XNYS:LOW Lowe's Companies Inc Annual Report 10-K Filing - 2/3/2012

Effective Date 2/3/2012

XNYS:LOW Fair Value Estimate
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XNYS:LOW Consider Buying
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XNYS:LOW Consider Selling
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XNYS:LOW Fair Value Uncertainty
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XNYS:LOW Economic Moat
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XNYS:LOW Stewardship
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 3, 2012
 
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 logo
 
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
  
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.50 Par Value
 
New York Stock Exchange (NYSE)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x
Yes
o
 No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
o
Yes
x
 No
 
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x
Yes
o
 No

 
 

 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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. (Check one):
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

As of July 29, 2011, the last business day of the Company's most recent second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $27.2 billion based on the closing sale price as reported on the New York Stock Exchange.
 
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
 
CLASS
 
OUTSTANDING AT MARCH 30, 2012
Common Stock, $0.50 par value
  1,198,910,882


DOCUMENTS INCORPORATED BY REFERENCE

Document
 
Parts Into Which Incorporated
Portions of the Proxy Statement for Lowe’s 2012 Annual Meeting of Shareholders
 
Part III
 

 
 

 

 LOWE’S COMPANIES, INC.
         
   
Page No.
 
PART I        
 Item 1.
    4-10  
 Item 1A.
    10-13  
 Item 1B.
    13  
 Item 2.
    13  
 Item 3.
    14  
 Item 4.
    14  
      15-16  
           
PART II
       
 Item 5.
    17-18  
 Item 6.
    18  
 Item 7.
    19-35  
 Item 7A.
    36  
 Item 8.
    37-68  
 Item 9.
    69  
 Item 9A.
    69  
 Item 9B.
    69  
           
PART III
       
 Item 10.
    70  
 Item 11.
    70  
 Item 12.
    70  
 Item 13.
    70  
 Item 14.
    70  
         
PART IV
       
 Item 15.
    71-78  
           
   Signatures     79-80   
 

 
 
 

 

Part I

 
General Information

Lowe’s Companies, Inc. and subsidiaries (the Company or Lowe’s) is a Fortune® 50 company and the world’s second largest home improvement retailer.  As of February 3, 2012, we operated 1,745 stores, comprised of 1,712 stores across 50 U.S. states, 31 stores in Canada and two stores in Mexico.  Our 1,745 stores represent approximately 197 million square feet of retail selling space.

We opened 25 stores in fiscal 2011, which included the relocation of two existing stores. Seven of the stores were opened in Canada.  In fiscal 2011, we closed 27 stores in the U.S.  We expect to open approximately 10 stores in fiscal 2012.  We are flexible in the size of store we open as we strive to maximize our return on investment by considering market demographics and land availability, among other factors, to determine the appropriate size for each particular market. 

During 2009, we entered into a joint venture agreement with Australian retailer Woolworths Limited, to develop a chain of home improvement stores in Australia. We are a one-third owner of the joint venture.  The venture opened its first seven stores under the name Masters™ in 2011, and expects to open 15 to 20 stores in 2012.

Lowe’s was incorporated in North Carolina in 1952 and has been publicly held since 1961. The Company’s common stock is listed on the New York Stock Exchange - ticker symbol “LOW.”

See Item 6, “Selected Financial Data,” of this Annual Report on Form 10-K, for historical revenues, profits and identifiable assets.  For additional information about the Company’s performance and financial condition, see also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of this Annual Report on Form 10-K.

Our Promise

We strive to be customers’ first choice for home improvement.  Customers expect that we will not only sell the products they need and want, but also deliver a full solution by being a partner through each step of the home improvement process, from inspiration and planning to completion and enjoyment.  Our goal is to execute better than our competitors, and make the process of home improvement as seamless and simple as possible for customers. At the core of this goal are three principles: possibilities, support and value.  Possibilities means providing customers with inspiration and ideas for enhancing and maintaining their homes through innovative solutions.  Support means being a trusted partner and resource whenever and wherever customers need us in the home improvement process.  Value means offering competitive prices plus helping customers successfully accomplish their home improvement goals.

Customers, Market and Competition

Our Customers

We serve homeowners, renters and commercial business customers.  Individual homeowners and renters complete a wide array of projects and vary along the spectrum of do-it-yourself (DIY) and do-it-for-me (DIFM).  Commercial business customers include those who work in construction, repair/remodel, commercial and residential property management, or business maintenance professions.

Based on our analysis of the market we have identified various types of home improvement customers.  Our target customer is the “creator”, whether they are a homeowner, renter, or commercial business customer. The creator is the most active in the home improvement category in terms of visits and amount of spend. Creators seek quality tailored experiences, and are on the lookout for new ideas to improve homes.  We believe that if we focus on the needs of these more discerning customers we will meet or exceed the needs of other customers.

 
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Our Market

 
We are among the many businesses, including home centers, paint stores, hardware stores, lumber yards and garden centers, whose revenues are included in the Building Material and Garden Equipment and Supplies Dealers Subsector (444) of the Retail Trade Sector of the North American Industry Classification System (NAICS), the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy.  The total annual revenue reported for businesses included in NAICS Subsector 444 in 2011 was $300 billion, which represented an increase of 5.7% from the total amount reported in 2010. The total annual revenue reported for businesses included in NAICS Subsector 444 in 2010 was $284 billion, which represented an increase of 5.9% over the amount reported for 2009.  NAICS Subsector 444 represents approximately half of what we consider the total market for our products and services.
 
There are many variables that impact consumer demand for the home improvement products and services we offer.  Key indicators we monitor include employment, home prices, real disposable personal income, housing turnover, and home ownership levels.  We also monitor demographic and societal trends that are indicators of home improvement industry growth. 

·  
The forecasted average unemployment rate of 8.2% for 2012 from the March 2012 Blue Chip Economic Indicators™ is lower than the 9.0% average seen in 2011, but suggests nonetheless that Americans will continue to face challenging employment prospects this year.

·  
Home prices temporarily stabilized in late 2009 after falling nearly 25% from peak levels in 2005, according to data from the National Association of Realtors® and Moody’s Analytics.  Home prices temporarily improved in early 2010 and remained relatively stable for the year, supported by the federal home-buyer tax credit and voluntary foreclosure moratoria instituted by several large mortgage loan service providers.  However, in 2011 home prices fell about 4.0% nationally, primarily weighed down by sales of distressed properties. Economists generally expect home prices to decline another 1% to 3% during 2012 as foreclosure activity further accelerates.

·  
Although growth in real disposable personal income continues to improve, it is projected to grow at a slower pace for 2012 than the long-term average annual increase of 3.3% during the period from 1960 to 2010.  Real disposable personal income growth is forecasted to be 1.5% for calendar 2012, compared with 1.3% for calendar 2011, based on data from the March 2012 Blue Chip Economic Indicators™.

·  
Housing turnover, which peaked in calendar year 2005, remains significantly below peak levels according to The National Association of Realtors.  However, recent data suggests that housing turnover in 2012 will increase over 2011.

·  
According to the U.S. Census Bureau, while U.S. home ownership levels over the past year have continued their decline, from 66.5% in the fourth quarter of 2010 to 66.0% in the fourth quarter of 2011, they remain above their historical average.
 
These indicators are important to our business because they impact income available to purchase our products and services, or otherwise provide an established customer base for home maintenance and repair projects.  Currently, these indicators suggest moderately improving consumer demand for the home improvement products and services we sell.  However, in this uncertain economic environment, we continue to balance implementation of our long-term growth plans with our near-term focus on improving performance and maintaining adequate liquidity.

Our Competition

The home improvement retailing business includes many competitors.  We compete with other home improvement warehouse chains and lumberyards in most of our trade areas.  We also compete with traditional hardware, plumbing, electrical and home supply retailers.  In addition, we compete, with respect to some of our products, with general merchandise retailers, mail order firms, warehouse clubs, online and other specialty retailers.  Our target customers value

 
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reputation, customer experience, quality and price of merchandise, and range and availability of products and services.  Location of stores also continues to be a key competitive factor in our industry. However, the increasing use of technology and the simplicity of online shopping also underline the importance of multi-channel presence as a competitive factor.  See further discussion of competition in Item 1A, “Risk Factors”, of this Annual Report on Form 10-K.

Products and Services

Our Products

Product Selection
To meet customers’ varying home improvement needs, we offer a complete line of products for maintenance, repair, remodeling, and home decorating.  We offer home improvement products in the following categories: Appliances, Lawn & Landscape, Fashion Electrical, Lumber, Building Materials, Paint, Home Fashions, Storage & Cleaning, Rough Plumbing, Flooring, Tools, Seasonal Living, Millwork, Hardware, Fashion Plumbing, Nursery and Cabinets & Countertops.  A typical Lowe's store stocks approximately 40,000 items, with hundreds of thousands of items available through our Special Order Sales system and Lowes.com.  In 2011, Lowe’s implemented flexible fulfillment, which allows the customer to order products that can be shipped parcel post and that are stocked in an RDC, a store, or in a vendor's distribution center, and have them shipped directly to a home or place of business.  Most items can be ordered and delivered within two days.  See Note 16 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K for historical revenues by product category for each of the last three fiscal years.

We are committed to offering a wide selection of national brand name merchandise, as well as building long-term value for Lowe’s through the development of private brands.

National Brand Name Merchandise
In many product categories, customers look for a brand they know and trust to instill confidence in their purchase.  Each Lowe’s store carries a wide selection of national brand-name merchandise such as Whirlpool® appliances and water heaters, GE® and Samsung® appliances, Stainmaster® carpets, Valspar® paints and stains, Pella® windows and doors, Sylvania® light bulbs, Dewalt® power tools, Owens Corning® roofing, Johns Manville® insulation, James Hardie® fiber cement siding and many more.  Our merchandise selection provides the DIY, DIFM and commercial business customer a one-stop shop for a wide variety of national brand name merchandise needed to complete home improvement, repair, maintenance or construction projects.

Private Brands
Private brands are an important element of our overall portfolio, helping to differentiate us from the competition with unique innovations and designs.  Private brands also provide a value alternative to national brands and, in categories where there are no strong national brands, can be used to give the customer a more simplified shopping experience.  We sell private brands throughout our stores including Tools, Seasonal Living, Home Fashions, Storage & Cleaning, Paint, Fashion Plumbing, Flooring, Millwork, Hardware, Fashion Electrical and Lumber.  Some of Lowe’s most important private brands include Kobalt® tools, allen+roth® home décor products, Blue Hawk® home improvement products, Project Source® everyday essentials, Portfolio® lighting products, Garden Treasures® lawn and patio products, Utilitech® electrical and utility products, Reliabilt® doors and windows, Aquasource® faucets, sinks and toilets, Harbor Breeze® ceiling fans, Top Choice® lumber products and Iris® home automation and management products.

Supply Chain
We source our products from over 7,000 vendors worldwide with no single vendor accounting for more than 7% of total purchases.  We believe that alternative and competitive suppliers are available for virtually all of our products.  Whenever possible, we purchase directly from manufacturers to provide savings for customers and improve our gross margin.

To efficiently move product from our vendors to our stores and maintain in-stock levels, we own and operate 14 highly-automated regional distribution centers (RDCs) in the United States, with a fifteenth RDC under construction.  On average, each domestic RDC serves approximately 120 stores.  In addition, we lease and operate a distribution facility to serve our Canadian stores.

 
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We also operate 15 flatbed distribution centers to distribute merchandise that requires special handling due to size or type of packaging such as lumber, boards, panel products, irrigation pipe, vinyl siding, ladders and building materials.  Additionally, we operate four facilities to support our import business and flexible fulfillment capabilities.  We also utilize three third-party transload facilities, which are the first point of receipt for imported products.  The transload facilities sort and allocate products to RDCs based on individual store demand and forecasts.

On average in fiscal 2011, approximately 75% of the total dollar amount of stock merchandise we purchased was shipped through our distribution network, while the remaining portion was shipped directly to our stores from vendors.

Our Services

Installed Sales
We offer installation services through independent contractors in many of our product categories, with Flooring, Millwork and Cabinets & Countertops accounting for the majority of sales.  Our Installed Sales model, which separates selling and project administration tasks, allows our sales associates to maintain their focus on project selling, while project managers ensure that the details related to installing the products are efficiently executed.  Installed Sales, which includes both product and labor, accounted for approximately 6% of total sales in fiscal 2011.

Extended Protection Plans and Repair Services
We offer extended protection plans on appliances, tools and outdoor power equipment.  Lowe’s extended protection plans provide customers with product protection that enhances or extends the manufacturer’s warranty.  We provide in warranty and out of warranty repair services for major appliances, outdoor power equipment and tools through our stores or in the home through our Lowe’s Authorized Service Repair Network. Our contact center takes the calls, diagnoses the problems, and facilitates the resolutions making after-sales service simpler for customers because we manage the entire process.

Credit Financing
We offer a proprietary consumer credit card for retail customers under an agreement with GE Money Bank.  This program provides Lowe's consumer credit cardholders with 5% off everyday purchases. For purchases above $299 customers have their choice of no-interest financing or the 5% off value.

We also offer proprietary credit programs for commercial business customers.  They include a Lowe’s Business Account, which is ideal for small- to medium-size businesses and offers minimum monthly payments, and Lowe’s Accounts Receivable, which is ideal for medium- to large-size businesses that pay in full each month.  These programs provide a 5% discount to commercial business customers when they use their Lowe’s commercial credit account.  We also offer the Lowe’s Business Rewards Card from American Express®.

For additional information regarding our credit programs, see the summary of our significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

Mylowes
In 2011, we introduced mylowes, a new online tool that is unique in the home improvement industry and makes managing, maintaining and improving homes simpler and more intuitive.  Using the capabilities provided by mylowes, customers can create home profiles, save room dimensions and paint colors, organize owners' manuals and product warranties, create shopping, to-do and wish lists for projects on the horizon, set recurring reminders for common maintenance items and store purchase history from across all Lowe's channels through the use of mylowes.

Selling Channels

We have multiple channels through which we engage customers and sell our products and services, including in-store, online, on-site and contact centers. Although we sell through all of these channels, our primary channel to fulfill customer orders continues to be our retail home improvement stores.  Regardless of the channel through which customers choose to engage with us, we will provide them with a seamless experience and an endless aisle of products, enabled by our flexible fulfillment capabilities.

 
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In-Store
Our 1,745 retail home improvement stores are generally open seven days per week and average approximately 113,000 square feet of retail selling space, plus approximately 32,000 square feet of outdoor garden center selling space.  Our stores offer similar products and services, with certain variations based on local market factors.  We continue to develop and implement tools to make our sales associates more efficient and to integrate our order management and fulfillment processes.  Our stores now have Wi-Fi capabilities that provide customers with access to Lowes.com and related mobile applications, making information available quickly, to further simplify the shopping experience.

Online
Through Lowes.com, we seek to empower consumers by providing a 24/7 shopping experience and helping reduce the complexity of product decisions and home improvement projects by providing online product information, customer ratings and reviews, online buying guides and how-to videos and information.  These tools help consumers make more informed purchasing decisions and give them confidence as they undertake simple to more complex home improvement projects.  We also enable customers to choose from a variety of fulfillment options, including buying online and picking up in-store as well as parcel shipment to their homes. In 2011, we introduced a mobile application for customers on the Apple iPhone®.  We also introduced a mobile application for our Creative Ideas publication, which provides inspirational home improvement ideas.  In 2011, Lowes.com accounted for approximately 1% of our total sales.

On-Site
We have on-site specialists available to retail customers and commercial business customers to assist them in selecting products and services for their projects.  Commercial account specialists meet with commercial business customers in their place of business or on a job site and leverage stores within the area to ensure we meet customer needs for products and resources.  Our Project Specialist Exteriors (PSE) program is available in most Lowe’s stores to discuss projects such as roofing, siding, fencing and windows, whose characteristics lend themselves to an in-home consultative sales approach.  PSEs take the measurements and tender the sale in the customer's home.

Contact Centers
Located in Wilkesboro, NC, and Albuquerque, NM, the Lowe's contact centers provide direct support to customers who contact Lowe’s via phone, e-mail or letter, including tendering sales.  They also provide store support, online sales support and facilitate repair services.

Employees
 
As of February 3, 2012, we employed approximately 161,000 full-time and 87,000 part-time employees.  No employees in the U.S. or Canada are covered by collective bargaining agreements. All employees in Mexico are covered by collective bargaining agreements. Management considers its relations with employees to be good.

Seasonality and Working Capital

The retail business in general is subject to seasonal influences, and our business is, to some extent, seasonal.  Historically, we have realized the highest volume of sales during our second fiscal quarter (May, June and July) and the lowest volume of sales during our fourth fiscal quarter (November, December and January).  Accordingly, our working capital requirements have historically been greater during our fourth fiscal quarter as we build inventory in anticipation of the spring selling season and as we experience lower fourth fiscal quarter sales volumes.  We fund our working capital requirements primarily through cash flows generated from operations, but also with short-term borrowings, as needed.  For more detailed information, see the Financial Condition, Liquidity and Capital Resources section in Item 7,  “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of this Annual Report on Form 10-K.

Intellectual Property

The name “Lowe’s” is a registered service mark of one of our wholly-owned subsidiaries. We consider this mark and the accompanying name recognition to be valuable to our business. This subsidiary has various additional trademarks, trade names and service marks, most of which are used in our private brand program.

 
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Environmental Leadership

We continue to build on a history of environmental leadership by helping consumers reduce their energy and water use and their environmental footprint while saving money through a growing number of product and service solutions.  We offer a wide selection of environmentally responsible and energy-efficient products for the home, including ENERGY STAR® appliances, WaterSense® labeled toilets, paint with no volatile organic compounds (VOC), indoor and outdoor LED lighting, the GE GeoSpring® hybrid water heater, and in certain states, GE electric car charging stations.  Additionally, we offer in-store customer recycling for plastic bags, CFL light bulbs and rechargeable batteries.  

Our role in helping consumers with their conservation was recognized by the U.S. Environmental Protection Agency (EPA) with our second consecutive ENERGY STAR Sustained Excellence Award in Retail (2010-2011), which recognizes our long-standing leadership as a retailer of energy-efficient products, as well as nine consecutive ENERGY STAR awards (2003-2011), including four ENERGY STAR Partner of the Year awards for educating consumers about the benefits of energy efficiency.  We were also recognized by the EPA WaterSense program with our third consecutive Retail Partner of the Year award.

Lowe’s also recognizes how efficient operations can help protect the environment and our bottom line. We examine our own operations to deliver efficiencies in energy use, water consumption and waste & recycling.  We annually track our carbon footprint and participate in the Carbon Disclosure Project, an independent not-for-profit organization holding the largest database of primary corporate climate change information in the world.  In an effort to mitigate the impact of our energy use, we also purchase Renewable Energy Certificates (REC) equal to 3% of our energy use, and are recognized as the sixth largest retail purchaser of green power in the EPA’s Green Power Partnership program.  To further reduce our footprint, we design energy-efficient features into new stores and during retrofits of existing stores.  These features include energy efficient lighting, white membrane cool roofs and HVAC units that meet or exceed ENERGY STAR qualifications.

We also strive to get products to our stores in an environmentally responsible manner.  We achieve that through involvement in the SmartWay® Transport Partnership, an innovative program launched by the U.S. EPA in 2004 that promotes environmentally cleaner, more fuel efficient transportation options.  Our latest recognition came in 2011 when we earned the 2011 SmartWay Team Champion.  This award was based on initiatives that resulted in reduced carbon dioxide emissions and less overall highway congestion. These included increasing shipping by rail, increasing efficiency of truckload shipments, allowing more products to be shipped on fewer trailers, and continuing to use a higher percentage of SmartWay carriers.

For more information on Lowe’s environmental leadership efforts, please refer to: http://www.lowescreativeideas.com/social/environment-our-mission.html

Compliance with Environmental Matters

Our operations are subject to numerous federal, state and local laws and regulations that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment.  They have in the past and may in the future increase our costs of doing business in a variety of ways, including indirectly through increased energy costs as producers of energy and petroleum, and potentially other major emitters of greenhouse gases, are subjected to increased or new regulation or legislation that results in greater regulation of greenhouse gas emissions.  We do not anticipate any material capital expenditures during fiscal 2012 for environmental control facilities or other costs of compliance with such laws or regulations.
 
Reaching Out

Lowe’s has a long and proud history of supporting local communities through public education and community improvement projects. In 2011, Lowe's and Lowe's Charitable and Educational Foundation (LCEF) contributed more than $32 million to schools and community organizations in the United States, Canada and Mexico. LCEF was created in 1957 to assist communities through financial contributions while also encouraging employees to become involved through volunteerism.  In 2011, Lowe’s and LCEF supported more than 4,000 community and education projects.  LCEF funds our signature education grant program, Lowe’s Toolbox for Education®, and national partnerships. Lowe’s Toolbox for

 
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Education grants totaling more than $30 million have benefited approximately 3.5 million schoolchildren since 2006. Lowe’s has worked with Habitat for Humanity® since 2003 to combat substandard housing. Our commitment through 2013 will bring Lowe's Habitat contributions to nearly $40 million since the partnership began. We also partner with customers to support the American Red Cross, contributing more than $22 million since 1999.  Lowe’s encourages employee volunteerism through the Lowe’s Heroes program, a companywide initiative. Lowe's Heroes participated in more than 1,400 projects across North America in 2011. For more information on our community involvement, please see the Lowe’s Social Responsibility Report at Lowes.com/SocialResponsibility.

Available Information
 
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge through our internet website at www.Lowes.com/investor, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC).  The public may also read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
 

We have developed a risk management process using periodic surveys, external research, risk mapping, analytics and other tools to identify and evaluate the operational, financial, environmental, reputational, strategic and other risks that could adversely affect our business.  For more information about our risk management process, which is administered by our Chief Risk Officer and includes developing risk mitigation controls and procedures for the material risks we identify, see the description included in the proxy statement for our annual meeting of shareholders (as defined in Item 10 of Part III of this Annual Report on Form 10-K) under “Board’s Role in the Risk Management Process.”
 
We describe below all known material risks that could adversely affect our results of operations, financial condition or business prospects.  These risk factors may change from time to time and may be amended, supplemented or superseded by updates to the risk factors contained in our future periodic reports on Form 10-K, Form 10-Q and reports on other forms we file with the Securities and Exchange Commission.  All forward-looking statements about our future results of operations or other matters made by us in this Annual Report on Form 10-K, in our Annual Report to Lowe’s Shareholders and in our subsequently filed reports to the Securities and Exchange Commission, as well as in our press releases and other public communications, are qualified by the risks described below.
 
Our sales are dependent upon the health and stability of the general economy.
General economic factors and other conditions, both domestically and internationally, may adversely affect the U.S. economy, the global economy and our financial performance.  These include, but are not limited to, periods of slow economic growth or recession, volatility and/or lack of liquidity from time to time in U.S. and world financial markets and the consequent reduced availability and/or higher cost of borrowing to Lowe’s and its customers, slower rates of growth in real disposable personal income, sustained high rates of unemployment, high consumer debt levels, increasing fuel and energy costs, inflation or deflation of commodity prices, natural disasters, acts of terrorism and developments in the war against terrorism in Asia, the Middle East and other parts of the world.
 
Adverse changes in economic factors specific to the home improvement industry may negatively impact the rate of growth of our total sales and comparable store sales.
Sales of many of our product categories and services are driven by the activity level of home improvement projects.  Steep declines in recent years’ home prices, the increasing number of households with little or negative equity, high mortgage delinquency and foreclosure rates, the reduction in the availability of mortgage financing, slower household formation growth rates, and lower housing turnover through existing home sales, have limited, and may continue to limit, consumers’ discretionary spending, particularly on larger home improvement projects that are important to our business.

 
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Changes in existing or new laws and regulations or regulatory enforcement priorities could adversely affect our business.
Laws and regulations at the local, regional, state, federal and international levels change frequently and the changes can impose significant costs and other burdens of compliance on our business and our vendors.  Any changes in regulations, the imposition of additional regulations, or the enactment of any new legislation that affect employment/labor, trade, product safety, transportation/logistics, energy costs, health care, tax or environmental issues, could have an adverse impact, directly or indirectly, on our financial condition and results of operations.  Changes in enforcement priorities by governmental agencies charged with enforcing existing laws and regulations can increase our cost of doing business. In addition, we are subject to various procurement regulations applicable to our contracts for sales to the U.S Government and could be adversely affected by changes in those regulations or any negative findings from an audit or investigation.

We have many competitors who could take sales and market share from us if we fail to execute our merchandising, marketing and distribution strategies effectively.
We operate in a highly competitive market for home improvement products and services and have numerous large and small, direct and indirect competitors.  The competitive environment in which we operate is particularly challenging during periods of slow economic growth and high unemployment with heavy promotions, particularly of discretionary items. The principal competitive factors in our industry include location of stores, customer service, quality and price of merchandise and services, in-stock levels, and merchandise assortment and presentation.  Our failure to respond effectively to competitive pressures and changes in the markets for home improvement products and services could affect our financial performance.  Moreover, changes in the promotional pricing and other practices of our competitors, including the effects of competitor liquidation activities, may impact our expected results.
 
Our inability to effectively manage our relationships with selected suppliers of brand name products could negatively impact our ability to differentiate ourselves from competitors.
Part of our expansion strategy includes continued differentiation from competitors.  To better distinguish our product offering, we form strategic relationships with selected suppliers to market and develop products under a variety of recognized and respected national brand names.  The inability to effectively and efficiently manage and maintain the relationships with these suppliers could negatively impact our business plan and financial results.
 
Expanding internationally presents unique challenges that will require us to adapt our store operations, merchandising, marketing and distribution functions to serve customers in Canada and Mexico and to work effectively with our joint venture partner in Australia.
A significant portion of our anticipated store growth over the next five years will be in Canada and Mexico.  We are also in a joint venture with Australia’s largest retailer, Woolworths Limited, to develop a network of home improvement stores for consumers in Australia.  Expanding internationally presents unique challenges that may increase the anticipated costs and risks, and slow the anticipated rate, of such expansion.
 
If we are unable to secure or develop and implement sufficiently robust new technologies to deliver business process solutions within the appropriate time frame, cost and functionality, our strategic initiatives that are dependent upon these technologies may not be successful.
The success of our strategic initiatives designed to increase our sales and capture a greater percentage of our customers’ expenditures on home improvement projects is dependent in varying degrees on the timely delivery and the functionality of information technology systems to support them.  Extended delays or cost overruns in securing, developing and otherwise implementing technology solutions to support the new business initiatives we are developing now, and will be developing in the future, would delay and possibly even prevent us from realizing the projected benefits of those initiatives.
 
We may not be able to achieve the objectives of the strategic initiatives we have underway if our organization is unable to make the transformational changes we are undertaking in our business model.
We are adapting our business model to meet our customers’ changing expectations that we will not only sell them the products and services they need and want, but also deliver, using new tools, skills and processes, a full service experience by being a part of their home improvement projects from start to finish.  Our strategies require transformational changes to our business model and will require new competencies in some positions, and our employees and independent contractors, such as third-party installers and repair technicians, will not only have to understand non-traditional selling platforms but also commit to fundamental changes in Lowe’s culture and the processes through which they have traditionally interacted with customers.  To the extent they are unable or unwilling to make these transformational changes, our strategic initiatives designed to increase our sales and capture a greater percentage of our customers’ expenditures on home improvement projects may not be as successful as we expect them to be.  The many challenges our

 
11

 

management faces in effectively managing our business as we adapt our business model also increase the risk that we may not achieve our objectives.

Our financial performance could suffer if we fail to properly maintain our critical information systems or if those systems are seriously disrupted.
An important part of our efforts to achieve efficiencies, cost reductions, and sales and cash flow growth is the maintenance and ongoing improvements of our existing management information systems that support operations such as inventory replenishment, merchandise ordering, transportation, receipt processing and product delivery.  Our financial performance could be adversely affected if our management information systems are seriously disrupted or we are unable to maintain, improve, upgrade, and expand our systems.
 
As customer-facing technology systems become an increasingly important part of our multi-channel sales and marketing strategy, the failure of those systems to perform effectively and reliably could keep us from delivering positive customer experiences.
Access to the internet from computers, smart phones and other mobile communication devices has empowered our customers and changed the way they shop and how we interact with them.  Our website, Lowes.com, is a sales channel for our products, and is also a method of making product, project and other relevant information available to them that influences our in-store sales.  In addition to Lowes.com, we have multiple affiliated websites and mobile apps through which we seek to inspire, inform, cross-sell, establish online communities among and otherwise interact with our customers.  Performance issues with these customer-facing technology systems or a complete failure of one or more of them without a disaster recovery plan that can be quickly implemented could quickly destroy the positive benefits they provide to our home improvement business and negatively affect our customers’ perceptions of Lowe’s as a reliable source of information about home improvement products and services.
 
Our business and our reputation could be adversely affected by the failure to protect sensitive customer, employee or vendor data or to comply with evolving regulations relating to our obligation to protect such data.
Cyber attacks designed to gain access to sensitive information by breaching mission critical systems of large organizations are constantly evolving, and high profile electronic security breaches leading to unauthorized release of confidential information have occurred recently at a number of major U.S. companies despite widespread recognition of the cyber attack threat and improved data protection methods.  While we have invested in the protection of our information technology and maintain what we believe are adequate security procedures and controls over financial and other individually identifiable customer, employee and vendor data provided to us, a breach in our systems that results in the unauthorized release of individually identifiable customer or other sensitive data could nonetheless occur and have a material adverse effect on our reputation and lead to financial losses from remedial actions, loss of business or potential liability, including for possible punitive damages.  An electronic security breach resulting in the unauthorized release of sensitive data from our information systems could also materially increase the costs we already incur to protect against such risks.  In addition, as the regulatory environment relating to retailers and other company’s obligation to protect such sensitive data becomes stricter, a material failure on our part to comply with applicable regulations could subject us to fines or other regulatory sanctions and potentially to lawsuits.
 
If we fail to hire, train, manage and retain qualified sales associates and specialists, or contract with qualified installers and repair technicians, with expanded skill sets who can work effectively and collaboratively in an increasingly culturally diverse environment, we could lose sales to our competitors.
Our customers, whether they are homeowners or commercial businesses, expect our sales associates and specialists to be well trained and knowledgeable about the products we sell and the home improvement services we provide.  Our customers also expect the independent contractors who install products they purchase from us to perform the installation in a timely and capable manner.  Increasingly, our sales associates and specialists must have expanded skill sets, including in some instances the ability to do in-home or telephone sales. In addition, in many of our stores our employees and third-party contractors must be able to serve customers whose primary language and cultural traditions are different from their own.  Also, as our employees as a group become increasingly culturally diverse, our managers and sales associates must be able to manage and work collaboratively with employees whose primary language and cultural traditions are different from their own.

 
12

 
 
Failure of a key vendor or service provider that we cannot quickly replace could disrupt our operations and negatively impact our business.
No single vendor of the products we sell accounts for more than 7% of our total purchases, but we rely upon a number of vendors as the sole or primary source of some of the products we sell.  We also rely upon many independent service providers for technology solutions and other services that are important to many aspects of our business.   If these vendors or service providers fail or are unable to perform as expected and we are unable to replace them quickly, our business could be adversely affected at least temporarily until we are able to do so and potentially, in some cases, permanently.
 
Failure to achieve and maintain a high level of product and service quality could damage our image with customers and negatively impact our sales, profitability, cash flows and financial condition.
Product and service quality issues could result in a negative impact on customer confidence in Lowe’s and the Company’s brand image.  As a result, Lowe’s reputation as a retailer of high quality products and services, including both national and Lowe’s private brands, could suffer and impact customer loyalty. Additionally, a decline in product and service quality could result in product recalls, product liability and warranty claims.
 
If the domestic or international supply chain for our products is disrupted, our sales and gross margin would be adversely impacted.
We source the approximately 40,000 products we stock and sell from over 7,000 domestic and international vendors.  We source a large number of those products from foreign manufacturers.  Financial instability among key vendors, political instability, trade restrictions, tariffs, currency exchange rates and transport capacity and costs are beyond our control and could negatively impact our business if they seriously disrupted the movement of products through our supply chain or increased their costs.

Future litigation or governmental proceedings could result in material adverse consequences, including judgments or settlements.
We are, and in the future will become, involved in lawsuits, regulatory inquiries, and governmental and other legal proceedings arising out of the ordinary course of our business. Some of these proceedings raise difficult and complicated factual and legal issues and are subject to uncertainties and complexities. The timing of the final resolutions to lawsuits, regulatory inquiries, and governmental and other legal proceedings is typically uncertain. Additionally, the possible outcomes of, or resolutions to, these proceedings could include adverse judgments or settlements, either of which could require substantial payments. None of the legal proceedings in which we are currently involved, individually or collectively, is considered material.


None.

 
At February 3, 2012, our properties consisted of 1,745 stores in the U.S., Canada and Mexico with a total of approximately 197 million square feet of selling space. Of the total stores operating at February 3, 2012, approximately 89% are owned, which includes stores on leased land, with the remainder being leased from unaffiliated third parties.  We also operate regional distribution centers and other facilities to support distribution and fulfillment, as well as data centers and various support offices.  Our executive offices are located in Mooresville, North Carolina.

 
13

 
 
 
We are a defendant in legal proceedings considered to be in the normal course of business, none of which, individually or collectively, is considered material.


Not applicable.

 
14

 
 

Set forth below is a list of names and ages of the executive officers of the registrant indicating all positions and offices with the registrant held by each such person and each person's principal occupations or employment during the past five years. Each officer of the registrant is elected by the board of directors at its first meeting after the annual meeting of shareholders and thereafter as appropriate. Each officer of the registrant holds office from the date of election until the first meeting of the directors held after the next annual meeting of shareholders or until a successor is elected.

Name
 Age
Title
Robert A. Niblock
49
Chairman of the Board, President and Chief Executive Officer since 2011; Chairman of the Board and Chief Executive Officer, 2005 – 2011.
     
Maureen K. Ausura
56
Executive Vice President, Human Resources since 2011; Senior Vice President, Human Resources, 2005 – 2011.
     
Gregory M. Bridgeford
57
Executive Vice President, Business Development since 2004.
     
Michael K. Brown
48
Executive Vice President and Chief Information Officer since 2011; Executive Vice President, Store Operations, 2006 – 2011.
     
Marshall A. Croom
51
Senior Vice President and Chief Risk Officer since 2009; Senior Vice President, Merchandising and Store Support, 2006 – 2009.
     
Rick D. Damron
 
49
Executive Vice President, Store Operations since 2011; Senior Vice President, Logistics, 2009 – 2011; Senior Vice President, Store Operations – North Central Division, 2008 – 2009; Senior Vice President, Store Operations – Northeast Division, 2004 – 2008.
     
Robert J. Gfeller, Jr.
 
50
Executive Vice President, Merchandising since 2011; Senior Vice President and General Merchandising Manager, Hardlines and Building Products, 2009 – 2011; Senior Vice President, Marketing, 1999 – 2009.
     
Matthew V. Hollifield
45
Senior Vice President and Chief Accounting Officer since 2005.
     
Robert F. Hull, Jr.
47
Executive Vice President and Chief Financial Officer since 2004.
     
Gaither M. Keener, Jr.
62
Executive Vice President, General Counsel, Secretary and Chief Compliance Officer since 2011; Senior Vice President, General Counsel, Secretary and Chief Compliance Officer, 2006 – 2011.
     
Thomas J. Lamb
46
Senior Vice President, Marketing and Advertising since 2009; Vice President, Marketing, 2006 – 2009.
     
Joseph M. Mabry, Jr.
49
Executive Vice President, Logistics and Distribution since 2004.
     
N. Brian Peace
46
Senior Vice President, Corporate Affairs since 2006.
     
M. Lee Reeves
44
Senior Vice President, Deputy General Counsel and Assistant Secretary since 2011; Vice President, Associate General Counsel, 2009 – 2011; Vice President, Assistant General Counsel, 2007 – 2009; Assistant General Counsel, 2005 – 2007.

 
15

 

William D. Robinson
52
Senior Vice President, International Operations and Customer Support Services since 2011; Vice President, Store Operations and Special Projects, 2008 – 2010; President, Lowe’s Canada, 2005 – 2008.
     
Janet M. Saura
 
47
 
Senior Vice President, Deputy General Counsel and Assistant Secretary since 2010; Vice President, Associate General Counsel and Assistant Secretary, 2006 – 2010.
     

 
16

 
 
Part II


Lowe's common stock is traded on the New York Stock Exchange (NYSE). The ticker symbol for Lowe's is “LOW”.  As of March 30, 2012, there were 28,727 holders of record of Lowe's common stock. The following table sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported by the NYSE Composite Tape and the dividends per share declared on the common stock during such periods.

 
 
Fiscal 2011
   
Fiscal 2010
 
 
 
High
   
Low
   
Dividend
   
High
   
Low
   
Dividend
 
1st Quarter
  $ 27.45     $ 24.13     $ 0.11     $ 28.54     $ 21.29     $ 0.09  
2nd Quarter
    26.60       21.31       0.14       27.93       19.64       0.11  
3rd Quarter
    22.48       18.07       0.14       22.91       19.35       0.11  
4th Quarter
  $ 27.57     $ 20.34     $ 0.14     $ 26.29     $ 21.09     $ 0.11  

Total Return to Shareholders

The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.

The following table and graph compare the total returns (assuming reinvestment of dividends) of the Company's common stock, the S&P 500 Index and the S&P Retail Index.  The graph assumes $100 invested on February 2, 2007 in the Company's common stock and each of the indices.
 
 
ITEM 5- TOTAL RETURNS GRAPH
 
 
 
   
2/2/2007
   
2/1/2008
   
1/30/2009
   
1/29/2010
   
1/28/2011
   
2/3/2012
 
Lowe’s
  $ 100.00     $ 75.64     $ 54.95     $ 66.21     $ 78.60     $ 86.54  
S&P 500
    100.00       98.17       59.53       79.25       96.09       103.45  
S&P Retail Index
  $ 100.00     $ 81.60     $ 50.82     $ 79.04     $ 100.68     $ 115.47  

 
17

 
 

 

Issuer Purchases of Equity Securities

The following table sets forth information with respect to purchases of the Company’s common stock made during the fourth quarter of 2011:
 
(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 2
   
Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs 2
 
October 29, 2011 – November 25,  2011
    7.6     $ 23.12       7.6     $ 4,825  
November 26, 2011 – December 30, 2011
    13.3       24.66       13.1       4,500  
December 31, 2011 – February 3, 2012
    -       -       -       4,500  
As of February 3, 2012
    20.9     $ 24.10       20.7     $ 4,500  

 
 1During the fourth quarter of fiscal 2011, the Company repurchased an aggregate of 20.9 million shares of its common stock. The total number of shares purchased also includes 0.2 million shares repurchased from employees to satisfy either the exercise price of stock options or the statutory withholding tax liability upon the vesting of restricted share-based awards.

 
2Authorization for up to $5.0 billion of share repurchases with no expiration was approved on August 19, 2011 by the Company's Board of Directors. Although the repurchase authorization has no expiration, the Company expects to execute the program by the end of fiscal 2012 through purchases made from time to time either in the open market or through private transactions in accordance with SEC regulations.



(In millions, except per share data)

Selected Statement of Earnings Data
    2011 1     2010       2009       2008       2007  
Net sales
  $ 50,208     $ 48,815     $ 47,220     $ 48,230     $ 48,283  
Gross margin
    17,350       17,152       16,463       16,501       16,727  
Net earnings
    1,839       2,010       1,783       2,195       2,809  
Basic earnings per common share
    1.43       1.42       1.21       1.50       1.89  
Diluted earnings per common share
    1.43       1.42       1.21       1.49       1.86  
Dividends per share
  $ 0.530     $ 0.420     $ 0.355     $ 0.335     $ 0.290  
Selected Balance Sheet Data
                                       
Total assets
  $ 33,559     $ 33,699     $ 33,005     $ 32,625     $ 30,816  
Long-term debt, excluding current maturities
  $ 7,035     $ 6,537     $ 4,528     $ 5,039     $ 5,576  
 
                                       

1 Fiscal 2011 contained 53 weeks, while all other years contained 52 weeks.

 
18

 
 

 


The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period ended February 3, 2012 (our fiscal years 2011, 2010 and 2009).  Fiscal year 2011 contains 53 weeks of operating results compared to fiscal years 2010 and 2009 which contain 52 weeks.  Unless otherwise noted, all references herein for the years 2011, 2010 and 2009 represent the fiscal years ended February 3, 2012, January 28, 2011 and January 29, 2010, respectively.  We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report on Form 10-K that have been prepared in accordance with accounting principles generally accepted in the United States of America.  This discussion and analysis is presented in seven sections:

·  
Executive Overview
 
·  
Operations
 
·  
Lowe’s Business Outlook
 
·  
Financial Condition, Liquidity and Capital Resources
 
·  
Off-Balance Sheet Arrangements
 
·  
Contractual Obligations and Commercial Commitments
 
·  
Critical Accounting Policies and Estimates
 

EXECUTIVE OVERVIEW

During 2011 we made progress towards delivering better customer experiences and transforming our business to drive long-term sales growth, increased profitability and increased shareholder value.  We operate in an increasingly socially-connected world with real-time expectations and a wide range of customer service and selling channels.  Our goal is to be relevant at each step of the home improvement process and to deliver an experience that is both seamless and simple.  Rather than be a home improvement retailer focused on store expansion as the engine for growth, we will be a home improvement company focused on maximizing asset productivity in order to grow.

Building the Foundation

Recognizing the need to adapt to this increasingly connected environment, we made a series of important decisions during 2011. These decisions included investments to position us for improved execution today, while enabling the customer experiences that will carry us into the future.  First, we implemented changes to our management structure, including the makeup of our senior executive team.  We also rationalized our existing and future store investments and accelerated significant upgrades to our information technology (IT) infrastructure.

Understanding the importance of responding quickly to the needs of the market, we reorganized our field-based store operations and human resources organizations during 2011, reducing the field structure from 188 districts to 132 markets.  This followed our decision in late 2010 to modify a portion of our mid-level store management structure from a tiered structure into a single-level assistant store manager position.  As a result, we are able to better coordinate our business and to push down the appropriate level of decision making and accountability to the working teams.

In addition to changes in management structure, we performed a comprehensive review of our existing stores and our pipeline of proposed new stores during 2011 in an effort to focus resources in a manner that will generate the greatest shareholder value. As a result, we closed 27 underperforming stores in the second half of the year and discontinued a number of planned new store projects. As part of the reassessment we also revised our future store expansion plan in North America and expect to open approximately 10 stores in 2012, and approximately 15 stores per year thereafter. This represents a 50% reduction in our previous expansion plan.

 
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In 2011, we also accelerated our investments in IT and store systems infrastructure and increased our efforts to improve the customer experience.  We undertook our largest, single-year investment in IT and store systems infrastructure to eliminate problems with slow response times, hard-to-use systems, and lack of access to necessary technology. This included upgrades to store IT bandwidth and the installation of in-store wireless networks to handle video downloads and provide customer access to Wi-Fi.  In addition, we enhanced existing store functionality with iPhones to provide store employees with better tools to assist the customer anywhere in the store.  These efforts contributed to the company’s total investments in IT infrastructure of $841 million in 2011.

In 2012, we will continue to evaluate our corporate infrastructure, which was built to support a single-channel business that was opening over 100 stores per year.  Today we are growing differently and our seamless multi-channel strategy requires a different infrastructure.  In the first few weeks of 2012, we announced a planned reduction in the size of the staff at our U.S. headquarters through a voluntary separation program.  In addition, we are also working to change our culture to enable our teams to move faster on calculated risks in order to improve our execution and to support changing customer expectations. We are refining our test-and-learn capabilities to more quickly and cost-effectively test new ideas before implementing changes company-wide.

Our Promise for the Future

Our promise continues to focus on three themes: possibilities regarding home improvement solutions, support and advice along the way, and providing value beyond price.  Keeping this promise requires us to maintain our commitment to retail excellence, develop capabilities to provide seamless support across channels and projects, and simplify the home improvement experience.

Retail excellence
In order to maintain our retail excellence, our near-term focus is on value improvement and product differentiation, both of which will drive greater asset productivity.  Our goal is to be the most efficient retailer our vendors do business with, and we are working with them in a collaborative manner to identify costs that do not add value. By eliminating these costs we are able to provide customers with the most competitively-priced products every day across the multiple channels that they shop, driving increases in sales and gross margin.

Value improvement is built on a foundation of every-day low cost and tailored market assorting to ensure that we have the right product, in the right market, in the right quantity at the right price.  This will ensure that we are getting the lowest inventory acquisition cost and rationalizing the use of promotions, which will allow us to provide low every-day retail prices. Every-day low prices result in more steady demand, eliminating the peaks and valleys associated with promotions which will make us and our vendors more efficient. During 2011, we also began implementing our Integrated Planning & Execution (IP&E) tools, which ensure that our product assortments are locally customized and supported by the right level of inventory per store to produce better productivity for high turning products. Our market analysis teams work closely with merchants as they use the IP&E tools to create the most efficient and effective product lines in each local market, improving our relevance to the customer. This process creates greater depth of in-stock, high-turning items, and reduces the breadth of items with lower turns.

Product differentiation will establish Lowe’s as the place to find the newest and most relevant products for home improvement and involves refreshing displays in our stores, while at the same time, expanding our online product assortments beyond what we stock in our stores to meet the demands of customers.  Through our test and learn approach, we have rolled out a new store layout to approximately 500 stores using interactive endcaps that leverage innovative technology and consistent presentation to inspire our customers to attempt new and exciting projects they may not have otherwise considered. In addition, we lowered or completely removed racking in key areas of the store to better display our products and to make them more accessible and visible to customers. As we test new concepts we will integrate those that work best into the store layout as we expand it to approximately 900 additional stores in 2012. We are creating a better shopping experience to deliver a compelling message of value and simplicity that will result in increased comparable store sales.

Seamless across channels
Recognizing that customers increasingly shop across channels, we are focused on providing a seamless multi-channel experience making it convenient for them to engage with us wherever and whenever they choose.  Over the past year we

 
20

 

have made additions and enhancements to enable the seamless experience, including interactions with our contact centers, our exterior sales programs, our website and our mobile applications. We equipped our contact center associates with better tools and greater access to information as well as the ability to close a sale. We continued to evolve our on-site selling model providing specialists with the appropriate tools to help customers visualize a project, provide a real-time quote and tender a sale on site. We also made incremental improvements to our online platform and by the end of the year there were over 250,000 items available through our website and our top-rated mobile application, which launched this past August. Together these improvements contributed to a 22% increase in customer traffic and a 35% increase in conversion rates, resulting in a 70% increase in online sales year-over-year, and a 100 basis point increase in online unit share.  In addition, we now offer preprinted return labels for parcel shipments free of charge, a simple and convenient option for customers and a competitive advantage in the home improvement industry.  Furthermore, in December we announced the acquisition of ATG Stores, an online retailer of home improvement and lifestyle products, which will allow us to more than double the number of items available through Lowes.com in 2012.

In addition to creating a more seamless experience for customers, we also invested in technology to ensure that customers have access to an even wider range of products beyond our stores via Lowes.com through the rollout of our flexible fulfillment process.  Flexible fulfillment allows any product that can be shipped parcel post and that is stocked in a regional distribution center, store or vendor's distribution center to be ordered online and shipped directly to a customer’s home or place of business.  In fiscal 2011, we fulfilled more than 275,000 orders using our flexible fulfillment capabilities. These are incremental transactions on products that were previously unavailable to customers online. We continue to expand our flexible fulfillment capabilities, and in 2012 will have the capability to fulfill any order from the most efficient location, including our stores.

Simple through knowledge and support
In 2011, we launched mylowes, an online tool that is unique in the home improvement industry and makes managing, maintaining and improving homes simpler and more intuitive than ever before. mylowes provides customers with a wide range of abilities to create home profiles, save room dimensions and paint colors, organize owner’s manuals and product warranties, create shopping lists and set recurring reminders for common maintenance items. As of the end of the year we had nearly three million customers activate mylowes cards. In addition, approximately 20% of mylowes members are either new customers or customers who haven't shopped at Lowe's in over a year. We expect mylowes to enable us to better serve our existing customer base and attract new customers.

In addition, we have improved service in the aisles by equipping store employees with iPhones and the necessary applications to give them immediate access to products and available quantities beyond the limits of the store's physical inventory. No longer do store employees have to leave customers in the aisle to access a fixed terminal. iPhones give employees quick access to detailed information about products that customers are interested in and further supplements both the employee's existing knowledge and point of purchase materials we provide. We have already seen a positive impact on the time it takes to serve customers, as well as the number of customers we are able to serve.

To leverage our employees’ knowledge, we launched Connections, an online employee social business network that gives them the ability to easily share information at anytime.  Employees have access to Connections directly from the sales floor, thereby increasing their breadth of knowledge and improving the customer experience.

All of the enhancements we made in 2011 are building momentum in developing deeper relationships with our customers that we believe will enable us to close more sales and improve profitability in 2012 and beyond.

 
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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 year. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements, including the related notes to the consolidated financial statements.

   
 
   
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year 1
   
Percentage Increase / (Decrease) in Dollar Amounts from Prior Year 1
 
   
2011
   
2010
   
2011 vs. 2010
   
2011 vs. 2010
 
Net sales
    100.00 %     100.00 %     N/A       2.9 %
Gross margin
    34.56       35.14       (58 )     1.2  
Expenses:
                               
Selling, general and administrative
    25.08       24.60       48       4.9  
Depreciation
    2.95       3.25       (30 )     (6.7 )
Interest - net
    0.74       0.68       6       11.7  
Total expenses
    28.77       28.53       24       3.7  
Pre-tax earnings
    5.79       6.61       (82 )     (10.0 )
Income tax provision
    2.13       2.49       (36 )     (12.4 )
Net earnings
    3.66 %     4.12 %     (46 )     (8.5 ) %
EBIT margin 2
    6.53 %     7.29 %     (76 )     (7.9 ) %
                                 
   
 
   
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year
   
Percentage Increase / (Decrease) in Dollar Amounts from Prior Year
 
      2010       2009    
2010 vs. 2009
   
2010 vs. 2009
 
Net sales
    100.00 %     100.00 %     N/A       3.4 %
Gross margin
    35.14       34.86       28       4.2  
Expenses:
                               
Selling, general and administrative
    24.60       24.85       (25 )     2.3  
Depreciation
    3.25       3.42       (17 )     (1.7 )
Interest - net
    0.68       0.61       7       15.7  
Total expenses
    28.53       28.88       (35 )     2.1  
Pre-tax earnings
    6.61       5.98       63       14.2  
Income tax provision
    2.49       2.20       29       16.9  
Net earnings
    4.12 %     3.78 %     34       12.7 %
EBIT margin 2
    7.29 %     6.59 %     70       14.4 %


 
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Other Metrics
 
2011
   
2010
   
2009
 
Comparable store sales increase (decrease) 3
    0.0 %     1.3 %     (6.7 )%
Total customer transactions (in millions) 1
    810       786       766  
Average ticket 4
  $ 62.00     $ 62.07     $ 61.66  
At end of year:
                       
Number of stores
    1,745       1,749       1,710  
Sales floor square feet (in millions)
    197       197       193  
Average store size selling square feet (in thousands) 5
    113       113       113  
Return on average assets 6
    5.4 %     5.8 %     5.3 %
Return on average shareholders' equity 7
    10.7 %     10.7 %     9.5 %
Return on invested capital 8
    8.7 %     9.0 %     8.2 %

1 The fiscal year ended February 3, 2012 had 53 weeks.  The fiscal years ended January 28, 2011 and January 29, 2010 had 52 weeks.
2 EBIT margin, also referred to as operating margin, is defined as earnings before interest and taxes as a percentage of sales.
3 A comparable store is defined 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.  A store we have decided to close is no longer considered comparable as of the beginning of the month in which we announce its closing.  The comparable store sales increase for 2011 included in the preceding table was calculated using sales for a comparable 53-week period.
4 Average ticket is defined as net sales divided by the total number of customer transactions.
5 Average store size selling square feet is defined as sales floor square feet divided by the number of stores open at the end of the period.
6 Return on average assets is defined as net earnings divided by average total assets for the last five quarters.
7 Return on average shareholders’ equity is defined as net earnings divided by average shareholders’ equity for the last five quarters.
8 Return on invested capital is a non-GAAP measure. See below for additional information.

Return on Invested Capital

Return on Invested Capital (ROIC) is considered a non-GAAP financial measure. We believe ROIC is a meaningful metric for investors because it measures how effectively the Company uses capital to generate profits.

We define ROIC as trailing four quarters' net operating profit after tax divided by the average of ending debt and equity for the last five quarters. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method used by our management to calculate ROIC may differ from the methods other companies use to calculate their ROIC. We encourage you to understand the methods used by another company to calculate its ROIC before comparing its ROIC to ours.

We consider return on average debt and equity to be the financial measure computed in accordance with generally accepted accounting principles that is the most directly comparable GAAP financial measure to ROIC.  The difference between these two measures is that ROIC adjusts net earnings to exclude tax adjusted interest expense.

The calculation of ROIC, together with a reconciliation to the calculation of return on average debt and equity, the most comparable GAAP financial measure, is as follows:

 
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(In millions, except percentage data)
 
 
   
 
   
 
 
Calculation of Return on Invested Capital
 
2011
   
2010
   
2009
 
Numerator
 
 
   
 
   
 
 
Net earnings
  $ 1,839     $ 2,010     $ 1,783  
Plus:
                       
Interest expense - net
    371       332       287  
Provision for income taxes
    1,067       1,218       1,042  
Earnings before interest and taxes
    3,277       3,560       3,112  
Less:
                       
Income tax adjustment1
    1,203       1,343       1,147  
Net operating profit after tax
  $ 2,074     $ 2,217     $ 1,965  
                         
Effective tax rate
    36.7 %     37.7 %     36.9 %
Denominator
                       
Average debt and equity2
  $ 23,940     $ 24,634     $ 24,105  
Return on invested capital
    8.7 %     9.0 %     8.2 %
                         
Calculation of Return on Average Debt and Equity
                 
Numerator
                       
Net earnings
  $ 1,839     $ 2,010     $ 1,783  
Denominator
                       
Average debt and equity2
  $ 23,940     $ 24,634     $ 24,105  
Return on average debt and equity
    7.7 %     8.2 %     7.4 %

1 Income tax adjustment is defined as earnings before interest and taxes multiplied by the effective tax rate.

2 Average debt and equity is defined as average debt, including current maturities and short-term borrowings, plus total equity for the last five quarters.

Fiscal 2011 Compared to Fiscal 2010

For the purpose of the following discussion, comparable store sales, comparable store average ticket and comparable store customer transactions are based on comparable 53-week periods.

Net sales – Net sales increased 2.9% to $50.2 billion in 2011, while comparable store sales were flat.  The additional week in 2011 contributed 1.6% to the increase in net sales.  Comparable store customer transactions increased approximately 0.4% and comparable store average ticket decreased 0.4% versus 2010.

While comparable stores sales were flat in 2011, we saw sequential improvement each quarter, with comparable store sales of negative 3.3% in the first quarter, negative 0.3% in the second quarter, positive 0.7% in the third quarter and positive 3.4% in the fourth quarter. Unseasonably cold, wet weather, severe storms and flooding during the first quarter as well as comparisons to the 2010 Cash for Appliances government incentive program led to lower performance during the first half of the year. However, as comparisons to the Cash for Appliances program eased and storm recovery efforts were underway, we saw improvement in comparable store sales.  In addition, strong customer response to our 5% off every-day offer to Lowe’s credit cardholders, launched in the first half of 2011, aided comparable store sales for the balance of the year.

 
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We experienced comparable store sales above the company average in the following product categories during 2011: Building Materials, Rough Plumbing, Tools, Fashion Electrical, Paint and Hardware.  In addition, Home Fashions, Storage & Cleaning, Seasonal Living, Flooring, Nursery and Lumber performed at approximately the overall company average.  Although unfavorable weather in the early part of the year negatively impacted outdoor categories such as Building Materials, recovery efforts after severe spring storms that hit many regions of the country and hurricane Irene positively impacted comparable store sales in Building Materials, with particularly strong sales of roofing products and installation services.  Rough Plumbing also benefited from the wet weather and storm recovery efforts, with strong sales of pumps & tanks and dehumidifiers.  In addition, Tools experienced favorable comparable store sales primarily driven by holiday promotions and strong customer response to new products, such as our new line of Kobalt mechanics tools.  Fashion Electrical also performed above the company average during 2011, driven by increased customer demand for energy-saving light bulbs, outdoor lighting and electrical cable.

However, difficult comparisons to prior year energy tax credits negatively impacted comparable store sales in Millwork. In addition, while we experienced strong market share gains in Cabinets & Countertops, they were not enough to offset the impact of the contracting market, leading to comparable store sales below the company average for the year.  Appliances also experienced negative comparable store sales for the year driven by comparisons to the prior year Cash for Appliances program, which primarily impacted the first half of the year.

Gross margin – Gross margin of 34.56% for 2011 represented a 58 basis point decrease from 2010, primarily driven by margin rate.  Strong customer response to our 5% off every-day offer to Lowe’s credit cardholders, targeted promotional activity and pricing changes associated with our move to every-day low prices negatively impacted margin for the year.  Margin was also negatively impacted by 19 basis points associated with distribution expenses, primarily related to higher fuel costs.  In addition, lower of cost or market inventory adjustments, primarily related to the 27 stores that closed in the second half of the year, negatively impacted margin by six basis points.  These were partially offset by 15 basis points of favorable impact associated with the mix of products sold across product categories.

SG&A – The increase in SG&A expense as a percentage of sales from 2010 to 2011 was primarily driven by de-leverage of 83 basis points related to charges for store closings, discontinued projects and long-lived asset impairments. We also experienced approximately 15 basis points of de-leverage related to investments made to improve customer experiences, including expenses associated with additional internal and external staffing and technology expenditures.  In addition, we experienced de-leverage in payroll taxes and fleet expense.  These increases were partially offset by leverage of approximately 40 basis points associated with our proprietary credit program due to reduced program costs associated with lower losses and lower promotional financing as more customers took advantage of the 5% off every day offer.  In addition, bonus expense leveraged 30 basis points due to lower attainment levels for the year relative to plan.

Depreciation – Depreciation expense leveraged 30 basis points for 2011 compared to 2010 primarily due to a lower asset base resulting from decreased capital spending and assets becoming fully depreciated or impaired.  Property, less accumulated depreciation, decreased to $22.0 billion at February 3, 2012 compared to $22.1 billion at January 28, 2011.  At February 3, 2012 and January 28, 2011, we owned 89% of our stores, which included stores on leased land.

Interest – Net interest expense is comprised of the following:

(In millions)
 
2011
   
2010
 
Interest expense, net of amount capitalized
  $ 379     $ 340  
Amortization of original issue discount and loan costs
    4       4  
Interest income
    (12 )     (12 )
Interest - net
  $ 371     $ 332  

Net interest expense increased primarily as a result of the issuance of $2.0 billion of notes during 2010 and $1.0 billion of notes during 2011, offset by the repayment of $500 million of notes during 2010.

Income tax provision – Our effective income tax rate was 36.7% in 2011 compared to 37.7% in 2010.  The reduction in the effective tax rate was predominantly due to the recognition of benefits from the federal HIRE (Hiring Incentives to Restore Employment) retention tax credit as well as various state tax credit programs.

 
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Fiscal 2010 Compared to Fiscal 2009

Net sales – Net sales increased 3.4% to $48.8 billion in 2010.  Comparable store sales increased 1.3% in 2010 compared to a decline of 6.7% in 2009.   We experienced comparable store sales increases over 2009 for each quarter and saw evidence of economic stabilization, as comparable store sales performance was more balanced across geographic markets in 2010.  Comparable store customer transactions increased 0.9%, and comparable store average ticket increased 0.5% versus 2009, as larger project sales remained slow for the year.

Overall, while growth in household spending moderately accelerated late in the year, it remained constrained by high unemployment, modest income growth, lower housing wealth and tight credit.  As a result, customers continued to focus on non-discretionary and smaller discretionary projects during 2010.  This focus was reflected by strength in categories that support smaller projects such as Tools and Lawn & Landscape, both of which outperformed the company average.  Meanwhile, categories that are more discretionary in nature such as Fashion Plumbing, Cabinets & Countertops and Home Fashions, Storage & Cleaning were negatively impacted by the remaining market uncertainty and performed below the company average.

We seized opportunities during the year to drive additional sales by quickly executing programs that helped customers benefit from government incentives.  The Cash for Appliances rebate program, as well as our continued focus on market-specific assortments to ensure that we have the right products in the right markets, helped drive comparable store sales increases above the company average for our Appliances category.  In addition, our PSE program, along with focused Special Order Sales promotions, helped customers take advantage of the higher tax credits for energy-efficient improvements that expired at the end of the year.  The PSE program also helped us to increase our 2010 comparable store installed sales over 10%, with the greatest growth occurring in Millwork, Lumber and Building Materials.

Comparable store sales for our Seasonal Living category also outperformed the company average for 2010. The increase was driven by improved sell-through of grills and grill accessories, patio furniture and holiday assortments, as well as increased sales of room air conditioners as a result of prolonged extreme heat across the U.S. in the middle of the year.

Gross margin – Gross margin of 35.14% for 2010 represented a 28 basis point increase over 2009.  The increase was driven by improvements in margin rates, primarily in Seasonal Living, Lumber and Hardware, which resulted in 38 basis points of improvement.  The rate increase is primarily attributable to better sell-through of seasonal inventory this year relative to 2009, our increased number of competitive pricing zones, and our Base Price Optimization strategy.   The rate improvement was partially offset by a 17 basis point unfavorable impact from the mix of products sold across categories, driven by increased sales in Appliances.

SG&A – The decrease in SG&A as a percentage of sales from 2009 to 2010 was primarily driven by leverage of 23 basis points in bonus expense, due to lower attainment levels relative to plan.  Impairment and discontinued project expense leveraged 13 basis points due to lower charges associated with existing stores as well as fewer construction projects discontinued in the current year.  We also experienced nine basis points of leverage associated with our proprietary credit programs due to decreased program costs for the year.  This was partially offset by de-leverage in store payroll due to the impact of the new Facilities Service Associate (FSA) position and wage growth, fleet expense due to increased deliveries related to free delivery promotions and increased average fuel costs, and bank card expense due to increased bank card transaction volume and higher transaction fees.

Depreciation – Depreciation expense decreased slightly for 2010 compared to 2009 due to a lower asset base resulting from decreased capital spending and assets becoming fully depreciated in 2010.  Property, less accumulated depreciation, decreased to $22.1 billion at January 28, 2011 compared to $22.5 billion at January 29, 2010.  At January 28, 2011 and January 29, 2010, we owned 89% and 88% of our stores, respectively, which included stores on leased land.

 
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Interest – Net interest expense is comprised of the following:

(In millions)
 
2010
   
2009
 
Interest expense, net of amount capitalized
  $ 340     $ 300  
Amortization of original issue discount and loan costs
    4       4  
Interest income
    (12 )     (17 )
Interest - net
  $ 332     $ 287  

Net interest expense increased primarily as a result of the issuance of $2.0 billion of notes during 2010 and due to the impact of tax settlements that favorably impacted our tax-related interest accruals in 2009, offset by the repayment of $500 million of notes during 2010.

Income tax provision – Our effective income tax rate was 37.7% in 2010 versus 36.9% in 2009.  The lower effective tax rate in 2009 was primarily due to certain prior year favorable state tax settlements, which decreased the effective tax rate by approximately 70 basis points.

LOWE’S BUSINESS OUTLOOK

Our fiscal year 2012 contains 52 weeks as compared to our fiscal 2011 which contained 53 weeks.  Therefore, our fiscal 2012 growth rates, with the exception of comparable store sales which is computed on a 52-week versus 52- week basis, will be negatively impacted by comparing 52 weeks with 53 weeks in fiscal 2011.

As of February 27, 2012, the date of our fourth quarter 2011 earnings release, we expected total sales in 2012 to increase 1% to 2%.  We expected comparable store sales to increase 1% to 3% in 2012.  We expected to open approximately 10 stores during 2012. Earnings before interest and taxes as a percentage of sales (operating margin) were expected to increase approximately 100 basis points. In addition, depreciation expense was expected to be approximately $1.5 billion.  Diluted earnings per share of $1.75 to $1.85 were expected for the fiscal year ending February 1, 2013.  Our guidance assumed approximately $4.5 billion in share repurchases during 2012, spread evenly across the four quarters.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Cash flows from operating activities continued to provide the primary source of our liquidity.  The increase in net cash provided by operating activities for 2011 versus 2010 was primarily driven by an increase in net earnings, adjusted for non-cash charges related to net losses on property and other assets, and changes in working capital.  The decrease in net cash used in investing activities for 2011 versus 2010 was driven by net cash inflows related to investments, partially offset by an increase in cash used for property acquired related to investments in corporate systems and store information technology.  Net cash used in financing activities for 2011 was primarily driven by share repurchases of $2.9 billion which was partially offset by net proceeds from the issuance of $1.0 billion of notes in November 2011. Net cash used in financing activities for 2010 was primarily driven by share repurchases of $2.6 billion which was partially offset by net proceeds from the issuance of $2.0 billion of notes in April and November 2010 and the repayment of $500 million of notes that matured in June 2010.

Sources of Liquidity

In addition to our cash flows from operations, liquidity is provided by our short-term borrowing facilities and through the issuance of long-term debt.  On October 25, 2011, we entered into a second amended and restated credit agreement (Amended Facility) to modify the senior credit facility dated June 2007, which provided for borrowings of up to $1.75 billion through June 2012.  The Amended Facility extends the maturity date to October 2016 and continues to provide for borrowings of up to $1.75 billion. The Amended Facility supports our commercial paper program and has a $500 million letter of credit sublimit.  Letters of credit issued pursuant to the Amended Facility reduce the amount available for

 
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borrowing under its terms.  Borrowings made are unsecured and are priced at fixed rates 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 February 3, 2012.  Thirteen banking institutions are participating in the Amended Facility.  There were no outstanding borrowings or letters of credit under the Amended Facility and no outstanding borrowings under our commercial paper program at February 3, 2012.

We have a Canadian dollar (C$) denominated credit facility in the amount of C$50 million that provides revolving credit support for our Canadian operations.  This uncommitted credit facility provides us with the ability to make unsecured borrowings, which are priced at fixed rates based upon market conditions at the time of funding in accordance with the terms of the credit facility.  As of February 3, 2012, there were no borrowings outstanding under this credit facility.

In 2011, our board of directors approved a change in the financial metric we use to determine our available debt capacity from time to time.  At February 3, 2012, our available debt capacity was $9.6 billion, which compared to debt outstanding at that date of $7.6 billion.  We plan to issue additional debt during 2012 and expect to use the net proceeds for general corporate purposes, which may include repurchases of shares of our common stock, capital expenditures, repayment of long-term debt maturities, acquisitions, other strategic initiatives and working capital needs.  The amount and timing of any additional debt issuances in 2012 will depend upon not only our financial performance and estimated available debt capacity at the time, but also upon macroeconomic and debt capital market conditions during the year. 

We expect to continue to have access to the capital markets on both short and long-term bases when needed for liquidity purposes by issuing commercial paper or new long-term debt. The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios.  The table below reflects our debt ratings by Standard & Poor’s (S&P) and Moody’s as of April 2, 2012, which we are disclosing to enhance understanding of our sources of liquidity and the effect of our ratings on our cost of funds.  Although we currently do not expect a downgrade in our debt ratings, our commercial paper and senior debt ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.

Debt Ratings
 
S&P
   
Moody’s
 
Commercial Paper
    A-2       P-2  
Senior Debt
    A-       A3  
Outlook
 
Negative
   
Stable
 

We believe that net cash provided by operating and financing activities will be adequate not only for our operating requirements, but also for our expansion plans, investments in our existing stores, investments in information technology, repurchases of shares of common stock and acquisitions, if any, over the next 12 months.  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. In addition, we do not have a significant amount of cash held in foreign affiliates.

Cash Requirements

Capital expenditures
Our fiscal 2012 capital budget is approximately $1.4 billion, inclusive of approximately $100 million of lease commitments, resulting in a planned net cash outflow of $1.3 billion.  Approximately 45% of the planned net cash outflow is for investments to enhance the customer experience, inclusive of enhancements in information technology.  Existing stores account for approximately 30% of planned net cash outflow including investments in resets and remerchandising.  In addition, approximately 15% of the planned net cash outflow is for store expansion.  Our expansion plans for 2012 consist of approximately 10 new stores and are expected to increase sales floor square footage slightly.  All of the 2012 projects are expected to be owned, which includes approximately 35% of the stores on leased land.  Other planned capital expenditures include investing in our distribution network, a part of which is the addition of one regional distribution center.

 
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During 2009, we entered into a joint venture agreement with Australian retailer Woolworths Limited, to develop a chain of home improvement stores in Australia.  As of February 3, 2012, we had contributed approximately $375 million.  The venture opened its first seven stores under the name MastersTM in 2011, and expects to open 15 to 20 stores in 2012.

Debt and capital
In November 2011, we issued $1.0 billion of unsecured notes, in two tranches:  $500 million of 3.8% notes maturing in November 2021 and $500 million of 5.125% notes maturing in November 2041.  Net proceeds from the 3.8% and 5.125% notes were $497 million and $495 million, respectively.  Net proceeds were available for general corporate purposes, including repurchases of shares of our common stock, capital expenditures, acquisitions and working capital needs.

Dividends declared during fiscal 2011 totaled $672 million.  Our dividend payment dates are established such that dividends are paid in the subsequent quarter to their declaration.  Dividends declared in the fourth quarter of 2011 were paid in fiscal 2012 and totaled $174 million.

We have a share repurchase program that is executed through purchases made from time to time in the open market or through private transactions.  Shares purchased under the share repurchase program are retired and returned to authorized and unissued status. On August 19, 2011, the Company's Board of Directors authorized a new $5.0 billion share repurchase program with no expiration.  As of February 3, 2012, we had a remaining repurchase authorization of $4.5 billion.  We expect to utilize the remaining authorization by the end of fiscal 2012.

The ratio of debt to equity plus debt was 31.6% and 26.6% as of February 3, 2012, and January 28, 2011, respectively.

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

The following table summarizes our significant contractual obligations at February 3, 2012:

   
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)   $ 13,150     $ 930     $ 699     $ 2,201     $ 9,320  
Capitalized lease obligations 1
    703       76       148       113       366  
Operating leases 1
    5,851       421       822       799       3,809  
Purchase obligations 2
    1,297       590       511       196       -  
Total contractual obligations
  $ 21,001     $ 2,017     $ 2,180     $ 3,309     $ 13,495  

1 Amounts do not include taxes, common area maintenance, insurance or contingent rent because these amounts have historically been insignificant.
2 Represents commitments related to certain marketing and information technology programs, and purchases of merchandise inventory.

At February 3, 2012, our reserve for uncertain tax positions (including penalties and interest), net of amounts held on deposit by taxing authorities, was $111 million, of which $107 million was classified as a current liability and $4 million was classified as a noncurrent 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.
 
At February 3, 2012, the Company had no significant commercial commitments.
 
 
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the consolidated financial statements and notes to consolidated financial statements presented in this Form 10-K 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 policies are described in Note 1 to the consolidated financial statements. We believe that the following accounting policies affect the most significant estimates and management judgments used in preparing the consolidated financial statements.

Merchandise Inventory

Description
We record an obsolete inventory reserve for the anticipated loss associated with selling inventories below cost.  This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience.  During 2011, our reserve increased approximately $8 million to $47 million as of February 3, 2012.

We also record an inventory reserve for the estimated shrinkage between physical inventories.  This reserve is based primarily on actual shrinkage results from previous physical inventories.  During 2011, the inventory shrinkage reserve increased approximately $14 million to $141 million as of February 3, 2012.

In addition, we receive funds from vendors in the normal course of business, principally as a result of purchase volumes, sales, early payments or promotions of vendors’ products, which generally do not represent the reimbursement of specific, incremental and identifiable costs that we incurred to sell the vendor’s product.  We treat these funds as a reduction in the cost of inventory as the amounts are accrued, and recognize these funds as a reduction of cost of sales when the inventory is sold.

Judgments and uncertainties involved in the estimate
We do not believe that our merchandise inventories are subject to significant risk of obsolescence in the near term, and we have the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in consumer purchasing patterns or a deterioration in product quality could result in the need for additional reserves.  Likewise, changes in the estimated shrink reserve may be necessary, based on the timing and results of physical inventories.  We also apply judgment in the determination of levels of non-productive inventory and assumptions about net realizable value.

For vendor funds, we develop accrual rates based on the provisions of the agreements in place.  Due to the complexity and diversity of the individual vendor agreements, we perform analyses and review historical purchase trends and volumes throughout the year, adjust accrual rates as appropriate and confirm actual amounts with select vendors to ensure the amounts earned are appropriately recorded.  Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met.

Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to establish our inventory valuation or the related reserves for obsolete inventory or inventory shrinkage during the past three fiscal years.  We believe that we have sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves.  However, it is possible that actual results could differ from recorded reserves.  A 10% change in either the amount of products considered obsolete or the weighted average estimated loss rate used in the calculation of our obsolete inventory reserve would have affected net earnings by approximately $3 million for 2011.  A 10% change in the estimated shrinkage rate included in the calculation of our inventory shrinkage reserve would have affected net earnings by approximately $9 million for 2011.

 
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We have not made any material changes in the methodology used to recognize vendor funds during the past three fiscal years.  If actual results are not consistent with the assumptions and estimates used, we could be exposed to additional adjustments that could positively or negatively impact gross margin and inventory.  However, substantially all receivables associated with these activities do not require subjective long-term estimates because they are collected within the following fiscal year.  Adjustments to gross margin and inventory in the following fiscal year have historically not been material.

Long-Lived Asset Impairment

Description
We review the carrying amounts of locations whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable.  When evaluating locations for impairment, our asset group is at an individual location level, as that is the lowest level for which cash flows are identifiable.  Cash flows for individual locations do not include an allocation of corporate overhead.

We evaluate locations for triggering events relating to long-lived asset impairment on a quarterly basis to determine when a location’s asset carrying values may not be recoverable.  For operating locations, our primary indicator that asset carrying values may not be recoverable is consistently negative cash flow for a 12-month period for those locations that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results.  Management also monitors other factors when evaluating operating locations for impairment, including individual locations’ execution of their operating plans and local market conditions, including incursion, which is the opening of either other Lowe’s locations or those of a direct competitor within the same market.  We also consider there to be a triggering event when there is a current expectation that it is more likely than not that a given location will be closed significantly before the end of its previously estimated useful life.

A potential impairment has occurred if projected future undiscounted cash flows expected to result from the use and eventual disposition of the location’s assets are less than the carrying amount of the assets.  When determining the stream of projected future cash flows associated with an individual operating location, management makes assumptions, incorporating local market conditions, about key store variables including sales growth rates, gross margin and controllable expenses, such as store payroll and occupancy expense, as well as asset residual values or lease rates.  An impairment loss is recognized when the carrying amount of the operating location is not recoverable and exceeds its fair value.

We use an income approach to determine the fair value of our individual operating locations, which requires discounting projected future cash flows.  This involves making assumptions regarding both a location’s future cash flows, as described above, and an appropriate discount rate to determine the present value of those future cash flows.  We discount our cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows.  The selected market participants represent a group of other retailers with a market footprint similar in size to ours.

We use a market approach to determine the fair value of our individual locations identified for closure.  This involves making assumptions regarding the estimated selling prices or estimated lease rates by obtaining information from property brokers or appraisers in the specific markets being evaluated.  The information includes comparable sales of similar assets and assumptions about demand in the market for purchase or lease of these assets.

Judgments and uncertainties involved in the estimate
Our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred, including the evaluation of whether it is more likely than not that a location will be closed significantly before the end of its previously estimated useful life.  Our impairment loss calculations require us to apply judgment in estimating expected future cash flows, including estimated sales, margin and controllable expenses, and assumptions about market performance for operating locations and estimated selling prices or lease rates for locations identified for closure.  We also apply judgment in estimating asset fair values, including the selection of an appropriate discount rate for fair values determined using an income approach.

 
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Effect if actual results differ from assumptions
During 2011, 12 operating locations and 27 locations identified for closure experienced a triggering event and were evaluated for recoverability.  Four of the 12 operating locations and all 27 of the locations identified for closure were determined to be impaired.  We recorded impairment losses related to operating locations and locations identified for closure of $309 million during 2011, compared to $36 million during 2010.

We have not made any material changes in the methodology used to estimate the future cash flows of operating locations or locations identified for closure during the past three fiscal years.  If the actual results are not consistent with the assumptions and judgments we have made in determining whether it is more likely than not that a location will be closed significantly before the end of its useful life or in estimating future cash flows and determining asset fair values, our actual impairment losses could vary positively or negatively from our estimated impairment losses.

Eight of the 12 operating locations that experienced a triggering event during 2011 were determined to be recoverable and therefore were not impaired.  For seven of these locations, the expected undiscounted cash flows substantially exceeded the net book value of the location’s assets. A 10% reduction in projected sales used to estimate future cash flows at the latest date that these eight operating locations were evaluated for impairment would have resulted in the impairment of one of these locations and increased recognized impairment losses by approximately $9 million.

We analyzed other assumptions made in estimating the future cash flows of the operating locations evaluated for impairment, but the sensitivity of those assumptions was not significant to the estimates.

All 27 of the locations identified for closure during 2011 were determined to be impaired.  For these locations, a 10% reduction in the estimated selling prices for owned locations, or the present value of estimated cash inflows from sublease activity for leased locations, at the dates that the locations were evaluated for impairment would have increased recognized impairment losses by approximately $7 million.

Store Closing Lease Obligations

Description
When locations under operating leases are closed, we recognize a liability for the fair value of future contractual obligations associated with the leased location.  The fair value of the store closing lease obligation is determined using an expected present value cash flow model incorporating future minimum lease payments, property taxes, utilities, common area maintenance and other ongoing expenses, net of estimated sublease income and other recoverable items, discounted at a credit-adjusted risk free rate.  The expected present value cash flow model uses a probability weighted scenario approach that assigns varying cash flows to certain scenarios based on the expected likelihood of outcomes.  Estimating the fair value involves making assumptions regarding estimated sublease income by obtaining information from property brokers or appraisers in the specific markets being evaluated.  The information includes comparable lease rates of similar assets and assumptions about demand in the market for leasing these assets.  Subsequent changes to the liability, including a change resulting from a revision to either the timing or the amount of estimated cash flows, are recognized in the period of the change.

Judgments and uncertainties involved in the estimate
Our store closing lease liability calculations require us to apply judgment in estimating expected future cash flows, primarily related to estimated sublease income, and the selection of an appropriate discount rate.

Effect if actual results differ from assumptions
During 2011, 13 stores under operating lease were closed, which includes one store that was relocated.  We recorded $76 million of expense for store closing lease obligations during 2011. These charges included $67 million related to new liabilities recorded during 2011 and $9 million of adjustments related to previously recorded liabilities.

We have not made any material changes in the methodology used to estimate the expected future cash flows of closed locations under operating leases during the past three fiscal years.  If the actual results are not consistent with the assumptions and judgments we have made in estimating expected future cash flows, our store closing lease obligation losses could vary positively or negatively from our estimated losses.   A 10% decrease in the estimated present value of

 
32

 

cash inflows from sublease activity for the 13 stores under operating lease that closed during 2011 would have increased expenses recorded for lease obligations by approximately $11 million.

Self-Insurance

Description
We are self-insured for certain losses relating to workers’ compensation; automobile; property; general and product liability; extended protection plan; and certain medical and dental claims.  Self-insurance claims filed and claims incurred but not reported are accrued based upon our estimates of the discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience.  During 2011, our self-insurance liability increased approximately $29 million to $864 million as of February 3, 2012.

Judgments and uncertainties involved in the estimate
These estimates are subject to changes in the regulatory environment; utilized discount rate; projected exposures including payroll, sales and vehicle units; as well as the frequency, lag and severity of claims.

Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to establish our self-insurance liability during the past three fiscal years.  Although we believe that we have the ability to reasonably estimate losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities.  A 10% change in our self-insurance liability would have affected net earnings by approximately $55 million for 2011.  A 100 basis point change in our discount rate would have affected net earnings by approximately $20 million for 2011.

Revenue Recognition

Description
See Note 1 to the consolidated financial statements for a discussion of our revenue recognition policies.  The following accounting estimates relating to revenue recognition require management to make assumptions and apply judgment regarding the effects of future events that cannot be determined with certainty.

We sell separately-priced extended protection plan contracts under a Lowe’s-branded program for which the Company is ultimately self-insured.  The Company recognizes revenues from extended protection plan sales on a straight-line basis over the respective contract term.  Extended protection plan contract terms primarily range from one to four years from the date of purchase or the end of the manufacturer’s warranty, as applicable.  The Company consistently groups and evaluates extended protection plan contracts based on the characteristics of the underlying products and the coverage provided in order to monitor for expected losses.  A loss on the overall contract would be recognized if the expected costs of performing services under the contracts exceeded the amount of unamortized acquisition costs and related deferred revenue associated with the contracts.  Deferred revenues associated with the extended protection plan contracts increased $73 million to $704 million as of February 3, 2012.

We defer revenue and cost of sales associated with settled transactions for which customers have not yet taken possession of merchandise or for which installation has not yet been completed.  Revenue is deferred based on the actual amounts received.  We use historical gross margin rates to estimate the adjustment to cost of sales for these transactions.  During 2011, deferred revenues associated with these transactions increased $59 million to $430 million as of February 3, 2012.

Judgments and uncertainties involved in the estimate
For extended protection plans, there is judgment inherent in our evaluation of expected losses as a result of our methodology for grouping and evaluating extended protection plan contracts and from the actuarial determination of the estimated cost of the contracts.  There is also judgment inherent in our determination of the recognition pattern of costs of performing services under these contracts.

For the deferral of revenue and cost of sales associated with transactions for which customers have not yet taken possession of merchandise or for which installation has not yet been completed, there is judgment inherent in our estimates of gross margin rates.

 
33

 

Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to recognize revenue on our extended protection plan contracts during the past three fiscal years.  We currently do not anticipate incurring any overall contract losses on our extended protection plan contracts.  Although we believe that we have the ability to adequately monitor and estimate expected losses under the extended protection plan contracts, it is possible that actual results could differ from our estimates.  In addition, if future evidence indicates that the costs of performing services under these contracts are incurred on other than a straight-line basis, the timing of revenue recognition under these contracts could change.  A 10% change in the amount of revenue recognized in 2011 under these contracts would have affected net earnings by approximately $12 million.

We have not made any material changes in the methodology used to reverse net sales and cost of sales related to amounts received for which customers have not yet taken possession of merchandise or for which installation has not yet been completed.  We believe we have sufficient current and historical knowledge to record reasonable estimates related to the impact to cost of sales for these transactions.  However, if actual results are not consistent with our estimates or assumptions, we may incur additional income or expense.  A 10% change in the estimate of the gross margin rates applied to these transactions would have affected net earnings by approximately $7 million in 2011.

 
 
34

 
 
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

We speak throughout this Annual Report on Form 10-K in forward-looking statements about our future, but particularly in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  The words “believe,” “expect,” “will,” “should,” and other similar expressions are intended to identify those forward-looking statements.  While we believe our expectations are reasonable, they are not guarantees of future performance.  Our actual results could differ substantially from our expectations.

For a detailed description of the risks and uncertainties that we are exposed to, you should read the “Risk Factors” included elsewhere in this Annual Report on Form 10-K to the United States Securities and Exchange Commission.  All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section and in the “Risk Factors” included elsewhere in this Annual Report on Form 10-K.  We do not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.

 
35

 
 


In addition to the risks inherent in our operations, we are exposed to certain market risks, including changes in interest rates, commodity prices and foreign currency exchange rates.

Interest Rate Risk

Fluctuations in interest rates do not have a material impact on our financial condition and results of operations because our long-term debt is carried at amortized cost and consists of fixed-rate instruments.  Therefore, providing quantitative information about interest rate risk is not meaningful for financial instruments.

Commodity Price Risk

We purchase certain commodity products that are subject to price volatility caused by factors beyond our control.  We believe that the price volatility of these products is partially mitigated by our ability to adjust selling prices.  The selling prices of these commodity products are influenced, in part, by the market price we pay, which is determined by industry supply and demand.

Foreign Currency Exchange Rate Risk

Although we have international operating entities, our exposure to foreign currency exchange rate fluctuations is not material to our financial condition and results of operations.

 
36

 
 


MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Lowe’s Companies, Inc. and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting (Internal Control) as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.  Our Internal Control was designed to provide reasonable assurance to our management and the Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and financial statement preparation and presentation.  Further, because of changes in conditions, the effectiveness may vary over time.

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our Internal Control as of February 3, 2012. In evaluating our Internal Control, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our management’s assessment, we have concluded that, as of February 3, 2012, our Internal Control is effective.

Deloitte & Touche LLP, the independent registered public accounting firm that audited the financial statements contained in this report, was engaged to audit our Internal Control. Their report appears on page 39.

 
37

 


 
To the Board of Directors and Shareholders of Lowe's Companies, Inc.
Mooresville, North Carolina
 
We have audited the accompanying consolidated balance sheets of Lowe's Companies, Inc. and subsidiaries (the "Company") as of February 3, 2012 and January 28, 2011, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three fiscal years in the period ended February 3, 2012. Our audits also included the financial statement schedule listed in the Table of Contents at Item 15.  These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 3, 2012 and January 28, 2011, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 3, 2012, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of February 3, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 2, 2012 expressed an unqualified opinion on the Company's internal control over financial reporting.
 
/s/ Deloitte & Touche LLP

 
Charlotte, North Carolina
April 2, 2012

 
38

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville, North Carolina
 
 
We have audited the internal control over financial reporting of Lowe’s Companies, Inc. and subsidiaries (the "Company") as of  February 3, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the fiscal year ended February 3, 2012 of the Company and our report dated April 2, 2012 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP
 
 
Charlotte, North Carolina
April 2, 2012

 
39

 

Lowe's Companies, Inc.
 
 
 
   
 
   
 
   
 
 
 
 
 
 
   
 
   
 
   
 
 
 
 
 
 
 
 
   
 
   
 
   
 
 
 
 
(In millions, except per share and percentage data)
February 3,
2012
 
%
   
January 28,
2011
   
%
   
January 29,
2010
 
%
 
Fiscal years ended on
Sales
   
Sales
 
Sales
 
 
 
 
 
   
 
   
 
   
 
 
 
 
Net sales
$ 50,208     100.00 %   $ 48,815       100.00 %   $ 47,220     100.00 %
 
                                         
Cost of sales
  32,858     65.44       31,663       64.86       30,757     65.14  
 
                                         
Gross margin
  17,350     34.56       17,152       35.14       16,463     34.86  
 
                                         
Expenses:
                                         
 
                                         
Selling, general and administrative
  12,593     25.08       12,006       24.60       11,737     24.85  
 
                                         
Depreciation
  1,480     2.95       1,586       3.25       1,614     3.42  
 
                                         
Interest - net
  371     0.74       332       0.68       287     0.61  
 
                                         
Total expenses
  14,444     28.77       13,924       28.53       13,638     28.88  
 
                                         
Pre-tax earnings
  2,906     5.79       3,228       6.61       2,825     5.98  
 
                                         
Income tax provision
  1,067     2.13       1,218       2.49       1,042     2.20  
 
                                         
Net earnings
$ 1,839     3.66 %   $ 2,010       4.12 %   $ 1,783     3.78 %
 
                                         
 
                                         
Basic earnings per common share
$ 1.43           $ 1.42             $ 1.21        
 
                                         
Diluted earnings per common share
$ 1.43           $ 1.42             $ 1.21        
 
                                         
Cash dividends per share
$ 0.530           $ 0.420             $ 0.355        
 
                                         
 
                                         
See accompanying notes to consolidated financial statements.
                               

 
40

 

Lowe's Companies, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
February 3,
2012
 
%
 
January 28,
2011
 
%
 
(In millions, except par value and percentage data)
 
 
 
Total
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
$
 1,014
 
3.0
%
$
 652
 
1.9
%
Short-term investments
 
 
 
 286
 
0.9
 
 
 471
 
1.4
 
Merchandise inventory - net
 
 
 
 8,355
 
24.9
 
 
 8,321
 
24.7
 
Deferred income taxes - net
 
 
 
 183
 
0.5
 
 
 193
 
0.6
 
Other current assets
 
 
 
 234
 
0.7
 
 
 330
 
1.0
 
Total current assets
 
 
 
 10,072
 
30.0
 
 
 9,967
 
29.6
 
Property, less accumulated depreciation
 
 
 
 21,970
 
65.5
 
 
 22,089
 
65.5
 
Long-term investments
 
 
 
 504
 
1.5
 
 
 1,008
 
3.0
 
Other assets
 
 
 
 1,013
 
3.0
 
 
 635
 
1.9
 
Total assets
 
 
$
 33,559
 
100.0
%
$
 33,699
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
 
 
$
 592
 
1.8
%
$
 36
 
0.1
%
Accounts payable
 
 
 
 4,352
 
13.0
 
 
 4,351
 
12.9
 
Accrued compensation and employee benefits
 
 
 
 613
 
1.8
 
 
 667
 
2.0
 
Deferred revenue
 
 
 
 801
 
2.4
 
 
 707
 
2.1
 
Other current liabilities
 
 
 
 1,533
 
4.5
 
 
 1,358
 
4.0
 
Total current liabilities
 
 
 
 7,891
 
23.5
 
 
 7,119
 
21.1
 
Long-term debt, excluding current maturities
 
 
 
 7,035
 
21.0
 
 
 6,537
 
19.4
 
Deferred income taxes - net
 
 
 
 531
 
1.6
 
 
 467
 
1.4
 
Deferred revenue - extended protection plans
 
 
 
 704
 
2.1
 
 
 631
 
1.9
 
Other liabilities
 
 
 
 865
 
2.5
 
 
 833
 
2.5
 
Total liabilities
 
 
 
 17,026
 
50.7
 
 
 15,587
 
46.3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock - $5 par value, none issued
 
 
 
 - 
 
 - 
 
 
 - 
 
 - 
 
Common stock - $.50 par value;
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued and outstanding
 
 
 
 
 
 
 
 
 
 
 
 
February 3, 2012
 1,241
 
 
 
 
 
 
 
 
 
 
 
January 28, 2011
 1,354
 
 
 621
 
1.9
 
 
 677
 
2.0
 
Capital in excess of par value
 
 
 
 14
 
-
 
 
 11
 
-
 
Retained earnings
 
 
 
 15,852
 
47.2
 
 
 17,371
 
51.5
 
Accumulated other comprehensive income
 
 
 
 46
 
0.2
 
 
 53
 
0.2
 
Total shareholders' equity
 
 
 
 16,533
 
49.3
 
 
 18,112
 
53.7
 
Total liabilities and shareholders' equity
 
 
$
 33,559
 
100.0
%
$
 33,699
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 

 
41

 

Lowe's Companies, Inc.
 
 
   
 
   
 
   
 
   
 
   
 
 
   
 
   
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
 
 
 
 
   
 
   
Capital in Excess of Par Value
   
Retained Earnings
   
Accumulated Other Comprehensive Income (Loss)
   
Total Shareholders' Equity
 
 
 
 
   
 
 
 
 
Common Stock
 
(In millions)
 
Shares
   
Amount
 
Balance January 30, 2009
    1,470     $ 735     $ 277     $ 17,049     $ (6 )   $ 18,055  
Comprehensive income:
                                               
Net earnings
                            1,783                  
Foreign currency translation
                                    32          
Net unrealized investment gains
                                    1          
Total comprehensive income
                                            1,816  
Tax effect of non-qualified stock options exercised and restricted stock vested
                    (6 )                     (6 )
Cash dividends declared
                            (522 )             (522 )
Share-based payment expense
                    102                       102  
Repurchase of common stock
    (22 )     (11 )     (490 )     (3 )             (504 )
Issuance of common stock under share-based payment plans 
    11       5       123                       128  
Balance January 29, 2010
    1,459     $ 729     $ 6     $ 18,307     $ 27     $ 19,069  
Comprehensive income:
                                               
Net earnings
                            2,010                  
Foreign currency translation
                                    28          
Net unrealized investment losses
                                    (2 )        
Total comprehensive income