
|
6.63
|
|
8.91
|
|
(228)
|
|
(24.5)
|
|
Income
tax provision
|
2.47
|
|
3.35
|
|
(88)
|
|
(25.4)
|
|
Net
earnings
|
4.16
|
%
|
5.56
|
%
|
(140)
|
|
(24.0)
|
%
|
|
|
|
|
|
|
|
|
|
EBIT
margin (1)
|
7.19
|
%
|
9.34
|
%
|
(215)
|
|
(22.0)
|
%
|
|
Nine
Months Ended
|
|
Basis
Point Increase / (Decrease) in Percentage of Net Sales from Prior
Period
|
|
Percentage
Increase / (Decrease) in Dollar Amounts from Prior Period
|
|
|
October
31, 2008
|
|
November
2, 2007
|
|
2008
vs. 2007
|
|
2008
vs. 2007
|
|
Net
sales
|
100.00
|
%
|
100.00
|
%
|
N/A
|
|
0.9
|
%
|
Gross
margin
|
34.34
|
|
34.58
|
|
(24)
|
|
0.2
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
22.13
|
|
21.17
|
|
96
|
|
5.5
|
|
Store
opening costs
|
0.18
|
|
0.21
|
|
(3)
|
|
(11.9)
|
|
Depreciation
|
2.99
|
|
2.63
|
|
36
|
|
14.8
|
|
Interest -
net
|
0.55
|
|
0.39
|
|
16
|
|
42.4
|
|
Total
expenses
|
25.85
|
|
24.40
|
|
145
|
|
6.9
|
|
Pre-tax
earnings
|
8.49
|
|
10.18
|
|
(169)
|
|
(15.8)
|
|
Income
tax provision
|
3.17
|
|
3.85
|
|
(68)
|
|
(16.7)
|
|
Net
earnings
|
5.32
|
%
|
6.33
|
%
|
(101)
|
|
(15.3)
|
%
|
|
|
|
|
|
|
|
|
|
EBIT
margin (1)
|
9.04
|
%
|
10.57
|
%
|
(153)
|
|
(13.7)
|
%
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
Other
metrics:
|
|
October
31, 2008
|
|
November
2, 2007
|
|
October
31, 2008
|
|
November
2, 2007
|
|
Comparable
store sales changes (2)
|
|
(5.9)
|
%
|
(4.3)
|
%
|
(6.5)
|
%
|
(4.3)
|
%
|
Customer
transactions (in millions)
|
|
179
|
|
173
|
|
577
|
|
558
|
|
Average
ticket (3)
|
|
$
|
65.64
|
|
$
|
66.95
|
|
$
|
66.32
|
|
$
|
67.92
|
|
At
end of period:
|
|
|
|
|
|
|
|
|
|
Number
of stores
|
|
1,616
|
|
1,464
|
|
|
|
|
|
Sales
floor square feet (in millions)
|
|
183
|
|
166
|
|
|
|
|
|
Average
store size selling square feet (in thousands) (4)
|
|
113
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) We define EBIT margin as
earnings before interest and taxes as a percentage of sales (operating
margin).
|
|
(2)
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. |
|
(3)
We define average
ticket as net sales divided by number of customer
transactions.
|
|
(4)
We define average
store size selling square feet as sales floor square feet divided by the
number of stores open at the end of the
period.
|
Net Sales - The increase in
sales for both the quarter and nine months ended October 31, 2008 was driven by
our store expansion program, which added 152 net new stores during the last four
quarters. Although total customer transactions increased 3.4%
compared to the third quarter of 2007, average ticket decreased 2.0% to
$65.64. Comparable store sales declined 5.9% for the quarter and 6.5%
for the first nine months of 2008. Comparable store customer
transactions decreased 3.5% compared to the third quarter of 2007 and comparable
store average ticket decreased 2.3%. Hurricane preparation and
recovery spending had a positive impact on our comparable store sales in the
third quarter of 2008 of approximately 100 basis points. In addition,
seasonable weather as compared to last year’s drought conditions in many parts
of the U.S. positively impacted comparable store sales by approximately 50 basis
points during the quarter.
The
demand for hurricane related products resulted in comparable store sales
increases in building materials and outdoor power equipment and an above average
comparable store sales change in lumber. Hurricane related demand
also resulted in an above average comparable store sales change in our hardware
category primarily driven by demand for flashlights and batteries. In
addition, favorable comparisons due to last year’s drought contributed to a
comparable store sales increase in nursery and an above average comparable store
sales change in lawn & landscape for the third quarter. Also,
consumers’ efforts to make their homes more energy-efficient in preparation for
winter resulted in an increase in seasonal living comparable store sales,
primarily driven by demand for seasonal heating products, as well as an above
average comparable store sales change in our rough plumbing category, primarily
driven by demand for air filters and programmable
thermostats. Finally, the continued willingness of homeowners to take
on smaller projects to improve their outdoor space and maintain their homes
contributed to the comparable store sales increase in nursery as well as an
above average comparable store sales change in paint.
We
experienced mixed results within Specialty Sales during the quarter, due to
consumers’ hesitancy to take on larger discretionary projects. This
contributed to a low double-digit decline in comparable store sales in Installed
Sales. Weakness in cabinets and countertops, fashion plumbing, and
lighting also led to a low double-digit decline in comparable store Special
Order Sales. However, Commercial Business Customer sales continued to
perform above our average comparable store sales change. Our focus on
the professional tradesperson, property maintenance professional and the
repair/remodeler continue to drive solid results in Commercial Business Customer
sales.
We
continued to experience a wide range of comparable store sales performance from
a geographic market perspective in the third quarter. Markets in the
western U.S., Florida, and certain areas of the Northeast experienced
double-digit declines in comparable store sales during the third
quarter. These areas, which include some of the markets most
pressured by the weak housing market, reduced our comparable store sales for the
quarter by approximately 350 basis points. Contrasting those markets,
we continued to see solid sales performance in our Southern Texas and Ohio
Valley markets during the third quarter of 2008. Our Southern Texas
market has performed well for several quarters, and during the third quarter, we
experienced increased demand for hurricane related products which resulted in
the strong comparable
store
sales performance. These better performing markets had a positive
impact on total company comparable store sales of approximately 150 basis points
for the quarter.
Gross Margin - The 29 basis
point decline in gross margin as a percentage of sales from the third quarter of
2007 was primarily driven by de-leverage of approximately 10 basis points
attributable to the mix of items sold, 10 basis points due to higher fuel costs
and nine basis points related to distribution fixed costs. In
addition, lower vendor rebates due to decreased volumes negatively impacted
gross margin by approximately eight basis points during the
quarter. De-leverage from these factors was partially offset by
leverage of approximately 10 basis points from lower inventory
shrink.
The
decrease in gross margin as a percentage of sales for the first nine months of
2008 compared to 2007 was primarily driven by our carpet installation promotion
and higher fuel costs. These factors were partially offset by the
positive impact from lower inventory shrink.
SG&A - The 160 basis
point increase in SG&A as a percentage of sales from the third quarter of
2007 was primarily driven by de-leverage of approximately 81 basis points in
store payroll. As sales per store declined, additional stores met the
base staffing hours threshold, which increased the proportion of fixed to total
payroll. The resulting de-leverage in store payroll was partially
offset by leverage of 34 basis points in store service expense, due to the
shifting of certain tasks from third-party in-store service groups to store
employees. The offsetting impact of these two factors resulted in net
de-leverage of 47 basis points. We also experienced de-leverage of
approximately 46 basis points in insurance expense, 36 basis points in bonus
expense, and 20 basis points in fixed expenses, such as rent, property taxes and
utilities during the quarter. De-leverage in insurance expense was
due to a favorable adjustment to self-insurance reserves in the third quarter of
2007. De-leverage in bonus expense was attributable to higher
achievement against performance targets this year. De-leverage in
fixed expenses was a result of the comparable store sales decline. In
addition, despite the difficult credit environment, we experienced de-leverage
in our proprietary credit programs of only 11 basis points, which was in line
with our expectations.
The
increase in SG&A as a percentage of sales for the first nine months of 2008
compared to 2007 was similarly driven by de-leverage in store payroll and fixed
expenses, such as rent, property taxes and utilities, as a result of softer
sales, as well as de-leverage in bonus expense. Our expense
de-leverage was partially offset by leverage in store service
expense.
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 $31 million and $41
million in the third quarters of 2008 and 2007, respectively. Because
store opening costs are expensed as incurred, the timing of expense recognition
fluctuates based on the timing of store openings. We opened 39 new
stores in the third quarter of 2008, compared to the opening of 40 new stores in
the third quarter of 2007. Store opening costs for stores opened
during the third quarter of 2008 and 2007 averaged approximately $0.7 million
and $0.8 million per store, respectively.
Store
opening costs were $70 million and $79 million for the first nine months of 2008
and 2007, respectively. Store opening costs were associated with the
opening of 82 new stores in 2008, compared to 81 stores (79 new and two
relocated) in 2007. Store opening costs for stores opened during the
first nine months of 2008 and 2007 averaged approximately $0.8 million and $0.7
million per store, respectively.
Depreciation - The
de-leverage in depreciation for the three and nine month periods ended October
31, 2008 was driven by the addition of 152 net new stores over the past four
quarters and negative comparable store sales. Property, less
accumulated depreciation, totaled $22.6 billion at October 31, 2008, an increase
of 8.9% from $20.8 billion at November 2, 2007. At October 31, 2008,
we owned 87% of our stores, compared to 86% at November 2, 2007, which includes
stores on leased land.
Interest - The de-leverage in
interest expense for the three and nine month periods ended October 31, 2008 was
primarily due to additional expense as a result of the September 2007 $1.3
billion debt issuance and lower capitalized interest associated with fewer
stores under construction.
Income Tax Provision - Our
effective income tax rate was 37.3% and 37.4% for the three and nine month
periods ended October 31, 2008, respectively, and 37.6% and 37.8% for the three
and nine month periods ended November 2, 2007, respectively. Our
effective income tax rate was 37.7% for fiscal 2007.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
Our
primary sources of liquidity are cash flows from operating activities and our
$1.75 billion senior credit facility that expires in June 2012. Net
cash provided by operating activities totaled $4.4 billion and $3.8 billion for
the nine month periods ended October 31, 2008 and November 2, 2007,
respectively. The change in cash flows from operating activities was
primarily the result of continued efforts to improve vendor payment terms
and a higher proportion of purchases near the end of the
period.
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 property
were $2.5 billion and $2.9 billion for the nine month periods ended
October 31, 2008 and November 2, 2007, respectively. At October 31,
2008, we operated 1,616
stores in the United States and Canada with 183 million square feet
of retail selling space, representing a 10.2% increase over the retail
selling space at November 2, 2007.
Net cash used in financing
activities was $1.6 billion and $1.0 billion for the nine month periods ended
October 31, 2008 and November 2, 2007, respectively. The increase in net cash used
was primarily driven by a $2.5 billion decrease in
cash flows associated with net borrowing activities as compared to the first
nine months of 2007. This change was partially offset by a $2.0
billion decrease in share repurchases under the share repurchase
program. The ratio of debt to
equity plus debt was 22.9%, 26.0% and 29.3% as of October 31, 2008, November 2,
2007, and February 1, 2008, respectively.
Cash
Requirements
Capital
Expenditures
Our
initial 2008 capital forecast was approximately $4.2 billion, inclusive of
approximately $350 million of lease commitments, resulting in a planned net cash
outflow of approximately $3.8 billion in 2008. As of the end of the
third quarter of 2008, we expect that annual net cash outflow will be
approximately $3.6 billion. Approximately 80% of this expected
commitment is for store expansion. Expansion plans for 2008 consist
of 115 to 120 stores, increasing our total sales floor square footage by 7% to
8% for the year. All of the 2008 projects will be owned, including
approximately 30% that will be ground-leased properties.
As of
October 31, 2008, we owned and operated 13 regional distribution centers
(RDCs). We plan to start operations at our next RDC in Pittston,
Pennsylvania in the fourth quarter of 2008. As of October 31, 2008,
we also operated 15 flatbed distribution centers (FDCs) for the handling of
lumber, building materials and other long-length items. We owned 13
and leased two of these FDCs.
Debt
and Capital
On June
30, 2008, we redeemed for cash approximately $19 million principal amount, $14
million carrying amount, of our convertible notes issued in February 2001, which
represented all remaining notes outstanding of such issue, at a price equal to
the sum of the issuance price plus accrued original issue discount of such notes
as of the redemption date ($730.71 per note). From their issuance
through the redemption, principal amounts of $986 million, or approximately 98%,
of our February 2001 convertible notes were converted from debt to
equity. During 2008, prior to the redemption, an insignificant amount
was converted from debt to equity. During the first nine months of
2007, principal amounts of $18 million were converted from debt to
equity.
On June
25, 2008, we completed a single open market repurchase of approximately $187
million principal amount, $164 million carrying amount, of our senior
convertible notes issued in October 2001 at a price of $875.73 per
note. We subsequently redeemed on June 30, 2008 for cash
approximately $392 million principal amount, $343 million carrying amount, of
our senior convertible notes issued in October 2001, which represented all
remaining notes outstanding of such issue, at a price equal to the sum of the
issuance price plus accrued original issue discount of such notes as of the
redemption date ($875.73 per note). From their issuance through the
redemption, an insignificant amount of our senior convertible notes had
converted from debt to equity.
During
the first nine months of 2008, there were no share repurchases under the share
repurchase program. As of October 31, 2008, we had remaining
authorization through 2009 under the share repurchase program of $2.2
billion. Our current outlook does not assume any share repurchases
for 2008.
Sources
of Liquidity
Global
financial markets have recently experienced a general decrease in liquidity and
credit availability. Despite these events, we believe that net cash
provided by operating activities, existing cash and investments, and existing
financing arrangements will be adequate for our expansion plans and for other
operating requirements over the next 12 months.
The $1.75
billion senior credit facility supports our commercial paper and revolving
credit programs. Borrowings made under the senior credit facility 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 senior credit
facility. The senior credit facility contains certain restrictive
covenants, which include maintenance of a debt leverage ratio as defined by the
senior credit facility. We were in compliance with those covenants at
October 31, 2008. Eighteen banking institutions are participating in
the senior credit facility. As of October 31, 2008, there was $60
million outstanding under the commercial paper program leaving approximately
$1.7 billion available under the commercial paper and revolving credit programs,
which we believe will continue to be accessible throughout the term of the
senior credit facility. The weighted-average interest rate on the
outstanding commercial paper was 1.03%. As of November 2, 2007, there
were no outstanding borrowings under the senior credit facility or under the
commercial paper program.
The
Canadian dollar (C$) denominated credit agreement in the amount of C$200 million
expires in January 2009. We currently plan to extend the credit
agreement or seek alternative C$ denominated financing. The agreement
was established for the purpose of funding the construction of retail stores and
for working capital and other general corporate purposes in
Canada. 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 credit agreement. The credit agreement contains certain
restrictive covenants, which include maintenance of a debt leverage ratio as
defined by the credit agreement. We were in compliance with those
covenants at October 31, 2008. Three banking institutions are
participating in the credit agreement. As of October 31, 2008, there
was C$200 million or the equivalent of $165 million outstanding under the credit
agreement. The weighted-average interest rate on the short-term
borrowings was 3.18%. As of November 2, 2007, there were no
borrowings outstanding under the credit agreement.
We also
have a C$ denominated credit facility in the amount of C$50 million that
provides revolving credit support for our Canadian operations. This
uncommitted facility provides us with the ability to make unsecured borrowings,
which are priced at a fixed rate based upon market conditions at the time of
funding in accordance with the terms of the credit facility. As of
October 31, 2008, there was C$29 million or the equivalent of $24 million
outstanding under the credit facility. The weighted-average interest
rate on the short-term borrowings was 2.90%. As of November 2, 2007
there was C$15 million or the equivalent of $16 million outstanding under the
credit facility and the weighted-average interest rate on the short-term
borrowings was 4.84%.
Our debt
ratings at October 31, 2008, were as follows:
Current
Debt Ratings
|
S&P
|
Moody’s
|
Fitch
|
Commercial
Paper
|
A1
|
P1
|
F1
|
Senior
Debt
|
A+
|
A1
|
A+
|
Outlook
|
Stable
|
Stable
|
Negative
|
The
availability of funds through the issuance of commercial paper and new debt
could be adversely affected due to a debt rating downgrade or a deterioration of
certain financial ratios. We do not expect our credit ratings to be
downgraded, but if a downgrade were to occur, it could adversely impact our
future borrowing costs and access to capital markets. There are no
provisions in any agreements 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.
We are
committed to maintaining strong commercial paper ratings through the management
of debt-related ratios.
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
On June
30, 2008, we redeemed all remaining notes outstanding of our convertible notes
issued in February 2001 and our senior convertible notes issued in October 2001,
as further described in Note 6 to the consolidated financial statements
(unaudited) contained herein.
|
|
|
Payments
Due by Period
|
|
Contractual
Obligations
|
|
|
|
|
|
|
Less
than
|
|
|
|
1-3
|
|
|
|
4-5
|
|
|
|
After
5
|
|
(In
millions)
|
|
|
Total
|
|
|
|
1
year
|
|
|
|
years
|
|
|
|
years
|
|
|
|
years
|
|
Long-term
debt (principal and interest amounts,
excluding
discount)
|
|
$ |
9,277
|
|
|
$ |
295
|
|
|
$ |
1,064
|
|
|
$ |
1,025
|
|
|
$ |
6,893
|
|
There
have been no other significant changes in our contractual obligations and
commercial commitments other than in the ordinary course of business since the
end of 2007. Refer to the Annual Report for additional information
regarding our contractual obligations and commercial commitments.
COMPANY
OUTLOOK
Fourth Quarter
As of
November 17, 2008, the date of our third
quarter 2008 earnings release, we expected to open 33 to 38 new stores during
the fourth quarter of 2008, which ends on January 30, 2009, reflecting square
footage growth of 7% to 8%. We expected total sales to range from a
decline of 3% to an increase of 2% and comparable store sales to decline 5% to
10%. Earnings before interest and taxes as a percentage of sales
(operating margin) was expected to decline approximately 330 basis
points. In addition, store opening costs were expected to be
approximately $31 million. Diluted earnings per share of $0.08 to
$0.16 were expected for the fourth quarter. All comparisons are with
the fourth quarter of fiscal 2007.
Fiscal
2008
As of
November 17, 2008, the date of our third quarter 2008 earnings release, we
expected to open 115 to 120 stores during fiscal 2008, which ends on January 30,
2009, reflecting total square footage growth of 7% to 8%. Total sales
were expected to range from flat to an increase of 1% for the
year. Comparable store sales were expected to decline 6% to
7%. Earnings before interest and taxes as a percentage of sales
(operating margin) was expected to decline approximately 190 basis
points. We expected store opening costs to be approximately $100
million. Diluted earnings per share of $1.46 to $1.54 were expected
for fiscal 2008. All comparisons are with fiscal 2007.
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 rising unemployment, interest rate and
currency fluctuations, higher fuel and other energy costs, slower growth in
personal income, changes in consumer spending, the availability of consumer
credit and mortgage financing, changes in the rate of housing turnover,
inflation or deflation of commodity prices and other factors which can
negatively affect our customers, as well as our ability to: (i)
respond to adverse trends 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 from that disclosed in our
Annual Report on Form 10-K for the fiscal year ended February 1,
2008.
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 October 31,
2008, 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 quarter ended October 31, 2008 that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Part
II - OTHER INFORMATION
There
have been no material changes in our risk factors from those disclosed in our
Annual Report on Form 10-K.
Exhibit
10.1 - Lowe’s Companies, Inc. Directors’ Deferred Compensation Plan
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.
|
|
|
|
December
2, 2008
Date
|
|
/s/ Matthew
V. Hollifield
Matthew
V. Hollifield
Senior
Vice President and Chief Accounting
Officer
|
Exhibit
No.
|
|
Description
|
|
|
|
10.1
|
|
Lowe’s
Companies, Inc. Directors’ Deferred Compensation Plan
|
|
|
|
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
|
|
|
|