Exhibit
4.5
__________________________________________
THIRD
SUPPLEMENTAL INDENTURE
Dated
as
of October 6, 200
5
___________________________________________
between
LOWE’S
COMPANIES, INC.
and
THE
BANK O
F
NEW YORK
as
Trustee
___________________________________________
Supplemental
to the Amended and Restated Indenture
Dated
as
of December 1, 1995
___________________________________________
Creating
a Series of Securities designated
5.0%
Notes due 201
5
and
Creating
a Series of Securities designated
5.5%
Notes due 2035
THIRD
SUPPLEMENTAL INDENTURE, dated as of October 6, 2005 (this “
Third
Supplemental Indenture
”),
between
LOWE'S
COMPANIES, INC.
,
a
corporation duly organized and existing under the laws of the State of North
Carolina (the “
Company
”),
having its principal office at 1000 Lowe’s Boulevard, Mooresville, North
Carolina 28117, and T
HE
BANK
OF NEW YORK
a
banking corporation duly organized and existing under the laws of the United
States, as Trustee (the “
Trustee
”
or
the
“
Successor
Trustee
”)
as
successor trustee to J.P. Morgan Trust Company, National Association (the
“
Resigning
Trustee
”),
pursuant to that certain Instrument of Resignation, Appointment and Acceptance,
dated as of April 21, 2004, (the “
Resignation
Instrument
”).
W
I T N E S S E T H :
WHEREAS,
the Company has heretofore executed and delivered to the Resigning Trustee
an
Amended and Restated Indenture, dated as of December 1, 1995 (the “
Base
Indenture
”)
as
supplemented and amended by this Third Supplemental Indenture (together with
the
Base Indenture, the “
Indenture
”),
providing for the issuance from time to time of its unsecured unsubordinated
debentures, notes or other evidences of indebtedness (the “
Securities
”),
to be
issued in one or more series as provided in the Base Indenture;
WHEREAS,
pursuant to the Resignation Instrument and the applicable provisions of the
Base
Indenture, the Resigning Trustee assigned, transferred, delivered and confirmed
to the Successor Trustee all right, title and interest of the Resigning Trustee
under the Indenture, with like effect as if the Successor Trustee was originally
named as trustee under the Indenture, and the Company accepted the resignation
of the Resigning Trustee as trustee, Paying Agent, Security Registrar,
Conversion Agent and Agent under the Indenture and duly appointed the Successor
Trustee as trustee, Paying Agent, Security Registrar, Conversion Agent and
Agent
under the Indenture and confirmed to the Successor Trustee all the rights,
powers and trusts of the Resigning Trustee under the Base
Indenture;
WHEREAS,
it is provided in Section 901 of the Base Indenture that, without the consent
of
any Holders, the Company, when authorized by a Board Resolution, and the
Trustee
may enter into indentures supplemental thereto (1) to add to, change or
eliminate any of the provisions of the Indenture in respect of one or more
series of Securities,
provided
that any
such addition, change or elimination (i) shall neither (A) apply to any Security
of any series created prior to the execution of such supplemental indenture
and
entitled to the benefit of such provision nor (B) modify the rights of the
Holder of any such Security with respect to such provision or (ii) shall
become
effective only when there is no such Security Outstanding, (2) to add to
the
covenants of the Company for the benefit of the Holders of all or any series
of
Securities (and if such covenants are to be for the benefit of less than
all
series of Securities, stating that such covenants are expressly being included
solely for the benefit of such series) and (3) to establish the form or terms
of
Securities of any series as permitted by Sections 201 and 301 of the Base
Indenture;
WHEREAS,
the Company, in the exercise of the power and authority conferred upon and
reserved to it under the provisions of the Indenture and pursuant to appropriate
Board Resolutions and actions of its authorized officers, has duly determined
to
make, execute and deliver to the Trustee this Third Supplemental Indenture
in
order to establish the form and terms
of,
and
to provide for the creation and issuance of, two new series of Securities
designated as its (i) 5.0% Notes due October 15, 2015 (the “
2015
Notes
”),
in an
aggregate Principal Amount at Maturity of up to $500,000,000 and (ii) 5.5%
Notes
due October 15, 2035 (the “
2035
Notes
”
and,
together with the 2015 Notes, the “
Notes
”)
in an
aggregate Principal Amount at Maturity of up to $500,000,000; and
WHEREAS,
all things necessary to make the Notes, when executed by the Company and
authenticated and delivered by the Trustee or any Authenticating Agent (as
defined in the Indenture) and issued upon the terms and subject to the
conditions of the Indenture against payment therefor, the valid, binding
and
legal obligations of the Company and to make this Third Supplemental Indenture
a
valid supplement to the Indenture.
NOW,
THEREFORE, in order to establish the form and terms of the series of the
2015
Notes and the series of the 2035 Notes and for and in consideration of the
premises and of the covenants contained in the Indenture and for other good
and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders, as follows:
ARTICLE
I
DEFINITIONS
AND OTHER PROVISIONS OF GENERAL APPLICATION
Section
101.
Definitions
. For
all purposes of the Base Indenture and this Third Supplemental Indenture
relating to the respective series of Notes created hereby, except as otherwise
expressly provided or unless the context otherwise requires, the terms used
in
this Third Supplemental Indenture have the meanings assigned to them in this
Article. Each capitalized term that is used in this Third Supplemental Indenture
but not defined herein shall have the meaning specified in the Base
Indenture.
“
Business
Day
”
means
any day other than a Saturday or Sunday or a day on which banking institutions
or trust companies in New York City are authorized or required by law,
regulation or executive order to close.
“
Comparable
Treasury Issue
”
means
the United States Treasury security selected by the Quotation Agent as having
a
maturity comparable to the remaining term of the notes to be redeemed that
would
be utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of such notes.
“
Comparable
Treasury Price
”
means,
with respect to any redemption date, (i) the average of four Reference Treasury
Dealer Quotations for such redemption date, after excluding the highest and
lowest such Reference Treasury Dealer Quotations, or (ii) if the Trustee
obtains
fewer than four such Reference Treasury Deale Quotations, the average of
all
such quotations, or (iii) if only one Reference Treasury Dealer Quotation
is
received, such quotation.
“
Depositary
”
means,
with respect to the Notes issuable in whole or in part in global form, DTC
and
any nominee thereof, until a successor is appointed and becomes such
pursuant
to the applicable provisions of the Indenture, and thereafter “
Depositary
”
shall
mean or include such successor and any nominee thereof.
“
DTC
”
means
The Depository Trust Company.
“
Global
Note
”
means
a
Note issued in global form and deposited with or on behalf of the Depositary,
substantially in the form of the Note attached hereto as Exhibit A-1 or Exhibit
A-2.
“
Interest
Payment Date
”
has
the
meaning set forth in Section 204(a) of this Third Supplemental
Indenture.
“
Principal
Amount at Maturity
”
of
the
Notes means the principal amount at maturity as set forth on the face of
each
respective Note.
“
Purchase
Agreement
”
means
the Purchase Agreement, dated October 3, 2005, between the Company and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC
and Banc of America Securities LLC.
“
Quotation
Agent
”
means
the Reference Treasury Dealer appointed by us.
“
Reference
Treasury Dealer
”
means
(i) Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banc of America
Securities LLC (or their respective affiliates that are Primary Treasury
Dealers) and their respective successors; provided, however, that if any
of the
foregoing shall cease to be a primary U.S. Government securities dealer in
New
York City (a “
Primary
Treasury Dealer
”),
we
will substitute therefor another Primary Treasury Dealer, and (ii) any other
Primary Treasury Dealer selected by us.
“
Reference
Treasury Dealer Quotations
”
means,
with respect to such Reference Treasury Dealer and any redemption date, the
average, as determined by the Trustee, of the bid and asked prices for the
Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the Trustee by such Reference Treasury
Dealer at 5:00 p.m., New York City time, on the third Business Day preceding
such redemption date.
“
Regular
Record Date
”
has
the
meaning set forth in Section 204(a) of this Third Supplemental
Indenture.
“
Stated
Maturity
”
has
the
meaning set forth in Section 203 of this Third Supplemental
Indenture.
“
Treasury
Rate
”
means,
with respect to any redemption date, the rate per annum equal to the semi-annual
equivalent yield to maturity of the Comparable Treasury Issue, assuming a
price
for the Comparable Treasury Issue (expressed as a percentage of its principal
amount) equal to the Comparable Treasury Price of such redemption
date.
Section
102.
Section
References
.
Each reference to a particular section set forth in this Third
Supplemental Indenture shall, unless the context otherwise requires, refer
to
this Third
Supplemental
Indenture. Each reference to a particular section of the Base Indenture shall
refer to that particular section of the Base Indenture.
Section
201.
Title
of the Notes
.
The Company hereby creates the 2015 Notes and the 2035 Notes, each as a separate
series of its Securities issued pursuant to the Indenture. The 2015 Notes
shall
be designated as the “5.0% Notes due 2015,” and the 2035 Notes shall be
designated as the “5.5% Notes due 2035.”
Section
202.
Amount
.
The aggregate Principal Amount at Maturity of the 2015 Notes that may be
authenticated and delivered under this Third Supplemental Indenture is limited
to $500,000,000, and the aggregate Principal Amount at Maturity of the 2035
Notes that may be authenticated and delivered under this Third Supplemental
Indenture is limited to $500,000,000.
Section
203.
Stated
Maturity
.
The Stated Maturity of the 2015 Notes shall be October 15, 2015, and the
Stated
Maturity of the 2035 Notes shall be October 15, 2035.
Section
204.
Interest
and Payment
.
(a)
The
2015
Notes shall bear interest at 5.0% per annum, and the 2035 Notes shall bear
interest at 5.5% per annum beginning on the date of issuance until the Notes,
respectively, are redeemed, paid or duly provided for. Interest shall be
paid
semi-annually in arrears on each April 15 and October 15 (each, an “
Interest
Payment Date
”),
commencing on April 15, 2006, to persons in whose names the Notes are registered
at the close of the Business Day on the April 1 immediately preceding each
April
15 or the October 1 immediately preceding each October 15 (each a “
Regular
Record Date
”).
(b)
Payments
of interest on the Notes shall include interest accrued to but excluding
the
respective Interest Payment Dates. Interest payments for the Notes shall
be
computed on the basis of a 360-day year composed of twelve 30-day months.
Payments of principal and interest to owners of book-entry interests shall
be
made to holders of the Notes on the respective Regular Record Date in accordance
with the procedures of DTC and its participants in effect from time to time.
Settlement for the Notes shall be made in immediately available funds. All
payments of principal and interest shall be made by the Company in immediately
available funds except as set forth in the applicable Note.
Section
205.
Optional
Redemption
.
(a)
The
2015
Notes and/or the 2035 Notes, as the case may be, will be redeemable, in whole
at
any time or in part from time to time, at the Company’s option at a redemption
price equal to the greater of:
(i)
100%
of
the principal amount of the 2015 Notes and/or the 2035 Notes to be redeemed;
or
(ii)
the
sum
of the present values of the remaining scheduled payments of principal
and
interest thereon (not including any portion of such payments of interest
accrued
as of the date of redemption), discounted to the date of redemption on
a
semi-annual basis (assuming a 360-day year consisting of twelve 30-day
months)
at the Treasury Rate, plus 15 basis points with respect to the 2015 Notes,
and
20 basis points with respect to the 2035 Notes,
plus,
in
each case, accrued interest thereon to but excluding the date of redemption.
Notwithstanding the foregoing, installments of interest on Notes that are
due
and payable on Interest Payment Dates falling on or prior to a redemption
date
will be payable on the Interest Payment Date to the registered holders
as of the
close of the Business Day on the relevant record date.
(b)
Notice
of
any redemption will be mailed at least 30 days but not more than 60 days
before
the Redemption Date set forth in such notice to each registered holder
of the
2015 Notes and/or the 2035 Notes, as the case may be, to be redeemed. Unless
the
Company defaults in payment of the redemption price, on and after the applicable
Redemption Date, interest will cease to accrue on the Notes or portions
thereof
called for redemption. If less than all of the Notes are to be redeemed,
the
Notes to be redeemed shall be selected by the Trustee by a method the Trustee
deems to be fair and appropriate.
Section
206.
Forms;
Denominations
.
The Notes shall be Registered Securities and shall be issued in
denominations of $1,000 or any integral multiple thereof. The certificates
for
the Notes shall be in substantially the forms attached hereto as Exhibit
A-1 and
Exhibit A-2.
(a)
Global
Notes
.
(i)
Notes
shall be issued initially in the form of one or more Global Notes in definitive
fully registered form without interest coupons, deposited on behalf of
the
subscribers for the Notes represented thereby with The Bank of New York,
at its
Corporate Trust Office, as custodian for the Depositary and registered
in the
name of DTC or a nominee thereof, duly executed by the Company and authenticated
by the Trustee as provided in the Indenture. The aggregate Principal Amount
at
Maturity of the Global Notes may from time to time be increased or decreased
by
adjustments made on the records of the Trustee and the Depositary as hereinafter
provided.
(ii)
Book-Entry
Provisions. The Company shall execute and the Trustee shall, in accordance
with
this Section 206(a)(ii) and Section 303 of the Base Indenture, authenticate
and
deliver initially one or more Global Notes that (a) shall be registered
in the
name of the Depositary, (b) shall be delivered by the Trustee to the Depositary
or pursuant to the Depositary’s instructions and (c) shall bear legends
substantially to the following effect:
“UNLESS THIS CERTIFICATE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (“DTC”) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE
OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE
&
CO. OR TO SUCH
OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND
ANY PAYMENT
HEREON
IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE
OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE
BY OR
TO ANY
PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.”
Section
207.
Applicability
of Reports by Company
.
For purposes of this Third Supplemental Indenture, to the extent information,
documents or reports are required to be filed with the Commission and
delivered
to the Trustee or the Holders, the availability of such information,
documents
or reports on the Commission’s Electronic Data Gathering Analysis and Retrieval
(“
EDGAR
”)
system
or the Company’s website shall be deemed to have satisfied such delivery
requirements to the Trustee or the Holders, as applicable.
Section
208.
Applicability
of Sinking Funds
.
The provisions of Article Twelve of the Base Indenture shall not apply
to the
2015 Notes or the 2035 Notes.
Section
209.
Applicability
of Repayment of Securities at Option of Holders
.
The provisions of Article Thirteen of the Base Indenture shall not apply
to the
2015 Notes or the 2035 Notes.
Section
210.
Applicability
of Conversion of Securities
.
The provisions of Article Fourteen of the Base Indenture shall not apply
to the
2015 Notes or the 2035 Notes.
ARTICLE
III
MISCELLANEOUS
PROVISIONS
Section
301.
Concerning
the Indenture
.
Except as expressly amended hereby, the Base Indenture shall continue
in full
force and effect in accordance with the provisions thereof and the Base
Indenture is in all respects hereby ratified and confirmed. This Third
Supplemental Indenture and all its provisions shall be deemed a part
of the Base
Indenture in the manner and to the extent herein and therein
provided.
Section
302.
Severability
.
If any provision in this Third Supplemental Indenture shall be invalid,
illegal
or unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
Section
303.
Trust
Indenture Act
.
If any provision in this Third Supplemental Indenture limits, qualifies
or
conflicts with any other provision hereof or of the Base Indenture which
provision is required to be included in the Base Indenture by any of
the
provisions of the Trust Indenture Act, such required provision shall
control.
Section
304.
Trustee
.
The recitals and statements herein are deemed to be those of the Company
and not
of the Trustee.
Section
305.
Governing
Law
.
This Third Supplemental Indenture shall be governed by, and construed
in
accordance with, the laws of the State of New York.
Section
306.
Multiple
Originals
.
This Third Supplemental Indenture may be executed in any number of
counterparts,
each of which so executed shall be deemed to be an original, but all
such
counterparts shall together constitute but one and the same
instrument.
IN
WITNESS WHEREOF, the parties have caused this Third Supplemental Indenture
to be
duly executed.
LOWE’S
COMPANIES, INC.
By:
/s/
Benjamin S. Adams,
Jr.
Name: Benjamin S. Adams, Jr.
Title: Assistant Treasurer
THE
BANK
OF NEW YORK, as Trustee
By:
/s/
Van K.
Brown
Name: Van K. Brown
Title:
Vice President
EXHIBIT
A-1
FORM
OF
GLOBAL NOTE
UNLESS
THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO LOWE’S COMPANIES, INC. OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY OR IN
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND
ANY
PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL, INASMUCH AS
THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
LOWE’S
COMPANIES, INC.
5.0%
Notes due October 15, 2015
GLOBAL
SECURITY
No.
[●]
CUSIP
No. 548661 CH 8
$500,000,000
Original
Principal Amount
Lowe’s
Companies, Inc., a corporation duly organized and existing under the laws
of the
State of North Carolina (herein called the “Company”, which term includes any
successor Person under the Indenture hereinafter referred to), for value
received, hereby promises to pay to Cede & Co. or its registered assigns,
the principal sum of $500,000,000 on October 15, 2015, at the office or agency
of the Company referred to below, in such coin or currency of the United
States
of America as at the time of payment is legal tender for the payment of public
and private debts, and to pay interest thereon in like coin or currency from
October 6, 2005, or from the most recent Interest Payment Date on which interest
has been paid or duly provided for, semi-annually in arrears on April 15
and
October 15 in each year, commencing April 15, 2006, at the rate of 5.0% per
annum until the principal hereof is paid or made available for payment, and
(to
the extent lawful) to pay interest at the same rate per annum on any overdue
principal and premium and on any overdue installments of interest until
paid.
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date, as provided in the Amended and Restated Indenture,
dated
as of December 1, 1995 (the “Base Indenture”) between the Company and The Bank
of New York, as trustee (the “Trustee”), as supplemented by the Third
Supplemental Indenture dated as of October 6, 2005, between the Company and
the
Trustee (the “Third Supplemental Indenture” and, together with
the
Base
Indenture, the “Indenture”) shall be paid to the Person in whose name this Note
is registered at the close of business on the respective Regular Record Date
for
such interest, which shall be the April 1 or October 1 (whether or not a
Business Day), as the case may be, next preceding such Interest Payment Date.
Any such interest not so punctually paid or duly provided for will forthwith
cease to be payable to the Person in whose name this Note is registered on
such
Regular Record Date and may either be paid to the Person in whose name this
Note
is registered at the close of business on a Special Record Date for the payment
of such Defaulted Interest to be fixed in accordance with Section 307 of the
Base Indenture by the Trustee, notice whereof shall be given to the Person
in
whose name this Note is registered not less than ten days prior to such Special
Record Date, or be paid at any time in any other lawful manner, all as more
fully provided in the Indenture.
This
Note
is a “book-entry” note and is being registered in the name of Cede & Co. as
nominee of The Depository Trust Company (“DTC”), a clearing agency. Subject to
the terms of the Indenture, this Note will be held by a clearing agency
or its
nominee, and beneficial interests will be held by beneficial owners through
the
book-entry facilities of such clearing agency or its nominee in minimum
denominations of $1,000 and increments of $1,000 in excess thereof.
As
long
as this Note is registered in the name of DTC or its nominee, the Trustee
will
make payments of principal of and interest on this Note by wire transfer
of
immediately available funds to DTC or its nominee. Notwithstanding the
above,
the final payment on this Note will be made after due notice by the Trustee
of
the pendency of such payment and only upon presentation and surrender of
this
Note at its principal corporate trust office or such other office or agencies
appointed by the Trustee for that purpose and such other locations provided
in
the Indenture.
Payments
of principal of (and premium, if any) and interest on this Note will be
made at
the office or agency of the Company maintained for that purpose in the
Borough
of Manhattan, The City of New York, in such coin or currency of the United
States of America as at the time of payment is legal tender for payments
of
public and private debts;
provided
,
however
,
that at
the option of the Company, payment of interest may be made by check mailed
to
the address of the Person entitled thereto as such address shall appear
in the
Security Register.
This
Note
is one of a duly authorized series of notes of the Company, designated
5.0%
Notes due October 15, 2015 (the “Notes”), limited in aggregate principal amount
at any time outstanding to FIVE HUNDRED MILLION DOLLARS ($500,000,000)
which may
be issued under the Indenture. Reference is hereby made to the Indenture
and all
indentures supplemental thereto which are applicable to the Notes for a
statement of the respective rights, limitations of rights, duties, obligations
and immunities thereunder of the Company, the Trustee and the Holders of
the
Notes, and the terms upon which the Notes are, and are to be, authenticated
and
delivered. All terms used in this Note that are defined in the Indenture
shall
have the meanings assigned to them in the Indenture.
The
Notes
do not have the benefit of any sinking fund obligations.
The
Notes
will be redeemable, in whole at any time or in part from time to time,
at the
Company’s option at a redemption price equal to the greater of:
(i)
100%
of
the principal amount of the Notes to be redeemed; or
(ii)
the
sum
of the present values of the remaining scheduled payments of principal
and
interest thereon (not including any portion of such payments of interest
accrued
as of the date of redemption), discounted to the date of redemption on
a
semi-annual basis (assuming a 360-day year consisting of twelve 30-day
months)
at the Treasury Rate, plus 15 basis points,
plus,
in
each case, accrued interest thereon to but excluding the date of redemption.
Notwithstanding the foregoing, installments of interest on Notes that are
due
and payable on Interest Payment Dates falling on or prior to a redemption
date
will be payable on the Interest Payment Date to the registered holders
as of the
close of the Business Day on the relevant record date.
Notice
of
any redemption will be mailed at least 30 days but not more than 60 days
before
the Redemption Date to each registered holder of the Notes to be redeemed.
Unless the Company defaults in payment of the redemption price, on and
after the
Redemption Date, interest will cease to accrue on the Notes or portions
thereof
called for redemption. If less than all of the Notes are to be redeemed,
the
Notes to be redeemed shall be selected by the Trustee by a method the Trustee
deems to be fair and appropriate.
If
an
Event of Default shall occur and be continuing, the principal of all the
Notes
may be declared due and payable in the manner and with the effect provided
in
the Indenture.
The
Indenture contains provisions for defeasance at any time of (a) the entire
indebtedness of the Company under this Note and (b) certain restrictive
covenants and the related defaults and Events of Default applicable to
the
Company, in each case, upon compliance by the Company with certain conditions
set forth in the Indenture, which provisions apply to this Note.
The
Indenture permits, with certain exceptions as therein provided, the amendment
thereof and the modification of the rights and obligations of the Company
and
the rights of the Holders of the Notes under the Indenture at any time
by the
Company, the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the Notes at the time Outstanding. The Indenture also
contains provisions permitting the Holders of specified percentages in
aggregate
principal amount of the Notes at the time Outstanding, on behalf of the
Holders
of all Notes, to waive compliance by the Company with certain provisions
of the
Indenture and certain past Defaults under the Indenture and their consequences.
Any such consent or waiver by the Holder of this Note shall be conclusive
and
binding upon such Holder and upon all future Holders of this Note and of
any
Note issued upon the registration of transfer thereof or in exchange herefor
or
in lieu hereof, whether or not notation of such consent or waiver is made
upon
this Note.
No
reference herein to the Indenture and provisions of this Note or of the
Indenture shall alter or impair the obligation of the Company, which is
absolute
and unconditional, to pay the principal of (and premium, if any) and interest
on
this Note at the times, place and rate, and in the coin or currency, as
herein
prescribed.
As
provided in the Indenture and subject to certain limitations on transfer
of this
Note by DTC or its nominee, the transfer of this Note is registrable in
the
Security Register, upon
surrender
of this Note for registration of transfer at the office or agency of the
Company
in the Borough of Manhattan, The City of New York, duly endorsed by, or
accompanied by a written instrument of transfer in the form attached hereto
duly
executed by the Holder hereof or his attorney duly authorized in writing,
and
thereupon one or more new Notes, of authorized denominations and for the
same
aggregate principal amount, shall be issued to the designated transferee
or
transferees.
The
Notes
are issuable only in registered form in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of different authorized denomination, as requested
by
the Holder surrendering the same.
No
service charge shall be made for any such registration of transfer or exchange
of Notes, but the Company may require payment of a sum sufficient to cover
any
tax or other governmental charge payable in connection therewith.
Prior
to
due presentment of this Note for registration of transfer, the Company, the
Trustee and any agent of the Company, or the Trustee may treat the Person
in
whose name this Note is registered as the owner hereof for all purposes,
whether
or not this Note be overdue, and none of the Company, the Trustee or any
such
agent shall be affected by notice to the contrary.
Interest
on this Note shall be computed on the basis of a 360-day year of twelve 30-day
months.
The
Company shall furnish to any Holder of record of Notes, upon written request
and
without charge, a copy of the Indenture.
The
Indenture and this Note each shall be governed by and construed in accordance
with the laws of the State of New York without regard to principles of conflicts
of law.
Unless
the certificate of authentication hereon has been executed by the Trustee
by
manual signature, this Note shall not be entitled to any benefit under the
Indenture or be valid or obligatory for any purpose.
IN
WITNESS WHEREOF, LOWE'S COMPANIES, INC. has caused this Note to be signed
by a
duly elected or appointed, qualified and serving officer and attested by
a duly
elected or appointed, qualified and serving officer.
LOWE'S
COMPANIES,
INC
.
By_____________________________________________
Name:
Title:
Dated:
October 6, 2005
Attest:
______________________________________
Name:
Title:
TRUSTEE’S
CERTIFICATE OF AUTHENTICATION
THIS
IS
ONE OF THE SECURITIES OF THE SERIES DESIGNATED THEREIN REFERRED TO IN
THE
WITHIN-MENTIONED INDENTURE.
THE
BANK OF NEW
YORK
as
Trustee
By:_____________________________________________
Authorized Officer
ABBREVIATIONS
The
following
abbreviations, when used in the inscription on the face of this Note,
shall be
construed as though they were written out in full according to applicable
laws
or regulations:
TEN
COM -
tenants in common
TEN
ENT -
tenants by the entireties
JT
TEN -
joint tenants with right of survivorship and not as tenants in
common
CUST
-
Custodian
U/G/M/A
or UNIF GIFT MIN ACT - Uniform Gifts to Minors Act
Additional
abbreviations may also be used though not in the above list.
FORM
OF
TRANSFER
FOR
VALUE
RECEIVED, the undersigned hereby sells, assigns and transfers unto
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
(Please
print or typewrite name and address of assignee)
__________________________________________________________________________________________________________________________
(Please
insert Social Security or other identifying Number of Assignee)
the
within Note of Lowe’s Companies, Inc. and does hereby irrevocably constitute and
appoint
_________________________________________________
Attorney, to transfer the said Note on the books of the within named
Lowe’s
Companies, Inc., with full power of substitution in the premises.
Dated:_______________________
________________________________________________________
|
|
NOTICE:
The signature to this assignment must correspond with the
name as written
upon the face of this Note in every particular without alteration
or
enlargement or any change whatever.
|
______________________________________________________
|
SIGNATURE
GUARANTEED:
The
signature must be guaranteed by a member of the Securities
Transfer Agents
Medallion
Program.
Notarized or witnessed signatures are nor
acceptable.
|
PAYMENT
INSTRUCTIONS
The
assignee should include the following for purposes of payment:
Payment
shall be made, by wire transfer or otherwise, in immediately available funds,
to
,
for the
account of
,
account number
,
or, if
mailed by check, to
.
Applicable reports and statements required to be physically delivered under
the
terms of the Indenture should be mailed to
.
This
information is provided by
,
the
assignee named above, or
,
as its
agent.
EXHIBIT
A-2
FORM
OF
GLOBAL NOTE
UNLESS
THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO LOWE’S COMPANIES, INC. OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY OR IN
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND
ANY
PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL, INASMUCH AS
THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
LOWE’S
COMPANIES, INC.
5.5%
Notes due October 15, 2035
GLOBAL
SECURITY
No.
[●]
CUSIP
No. 548661 CJ 4
$500,000,000
Original
Principal Amount
Lowe’s
Companies, Inc., a corporation duly organized and existing under the laws
of the
State of North Carolina (herein called the “Company”, which term includes any
successor Person under the Indenture hereinafter referred to), for value
received, hereby promises to pay to Cede & Co. or its registered assigns,
the principal sum of $500,000,000 on October 15, 2035, at the office or agency
of the Company referred to below, in such coin or currency of the United
States
of America as at the time of payment is legal tender for the payment of public
and private debts, and to pay interest thereon in like coin or currency from
October 6, 2005, or from the most recent Interest Payment Date on which interest
has been paid or duly provided for, semi-annually in arrears on April 15
and
October 15 in each year, commencing April 15, 2006, at the rate of 5.5% per
annum until the principal hereof is paid or made available for payment, and
(to
the extent lawful) to pay interest at the same rate per annum on any overdue
principal and premium and on any overdue installments of interest until
paid.
The
interest
so payable, and punctually paid or duly provided for, on any Interest Payment
Date, as provided in the Amended and Restated Indenture, dated as of December
1,
1995 (the “Base Indenture”) between the Company and The Bank of New York, as
trustee (the “Trustee”), as supplemented by the Third Supplemental Indenture
dated as of October 6, 2005,
between
the Company and the Trustee (the “Third Supplemental Indenture” and, together
with the Base Indenture, the “Indenture”) shall be paid to the Person in whose
name this Note is registered at the close of business on the respective Regular
Record Date for such interest, which shall be the April 1 or October 1 (whether
or not a Business Day), as the case may be, next preceding such Interest Payment
Date. Any such interest not so punctually paid or duly provided for will
forthwith cease to be payable to the Person in whose name this Note is
registered on such Regular Record Date and may either be paid to the Person
in
whose name this Note is registered at the close of business on a Special Record
Date for the payment of such Defaulted Interest to be fixed in accordance with
Section 307 of the Base Indenture by the Trustee, notice whereof shall be given
to the Person in whose name this Note is registered not less than ten days
prior
to such Special Record Date, or be paid at any time in any other lawful manner,
all as more fully provided in the Indenture.
This
Note
is a “book-entry” note and is being registered in the name of Cede & Co. as
nominee of The Depository Trust Company (“DTC”), a clearing agency. Subject to
the terms of the Indenture, this Note will be held by a clearing agency or
its
nominee, and beneficial interests will be held by beneficial owners through
the
book-entry facilities of such clearing agency or its nominee in minimum
denominations of $1,000 and increments of $1,000 in excess thereof.
As
long
as this Note is registered in the name of DTC or its nominee, the Trustee
will
make payments of principal of and interest on this Note by wire transfer
of
immediately available funds to DTC or its nominee. Notwithstanding the above,
the final payment on this Note will be made after due notice by the Trustee
of
the pendency of such payment and only upon presentation and surrender of
this
Note at its principal corporate trust office or such other office or agencies
appointed by the Trustee for that purpose and such other locations provided
in
the Indenture.
Payments
of principal of (and premium, if any) and interest on this Note will be made
at
the office or agency of the Company maintained for that purpose in the Borough
of Manhattan, The City of New York, in such coin or currency of the United
States of America as at the time of payment is legal tender for payments
of
public and private debts;
provided
,
however
,
that at
the option of the Company, payment of interest may be made by check mailed
to
the address of the Person entitled thereto as such address shall appear in
the
Security Register.
This
Note
is one of a duly authorized series of notes of the Company, designated 5.5%
Notes due October 15, 2035 (the “Notes”), limited in aggregate principal amount
at any time outstanding to FIVE HUNDRED MILLION DOLLARS ($500,000,000) which
may
be issued under the Indenture. Reference is hereby made to the Indenture
and all
indentures supplemental thereto which are applicable to the Notes for a
statement of the respective rights, limitations of rights, duties, obligations
and immunities thereunder of the Company, the Trustee and the Holders of
the
Notes, and the terms upon which the Notes are, and are to be, authenticated
and
delivered. All terms used in this Note that are defined in the Indenture
shall
have the meanings assigned to them in the Indenture.
The
Notes
do not have the benefit of any sinking fund obligations.
The
Notes
will be redeemable, in whole at any time or in part from time to time, at
the
Company’s option at a redemption price equal to the greater of:
(iii)
100%
of
the principal amount of the Notes to be redeemed; or
(iv)
the
sum
of the present values of the remaining scheduled payments of principal and
interest thereon (not including any portion of such payments of interest
accrued
as of the date of redemption), discounted to the date of redemption on a
semi-annual basis (assuming a 360-day year consisting of twelve 30-day months)
at the Treasury Rate, plus 20 basis points,
plus,
in
each case, accrued interest thereon to but excluding the date of redemption.
Notwithstanding the foregoing, installments of interest on Notes that are
due
and payable on Interest Payment Dates falling on or prior to a redemption
date
will be payable on the Interest Payment Date to the registered holders as
of the
close of the Business Day on the relevant record date.
Notice
of
any redemption will be mailed at least 30 days but not more than 60 days
before
the Redemption Date to each registered holder of the Notes to be redeemed.
Unless the Company defaults in payment of the redemption price, on and after
the
Redemption Date, interest will cease to accrue on the Notes or portions thereof
called for redemption. If less than all of the Notes are to be redeemed,
the
Notes to be redeemed shall be selected by the Trustee by a method the Trustee
deems to be fair and appropriate.
If
an
Event of Default shall occur and be continuing, the principal of all the
Notes
may be declared due and payable in the manner and with the effect provided
in
the Indenture.
The
Indenture contains provisions for defeasance at any time of (a) the entire
indebtedness of the Company under this Note and (b) certain restrictive
covenants and the related defaults and Events of Default applicable to the
Company, in each case, upon compliance by the Company with certain conditions
set forth in the Indenture, which provisions apply to this Note.
The
Indenture permits, with certain exceptions as therein provided, the amendment
thereof and the modification of the rights and obligations of the Company
and
the rights of the Holders of the Notes under the Indenture at any time by
the
Company, the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the Notes at the time Outstanding. The Indenture also
contains provisions permitting the Holders of specified percentages in aggregate
principal amount of the Notes at the time Outstanding, on behalf of the Holders
of all Notes, to waive compliance by the Company with certain provisions
of the
Indenture and certain past Defaults under the Indenture and their consequences.
Any such consent or waiver by the Holder of this Note shall be conclusive
and
binding upon such Holder and upon all future Holders of this Note and of
any
Note issued upon the registration of transfer thereof or in exchange herefor
or
in lieu hereof, whether or not notation of such consent or waiver is made
upon
this Note.
No
reference herein to the Indenture and provisions of this Note or of the
Indenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of (and premium, if any) and interest
on
this Note at the times, place and rate, and in the coin or currency, as herein
prescribed.
As
provided in the Indenture and subject to certain limitations on transfer
of this
Note by DTC or its nominee, the transfer of this Note is registrable in
the
Security Register, upon surrender of this Note for registration of transfer
at
the office or agency of the Company in the Borough of Manhattan, The City
of New
York, duly endorsed by, or accompanied by a written instrument of transfer
in
the form attached hereto duly executed by the Holder hereof or his attorney
duly
authorized in writing, and thereupon one or more new Notes, of authorized
denominations and for the same aggregate principal amount, shall be issued
to
the designated transferee or transferees.
The
Notes
are issuable only in registered form in denominations of $1,000 and any
integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of different authorized denomination, as requested
by
the Holder surrendering the same.
No
service charge shall be made for any such registration of transfer or exchange
of Notes, but the Company may require payment of a sum sufficient to cover
any
tax or other governmental charge payable in connection therewith.
Prior
to
due presentment of this Note for registration of transfer, the Company,
the
Trustee and any agent of the Company, or the Trustee may treat the Person
in
whose name this Note is registered as the owner hereof for all purposes,
whether
or not this Note be overdue, and none of the Company, the Trustee or any
such
agent shall be affected by notice to the contrary.
Interest
on this Note shall be computed on the basis of a 360-day year of twelve
30-day
months.
The
Company shall furnish to any Holder of record of Notes, upon written request
and
without charge, a copy of the Indenture.
The
Indenture and this Note each shall be governed by and construed in accordance
with the laws of the State of New York without regard to principles of
conflicts
of law.
Unless
the certificate of authentication hereon has been executed by the Trustee
by
manual signature, this Note shall not be entitled to any benefit under
the
Indenture or be valid or obligatory for any purpose.
IN
WITNESS WHEREOF, LOWE'S COMPANIES, INC. has caused this Note to be signed
by a
duly elected or appointed, qualified and serving officer and attested
by a duly
elected or appointed, qualified and serving officer.
LOWE'S
COMPANIES, INC
.
By_____________________________________________
Name:
Title:
Dated:
October 6, 2005
Attest:
______________________________________
Name:
Title:
TRUSTEE’S
CERTIFICATE OF AUTHENTICATION
THIS
IS
ONE OF THE SECURITIES
OF
THE SERIES DESIGNATED THEREIN REFERRED TO IN THE WITHIN-MENTIONED
INDENTURE.
THE
BANK OF NEW
YORK
as
Trustee
By:_____________________________________________
Authorized Officer
ABBREVIATIONS
The
following abbreviations, when used in the inscription on the face of
this Note,
shall be construed as though they were written out in full according
to
applicable laws or regulations:
TEN
COM -
tenants in common
TEN
ENT -
tenants by the entireties
JT
TEN -
joint tenants with right of survivorship and not as tenants in
common
CUST
-
Custodian
U/G/M/A
or UNIF GIFT MIN ACT - Uniform Gifts to Minors Act
Additional
abbreviations may also be used though not in the above list.
FORM
OF
TRANSFER
FOR
VALUE
RECEIVED, the undersigned hereby sells, assigns and transfers unto
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
(Please
print or typewrite name and address of assignee)
__________________________________________________________________________________________________________________________
(Please
insert Social Security or other identifying Number of Assignee)
the
within Note of Lowe’s Companies, Inc. and does hereby irrevocably constitute and
appoint
_________________________________________________
Attorney, to transfer the said Note on the books of the within named
Lowe’s
Companies, Inc., with full power of substitution in the premises.
Dated:_______________________
________________________________________________________
|
|
NOTICE:
The signature to this assignment must correspond with the
name as written
upon the face of this Note in every particular without
alteration or
enlargement or any change whatever.
|
______________________________________________________
|
SIGNATURE
GUARANTEED:
The
signature must be guaranteed by a member of the Securities
Transfer Agents
Medallion
Program.
Notarized or witnessed signatures are nor
acceptable.
|
PAYMENT
INSTRUCTIONS
The
assignee should include the following for purposes of payment:
Payment
shall be made, by wire transfer or otherwise, in immediately available
funds, to
,
for the
account of
,
account number
,
or, if
mailed by check, to
.
Applicable reports and statements required to be physically delivered
under the
terms of the Indenture should be mailed to
.
This
information is provided by
,
the
assignee named above, or
,
as its
agent.
Exhibit
13
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This
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 2, 2007 (our fiscal years
2006, 2005 and 2004). Fiscal years 2006 and 2004 contain 52 weeks of operating
results compared to fiscal year 2005 which contains 53 weeks. Unless otherwise
noted, all references herein for the years 2006, 2005 and 2004 represent the
fiscal years ended February 2, 2007, February 3, 2006, and January 28, 2005,
respectively. This discussion should be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements included in this annual report.
EXECUTIVE
OVERVIEW
External
Factors Impacting Our Business
The
home
improvement market is large and fragmented. While we are the world’s
second-largest home improvement retailer, we have captured a relatively small
portion of the overall home improvement market. We estimate the size of the
U.S.
home improvement market to be approximately $725 billion annually, comprised
of
$560 billion of product demand and $165 billion of installed labor opportunity.
This data captures a wide range of categories relevant to our business,
including major appliances and garden supplies. We believe the current home
improvement market provides ample opportunity to support our growth plans.
Net
sales
totaled $46.9 billion in 2006, an increase of 8.5% versus the prior year. This
increase was driven by our store expansion program. The additional week in
2005
resulted in approximately $750 million in additional net sales in 2005.
Excluding the additional week, net sales would have increased approximately
10%
in 2006. However, comparable store sales were flat in 2006. The effects of
a
slowing housing market, difficult comparisons to 2005’s hurricane recovery and
rebuilding efforts, and significant deflation in lumber and plywood retail
prices contributed to lower than expected sales.
At
the
beginning of 2006, many markets including areas of the Northeast, southern
Florida and the west coast demonstrated signs of slowing housing-related demand.
That evidence led us to estimate housing turnover would decline in 2006 as
these
once-hot markets cooled. What was more difficult to anticipate was the decline
in home improvement demand that we experienced in many unaffected markets where
housing dynamics remained solid, but consumers chose to delay home improvement
projects due to well-publicized reports of a slowing housing market and
declining home values. As the year progressed, housing turnover slowed more
quickly and deeply than we had originally anticipated. That rapid decline
also pressured home prices as speculative demand waned, housing supply grew
and
home buyers, as well as home improvement consumers, became cautious about
spending. We continue to closely monitor the drivers of demand and the mindset
of the home improvement consumer as we enter 2007.
Despite
the housing-related pressures on the consumer, the job market remains solid
and
personal disposable income continues to rise. In addition, the difficult
sales comparisons due to 2005’s hurricanes and last year’s commodity deflation
are expected to ease in 2007. While we are not expecting a rapid recovery,
the most recent housing data shows encouraging signs of a stabilization of
housing supply and a bottoming in total housing turnover. Based on all these
external factors, combined with our internal initiatives to drive sales, we
believe the quarterly trend of declining comparable store sales performance
has
bottomed, and we expect to see gradual improvement in comparable store sales
throughout 2007.
Managing
for the Long-Term
We
continue to manage our business for the long-term. Our vision is to provide
customer-valued solutions with the best prices, products and services to
make
Lowe’s the first choice for home improvement. In today’s environment, it is
important that we remain focused on customers. This focus on customers drives
our operational, merchandising, marketing and distribution initiatives to
both
capture market share and improve operating efficiency.
Capturing
Market Share
Investing
in existing stores
We
continue to gain unit market share by improving the shopping experience in
our
stores, and by adding innovative products and services that provide value
to
customers. In addition, we have opportunities to capture additional unit
market
share in each of our 20 product categories by ensuring that we meet the needs
of
home improvement customers better than our competitors.
We
have
consistently invested in our business, and we will continue to do so to ensure
our stores remain clean, easy to shop and appropriately staffed in order
to
maintain our customer franchise and grow unit market share. In 2006, we
remerchandised 150 of our earlier-format stores to make them more closely
resemble our current store prototypes, with minimal disruption to our customers.
These remerchandising efforts focused on moving entire departments, improving
adjacencies, and enhancing the shopability within the appliances, cabinets
&
countertops, flooring, fashion plumbing, paint, walls / windows, lighting,
home
organization, lumber and building materials departments. In addition, we
replaced or refurbished all of our selling centers, including the returns
and
customer service areas of these stores. All new interior graphics, signage,
and
way-finding materials were also added to increase shopability and brighten
the
atmosphere. Finally, we installed self-check-out in all 150 of our
remerchandised stores. In 2007, we expect to complete the remerchandising
process in over 100 additional stores. We continuously make these investments
to
maintain our best-in-class stores and offer customers the shopping experience
and environment they expect. As a result, despite the external pressures
we
faced in 2006,
we
gained
110 basis points of unit market share among all 20 of our product categories,
according to independent measures, a clear indication that more customers
are
choosing Lowe’s for their home improvement needs.
Specialty
Sales
We
recognize the opportunity that our Specialty Sales initiatives represent
and the
importance of these businesses to our long-term growth. Our Specialty Sales
initiatives include three major categories: Installed Sales, Special Order
Sales
and Commercial Business Customer sales, internally referred to as the “Big 3.”
In addition, our effort to utilize e-Commerce to drive sales and conveniently
provide product information to customers is managed by our Specialty Sales
group. Our Big 3 Specialty Sales initiatives had mixed results in 2006. A
hesitation to take on large projects by some consumers had an impact on our
Installed Sales and Special Order Sales in the second half of 2006. Installed
Sales increased by slightly more than the Company average, while Special
Order
Sales increased less than the Company average. However, sales growth for
Commercial Business Customers was nearly double the Company
average.
We
also
continue to refine our offerings, including an ongoing test of an in-home
selling model for certain Installed Sales categories, new Special Order
electronic selling tools, and many enhancements to Lowes.com, to continue
growth
in these areas for 2007.
New
store expansion
We
have
considerable growth opportunities and see the potential for over 2,000 stores
in
North America with our current prototypes. In 2006, we opened 155 stores
(151
new and four relocated) in markets around the country, bringing our total
to
1,385 stores in 49 states. We plan to open another 150 to 160 stores in 2007,
including our first stores in Toronto, Canada in the second half of 2007.
We
also announced our intention to enter Mexico with plans for three to five
stores
in Monterrey in 2009.
Improving
Operating Efficiency
Store
productivity
We
are
focused on improving store productivity and operational efficiency. The
more
productive our employees are on tasks, the more time they have to assist
customers. The basics of sustaining productivity include assessing the
value of
tasks performed, accurate planning of sales and hours, ensuring our employees
are scheduled when customers are shopping, and monitoring key labor metrics.
We
will also continue to ensure that our employee base includes tenured and
talented people at all levels of the organization to fuel growth and maintain
our commitment to service.
We
are
also working to further enhance our sales culture by continuously providing
training for our team and improving our service. Customers tell us that
they
want knowledgeable sales people, so we will continue to focus on expanding
our
employees’ product knowledge.
Merchandising
One
way
we seek to increase sales is by effectively using displays, signage, adjacencies
and product packaging as tools to enhance the shopping experience. When
customers can easily identify features and benefits, compare product choices
and
shop for related purchases nearby, they purchase more. When packaging is
consistent and informative, when allocated space has enough holding power
to
satisfy demand and when store employees keep the displays stocked and shopable,
our customers’ experience is enhanced. When signage is clear, concise and gives
customers information they need to make a buying decision, they will also
purchase more. This is the operationally efficient merchandising approach
that
continues to drive sales in our stores.
Distribution
network
Our
distribution network supports new store expansion and improves operating
efficiency. To improve the service and efficiency of this network, our
largest
initiative over the past couple of years was Rapid Response Replenishment
(R3),
which encompassed numerous supply chain enhancements that would allow
us to more
effectively and efficiently move product to our stores in changing demand
environments. That platform is firmly in place and is now our standard
operating
model. Many years of investment in and refinement of our logistics and
distribution organization have made it one of our key competitive advantages.
The organization is focused on improving service to our stores, increasing
efficiency and improving inventory productivity. On average in 2006,
nearly 70%
of the stock merchandise we purchased was shipped through our distribution
network, while the remaining portion was shipped directly to stores from
vendors. In the fourth quarter of 2006, we reached nearly 75%. As evidence
of
the effectiveness gained from our distribution network, both comparable
store
and distribution center inventories were down slightly versus the prior
year.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
following discussion and analysis of our financial condition and results
of
operations are based on the consolidated financial statements and notes
to
consolidated financial statements presented in this annual report that
have been
prepared in accordance with accounting principles generally accepted
in the
United States of America. The preparation of these financial statements
requires
us to make estimates that affect the reported amounts of assets, liabilities,
sales and expenses, and related disclosures of contingent assets and
liabilities. We base these estimates on historical results and various
other
assumptions believed to be reasonable, all of which form the basis for
making
estimates concerning the carrying values of assets and liabilities that
are not
readily available from other sources. Actual results may differ from
these
estimates.
Our
significant accounting policies are described in Note 1 to the consolidated
financial statements. We believe that the following accounting policies
affect
the more significant estimates used in preparing the consolidated financial
statements.
Merchandise
Inventory
Description
We
record
an inventory reserve for the 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 2006, our reserve
decreased $38 million to $66 million as of February 2, 2007, as a result
of
better sell-through of obsolete or slow-moving inventory. 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 2006, the inventory shrinkage reserve increased
$16 million
to $129 million as of February 2, 2007.
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 could result in the
need for
additional reserves. Likewise, changes in the estimated shrink reserve
may be
necessary, based on the results of physical inventories.
Effect
if actual results differ from assumptions
Although
we believe that we have sufficient current and historical knowledge
to record
reasonable estimates for both of these inventory reserves, it is possible
that
actual results could differ from recorded reserves. A 10% change in
our obsolete
inventory reserve would have affected net earnings by approximately
$4 million for 2006. A 10% change in our estimated shrinkage reserve
would have affected net earnings by approximately $8 million for
2006.
Vendor
Funds
Description
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.
Under
Emerging Issues Task Force Issue No. 02-16 (EITF 02-16), “Accounting by a
Customer (Including a Reseller) for Certain Consideration Received
from a
Vendor,” vendor funds are treated as a reduction of inventory cost, unless they
represent a reimbursement of specific, incremental and identifiable
costs
incurred by the customer to sell the vendor’s product. Substantially all of the
vendor funds that we receive do not meet the specific, incremental
and
identifiable criteria in EITF 02-16. Therefore, we treat the majority
of these
funds as a reduction in the cost of inventory as the amounts are earned
and
recognize these funds as a reduction of cost of sales when the inventory
is
sold.
Judgments
and uncertainties involved in the estimate
Based
on
the provisions of the vendor agreements in place, we develop vendor
fund accrual
rates by estimating the point at which we will have completed our performance
under the agreement and the amounts will be earned. During the year,
due to the
complexity and diversity of the individual vendor agreements, we perform
analyses and review historical trends to ensure the amounts earned
are
appropriately recorded. As a part of these analyses, we validate our
accrual
rates based on actual purchase trends and apply those rates to actual
purchase
volumes to determine the amount of funds accrued and receivable from
the vendor.
Amounts accrued throughout the year could be impacted if actual purchase
volumes
differ from projected annual 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
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 are collected within the following fiscal year
and
therefore do not require subjective long-term estimates. Adjustments
to gross
margin and inventory in the following fiscal year have historically
not been
material.
Self-Insurance
Description
We
are
self-insured for certain losses relating to workers’ compensation, automobile,
property, general and product liability
,
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 2006, our self-insurance liability increased
$79
million to $650 million as of February 2, 2007 as a result of an increase in
the
number of stores and employees.
Judgments
and uncertainties involved in the estimate
These
estimates are subject to changes in the utilized discount rate, payroll, sales
and vehicle units, as well as the frequency and severity of claims.
Effect
if actual results differ from assumptions
Although
we believe that we have the ability to adequately record estimated 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 $40 million for 2006. A 1%
change in our discount rate would have affected net earnings by approximately
$9
million for 2006.
Revenue
Recognition
Description
See
Note
1 to the consolidated financial statements for a complete 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.
Revenues
from stored value cards, which include gift cards and returned merchandise
credits, are deferred and recognized when the cards are redeemed. We recognize
income from unredeemed stored value cards at the point at which redemption
becomes remote. Our stored value cards have no expiration. Therefore, to
determine when redemption is remote, we analyze an aging of the unredeemed
cards, based on the date of last stored value card use. The deferred
revenue associated with outstanding stored value cards increased $74 million
to
$367 million as of February 2, 2007.
We
sell
separately-priced extended warranty contracts under a Lowe’s-branded program for
which the Company is ultimately self-insured. We recognize revenues from
extended warranty sales on a straight-line basis over the respective contract
term due to a lack of sufficient historical evidence indicating that costs
of
performing services under the contracts are incurred on an other than
straight-line basis as a result of the program being in its beginning stages.
Extended warranty contract terms primarily range from one to four years from
the
date of purchase or the end of the manufacturer’s warranty, as applicable. We
consistently group and evaluate extended warranty contracts based on the
characteristics of the underlying products and the coverage provided in order
to
monitor for expected losses. A loss 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 warranty contracts increased
$109
million to $315 million as of February 2, 2007. The liability associated with
unpaid extended warranty claims incurred was insignificant as of February 2,
2007 and February 3, 2006.
We
record
a reserve for anticipated merchandise returns through a reduction of sales
and
costs of sales in the period that the related sales are recorded. We use
historical return levels to estimate return rates, which are applied to sales
during the estimated average return period.
Judgments
and uncertainties involved in the estimate
There
is
judgment inherent in our evaluation of when the redemption of stored value
cards
becomes remote, and therefore, when the related income is recognized.
For
extended warranties, there is judgment inherent in our evaluation of expected
losses as a result of our methodology for grouping and evaluating extended
warranty 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.
There
is
judgment applied in our estimate of historical return levels and in the
determination of the average return period.
Effect
if actual results differ from assumptions
We
do not
anticipate that there will be a material change in the future estimates or
assumptions we use to recognize income related to unredeemed stored value
cards.
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
unredeemed stored value cards for which redemption is considered remote would
have affected net earnings by approximately $2 million in 2006.
We
currently do not anticipate incurring any losses on our extended warranty
contracts. Although we believe that we have the ability to adequately monitor
and estimate expected losses under the extended warranty 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 2006 under these contracts would have affected
net earnings by approximately $2 million.
Although
we believe we have sufficient current and historical knowledge to record
reasonable estimates of sales returns, it is possible that actual returns
could
differ from recorded amounts. A 1% change in actual returns would have affected
net earnings for 2006 by approximately $3 million. A 1% change in the average
return period would not have had a significant impact on net earnings for
2006.
OPERATIONS
The
following table sets 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
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
vs. 2005
|
|
|
2006
vs. 2005
|
|
|
Net
sales
|
|
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
|
|
9
|
%
|
|
Gross
margin
|
|
|
34.52
|
|
|
34.20
|
|
|
32
|
|
|
10
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
20.75
|
|
|
20.84
|
|
|
(9
|
)
|
|
8
|
|
|
Store
opening costs
|
|
|
0.31
|
|
|
0.33
|
|
|
(2
|
)
|
|
3
|
|
|
Depreciation
|
|
|
2.48
|
|
|
2.27
|
|
|
21
|
|
|
19
|
|
|
Interest
- net
|
|
|
0.33
|
|
|
0.37
|
|
|
(4
|
)
|
|
(3
|
)
|
|
Total
expenses
|
|
|
23.87
|
|
|
23.81
|
|
|
6
|
|
|
9
|
|
|
Pre-tax
earnings
|
|
|
10.65
|
|
|
10.39
|
|
|
26
|
|
|
11
|
|
|
Income
tax provision
|
|
|
4.03
|
|
|
4.00
|
|
|
3
|
|
|
9
|
|
|
Net
earnings
|
|
|
6.62
|
%
|
|
6.39
|
%
|
|
23
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
Basis
Point Increase / (Decrease) in Percentage of Net Sales
from
Prior
Year
1
|
|
|
Percentage
Increase / (Decrease) in Dollar Amounts from Prior Year
1
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
vs. 2004
|
|
|
2005
vs. 2004
|
|
|
Net
sales
|
|
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
|
|
19
|
%
|
|
Gross
margin
|
|
|
34.20
|
|
|
33.56
|
|
|
64
|
|
|
21
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
20.84
|
|
|
20.74
|
|
|
10
|
|
|
19
|
|
|
Store
opening costs
|
|
|
0.33
|
|
|
0.34
|
|
|
(1
|
)
|
|
15
|
|
|
Depreciation
|
|
|
2.27
|
|
|
2.35
|
|
|
(8
|
)
|
|
14
|
|
|
Interest
- net
|
|
|
0.37
|
|
|
0.48
|
|
|
(11
|
)
|
|
(10
|
)
|
|
Total
expenses
|
|
|
23.81
|
|
|
23.91
|
|
|
(10
|
)
|
|
18
|
|
|
Pre-tax
earnings
|
|
|
10.39
|
|
|
9.65
|
|
|
74
|
|
|
28
|
|
|
Income
tax provision
|
|
|
4.00
|
|
|
3.71
|
|
|
29
|
|
|
28
|
|
|
Net
earnings
|
|
|
6.39
|
%
|
|
5.94
|
%
|
|
45
|
|
|
28
|
%
|
|
Other
Metrics
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Comparable
store sales increases
2
|
|
|
0.0
|
%
|
|
6.1
|
%
|
|
6.6
|
%
|
|
Customer
transactions (in millions)
1
|
|
|
680
|
|
|
639
|
|
|
575
|
|
|
Average
ticket
1, 3
|
|
$
|
68.98
|
|
$
|
67.67
|
|
$
|
63.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
end of year:
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores
|
|
|
1,385
|
|
|
1,234
|
|
|
1,087
|
|
|
Sales
floor square feet (in millions)
|
|
|
157
|
|
|
140
|
|
|
124
|
|
|
Average
store size selling square feet (in thousands)
|
|
|
113
|
|
|
113
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on beginning assets
1, 4
|
|
|
12.6
|
%
|
|
13.1
|
%
|
|
11.6
|
%
|
|
Return
on beginning shareholders' equity
1, 5
|
|
|
21.7
|
%
|
|
24.0
|
%
|
|
21.3
|
%
|
1
The
fiscal years ended February 2, 2007 and January 28, 2005 had 52 weeks. The
fiscal year ended February 3, 2006 had 53 weeks.
2
We
define a comparable store as a store that has been open longer than 13
months.
A
store that is identified for relocation is no longer considered comparable
one
month prior to its relocation. The relocated store must then
remain
open longer than 13 months to be considered comparable. The comparable store
sales increase for 2006 included in the preceding table was calculated using
sales for a comparable 52-week period, while the comparable store sales increase
for 2005 was calculated using sales for a comparable 53-week
period.
3
We
define average ticket as net sales divided by number of customer
transactions.
4
Return
on beginning assets is defined as net earnings divided by beginning total
assets.
5
Return on beginning shareholders’ equity is defined as net earnings divided by
beginning shareholders’ equity.
Fiscal
2006 Compared to Fiscal 2005
For
the
purpose of the following discussion, comparable store sales, comparable store
average ticket and comparable store customer transactions are based on
comparable 52-week periods.
Net
sales -
Our
continued focus on executing the fundamentals and providing customer-valued
solutions together with our store expansion program drove sales of $46.9
billion
in 2006. We opened 155 stores in 2006, including four relocations, and ended
the
year with 1,385 stores in 49 states. The additional week in 2005 resulted
in
approximately $750 million in additional net sales in 2005. Excluding the
additional week, net sales would have increased approximately 10% in 2006.
Comparable
store sales were flat in 2006 versus a comparable store sales increase of
6.1%
in 2005. Average ticket for comparable stores increased slightly versus the
prior year, but comparable store customer transactions declined slightly.
Although
nine of our 21 regions had comparable store sales increases for 2006, sales
in
many areas of the country were pressured by the slowdown in the housing market.
Markets in the Northeast, Florida and California were most exposed to the
slowdown in housing in 2006. Sales trends in those areas clearly indicated
a
cautious home improvement consumer. Also, areas of the Gulf Coast and Florida,
which experienced increased demand in 2005 related to rebuilding from the
hurricanes, experienced comparable store sales declines in the second half
of
2006. We expect the difficult sales comparisons to ease in the second half
of
2007 as we pass the second anniversary of Hurricanes Katrina, Rita and Wilma.
Reflective
of the difficult sales environment, only 11 of our 20 product categories
experienced comparable store sales increases in 2006. The categories that
performed above our average comparable store sales change included rough
plumbing, building materials, rough electrical, home environment, paint,
fashion
plumbing, flooring, nursery, seasonal living, and lawn & landscape products.
In addition, hardware performed at approximately our average comparable store
sales change in 2006. Despite the difficult sales environment, we were able
to
gain unit market share in all of our 20 product categories versus the prior
calendar year, according to third-party estimates.
Outdoor
power equipment and lumber experienced the greatest comparable store sales
declines in 2006. Comparable store generator sales were down 34% for the
year,
compared to strong sales driven by the 2005 hurricanes. Additionally, a warmer
than normal winter led to comparable store sales declines for snow throwers.
However, despite the difficult sales environment, we experienced a 2% unit
market share gain in outdoor power equipment in calendar year 2006. Lumber
and
plywood experienced more than 15% cost deflation and similar retail price
deflation in 2006.
Our
Big 3
Specialty Sales initiatives had mixed results in 2006. A hesitation to take
on
large projects by some consumers had an impact on our Installed Sales and
Special Order Sales in the second half of 2006. Installed Sales increased
9%
over 2005. Our Installed Sales consist of both stock and special order
product for which we arrange installation for our customers. Special Order
Sales
increased 5% over 2005. In contrast, sales growth for Commercial Business
Customers was nearly double the Company average.
Gross
margin -
For
2006,
gross margin of 34.52% represented a 32-basis-point increase over 2005. This
increase as a percentage of sales was primarily due to positive product mix
shifts and a greater proportion of imported goods, which
typically have
lower acquisition costs. For 2006, we imported approximately 11% of our goods
compared to approximately 9.5% in the prior year. These items were slightly
offset by higher inventory shrink as a percentage of sales.
SG&A
-
The
decrease in SG&A as a percentage of sales from 2005 to 2006 was primarily
due to lower expenses related to bonus and retirement plans. Our
performance-based bonus and retirement expenses fluctuate with our sales
and
earnings performance relative to plan, and decreased approximately $200 million
or 50 basis points in 2006. In addition, insurance expense leveraged 12 basis
points in 2006, a result of our ongoing safety initiatives and the benefits
of
regulatory changes in certain states, which contributed to actuarial projections
of lower costs to settle claims. These items were partially offset by
de-leverage in store payroll. As sales slowed throughout the year, our stores
adjusted their hours accordingly. However, because of our base staffing
requirements and customer service standards, we chose not to reduce payroll
at
the same rate as sales.
Store
opening costs -
Store
opening costs, which include payroll and supply costs incurred prior to store
opening as well as grand opening advertising costs, totaled $146 million
in 2006
compared to $142 million in 2005. These costs are associated with the opening
of
155 stores in 2006 (151 new and four relocated), as compared with the opening
of
150 stores in 2005 (147 new and three relocated). Store opening costs for
stores
opened during the year averaged approximately $0.9 million per store in 2006
and
2005. Because store opening costs are expensed as incurred, the timing of
expense recognition fluctuates based on the timing of store
openings.
Depreciation
-
Depreciation
de-leveraged 21 basis points as a percentage of sales in 2006. This de-leverage
was driven by growth in assets and the softer sales environment. At February 2,
2007, we owned 86% of our stores, compared to 84% at February 3, 2006, which
includes stores on leased land. Property, less accumulated depreciation,
increased to $19.0 billion at February 2, 2007, compared to $16.4 billion
at
February 3, 2006. The increase in property resulted primarily from our store
expansion program as well as our remerchandising efforts.
Interest
-
Net
interest expense is comprised of the following:
|
(In
millions)
|
|
|
2006
|
|
|
2005
|
|
|
Interest
expense, net of amount capitalized
|
|
$
|
200
|
|
$
|
186
|
|
|
Amortization
of original issue discount and loan costs
|
|
|
6
|
|
|
17
|
|
|
Interest
income
|
|
|
(52
|
)
|
|
(45
|
)
|
|
Net
interest expense
|
|
$
|
154
|
|
$
|
158
|
|
Interest
expense increased primarily due to the October 2006 $1 billion debt issuance,
partially offset by lower interest expense on convertible debt due to
conversions during 2006. Interest expense relating to capital leases was
$34
million for 2006 and $39 million for 2005. Amortization of loan costs decreased
in 2006 versus the prior year as a result of increased debt
conversions.
Income
tax provision -
Our
effective income tax rate was 37.9% in 2006 versus 38.5% in 2005. The decrease
in the effective tax rate was the result of increased federal tax credits
associated with Welfare to Work and Work Opportunity Tax Credit programs
and
increased state tax credits related to our investments in employees and
property.
Fiscal
2005 Compared to Fiscal 2004
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 -
Comparable
store sales, our ongoing store expansion and relocation program and continued
growth in our Specialty Sales initiatives were key drivers of our sales increase
in 2005. We opened 150 stores in 2005, including three relocations, and ended
the year with stores in 49 states, including our first stores in New Hampshire.
The additional week in 2005 resulted in approximately $750 million in sales
and
impacted 2005 sales growth by about 2.1%.
The
comparable store sales increase of 6.1% in 2005 was on top of comparable
store
sales increases of 6.6% in 2004 and 6.7% in 2003. The comparable store sales
increase in 2005 was driven by increases in both average ticket and
transactions. Average ticket for comparable stores increased 6.1% and comparable
store customer transactions increased slightly.
We
experienced comparable store sales increases in every product category for
2005.
The categories that performed above our average comparable store sales increase
for 2005 included millwork, rough plumbing, building materials, rough
electrical, outdoor power equipment, appliances, home environment, paint,
flooring and cabinets & countertops. In addition, hardware and fashion
plumbing performed at approximately the average comparable store sales increase.
Inflation in lumber and building materials favorably impacted comparable
store
sales for 2005 by approximately 50 basis points, driven by gypsum, roofing
and
cement products. We also continued to gain market share in key product
categories previously dominated by other channels, including appliances,
outdoor
power equipment and cabinets & countertops.
The
appliance category delivered a double-digit comparable store sales increase
for
2005. According to independent measures, we increased our unit market share
in
major appliances by 130 basis points for calendar year 2005 versus calendar
year
2004. Our success in appliances is a function of our brand selection and
knowledgeable sales specialists. The introduction of Samsung digital appliances
in 2005 was evidence of our commitment to enhance our brand selection and
competitive offering.
We
experienced a double-digit comparable store sales increase for 2005 in cabinets
& countertops, which was driven by emphasis on our product offering, as well
as a focus on our Installed Sales initiative, which plays a key role in driving
cabinets & countertops sales.
Outdoor
power equipment delivered a high single-digit comparable store sales increase
for the year. According to independent measures, we increased our outdoor
power
equipment unit market share by 190 basis points for calendar year 2005 versus
calendar year 2004.
We
also
experienced comparable store sales increases in 18 of the 21 geographic regions.
We continued to experience strong sales in Florida and the Gulf Coast regions
as
customers repaired the damage caused by the hurricanes in 2005 and 2004.
We
experienced comparable store sales decreases in two Northeastern regions
that
had a slow, weather-affected start in the first quarter and never fully
recovered. In addition, certain areas of our North Central division suffered
from headline-making layoffs and plant closings, which contributed to these
decreases in comparable store sales.
The
growth in our Big 3 Specialty Sales initiatives also drove our sales increase
in
2005. Our focus on execution under our Installed Sales model led to a 31%
increase in Installed Sales over 2004. Our growth in 2005 was driven by
sales in cabinets & countertops, flooring and millwork. Special Order Sales
increased 25% over 2004. Finally, we experienced significant sales growth
from
Commercial Business Customers. Strengthening customer relationships, supported
by targeted marketing and market-specific merchandising assortments, continued
to drive this part of our business.
Gross
margin -
For
2005,
gross margin of 34.20% represented a 64-basis-point increase over 2004.
Approximately 40 basis points of the increase in gross margin as a percentage
of
sales for 2005 was due to the impact of the implementation of EITF 02-16
as it
related to cooperative advertising and in-store services, which reduced gross
margin in 2004 as these funds were capitalized into inventory and recognized
in
income when the product was sold. The increase in 2005 gross margin was also
driven by growth in imported goods, improvements in inventory shrink and
a
positive sales mix.
SG&A
-
The
increase in SG&A expenses as a percentage of sales from 2004 to 2005 was
primarily due to increased 401(k) performance match contributions as a
percentage of sales resulting from our increased profitability in 2005. In
addition, there were increases as a percentage of sales in store remerchandising
expense, which resulted from our continued investment in existing stores, and
rent expense, as we continue to expand into metropolitan markets. These
increases were partially offset by a decrease in vendor-provided store-service
costs as a percentage of sales. Our ongoing evaluation of in-store vendor
service expense allowed us to appropriately adjust the level of vendor service
in our stores, which led to the decrease as a percentage of sales. In addition,
although there was an increase in advertising expense compared to 2004, we
were
able to enhance messaging and refine our marketing mix to make our advertising
programs more productive, thereby resulting in the leverage of advertising
expense as a percentage of sales in 2005.
Store
opening costs -
Store
opening costs totaled $142 million in 2005 compared to $123 million in 2004.
These costs are associated with the opening of 150 stores in 2005 (147 new
and
three relocated), as compared with the opening of 140 stores in 2004 (136 new
and four relocated). Store opening costs for stores opened during the year
averaged approximately $0.9 million per store in 2005 and 2004. Because store
opening costs are expensed as incurred, the timing of expense recognition may
fluctuate based on the timing of store openings.
Depreciation
-
Depreciation
leveraged eight basis points as a percentage of sales in 2005. At February
3,
2006, we owned 84% of our stores, compared to 81% at January 28, 2005, which
includes stores on leased land. Property, less accumulated depreciation,
increased to $16.4 billion at February 3, 2006, compared to $13.9 billion at
January 28, 2005. The increase in property resulted primarily from our store
expansion program and an additional investment in information technology.
Interest
-
Net
interest expense was comprised of the following:
|
(In
millions)
|
|
|
2005
|
|
|
2004
|
|
|
Interest
expense, net of amount capitalized
|
|
$
|
186
|
|
$
|
172
|
|
|
Amortization
of original issue discount and loan costs
|
|
|
17
|
|
|
20
|
|
|
Interest
income
|
|
|
(45
|
)
|
|
(16
|
)
|
|
Net
interest expense
|
|
$
|
158
|
|
$
|
176
|
|
Interest
expense increased primarily due to the October 2005 $1 billion debt issuance,
partially offset by lower interest expense on convertible debt due to
conversions during 2005. Interest expense relating to capital leases was $39
million for 2005 and $38 million for 2004. Interest income increased primarily
due to the investment of a portion of the proceeds from the October 2005 $1
billion debt issuance.
Income
tax provision -
Our
effective income tax rate was 38.5% in 2005 and 2004.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We
believe in our potential for long-term growth and profitability, and while
we
are focused on growing sales and earnings, we are also focused on cash flow.
By
making working capital improvements, we expect cash flow from operations to
grow
faster than earnings. Our long-term goal is to grow inventory at 75% of sales
growth. Our largest initiative over the past couple of years was R3, which
encompassed numerous supply chain enhancements that would allow us to more
effectively and efficiently move product to our stores in changing demand
environments. That platform is firmly in place and is now our standard operating
model.
In
2006,
sales increased 8.5%, while inventory growth was 7.7%. The increase in our
inventory balance from 2005 to 2006 was the result of new or non-comparable
stores. Both comparable stores and distribution center inventories were down
slightly versus the prior year. In addition, we are focused on improving working
capital through increased days payable outstanding.
Cash
Flows
The
following table summarizes the components of the consolidated statements
of cash
flows. 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:
|
(In
millions)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net
cash provided by operating activities
|
|
$
|
4,502
|
|
$
|
3,842
|
|
$
|
3,073
|
|
|
Net
cash used in investing activities
|
|
|
(3,715
|
)
|
|
(3,674
|
)
|
|
(2,362
|
)
|
|
Net
cash used in financing activities
|
|
|
(846
|
)
|
|
(275
|
)
|
|
(1,047
|
)
|
|
Net
decrease in cash and cash equivalents
|
|
|
(59
|
)
|
|
(107
|
)
|
|
(336
|
)
|
|
Cash
and cash equivalents, beginning of year
|
|
|
423
|
|
|
530
|
|
|
866
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
364
|
|
$
|
423
|
|
$
|
530
|
|
Cash
flows from operating activities provide a significant source of our liquidity.
The increase in cash provided by operating activities in 2006 compared to
2005
resulted primarily from increased net earnings and increased days payable
outstanding, partially offset by the timing of tax payments and a decline
in
deferred revenue associated with Specialty Sales. The increase in cash provided
by operating activities in 2005 compared to 2004 resulted primarily from
increased net earnings as well as a lower investment in inventory compared
to
2004. Working capital at February 2, 2007, was $1.8 billion compared to $2.0
billion at February 3, 2006. The decrease in working capital was due primarily
to increased days payable outstanding.
The
primary component of net cash used in investing activities continues to be
opening new stores, investing in existing stores through resets and
remerchandising, and investing in our distribution center and information
technology infrastructure. Cash acquisitions of fixed assets were $3.9
billion
for
2006, $3.4 billion in 2005 and $2.9 billion in 2004. The February 2, 2007,
retail selling space of 157 million square feet represented a 12% increase
over
February 3, 2006. The February 3, 2006, retail selling space of 140 million
square feet represented a 13% increase over January 28, 2005.
The
increase in cash used in financing activities in 2006 compared to 2005 resulted
primarily from greater repurchases of common stock under our share repurchase
program. The decrease in cash used in financing activities in 2005 compared
to
2004 resulted primarily from the proceeds from the October 2005 issuance
of $1
billion in senior notes and fewer share repurchases, offset by greater scheduled
debt repayments. The ratio of debt to equity plus debt was 22.0% and 19.8%
as of
the years ended 2006 and 2005, respectively.
Sources
of Liquidity
In
addition to our cash flows from operations, we have a $1 billion senior credit
facility that expires in July 2009 that also provides a source of liquidity.
The
facility is available to support our commercial paper program and for direct
borrowings. Borrowings made are priced based upon market conditions at the
time
of funding in accordance with the terms of the senior credit facility. The
senior credit facility contains certain restrictive covenants, which include
maintenance of a debt leverage ratio as defined by the facility. We were
in
compliance with those covenants at February 2, 2007 and February 3, 2006.
Fifteen banking institutions are participating in the $1 billion senior credit
facility. As of February 2, 2007, we had $23 million outstanding under the
senior credit facility, but no outstanding borrowings under our commercial
paper
program. The interest rate on the short-term borrowings was 5.4%. As of February
3, 2006, there were no outstanding borrowings under the senior credit facility
or under our commercial paper program.
Five
banks have extended lines of credit aggregating $486 million for the purpose
of
issuing documentary letters of credit and standby letters of credit. These
lines
do not have termination dates and are reviewed periodically. Commitment fees
ranging from .225% to .50% per annum are paid on the letters of credit amounts
outstanding. Outstanding letters of credit totaled $346 million as of February
2, 2007, and $316 million as of February 3, 2006.
Cash
Requirements
Our
2007
capital budget is $4.6 billion, inclusive of approximately $300 million of
lease
commitments, resulting in a net cash outflow of $4.3 billion in 2007.
Approximately 81% of this planned commitment is for store expansion and new
distribution centers. Expansion plans for 2007 consist of 150 to 160
stores, including 4 relocations of older stores. This planned expansion is
expected to increase sales floor square footage by approximately 11%. All
of the 2007 projects will be owned, which includes approximately 32% that
will
be ground-leased properties.
On
February 2, 2007, we owned and operated 11 regional distribution centers
(RDCs).
We expect to open additional RDCs in Rockford, Illinois, and Lebanon, Oregon,
in
2007, and are planning for an additional RDC in 2008. On February 2, 2007,
we
also operated 13 flatbed distribution centers for the handling of lumber,
building materials and other long-length items. We owned 12 of these flatbed
distribution centers, and we leased one flatbed distribution center. We expect
to open two additional flatbed distribution centers in 2007.
In
October 2006, we issued an additional $1 billion of unsecured senior notes,
comprised of two tranches: $550 million of 5.4% senior notes maturing in
October
2016 and $450 million of 5.8% senior notes maturing in October 2036. Interest
on
the senior notes is payable semiannually in arrears in April and October
of each
year until maturity, beginning in April 2007.
From
their issuance through the end of 2006, principal amounts of $967 million,
or
approximately 96% of our February 2001 convertible notes, had converted from
debt to equity. In 2006, $118 million in principal amounts
converted.
Holders
of the senior convertible notes, issued in October 2001, may convert their
notes
into 34.424 shares of the company’s common stock only if: the sale price of the
company’s common stock reaches specified thresholds, or the credit rating of the
notes is below a specified level, or the notes are called for redemption,
or
specified corporate transactions representing a change in control have occurred.
There is no indication that we will not be able to maintain the minimum
investment grade rating. From their issuance through the end of 2006, an
insignificant amount of the senior convertible notes had converted from debt
to
equity. During the fourth quarter of 2006, our closing share prices reached
the
specified threshold such that the senior convertible notes are convertible
at
the option of each holder into shares of common stock in the first quarter
of
2007. Cash interest payments on the senior convertible notes ceased in October
2006. We may redeem for cash all or a portion of the notes at any time, at
a
price equal to the sum of the issue price plus accrued original issue discount
on the redemption date.
Our
debt
ratings at February 2, 2007, were as follows:
|
Current
Debt Ratings
|
S&P
|
Moody’s
|
Fitch
|
|
Commercial
Paper
|
A1
|
P1
|
F1+
|
|
Senior
Debt
|
A+
|
A1
|
A+
|
|
Outlook
|
Stable
|
Stable
|
Stable
|
We
believe that net cash provided by operating activities and financing activities
will be adequate for our expansion plans and other operating requirements
over
the next 12 months. However, the availability of funds through the
issuance
of commercial paper and new debt could be adversely affected due to a debt
rating downgrade or a deterioration of certain financial ratios. 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.
Our
quarterly cash dividend was increased in 2006 to $.05 per share.
In
January 2005, the Board of Directors authorized up to $1 billion in share
repurchases through 2006. In January and August 2006, the Board of Directors
authorized up to an additional $1 billion and $2 billion in share repurchases
through 2007 and 2008, respectively. This program is implemented through
purchases made from time to time either in the open market or through private
transactions. Shares purchased under the share repurchase program are retired
and returned to authorized and unissued status. During 2006, the Company
repurchased 56.8 million shares at a total cost of $1.7 billion. As of
February
2, 2007, the total remaining authorization under the share repurchase program
was $1.5 billion.
OFF-BALANCE
SHEET ARRANGEMENTS
Other
than in connection with executing operating leases, we do not have any
off-balance sheet financing that has, or is reasonably likely to have,
a
material, current or future effect on our financial condition, cash flows,
results of operations, liquidity, capital expenditures or capital
resources.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
The
following table summarizes our significant contractual obligations and
commercial commitments:
|
|
|
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)
|
|
$
|
7,865
|
|
$
|
281
|
|
$
|
438
|
|
$
|
870
|
|
$
|
6,276
|
|
|
Capital
lease obligations
1
|
|
|
644
|
|
|
62
|
|
|
124
|
|
|
123
|
|
|
335
|
|
|
Operating
leases
1
|
|
|
5,527
|
|
|
323
|
|
|
645
|
|
|
642
|
|
|
3,917
|
|
|
Purchase
obligations
2
|
|
|
2,307
|
|
|
1,079
|
|
|
834
|
|
|
382
|
|
|
12
|
|
|
Total
contractual obligations
|
|
$
|
16,343
|
|
$
|
1,745
|
|
$
|
2,041
|
|
$
|
2,017
|
|
$
|
10,540
|
|
|
|
|
Amount
of Commitment Expiration by Period
|
|
|
Commercial
Commitments
|
|
|
|
|
|
Less
than
|
|
|
1-3
|
|
|
4-5
|
|
|
After
5
|
|
|
(In
millions)
|
|
|
Total
|
|
|
1
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
|
Letters
of credit
3
|
|
$
|
346
|
|
$
|
344
|
|
$
|
2
|
|
$
|
-
|
|
$
|
-
|
|
1
Amounts
do not include taxes, common area maintenance, insurance or contingent
rent
because these amounts have historically been insignificant.
2
Represents
contracts for purchases of merchandise inventory, property and construction
of
buildings, as well as commitments related to certain marketing and information
technology programs.
3
Letters
of credit are issued for the purchase of import merchandise inventories,
real
estate and construction contracts, and insurance
programs.
COMPANY
OUTLOOK
As
of
February 23, 2007, the date of our fourth quarter 2006 earnings release,
we
expected to open 150 to 160 stores during 2007, resulting in total square
footage growth of approximately 11%. We expected total sales to increase
approximately 10% and comparable store sales to be approximately flat to
up 2%.
Operating margin, defined as gross margin less SG&A and depreciation, was
expected to decline 70 to 80 basis points. In addition, store opening costs
were
expected to be approximately $140 to $145 million. Diluted earnings per share
of
$2.02 to $2.09 were expected for the fiscal year ending February 1,
2008.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
primary market risk exposure is the potential loss arising from the impact
of
changing interest rates on long-term debt. Our policy is to monitor the interest
rate risks associated with this debt, and we believe any significant risks
could
be offset by accessing variable rate instruments available through our lines
of
credit. The following tables summarize our market risks associated with
long-term debt, excluding capital leases and other. The tables present principal
cash outflows and related interest rates by year of maturity, excluding
unamortized original issue discounts as of February 2, 2007, and February
3,
2006. Variable interest rates are based on the weighted-average rates of
the
portfolio at the end of the year presented. The fair values included below
were
determined using quoted market rates or interest rates that are currently
available to us on debt with similar terms and remaining
maturities.
|
Long-Term
Debt Maturities by Fiscal Year
|
|
|
February
2, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Fixed
|
|
|
Interest
|
|
|
Variable
|
|
|
Interest
|
|
|
(Dollars
in millions)
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
2007
|
|
$
|
59
|
|
|
7.24
|
%
|
$
|
2
|
|
|
6.57
|
%
|
|
2008
|
|
|
7
|
|
|
7.84
|
|
|
-
|
|
|
-
|
|
|
2009
|
|
|
1
|
|
|
5.96
|
|
|
-
|
|
|
-
|
|
|
2010
|
|
|
501
|
|
|
8.25
|
|
|
-
|
|
|
-
|
|
|
2011
|
|
|
1
|
|
|
7.50
|
|
|
-
|
|
|
-
|
|
|
Thereafter
|
|
|
3,570
|
|
|
5.02
|
%
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
4,139
|
|
|
|
|
$
|
2
|
|
|
|
|
|
Fair
value
|
|
$
|
4,299
|
|
|
|
|
$
|
2
|
|
|
|
|
|
Long-Term
Debt Maturities by Fiscal Year
|
|
|
February
3, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Fixed
|
|
|
Interest
|
|
|
Variable
|
|
|
Interest
|
|
|
(Dollars
in millions)
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
2006
|
|
$
|
5
|
|
|
7.58
|
%
|
$
|
2
|
|
|
5.82
|
%
|
|
2007
|
|
|
59
|
|
|
7.25
|
|
|
2
|
|
|
5.82
|
|
|
2008
|
|
|
7
|
|
|
7.84
|
|
|
-
|
|
|
-
|
|
|
2009
|
|
|
1
|
|
|
7.49
|
|
|
-
|
|
|
-
|
|
|
2010
|
|
|
501
|
|
|
8.25
|
|
|
-
|
|
|
-
|
|
|
Thereafter
|
|
|
2,691
|
|
|
4.70
|
%
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
3,264
|
|
|
|
|
$
|
4
|
|
|
|
|
|
Fair
value
|
|
$
|
3,574
|
|
|
|
|
$
|
4
|
|
|
|
|
Disclosure
Regarding Forward-Looking Statements
We
speak
throughout this Annual Report about our future, particularly in the “Letter to
Shareholders” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.” While we believe our estimates and
expectations are reasonable, they are not guarantees of future
performance.
Our
actual results could differ substantially from our expectations because,
for
example:
•
Our
sales are dependent upon the health and stability of the general economy.
We
monitor key economic indicators including disposable personal income, employment
growth, housing turnover, and homeownership levels. In addition, changes
in the
level of repairs, remodeling and additions to existing homes, changes in
commercial building activity, and the availability and cost of financing
can
impact our business.
•
Major
weather-related events and unseasonable weather, particularly wet and cold
weather during the spring and early summer months, may impact sales of seasonal
merchandise and products designed for outdoor use on a short-term
basis.
•
Our
expansion strategy may be impacted by environmental regulations, local zoning
issues, availability and development of land, and more stringent land use
regulations. Furthermore, our ability to secure a highly-qualified workforce
is
an important element to the success of our expansion strategy.
•
Our
business is highly competitive, and as we build an increasing percentage
of our
new stores in larger markets and utilize new sales channels such as the
internet, we may face new and additional forms of competition.
•
The
ability to continue our everyday low pricing strategy and provide the products
that customers want depends on our vendors providing a reliable supply of
products at competitive prices and our ability to effectively manage our
inventory. As an increasing number of the products we sell are imported,
any
restrictions or limitations on importation of such products, political or
financial instability in some of the countries from which we import them,
or a
failure to comply with laws and regulation of those countries from which
we
import them, could interrupt our supply of imported inventory.
•
Our
goal of increasing our market share and our commitment to keeping our prices
low
require us to make substantial investments in new technology and processes
whose
benefits could take longer than expected to be realized and which can be
difficult to implement and integrate.
For
more
information about these and other risks and uncertainties that we are exposed
to, you should read the “Risk Factors” included in our Annual Report on Form
10-K to the United States Securities and Exchange Commission. All
forward-looking statements in this report 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 in our
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.
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 presntation 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 2, 2007. 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
2, 2007,
our Internal Control is effective.
Deloitte
&
Touche,
LLP, the independent registered
public accounting firm that audited the financial statements contained
in this
report, has issued an attestation report on our management's assessment
of our
Internal Control. This report appears on page 27.
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 2, 2007 and February 3, 2006,
and the related consolidated statements of earnings, shareholders' equity,
and
cash flows for each of the three fiscal years in the period ended February
2,
2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 2, 2007 and
February
3, 2006, and the results of its operations and its cash flows for each
of the
three fiscal years in the period ended February 2, 2007, in conformity
with
accounting principles generally accepted in the United States of America.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company's internal
control over financial reporting as of February 2, 2007, 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 3, 2007 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over
financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/
Deloitte & Touche LLP
Charlotte,
North Carolina
April
3,
2007
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 management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting included on page
26, that
Lowe’s Companies, Inc. and subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of February 2, 2007, 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. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness
of 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, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary
in the
circumstances. We believe that our audit provides a reasonable basis for
our opinions.
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, management's assessment that the Company maintained effective
internal
control over financial reporting as of February 2, 2007, is fairly
stated, in
all material respects, based on the criteria established in
Internal
Control—Integrated Framework
issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of February 2, 2007, 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
as of and
for the fiscal year ended February 2, 2007 of the Company and our report
dated
April 3, 2007 expressed an unqualified opinion on those financial
statements.
/s/
Deloitte & Touche LLP
Charlotte,
North Carolina
April
3,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions, except per share and percentage data)
|
|
|
February
2,
|
|
|
%
|
|
|
February
3,
|
|
|
|
|
|
January
28,
|
|
|
|
|
|
Fiscal
years ended on
|
|
|
2007
|
|
|
Sales
|
|
|
2006
|
|
|
Sales
|
|
|
2005
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales (Note 1)
|
|
$
|
46,927
|
|
|
100.00
|
%
|
$
|
43,243
|
|
|
100.00
|
%
|
$
|
36,464
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales (Notes 1 and 15)
|
|
|
30,729
|
|
|
65.48
|
|
|
28,453
|
|
|
65.80
|
|
|
24,224
|
|
|
66.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
16,198
|
|
|
34.52
|
|
|
14,790
|
|
|
34.20
|
|
|
12,240
|
|
|
33.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative (Notes 1, 4 and 9)
|
|
|
9,738
|
|
|
20.75
|
|
|
9,014
|
|
|
20.84
|
|
|
7,562
|
|
|
20.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
opening costs (Note 1)
|
|
|
146
|
|
|
0.31
|
|
|
142
|
|
|
0.33
|
|
|
123
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
(Notes 1 and 3)
|
|
|
1,162
|
|
|
2.48
|
|
|
980
|
|
|
2.27
|
|
|
859
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
- net (Note 16)
|
|
|
154
|
|
|
0.33
|
|
|
158
|
|
|
0.37
|
|
|
176
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
11,200
|
|
|
23.87
|
|
|
10,294
|
|
|
23.81
|
|
|
8,720
|
|
|
23.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
4,998
|
|
|
10.65
|
|
|
4,496
|
|
|
10.39
|
|
|
3,520
|
|
|
9.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (Note 11)
|
|
|
1,893
|
|
|
4.03
|
|
|
1,731
|
|
|
4.00
|
|
|
1,353
|
|
|
3.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
3,105
|
|
|
6.62
|
%
|
$
|
2,765
|
|
|
6.39
|
%
|
$
|
2,167
|
|
|
5.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share (Note 12)
|
|
$
|
2.02
|
|
|
|
|
$
|
1.78
|
|
|
|
|
$
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share (Note 12)
|
|
$
|
1.99
|
|
|
|
|
$
|
1.73
|
|
|
|
|
$
|
1.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$
|
0.18
|
|
|
|
|
$
|
0.11
|
|
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
2,
|
|
|
%
|
|
|
February
3,
|
|
|
|
|
|
(In
millions, except par value and percentage data)
|
|
|
|
|
2007
|
|
|
Total
|
|
|
2006
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 1)
|
|
|
|
$
|
364
|
|
|
1.3
|
%
|
$
|
423
|
|
|
1.7
|
%
|
|
Short-term investments (Notes 1 and 2)
|
|
|
|
|
432
|
|
|
1.6
|
|
|
453
|
|
|
1.8
|
|
|
Merchandise inventory - net (Note 1)
|
|
|
|
|
7,144
|
|
|
25.7
|
|
|
6,635
|
|
|
27.0
|
|
|
Deferred income taxes - net (Note 11)
|
|
|
|
|
161
|
|
|
0.6
|
|
|
155
|
|
|
0.6
|
|
|
Other current assets
|
|
|
|
|
213
|
|
|
0.8
|
|
|
122
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
8,314
|
|
|
30.0
|
|
|
7,788
|
|
|
31.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, less accumulated depreciation (Notes 3 and 4)
|
|
|
|
|
18,971
|
|
|
68.3
|
|
|
16,354
|
|
|
66.4
|
|
|
Long-term investments (Notes 1 and 2)
|
|
|
|
|
165
|
|
|
0.6
|
|
|
294
|
|
|
1.2
|
|
|
Other assets (Notes 1 and 4)
|
|
|
|
|
317
|
|
|
1.1
|
|
|
203
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
$
|
27,767
|
|
|
100.0
|
%
|
$
|
24,639
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (Note 5)
|
|
|
|
|
23
|
|
|
0.1
|
%
|
$
|
-
|
|
|
-
|
%
|
|
Current maturities of long-term debt (Note 6)
|
|
|
|
|
88
|
|
|
0.3
|
|
|
32
|
|
|
0.1
|
|
|
Accounts payable
|
|
|
|
|
3,524
|
|
|
12.7
|
|
|
2,832
|
|
|
11.6
|
|
|
Accrued salaries and wages
|
|
|
|
|
372
|
|
|
1.3
|
|
|
424
|
|
|
1.7
|
|
|
Self-insurance liabilities (Note 1)
|
|
|
|
|
650
|
|
|
2.4
|
|
|
571
|
|
|
2.3
|
|
|
Deferred revenue (Note 1)
|
|
|
|
|
731
|
|
|
2.6
|
|
|
709
|
|
|
2.9
|
|
|
Other current liabilities (Notes 1 and 4)
|
|
|
|
|
1,151
|
|
|
4.1
|
|
|
1,264
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
6,539
|
|
|
23.5
|
|
|
5,832
|
|
|
23.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding current maturities (Notes 6, 7 and
13)
|
|
|
|
|
4,325
|
|
|
15.6
|
|
|
3,499
|
|
|
14.2
|
|
|
Deferred income taxes - net (Note 11)
|
|
|
|
|
735
|
|
|
2.7
|
|
|
735
|
|
|
3.0
|
|
|
Other long-term liabilities (Note 1)
|
|
|
|
|
443
|
|
|
1.6
|
|
|
277
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
12,042
|
|
|
43.4
|
|
|
10,343
|
|
|
42.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
(Note
8)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - $5 par value, none issued
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Common stock - $.50 par value;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2,
2007
1,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
2006
1,568
|
|
|
|
|
762
|
|
|
2.7
|
|
|
784
|
|
|
3.2
|
|
|
Capital in excess of par value
|
|
|
|
|
102
|
|
|
0.4
|
|
|
1,320
|
|
|
5.3
|
|
|
Retained earnings
|
|
|
|
|
14,860
|
|
|
53.5
|
|
|
12,191
|
|
|
49.5
|
|
|
Accumulated other comprehensive income (Note 1)
|
|
|
|
|
1
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
|
|
15,725
|
|
|
56.6
|
|
|
14,296
|
|
|
58.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders'
equity
|
|
|
|
$
|
27,767
|
|
|
100.0
|
%
|
$
|
24,639
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
in
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
Common
Stock
|
|
|
Excess
of
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
|
(In
millions)
|
|
|
Shares
|
|
|
Amount
|
|
|
Par
Value
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
|
Balance
January 30, 2004
|
|
|
1,574.7
|
|
$
|
787
|
|
$
|
1,854
|
|
$
|
7,546
|
|
$
|
1
|
|
$
|
10,188
|
|
|
Comprehensive
income (Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
2,167
|
|
|
|
|
|
|
|
|
Net unrealized investment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,166
|
|
|
Tax
effect of non-qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock options exercised
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
33
|
|
|
Cash
dividends
|
|
|
|
|
|
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
(116
|
)
|
|
Share-based
payment expense (Note 9)
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
70
|
|
|
Repurchase
of common stock (Note 8)
|
|
|
(36.9
|
)
|
|
(18
|
)
|
|
(982
|
)
|
|
|
|
|
|
|
|
(1,000
|
)
|
|
Conversion
of debt to common stock (Note 6)
|
|
|
0.3
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
6
|
|
|
Employee
stock options exercised and other (Note 9)
|
|
|
6.7
|
|
|
3
|
|
|
87
|
|
|
|
|
|
|
|
|
90
|
|
|
Employee
stock purchase plan (Note 9)
|
|
|
2.7
|
|
|
2
|
|
|
59
|
|
|
|
|
|
|
|
|
61
|
|
|
Balance
January 28, 2005
|
|
|
1,547.5
|
|
$
|
774
|
|
$
|
1,127
|
|
$
|
9,597
|
|
$
|
-
|
|
$
|
11,498
|
|
|
Comprehensive
income (Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
2,765
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,766
|
|
|
Tax
effect of non-qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock options exercised
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
59
|
|
|
Cash
dividends
|
|
|
|
|
|
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
(171
|
)
|
|
Share-based
payment expense (Note 9)
|
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
76
|
|
|
Repurchase
of common stock (Note 8)
|
|
|
(25.0
|
)
|
|
(12
|
)
|
|
(762
|
)
|
|
|
|
|
|
|
|
(774
|
)
|
|
Conversion
of debt to common stock (Note 6)
|
|
|
27.6
|
|
|
14
|
|
|
551
|
|
|
|
|
|
|
|
|
565
|
|
|
Employee
stock options exercised and other (Note 9)
|
|
|
15.6
|
|
|
7
|
|
|
205
|
|
|
|
|
|
|
|
|
212
|
|
|
Employee
stock purchase plan (Note 9)
|
|
|
2.5
|
|
|
1
|
|
|
64
|
|
|
|
|
|
|
|
|
65
|
|
|
Balance
February 3, 2006
|
|
|
1,568.2
|
|
$
|
784
|
|
$
|
1,320
|
|
$
|
12,191
|
|
$
|
1
|
|
$
|
14,296
|
|
|
Comprehensive
income (Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
3,105
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Net unrealized investment gains (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,105
|
|
|
Tax
effect of non-qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock options exercised
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
21
|
|
|
Cash
dividends
|
|
|
|
|
|
|
|
|
|
|
|
(276
|
)
|
|
|
|
|
(276
|
)
|
|
Share-based
payment expense (Note 9)
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
59
|
|
|
Repurchase
of common stock (Note 8)
|
|
|
(56.8
|
)
|
|
(28
|
)
|
|
(1,549
|
)
|
|
(160
|
)
|
|
|
|
|
(1,737
|
)
|
|
Conversion
of debt to common stock (Note 6)
|
|
|
3.9
|
|
|
2
|
|
|
80
|
|
|
|
|
|
|
|
|
82
|
|
|
Employee
stock options exercised and other (Note 9)
|
|
|
6.6
|
|
|
3
|
|
|
96
|
|
|
|
|
|
|
|
|
99
|
|
|
Employee
stock purchase plan (Note 9)
|
|
|
2.9
|
|
|
1
|
|
|
75
|
|
|
|
|
|
|
|
|
76
|
|
|
Balance
February 2, 2007
|
|
|
1,524.8
|
|
$
|
762
|
|
$
|
102
|
|
$
|
14,860
|
|
$
|
1
|
|
$
|
15,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
February
2,
|
|
|
February
3,
|
|
|
January
28,
|
|
|
Fiscal
years ended on
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,105
|
|
$
|
2,765
|
|
$
|
2,167
|
|
|
Adjustments to reconcile earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,237
|
|
|
1,051
|
|
|
926
|
|
|
Deferred income taxes
|
|
|
(6
|
)
|
|
(37
|
)
|
|
102
|
|
|
Loss on disposition/writedown of fixed and other assets
|
|
|
23
|
|
|
31
|
|
|
55
|
|
|
Share-based payment expense
|
|
|
62
|
|
|
76
|
|
|
70
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventory - net
|
|
|
(509
|
)
|
|
(785
|
)
|
|
(1,358
|
)
|
|
Other operating assets
|
|
|
(135
|
)
|
|
(38
|
)
|
|
156
|
|
|
Accounts payable
|
|
|
692
|
|
|
137
|
|
|
483
|
|
|
Other operating liabilities
|
|
|
33
|
|
|
642
|
|
|
472
|
|
|
Net cash provided by operating activities
|
|
|
4,502
|
|
|
3,842
|
|
|
3,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(284
|
)
|
|
(1,829
|
)
|
|
(1,180
|
)
|
|
Proceeds from sale/maturity of short-term investments
|
|
|
572
|
|
|
1,802
|
|
|
1,799
|
|
|
Purchases of long-term investments
|
|
|
(558
|
)
|
|
(354
|
)
|
|
(156
|
)
|
|
Proceeds from sale/maturity of long-term investments
|
|
|
415
|
|
|
55
|
|
|
28
|
|
|
Increase in other long-term assets
|
|
|
(16
|
)
|
|
(30
|
)
|
|
(12
|
)
|
|
Fixed assets acquired
|
|
|
(3,916
|
)
|
|
(3,379
|
)
|
|
(2,927
|
)
|
|
Proceeds from the sale of fixed and other long-term assets
|
|
|
72
|
|
|
61
|
|
|
86
|
|
|
Net cash used in investing activities
|
|
|
(3,715
|
)
|
|
(3,674
|
)
|
|
(2,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net increase from short-term borrowings
|
|
|
23
|
|
|
-
|
|
|
-
|
|
|
Proceeds from issuance of long-term debt
|
|
|
989
|
|
|
1,013
|
|
|
-
|
|
|
Repayment of long-term debt
|
|
|
(33
|
)
|
|
(633
|
)
|
|
(82
|
)
|
|
Proceeds from issuance of common stock under employee stock purchase
plan
|
|
|
76
|
|
|
65
|
|
|
61
|
|
|
Proceeds from issuance of common stock from stock options
exercised
|
|
|
100
|
|
|
225
|
|
|
90
|
|
|
Cash dividend payments
|
|
|
(276
|
)
|
|
(171
|
)
|
|
(116
|
)
|
|
Repurchase of common stock
|
|
|
(1,737
|
)
|
|
(774
|
)
|
|
(1,000
|
)
|
|
Excess tax benefits of share-based payments
|
|
|
12
|
|
|
-
|
|
|
-
|
|
|
Net cash used in financing activities
|
|
|
(846
|
)
|
|
(275
|
)
|
|
(1,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(59
|
)
|
|
(107
|
)
|
|
(336
|
)
|
|
Cash
and cash equivalents, beginning of year
|
|
|
423
|
|
|
530
|
|
|
866
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
364
|
|
$
|
423
|
|
$
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N
OT
ES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED FEBRUARY 2, 2007, FEBRUARY 3, 2006 AND JANUARY 28,
2005
NOTE
1 - Summary of Significant Accounting Policies:
Lowe’s
Companies, Inc. and subsidiaries (the Company) is the world's second-largest
home improvement retailer and operated 1,385 stores in 49 states at February
2,
2007. Below are those accounting policies considered to be significant
by the
Company.
Fiscal
Year -
The
Company’s fiscal year ends on the Friday nearest the end of January. The fiscal
years ended February 2, 2007 and January 28, 2005 had 52 weeks. The fiscal
year
ended February 3, 2006 had 53 weeks. All references herein for the years
2006,
2005 and 2004 represent the fiscal years ended February 2, 2007, February
3,
2006 and January 28, 2005, respectively.
Stock
Split -
The
Company’s Board of Directors approved a 2-for-1 stock split of its common shares
on May 25, 2006. On June 30, 2006, shareholders received one additional
common
share for each common share held as of the record date of June 16, 2006.
The par
value of the Company’s common stock remained at $0.50 per share. The par value
of the additional shares issued to effect the stock split totaling $384
million
was reclassified from Capital in Excess of Par Value to Common Stock on
the
Company’s consolidated balance sheet. All prior period common share and per
common share amounts presented herein have been adjusted to reflect the
2-for-1
stock split.
Principles
of Consolidation
- The
consolidated financial statements include the accounts of the Company and
its
wholly-owned or controlled operating subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Use
of Estimates
-
The
preparation of the Company’s financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates that affect the reported amounts of assets,
liabilities, sales and expenses and related disclosures of contingent assets
and
liabilities. The Company bases 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.
Cash
and Cash Equivalents
- Cash
and cash equivalents include cash on hand, demand deposits and short-term
investments with original maturities of three months or less when purchased.
The
majority of payments due from financial institutions for the settlement
of
credit card and debit card transactions process within two business days,
and
are therefore classified as cash and cash equivalents.
Investments
-
The
Company has a cash management program which provides for the investment
of cash
balances not expected to be used in current operations in financial instruments
that have maturities of up to 10 years. Variable rate demand notes and
auction
rate securities, which have stated maturity dates of up to 30 years,
meet this
maturity requirement of the cash management program because the maturity
date of
these investments is determined based on the interest rate reset date
for the
purpose of applying this criteria.
Investments,
exclusive of cash equivalents, with a stated maturity date of one year
or less
from the balance sheet date or that are expected to be used in current
operations, are classified as short-term investments. All other investments
are
classified as long-term. Investments consist primarily of certificates
of
deposit, time deposits, U.S. dollar foreign government securities, money
market
preferred stocks, municipal obligations, agency bonds, corporate notes
and
bonds, auction rate securities and money market mutual funds. Restricted
balances pledged as collateral for letters of credit for the Company’s extended
warranty program and for a portion of the Company’s casualty insurance and
installed sales program liabilities are also classified as investments.
The
Company has classified all investment securities as available-for-sale,
and they
are carried at fair market value. Unrealized gains and losses on such
securities
are included in accumulated other comprehensive income in shareholders'
equity.
Merchandise
Inventory
-
Inventory is stated at the lower of cost or market using the first-in,
first-out
method of inventory accounting. The cost of inventory also includes certain
costs associated with the preparation of inventory for resale and distribution
center costs, net of vendor funds.
The
Company records an inventory reserve for the loss associated with selling
inventories below cost. This reserve is based on management’s current knowledge
with respect to inventory levels, sales trends and historical experience.
Management does not believe the Company’s merchandise inventories are subject to
significant risk of obsolescence in the near term, and management has
the
ability to adjust purchasing practices based on anticipated sales trends
and
general economic conditions. However, changes in consumer purchasing
patterns
could result in the need for additional reserves. The Company also records
an
inventory reserve for the estimated shrinkage between physical inventories.
This
reserve is based primarily on actual shrink results from previous physical
inventories. Changes in the estimated shrink reserve may be necessary
based on
the results of physical inventories. Management believes it has sufficient
current and historical knowledge to record reasonable estimates for both
of
these inventory reserves.
Derivative
Financial
Instruments
- The
Company occasionally utilizes derivative financial instruments to manage
certain
business risks. However, the amounts were not material to the Company’s
consolidated financial statements in any of the years presented. The
Company
does not use derivative financial instruments for trading purposes.
Accounts
Receivable
- The
majority of the Company’s accounts receivable arises from sales of goods and
services to Commercial Business Customers. In May 2004, the Company entered
into
an agreement with General Electric Company and its subsidiaries (GE)
to sell its
then-existing portfolio of commercial business accounts receivable to
GE. During
the term of the agreement, which ends on December 31, 2009, unless terminated
sooner by the parties, GE also
purchases
at face value new commercial business accounts receivable originated
by the
Company and services these accounts. The Company accounts for these transfers
as
sales of accounts receivable. When the Company sells its commercial business
accounts receivable, it retains certain interests in those receivables,
including the funding of a loss reserve and its obligation related to
GE’s
ongoing servicing of the receivables sold. Any gain or loss on the sale
is
determined based on the previous carrying amounts of the transferred
assets
allocated at fair value between the receivables sold and the interests
retained.
Fair value is based on the present value of expected future cash flows
taking
into account the key assumptions of anticipated credit losses, payment
rates,
late fee rates, GE’s servicing costs and the discount rate commensurate with the
uncertainty involved. Due to the short-term nature of the receivables
sold,
changes to the key assumptions would not materially impact the recorded
gain or
loss on the sales of receivables or the fair value of the retained interests
in
the receivables.
Total
commercial business accounts receivable sold to GE were $1.8 billion
in 2006,
$1.7 billion in 2005 and $1.2 billion in 2004. During 2006, 2005 and
2004, the
Company recognized losses of $35 million, $41 million and $34 million,
respectively, on these sales as selling, general and administrative (SG&A)
expense, which primarily relates to the fair value of the obligations
incurred
related to servicing costs that are remitted to GE monthly. At February
2, 2007
and February 3, 2006, the fair value of the retained interests was insignificant
and was determined based on the present value of expected future cash
flows.
Sales
generated through the Company’s proprietary credit cards are not reflected in
receivables. Under an agreement with GE, credit is extended directly
to
customers by GE. All credit program-related services are performed and
controlled directly by GE. The Company has the option, but no obligation,
to
purchase the receivables at the end of the agreement in December 2016.
Tender
costs, including amounts associated with accepting the Company’s proprietary
credit cards, are recorded in SG&A in the consolidated financial
statements.
The
total
portfolio of receivables held by GE, including both receivables originated
by GE
from the Company’s private label credit cards and commercial business accounts
receivable originated by the Company and sold to GE, approximated $6.0
billion
at February 2, 2007, and $5.0 billion at February 3, 2006.
Property
and Depreciation
-
Property is recorded at cost. Costs associated with major additions are
capitalized and depreciated. Capital assets are expected to yield future
benefits and have useful lives which exceed one year. The total cost
of a
capital asset generally includes all applicable sales taxes, delivery
costs,
installation costs and other appropriate costs incurred by the Company
in the
case of self-constructed assets. Upon disposal, the cost of properties
and
related accumulated depreciation are removed from the accounts, with gains
and
losses reflected in SG&A expense in the consolidated statements of
earnings.
Depreciation
is provided over the estimated useful lives of the depreciable assets.
Assets
are depreciated using the straight-line method. Leasehold improvements
are
depreciated over the shorter of their estimated useful lives or the term
of the
related lease, which may include one or more option renewal periods where
failure to exercise such options
would
result in an economic penalty in such amount that renewal appears, at the
inception of the lease, to be reasonably assured. During the term of a
lease, if
a substantial additional investment is made in a leased location, the Company
reevaluates its definition of lease term to determine whether the investment,
together with any penalties related to non-renewal, would constitute an
economic
penalty in such amount that renewal appears, at the time of the reevaluation,
to
be reasonably assured.
Long-Lived
Assets/Store Closing
-
Losses
related to impairment of long-lived assets are recognized when circumstances
indicate the carrying values of the assets may not be recoverable. When
management commits to close or relocate a store location, or when there
are
indicators that the carrying value of a long-lived asset may not be recoverable,
the Company evaluates the carrying value of the asset in relation to its
expected undiscounted future cash flows. If the carrying value of the assets
is
greater than the expected undiscounted future cash flows, and the fair
value of
the assets is less than the carrying value, a provision is made for the
impairment of the assets based on the excess of carrying value over fair
value.
The fair value of the assets is generally based on appraisals and the Company’s
historical experience.
When
a
leased location is closed, a provision is made for the present value of
future
lease obligations, including property taxes, utilities, and common area
maintenance, net of anticipated sublease income. Provisions for impairment
and
store closing costs are included in SG&A expense. The store closing
liability is included in other current liabilities in the consolidated
balance
sheets.
Leases
- For
lease agreements that provide for escalating rent payments or free-rent
occupancy periods, the Company recognizes rent expense on a straight-line
basis
over the non-cancelable lease term and option renewal periods where failure
to
exercise such options would result in an economic penalty in such amount
that
renewal appears, at the inception of the lease, to be reasonably assured.
The
lease term commences on the date that the Company takes possession of or
controls the physical use of the property. Deferred rent is included in
other
long-term liabilities in the consolidated balance sheets.
Assets
under capital leases are amortized in accordance with the Company's normal
depreciation policy for owned assets or, if shorter, over the non-cancelable
lease term and any option renewal period where failure to exercise such
option
would result in an economic penalty in such amount that renewal appears,
at the
inception of the lease, to be reasonably assured. The amortization of the
assets
is included in depreciation expense in the consolidated financial statements.
During the term of a lease, if a substantial additional investment is made
in a
leased location, the Company reevaluates its definition of lease term.
Self-Insurance
- The
Company is self-insured for certain losses relating to workers’ compensation,
automobile, property, and general and product liability claims. The Company
has
stop-loss coverage to limit the exposure arising from these claims. The
Company
is also self-insured for certain losses relating to medical and dental
claims.
Self-insurance claims filed and claims incurred but not reported are accrued
based upon management’s estimates of the discounted ultimate cost for uninsured
claims incurred using actuarial assumptions followed in the insurance industry
and historical experience. Although management believes it has the ability
to
adequately record estimated losses related to claims, it is possible that
actual
results could differ from recorded self-insurance liabilities.
Income
Taxes
- The
Company establishes deferred income tax assets and liabilities for temporary
differences between the tax and financial accounting bases of assets and
liabilities. The tax effects of such differences are reflected in the balance
sheet at the enacted tax rates expected to be in effect when the differences
reverse. A valuation allowance is recorded to reduce the carrying amount
of
deferred tax assets if it is more likely than not that all or a portion
of the
asset will not be realized. The tax balances and income tax expense recognized
by the Company are based on management’s interpretation of the tax statutes of
multiple jurisdictions.
The
Company includes interest related to tax issues as part of net interest
in the
consolidated financial statements. The Company records any applicable penalties
related to tax issues within the income tax provision.
Revenue
Recognition -
The
Company recognizes revenues, net of sales tax, when sales transactions
occur and
customers take possession of the merchandise. A provision for anticipated
merchandise returns is provided through a reduction of sales and cost of
sales
in the period that the related sales are recorded. Revenues from product
installation services are recognized when the installation is completed.
Deferred revenues associated with amounts received for which customers
have not
yet taken possession of merchandise or for which installation has not yet
been
completed were $364 million and $377 million at February 2, 2007, and February
3, 2006, respectively.
Revenues
from stored value cards, which include gift cards and returned merchandise
credits, are deferred and recognized when the cards are redeemed. The liability
associated with outstanding stored value cards was $367 million and $293
million
at February 2, 2007, and February 3, 2006, respectively, and these amounts
are
included in deferred revenue in the accompanying consolidated balance sheets.
The
Company recognizes income from unredeemed stored value cards at the point
at
which redemption becomes remote. The Company’s stored value cards have no
expiration. Therefore, to determine when redemption is remote, the Company
analyzes an aging of the unredeemed cards, based on the date of last stored
value card use.
Extended
Warranties -
Lowe’s
sells separately-priced extended warranty contracts under a Lowe’s-branded
program for which the Company is ultimately self-insured. The Company recognizes
revenue from extended warranty sales on a straight-line basis over the
respective contract term. Extended warranty contract terms primarily range
from
one to four years from the date of purchase or the end of the manufacturer’s
warranty, as applicable. Deferred revenues related to the Company’s extended
warranty sales were $315 million and $206 million at February 2, 2007 and
February 3, 2006, respectively. The Company’s extended warranty deferred revenue
is included in other long-term liabilities in the accompanying consolidated
balance sheets. Changes in deferred revenue for extended warranty contracts
are
summarized as follows:
|
(In
millions)
|
|
|
2006
|
|
|
2005
|
|
|
Extended
warranty deferred revenue, beginning of period
|
|
$
|
206
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to deferred revenue
|
|
|
148
|
|
|
130
|
|
|
Deferred
revenue recognized
|
|
|
(39
|
)
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
Extended
warranty deferred revenue, end of period
|
|
$
|
315
|
|
$
|
206
|
|
Incremental
direct acquisition costs associated with the sale of extended warranties
are
also deferred and recognized as expense on a straight-line basis over the
respective contract term. Deferred costs associated with extended warranty
contracts were $81 million and $54 million at February 2, 2007 and February
3,
2006, respectively. The Company’s extended warranty deferred costs are included
in other assets (non-current) in the accompanying consolidated balance
sheets.
All other costs, such as costs of services performed under the contract,
general
and administrative expenses and advertising expenses are expensed as
incurred.
The
Company’s liability for extended warranty claims incurred is included in
self-insurance liabilities in the accompanying consolidated balance sheets.
Reductions in the extended warranty liability for payments made under the
extended warranties were $16 million, and increases in the liability for
accruals related to preexisting warranties were $17 million in 2006. Reductions
in the extended warranty liability for payments made under the extended
warranties and aggregate changes in the liability for accruals related
to
preexisting warranties were not significant in 2005, as the program was
still in
its beginning stages.
Cost
of Sales and Selling, General and Administrative Expenses -
The
following lists the primary costs classified in each major expense
category:
|
Cost
of Sales
|
|
Selling,
General and Administrative
|
|
§
Total
cost of products sold, including:
-
Purchase
costs, net of vendor funds;
-
Freight
expenses associated with moving merchandise inventories
from
vendors to retail
stores;
-
Costs
associated with operating the Company’s distribution
network,
including payroll and benefit costs and occupancy
costs;
§
Costs
of services provided;
§
Costs
associated with delivery of products directly from vendors
to customers
by
third
parties;
§
Costs
associated with inventory shrinkage and obsolescence.
|
|
§
Payroll
and benefit costs for retail and corporate employees;
§
Occupancy
costs of retail and corporate facilities;
§
Advertising;
§
Costs
associated with delivery of products from stores to
customers;
§
Third-party
in-store service costs;
§
Tender
costs, including bank charges, costs associated with credit
card
interchange
fees,
and amounts associated with accepting the Company's
proprietary
credit
cards;
§
Costs
associated with self-insured plans, and premium costs for
stop-loss
coverage
and
fully insured plans;
§
Long-lived
asset impairment charges and gains/losses on disposal of
assets;
§
Other
administrative costs, such as supplies, and travel and
entertainment.
|
Vendor
Funds
- The
Company receives funds from vendors in the normal course of business
principally
as a result of purchase volumes, sales, early payments, or promotions
of
vendors’ products. Based on the provisions of the vendor agreements in place,
management develops accrual rates by estimating the point at which
the Company
will have completed its performance under the agreement and the amount
will be
earned. During the year, due to the complexity and diversity of the
individual
vendor agreements, the Company performs analyses and reviews historical
trends
to ensure the amounts earned are appropriately recorded. As a part
of these
analyses, the Company validates its accrual rates based on actual purchase
trends and applies those rates to actual purchase volumes to determine
the
amount of funds accrued by the Company and receivable from the vendor.
Amounts
accrued throughout the year could be impacted if actual purchase volumes differ
from projected annual purchase volumes, especially in the case of programs
that
provide for increased funding when graduated purchase volumes are met.
Under
Emerging Issues Task Force Issue No. 02-16 (EITF 02-16), “Accounting by a
Customer (Including a Reseller) for Certain Consideration Received
from a
Vendor,” vendor funds are treated as a reduction of inventory cost, unless they
represent a reimbursement of specific, incremental and identifiable
costs
incurred by the customer to sell the vendor’s product. Substantially all of the
vendor funds that the Company receives do not meet the specific, incremental
and
identifiable criteria in EITF 02-16. Therefore, the Company treats
the majority
of these funds as a reduction in the cost of inventory as the amounts
are earned
and recognizes these funds as a reduction of cost of sales when the
inventory is
sold. There is no impact to the timing of when the funds are received
from
vendors or the associated cash flows.
Advertising
-
Costs
associated with advertising are charged to operations as incurred.
Advertising
expenses were $873 million, $812 million and $740 million in 2006,
2005 and
2004, respectively.
Shipping
and Handling Costs
- The
Company includes shipping and handling costs relating to the delivery
of
products directly from vendors to customers by third parties in cost
of sales.
Shipping and handling costs, which include salaries and vehicle operations
expenses relating to the delivery of products from stores to customers,
are
classified as SG&A expenses. Shipping and handling costs included in
SG&A expenses were $310 million, $312 million and $255 million during
2006,
2005 and 2004, respectively.
Store
Opening Costs
- Costs
of opening new or relocated retail stores, which include payroll and
supply
costs incurred prior to store opening and grand opening advertising
costs, are
charged to operations as incurred.
Comprehensive
Income
- The
Company reports comprehensive income in its consolidated statements
of
shareholders’ equity. Comprehensive income represents changes in shareholders'
equity from non-owner sources and is comprised primarily of net earnings
plus or
minus unrealized gains or losses on available-for-sale securities,
as well as
foreign currency translation adjustments. For the year ended February
2, 2007,
foreign currency translation losses were approximately $2 million,
and net
unrealized holding gains on available-for-sale securities were approximately
$2
million. For the year ended February 3, 2006, foreign currency translation
gains
were approximately $1 million and unrealized holding losses on
available-for-sale securities were insignificant. For the year ended
January 28,
2005, unrealized holding losses on available-for-sale securities were
approximately $1 million, and there were no foreign currency translation
adjustments. The reclassification adjustments for gains/losses included
in net
earnings for 2006, 2005 and 2004 were insignificant.
Recent
Accounting Pronouncements -
In
July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109.” This Interpretation clarifies the accounting for
uncertainty in income taxes and prescribes a recognition threshold
and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure,
and
transition. The Interpretation is effective for fiscal years beginning
after
December 15, 2006. Management is continuing to evaluate the effect
that the
adoption of FIN 48 will have on the Company’s consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value Measurements.” The Statement provides a single
definition of fair value, together with a framework for measuring it,
and
requires additional disclosure about the use of fair value to measure
assets and
liabilities. SFAS No. 157 also emphasizes that fair value is a market-based
measurement, not an entity-specific measurement, and sets out a fair
value
hierarchy with the highest priority being quoted prices in active markets.
Under
the Statement, fair value measurements are required to be disclosed
by level
within that hierarchy. The Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim
periods
within those fiscal years.
The
Company is currently evaluating the effect that the adoption of SFAS
No. 157
will have on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Liabilities.” The Statement provides entities an option to
measure many financial instruments and certain other items at fair
value,
including available-for-sale and held-to-maturity securities previously
accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt
and Equity Securities.” Under this Statement, unrealized gains and losses on
items for which the fair value option has been elected will be reported
in
earnings at each subsequent reporting period. The Statement is effective
for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the effect that the adoption of SFAS No. 159 will have on
its
consolidated financial statements.
Segment
Information
- The
Company’s operating segments, representing the Company’s home improvement retail
stores, are aggregated within one reportable segment, based on the
way the
Company manages its business. The Company’s home improvement retail stores
exhibit similar long-term economic characteristics, sell similar products
and
services, use similar processes to sell those products and services,
and sell
their products and services to similar classes of customers.
Reclassifications
-
Certain prior period amounts have been reclassified to conform to current
classifications.
NOTE
2 - Investments:
The
Company’s investment securities are classified as available-for-sale. The
amortized costs, gross unrealized holding
gains
and
losses and fair values of the investments at February 2, 2007, and
February 3,
2006, were as follows:
|
|
|
February
2, 2007
|
|
|
Type
|
|
|
Amortized
|
|
|
Gross
Unrealized
|
|
|
Gross
Unrealized
|
|
|
Fair
|
|
|
(In
millions)
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Municipal
obligations
|
|
$
|
258
|
|
$
|
-
|
|
$
|
(1
|
)
|
$
|
257
|
|
|
Money
market preferred stock
|
|
|
148
|
|
|
-
|
|
|
-
|
|
|
148
|
|
|
Corporate
notes
|
|
|
26
|
|
|
-
|
|
|
-
|
|
|
26
|
|
|
Certificates
of deposit
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
Classified
as short-term
|
|
|
433
|
|
|
-
|
|
|
(1
|
)
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
obligations
|
|
|
127
|
|
|
-
|
|
|
-
|
|
|
127
|
|
|
Mutual
funds
|
|
|
35
|
|
|
3
|
|
|
-
|
|
|
38
|
|
|
Classified
as long-term
|
|
|
162
|
|
|
3
|
|
|
-
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
595
|
|
$
|
3
|
|
$
|
(1
|
)
|
$
|
597
|
|
|
|
|
February
3, 2006
|
|
|
Type
|
|
|
Amortized
|
|
|
Gross
Unrealized
|
|
|
Gross
Unrealized
|
|
|
Fair
|
|
|
(In
millions)
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Municipal
obligations
|
|
$
|
295
|
|
$
|
-
|
|
$
|
(1
|
)
|
$
|
294
|
|
|
Money
market preferred stock
|
|
|
157
|
|
|
-
|
|
|
-
|
|
|
157
|
|
|
Corporate
notes
|
|
|
2
|
|
|
-
|
|
|
-
|
|
|
2
|
|
|
Classified
as short-term
|
|
|
454
|
|
|
-
|
|
|
(1
|
)
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
obligations
|
|
|
223
|
|
|
-
|
|
|
(1
|
)
|
|
222
|
|
|
Corporate
notes
|
|
|
32
|
|
|
-
|
|
|
-
|
|
|
32
|
|
|
Mutual
funds
|
|
|
23
|
|
|
2
|
|
|
-
|
|
|
25
|
|
|
Asset-backed
obligations
|
|
|
14
|
|
|
-
|
|
|
-
|
|
|
14
|
|
|
Certificates
of deposit
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
Classified
as long-term
|
|
|
293
|
|
|
2
|
|
|
(1
|
)
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
747
|
|
$
|
2
|
|
$
|
(2
|
)
|
$
|
747
|
|
The
proceeds from sales of available-for-sale securities were $412 million,
$192
million and $165 million for 2006, 2005 and 2004, respectively. Gross
realized
gains and losses on the sale of available-for-sale securities were
not
significant for any of the periods presented. The municipal obligations
classified as long-term at February 2, 2007, will mature in one to
30 years,
based on stated maturity dates.
Short-term
and long-term investments include restricted balances pledged as collateral
for
letters of credit for the Company’s extended warranty program and for a portion
of the Company’s casualty insurance and installed sales program liabilities.
Restricted balances included in short-term investments were $248 million
at
February 2, 2007 and $152 million at February 3, 2006. Restricted balances
included in long-term investments were $32 million at February 2, 2007
and $74
million at February 3, 2006.
NOTE
3 - Property and Accumulated Depreciation:
Property
is summarized by major class in the following table:
|
(In
millions)
|
|
|
Estimated
Depreciable Lives, In Years
|
|
|
February
2,
2007
|
|
|
February
3,
2006
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
N/A
|
|
$
|
5,496
|
|
$
|
4,894
|
|
|
Buildings
|
|
|
10-40
|
|
|
9,655
|
|
|
8,204
|
|
|
Equipment
|
|
|
3-15
|
|
|
7,477
|
|
|
6,468
|
|
|
Leasehold
improvements
|
|
|
3-40
|
|
|
2,476
|
|
|
1,853
|
|
|
Total
cost
|
|
|
|
|
|
25,104
|
|
|
21,419
|
|
|
Accumulated
depreciation
|
|
|
|
|
|
(6,133
|
)
|
|
(5,065
|
)
|
|
Property,
less accumulated depreciation
|
|
|
|
|
$
|
18,971
|
|
$
|
16,354
|
|
Included
in net property are assets under capital lease of $533 million, less
accumulated
depreciation of $274 million, at February 2, 2007, and $534 million,
less
accumulated depreciation of $248 million, at February 3, 2006.
NOTE
4 - Impairment and Store Closing Costs:
The
Company periodically reviews the carrying value of long-lived assets
for
potential impairment. The charge for impairment is included in SG&A expense.
Impairment charges were $5 million, $16 million and $31 million in
2006, 2005
and 2004, respectively.
The
net
carrying value for relocated stores, closed stores and other excess
property are
included in other assets (non-current) and totaled $113 million and
$63 million
at February 2, 2007, and February 3, 2006, respectively.
When
leased locations are closed, a liability is recognized for the fair
value of
future contractual obligations, including property taxes, utilities,
and common
area maintenance, net of anticipated sublease income. The charge for
store
closing costs is included in SG&A expense. The store closing liability,
which is included in other current liabilities in the consolidated
balance
sheets, was $19 million and $23 million at February 2, 2007, and February
3,
2006, respectively.
NOTE
5 - Short-term Borrowings and Lines of Credit:
The
Company has a $1 billion senior credit facility which became effective
in July
2004 and expires in July 2009. This facility is available to support
the
Company's commercial paper program and for direct borrowings. Borrowings
are
priced based upon market conditions at the time of funding in accordance
with
the terms of the senior credit facility. The senior credit facility
contains
certain restrictive covenants, which include maintenance of a debt
leverage
ratio as defined by the facility. The Company was in compliance with
these
covenants at February 2, 2007 and February 3, 2006. Fifteen banking
institutions
are participating in the $1 billion senior credit facility. As of February
2,
2007, the Company had $23 million of short-term borrowings outstanding
under the
senior credit facility but no outstanding borrowings under the commercial
paper
program. The interest rate on short-term borrowings was 5.4%. As of
February 3,
2006, there were no outstanding borrowings under the senior credit
facility or
under the commercial paper program.
Five
banks have extended lines of credit aggregating $486 million for the
purpose of
issuing documentary letters of credit and standby letters of credit.
These lines
do not have termination dates and are reviewed periodically. Commitment
fees
ranging from .225% to .50% per annum are paid on the letters of credit
amounts
outstanding. Outstanding letters of credit totaled $346 million as
of February
2, 2007, and $316 million as of February 3, 2006.
NOTE
6 - Long-Term Debt:
|
|
|
|
|
|
|
Fiscal
Year
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
of
Final
|
|
|
February
2,
|
|
|
February
3,
|
|
|
Debt
Category
|
|
|
Interest
Rates
|
|
|
Maturity
|
|
|
2007
|
|
|
2006
|
|
|
Secured
debt:
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
notes
|
|
|
6.57
to 8.25
|
%
|
|
2028
|
|
$
|
30
|
|
$
|
38
|
|
|
Unsecured
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures
|
|
|
6.50
to 6.88
|
%
|
|
2029
|
|
|
693
|
|
|
693
|
|
|
Notes
|
|
|
8.25
|
%
|
|
2010
|
|
|
498
|
|
|
498
|
|
|
Medium-term
notes - series A
|
|
|
7.35
to 8.20
|
%
|
|
2023
|
|
|
27
|
|
|
27
|
|
|
Medium-term
notes - series B
2
|
|
|
6.70
to 7.61
|
%
|
|
2037
|
|
|
267
|
|
|
267
|
|
|
Senior
notes
|
|
|
5.00
to 5.80
|
%
|
|
2036
|
|
|
1,980
|
|
|
988
|
|
|
Convertible
notes
|
|
|
0.86
to 2.50
|
%
|
|
2021
|
|
|
518
|
|
|
596
|
|
|
Capital
leases and other
|
|
|
|
|
|
2030
|
|
|
400
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
|
|
|
|
|
|
|
4,413
|
|
|
3,531
|
|
|
Less
current maturities
|
|
|
|
|
|
|
|
|
88
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current maturities
|
|
|
|
|
|
|
|
$
|
4,325
|
|
$
|
3,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Real
properties with an aggregate book value of $122 million were
pledged as
collateral at February 2, 2007, for secured
debt.
|
|
2
|
Approximately
37% of these medium-term notes may be put at the option of
the holder on
either the tenth or twentieth anniversary of the issue at
par value. The
medium-term notes were issued in 1997. None of these notes
are currently
putable.
|
Debt
maturities, exclusive of unamortized original issue discounts, capital
leases
and other, for the next five years and thereafter are as follows: 2007,
$61
million; 2008, $7 million; 2009, $1 million; 2010, $501 million; 2011,
$1
million; thereafter, $3.6 billion.
The
Company’s debentures, notes, medium-term notes, senior notes, and convertible
notes contain certain restrictive covenants. The Company was in compliance
with
all covenants in these agreements at February 2, 2007 and February
3,
2006.
Senior
Notes
In
October 2005, the Company issued $1 billion of unsecured senior notes,
comprised
of two $500 million tranches maturing in October 2015 and October 2035,
respectively. The first $500 million tranche of 5.0% Senior Notes was
sold at a
discount of $4 million. The second $500 million tranche of 5.5% Senior
Notes was
sold at a discount of $8 million. Interest on the Senior Notes is payable
semi-annually in arrears in April and October of each year until maturity.
The
discount associated with the issuance is included in long-term debt
and is being
amortized over the respective terms of the Senior Notes. Issuance costs
were
approximately $1 million and are being amortized over the respective
terms of
the Senior Notes. The net proceeds of approximately $988 million were
used for
the repayment of $600 million in outstanding notes due December 2005,
for
general corporate purposes, including capital expenditures and working
capital
needs, and to finance repurchases of common stock.
In
October 2006, the Company issued $1 billion of unsecured senior notes,
comprised
of two tranches: $550 million of 5.4% Senior Notes maturing in October
2016 and
$450 million of 5.8% Senior Notes maturing in October 2036. The 5.4%
Senior
Notes and the 5.8% Senior Notes were each issued at a discount of approximately
$4.4 million. Interest on the Senior Notes is payable semi-annually
in arrears
in April and October of each year until maturity, beginning in April
2007. The
discount associated with the issuance is included in long-term debt
and is being
amortized over the
respective
terms of the Senior Notes. Issuance costs were approximately $1.6 million
and
are being amortized over the respective terms of the Senior Notes. The
net
proceeds of approximately $991 million were used for general corporate
purposes,
including capital expenditures and working capital needs, and to finance
repurchases of common stock.
The
Senior Notes issued in 2005 and 2006 may be redeemed by the Company
at any time,
in whole or in part, at a redemption price plus accrued interest to
the date of
redemption. The redemption price is equal to the greater of (1) 100%
of the
principal amount of the Senior Notes to be redeemed, or (2) the sum
of the
present values of the remaining scheduled payments of principal and
interest
thereon, discounted to the date of redemption on a semi-annual basis
at a
specified rate. The indenture governing the Senior Notes does not limit
the
aggregate principal amount of debt securities that the Company may
issue, nor is
the Company required to maintain financial ratios or specified levels
of net
worth or liquidity. However, the indenture contains various restrictive
covenants, none of which is expected to impact the Company’s liquidity or
capital resources.
Convertible
Notes
The
Company has $578.8 million aggregate principal of senior convertible
notes
issued in October 2001 at an issue price of $861.03 per note. Cash
interest
payments on the notes ceased in October 2006. In October 2021 when
the notes
mature, a holder will receive $1,000 per note, representing a yield
to maturity
of approximately 1%. Holders of the notes had the right to require
the Company
to purchase all or a portion of their notes in October 2003 and October
2006, at
a price of $861.03 per note plus accrued cash interest, if any, and
will have
the right in October 2011 to require the Company to purchase all or
a portion of
their notes at a price of $905.06 per note. The Company may choose
to pay the
purchase price of the notes in cash or common stock or a combination
of cash and
common stock. Holders of an insignificant number of notes exercised
their right
to require the Company to repurchase their notes during 2003 and 2006,
all of
which were purchased in cash. The Company may redeem for cash all or
a portion
of the notes at any time, at a price equal to the sum of the issue
price plus
accrued original issue discount on the redemption date.
Holders
of the senior convertible notes may convert their notes into 34.424
shares of
the Company’s common stock only if: the sale price of the Company’s common stock
reaches specified thresholds, or the credit rating of the notes is
below a
specified level, or the notes are called for redemption, or specified
corporate
transactions representing a change in control have occurred. The conversion
ratio of 34.424 shares per note is only adjusted based on normal antidilution
provisions designed to protect the value of the conversion option.
The
Company’s closing share prices reached the specified threshold such that the
senior convertible notes became convertible at the option of each holder
into
shares of common stock during specified quarters of 2006. Holders of
an
insignificant number of senior convertible notes exercised their right
to
convert their notes into shares of the Company’s common stock during 2006 and
2005. During the fourth quarter of 2006, the Company’s closing share prices
again reached the specified threshold such that the senior convertible
notes are
convertible at the option of each holder into shares of common stock
in the
first quarter of 2007.
The
Company has $37.7 million aggregate principal of convertible notes
issued in
February 2001 at an issue price of $608.41 per note. Interest will
not be paid
on the notes prior to maturity in February 2021, at which time the
holders will
receive $1,000 per note, representing a yield to maturity of 2.5%.
Holders of
the notes had the right to require the Company to purchase all or a
portion of
their notes in February 2004, at a price of $655.49 per note and will
have the
right in February 2011 to require the Company to purchase all or a
portion of
their notes at a price of $780.01 per note. The Company may choose
to pay the
purchase price of the notes in cash or common stock, or a combination
of cash
and common stock. Holders of an insignificant number of notes exercised
their
right to require the Company to purchase their notes during 2004, all
of which
were purchased in cash.
Holders
of the convertible notes issued in February 2001 may convert their
notes at any
time on or before the maturity date, unless the notes have been previously
purchased or redeemed, into 32.896 shares of the Company's common stock
per
note. The conversion ratio of 32.896 shares per note is only adjusted
based on
normal antidilution provisions designed to protect the value of the
conversion
option. During 2006, holders of $118 million principal amount, $80
million
carrying amount, of the Company’s convertible notes issued in February 2001
exercised their right to convert their notes into 3.9 million shares
of the
Company’s common stock at the rate of 32.896 shares per note. During 2005,
holders
of $839 million principal amount, $565 million carrying amount of the Company’s
convertible notes issued in February 2001 exercised their right to convert
their
notes into 27.6 million shares of the Company’s common stock.
Upon
the
issuance of each of the series of convertible notes previously described,
the
Company evaluated the optionality features embedded in the notes and concluded
that these features do not require bifurcation from the host contracts and
separate accounting as derivative instruments.
NOTE
7 - Financial Instruments:
Cash
and
cash equivalents, accounts receivable, short-term borrowings, trade accounts
payable and accrued liabilities are reflected in the financial statements
at
cost, which approximates fair value due to their short-term nature. Short-
and
long-term investments classified as available-for-sale securities, which
include
restricted balances, are reflected in the financial statements at fair value.
Estimated fair values for long-term debt have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop
the
estimates of fair value. Accordingly, the estimates presented herein are
not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value
amounts. The fair value of the Company's long-term debt excluding capital
leases
and other is as follows:
|
|
February
2, 2007
|
|
February
3, 2006
|
|
|
Carrying
|
Fair
|
|
Carrying
|
Fair
|
|
(In
millions)
|
Amount
|
Value
|
|
Amount
|
Value
|
|
Liabilities:
|
|
|
|
|
|
|
Long-term
debt
(excluding
capital leases and other)
|
$4,013
|
$4,301
|
|
$3,107
|
$3,578
|
Interest
rates that are currently available to the Company for issuance of debt with
similar terms and remaining maturities are used to estimate fair value for
debt
issues that are not quoted on an exchange.
NOTE
8 - Shareholders' Equity:
Authorized
shares of common stock were 5.6 billion ($.50 par) at February 2, 2007 and
February 3, 2006.
The
Company has five million ($5 par) authorized shares of preferred stock, none
of
which have been issued. The Board of Directors may issue the preferred stock
(without action by shareholders) in one or more series, having such voting
rights, dividend and liquidation preferences and such conversion and other
rights as may be designated by the Board of Directors at the time of
issuance.
In
January 2005, the Board of Directors authorized up to $1 billion in share
repurchases through 2006. In January and August 2006, the Board of Directors
authorized up to an additional $1 billion and $2 billion in share repurchases
through 2007 and 2008, respectively. This program is implemented through
purchases made from time to time either in the open market or through private
transactions. Shares purchased under the share repurchase program are retired
and returned to authorized and unissued status. During 2005, the Company
repurchased 25.0 million shares at a total cost of $774 million. During 2006,
the Company repurchased 56.8 million shares at a total cost of $1.7 billion
(of
which $160 million was recorded as a reduction in retained earnings in the
third
quarter after capital in excess of par value was depleted). As of February
2,
2007, the total remaining authorization under the share repurchase program
was
$1.5 billion.
NOTE
9 - Accounting for Share-Based Payment:
Effective
February 4, 2006, the Company adopted the fair value recognition provisions
of
SFAS No. 123(R), “Share-Based Payment,” using the
modified-prospective-transition method. Prior to this, the Company was applying
the fair value recognition provisions of SFAS No. 123, “Accounting for Stock
Based Compensation.” Under the SFAS No. 123(R) transition method, compensation
cost recognized in the year ended February 2, 2007 included: (a) the pro
rata
compensation cost for all share-based payments granted prior to, but not
yet
vested as of February 4, 2006, based on
the
grant-date fair value estimated in accordance with the original provisions
of
SFAS No. 123, and (b) the pro rata compensation cost for all share-based
payments granted on or subsequent to February 4, 2006, based on the grant-date
fair value estimated in accordance with the provisions of SFAS No. 123(R).
In
accordance with the modified-prospective-transition method of SFAS No. 123(R),
results for prior periods have not been restated. For all grants, the amount of
share-based payment expense recognized has been adjusted for estimated
forfeitures of awards for which the requisite service is not expected to
be
provided. Estimated forfeiture rates are developed based on the Company’s
analysis of historical forfeiture data for homogeneous employee groups. Prior
to
the adoption of the fair value recognition provisions of SFAS No. 123(R),
share-based payment expense was adjusted for actual forfeitures as they
occurred. This transition resulted in a pre-tax cumulative effect adjustment
of
$10 million as of February 4, 2006. The cumulative effect adjustment was
presented as a reduction of share-based payment expense in the first quarter
of
2006.
The
Company recognized share-based payment expense in SG&A expense on the
consolidated statements of earnings totaling $62 million, $76 million and
$70
million in 2006, 2005 and 2004, respectively. The total income tax benefit
recognized was $18 million, $19 million and $16 million in 2006, 2005 and
2004,
respectively.
Total
unrecognized share-based payment expense for all share-based payment plans
was
$103 million at February 2, 2007, of which $51 million will be recognized
in
2007, $34 million in 2008 and $18 million thereafter. This results in these
amounts being recognized over a weighted-average period of 1.2
years.
Prior
to
the adoption of SFAS No. 123(R), the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash
flows
in the consolidated statements of cash flows. SFAS No. 123(R) requires the
cash
flows resulting from the tax benefits of deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. In accordance with the
modified-prospective-transition method of SFAS No. 123(R), the prior period
consolidated statements of cash flows have not been restated to reflect this
change.
As
the
Company adopted the fair-value recognition provisions of SFAS No. 123
prospectively for all employee awards granted or modified after January 31,
2003, share-based payment expense included in the determination of net earnings
for years ended February 3, 2006 and January 28, 2005 is less than that which
would have been recognized if the fair-value-based method had been applied
to
all awards since the original effective date of SFAS No. 123. The following
table illustrates the effect on net earnings and earnings per share in the
period if the fair-value-based method had been applied to all outstanding
and
unvested awards.
|
(In
millions, except per share data)
|
|
|
2005
|
|
|
2004
|
|
|
Net
earnings as reported
|
|
$
|
2,765
|
|
$
|
2,167
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Stock-based compensation expense
included
in net earnings,
net
of related
tax
effects
|
|
|
57
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based compensation expense determined under the
fair-value-based method for all awards, net of related tax
effects
|
|
|
(59
|
)
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net earnings
|
|
$
|
2,763
|
|
$
|
2,125
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic - as reported
|
|
$
|
1.78
|
|
$
|
1.39
|
|
|
Basic - pro forma
|
|
$
|
1.78
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
Diluted - as reported
|
|
$
|
1.73
|
|
$
|
1.35
|
|
|
Diluted - pro forma
|
|
$
|
1.73
|
|
$
|
1.32
|
|
Overview
of Share-Based Payment Plans
The
Company has (a) four equity incentive plans, referred to as the “2006,” “2001,”
“1997,” and “1994” Incentive Plans, (b) one share-based plan for awards to
non-employee directors and (c) an employee stock purchase plan (ESPP) that
allows employees to purchase Company shares through payroll deductions.
These
plans contain a nondiscretionary antidilution provision that is designed
to
equalize the value of an award as a result of an equity restructuring.
Share-based awards in the form of incentive and non-qualified stock options,
performance accelerated restricted stock (PARS), restricted stock and deferred
stock units may be granted to key employees from the 2006 plan. No new awards
may be granted from the 2001, 1997 and 1994 plans.
The
share-based plan for non-employee directors is referred to as the Amended
and
Restated Directors’ Stock Option and Deferred Stock Unit Plan (Directors’ Plan).
Prior to the amendment to the Directors’ Plan in 2005, each non-employee
Director was awarded 8,000 options on the date of the first Board meeting
after
each annual meeting of the Company’s shareholders, which occurs in the second
quarter of each fiscal year. Since the amendment to the Directors’ Plan in 2005,
each non-employee Director is awarded a number of deferred stock units
determined by dividing the annual award amount by the fair market value of
a
share of the Company’s common stock on the award date and rounding up to the
next 100 units. The annual award amount used to determine the number of deferred
stock units granted to each director was $115,000 and $85,000 in 2006 and
2005,
respectively.
Share-based
awards were authorized for grant to key employees and non-employee directors
for
up to 169.0 million shares of common stock. Stock options were authorized
for up
to 129.2 million shares, while P
ARS,
restricted stock and deferred stock units, which represent nonvested stock,
were
authorized for up to 39.8 million shares of common stock.
At
February 2, 2007, there were 49.8 million shares available for grant under
the
2006 and Directors’ Plans, and 1.3
million
shares
available under the ESPP.
General
terms and methods of valuation for the Company’s share-based awards are as
follows
:
Stock
Options
Stock
options generally have terms of seven years, with normally one-third of each
grant vesting each year for three years, and are assigned an exercise price
of
not less than the fair market value of a share of the Company’s common stock on
the date of grant.
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. When determining expected volatility,
the
Company considers the historical performance of the Company’s stock, as well as
implied volatility. The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant, based on the options’ expected term.
The expected term of the options is based on the Company’s evaluation of option
holders’ exercise patterns and represents the period of time that options are
expected to remain unexercised. The Company uses historical data to estimate
the
timing and amount of forfeitures. These options are expensed on a straight-line
basis over the vesting period, which is considered to be the requisite service
period. The assumptions used in the Black-Scholes option-pricing model for
options granted in the three years ended February 2, 2007, February 3, 2006
and
January 28, 2005 were as follows:
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Assumptions
used:
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
22.3%-29.4%
|
|
|
25.8%-34.1%
|
|
|
31.6%-41.4%
|
|
|
Weighted-average
expected volatility
|
|
|
26.8%
|
|
|
31.4%
|
|
|
38.3%
|
|
|
Expected
dividend yield
|
|
|
0.27%-0.31%
|
|
|
0.23%-0.28%
|
|
|
0.21%-0.23%
|
|
|
Weighted-average
dividend yield
|
|
|
0.28%
|
|
|
0.24%
|
|
|
0.22%
|
|
|
Risk-free
interest rate
|
|
|
4.54%-4.97%
|
|
|
3.76%-4.44%
|
|
|
2.18%-3.46%
|
|
|
Weighted-average
risk-free interest rate
|
|
|
4.69%
|
|
|
3.81%
|
|
|
2.39%
|
|
|
Expected
term, in years
|
|
|
3-4
|
|
|
3-4
|
|
|
3-4
|
|
|
Weighted-average
expected term, in years
|
|
|
3.57
|
|
|
3.22
|
|
|
3.27
|
|
The
weighted-average grant-date fair value per share of options granted was
$8.86,
$7.81 and $8.28 in 2006, 2005 and 2004, respectively. The total intrinsic
value
of options exercised, representing the difference between the exercise
price and
the market price on the date of exercise, was approximately $80 million,
$175
million and $76 million in 2006, 2005 and 2004, respectively.
Transactions
related to stock options issued under the 2006, 2001, 1997, 1994 and Directors’
plans for the year ended February 2, 2007 are summarized as
follows:
|
|
|
|
Shares
(In
Thousands)
|
|
|
Weighted-Average
Exercise Price
Per
Share
|
|
|
Weighted-Average
Remaining Term
(In
Years)
|
|
|
Aggregate
Intrinsic Value
(In
Thousands)
|
|
|
Outstanding
at February 3, 2006
|
|
|
30,595
|
|
$
|
22.48
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,691
|
|
|
33.65
|
|
|
|
|
|
|
|
|
Canceled,
forfeited or expired
|
|
|
(1,140
|
)
|
|
30.82
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,758
|
)
|
|
17.89
|
|
|
|
|
|
|
|
|
Outstanding
at February 2, 2007
|
|
|
30,388
|
|
|
25.51
|
|
|
3.72
|
|
$
|
262,577
|
|
|
Vested
and expected to vest at
February
2, 2007
(1)
|
|
|
29,235
|
|
|
25.24
|
|
|
3.64
|
|
$
|
260,641
|
|
|
Exercisable
at February 2, 2007
|
|
|
19,438
|
|
$
|
22.06
|
|
|
2.70
|
|
$
|
234,952
|
|
(1)
Includes
outstanding vested options as well as outstanding, nonvested options after
a
forfeiture rate is applied.
Performance
Accelerated Restricted Stock Awards
PARS
are
valued at the market price of a share of the Company’s common stock on the date
of grant. In general, these awards vest at the end of a five-year service
period
from the date of grant, unless performance acceleration goals are achieved,
in
which case, awards vest 50% at the end of three years or 100% at the end
of four
years. The performance acceleration goals are based on targeted Company return
on beginning non-cash assets, as defined in the PARS agreement. PARS are
expensed on a straight-line basis over the shorter of the explicit service
period related to the service condition or the implicit service period related
to the performance conditions, based on the probability of meeting the
conditions. The Company uses historical data to estimate the timing and amount
of forfeitures. The weighted-average grant-date fair value per share of PARS
granted was $34.10 and $29.24 in 2006 and 2005, respectively. No PARS were
granted in 2004. The total fair value of PARS vested was approximately $1
million in 2005. No PARS vested in 2006 or 2004.
Transactions
related to PARS issued under the 2006, 2001, 1997 and 1994 plans for the
year
ended February 2, 2007 are summarized as follows:
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value Per Share
|
|
|
Nonvested
at February 3, 2006
|
|
|
595,830
|
|
$
|
29.25
|
|
|
Granted
|
|
|
893,160
|
|
|
34.10
|
|
|
Canceled
or forfeited
|
|
|
(50,410
|
)
|
|
32.05
|
|
|
Nonvested
at February 2, 2007
|
|
|
1,438,580
|
|
$
|
32.17
|
|
Restricted
Stock Awards
The
restricted stock awards are valued at the market price of a share of the
Company’s common stock on the date of grant. In general, these awards vest at
the end of a three-year period from the date of grant and are expensed on
a
straight-line basis over that period, which is considered to be the requisite
service period. The Company uses historical data to estimate the timing and
amount of forfeitures. The weighted-average grant-date fair value per share
of
restricted stock awards granted was $27.34, $32.30 and $28.38 in 2006, 2005
and
2004, respectively. The total fair value of restricted stock awards vested
was
approximately $4 million in 2005. No restricted stock awards vested in 2006
or
2004.
Transactions
related to restricted stock issued under the 2006, 2001, 1997 and 1994 plans
for
the year ended February 2, 2007 are summarized as follows:
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value Per Share
|
|
|
Nonvested
at February 3, 2006
|
|
|
1,765,312
|
|
$
|
31.17
|
|
|
Granted
|
|
|
206,886
|
|
|
27.34
|
|
|
Canceled
or forfeited
|
|
|
(84,616
|
)
|
|
30.80
|
|
|
Nonvested
at February 2, 2007
|
|
|
1,887,582
|
|
$
|
30.77
|
|
Deferred
Stock Units
The
deferred stock units are valued at the market price
of
a
share of the Company’s common stock
on
the
date of grant. For key employees, these awards generally vest over three
to five
years and are expensed on a straight-line basis over that period, which is
considered to be the requisite service period. The Company uses historical
data
to estimate the timing and amount of forfeitures. For non-employee directors,
these awards vest immediately and are expensed on the grant date. The
weighted-average grant-date fair value per share of deferred stock units
granted
was $31.02 and
$28.58
in
2006 and 2005, respectively. No deferred stock units were granted in 2004.
The
total fair value of deferred stock units vested was approximately $5 million
and
$17 million in 2006 and 2005, respectively. No deferred stock units vested
in
2004. There were 568,000 deferred stock units outstanding at February 2,
2007.
Transactions
related to deferred stock units issued under the 2006, 2001, 1997, 1994
and
Directors’ plans for the year ended February 2, 2007 are summarized as
follows:
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value Per Share
|
|
|
Nonvested
at February 3, 2006
|
|
|
500,000
|
|
$
|
19.65
|
|
|
Granted
|
|
|
38,000
|
|
|
31.02
|
|
|
Vested
|
|
|
(158,000
|
)
|
|
22.38
|
|
|
Nonvested
at February 2, 2007
|
|
|
380,000
|
|
$
|
19.65
|
|
ESPP
The
purchase price of the shares under the ESPP equals 85% of the closing price
on
the date of purchase. The Company’s share-based payment expense is equal to 15%
of the closing price on the date of purchase. Prior to the adoption of
SFAS No.
123(R), the ESPP was considered an equity award. In connection with the
implementation of SFAS No. 123(R), the ESPP was reclassified as a liability
award. This liability award is measured at fair value at each reporting
date and
the share-based payment expense is recognized over the six-month offering
period. Twenty million
shares
were authorized for this plan with 1,268,979 remaining available at February
2,
2007. The Company issued 2,916,259 shares of common stock pursuant to this
plan
during the year ended February 2, 2007.
NOTE
10 - Employee Retirement Plans:
The
Company maintains a defined contribution retirement plan for its employees
(the
401(k) Plan). Employees are eligible to participate in the 401(k) Plan
after
completing 90 days of continuous service. Participants are allowed to choose
from a group of mutual funds in order to designate how both employer and
employee contributions are to be invested. The Company's common stock is
also
one of the investment options for contributions to the 401(k) Plan. Company
shares held on the participants’ behalf by the 401(k) Plan
are
voted by
the participants. The Company makes contributions to the 401(k) Plan each
payroll period, based upon a matching formula applied to employee contributions
(baseline match). In addition, the Company offers a performance match to
eligible 401(k) Plan participants, based on growth of Company earnings
before
taxes for the fiscal year. 401(k) Plan participants must have three or
more
years of employment service and be actively employed on the last day of
the
fiscal year to be eligible for the performance match. The performance match
is
funded in participant accounts in April of the following year. The Company’s
contributions to the 401(k) Plan vest immediately in the participant accounts.
Once participants reach age 59 ½, they may elect to withdraw their entire 401(k)
Plan balance. This is a one-time, in-service distribution option. Participants
may also withdraw contributions and rollover contributions for reasons
of
hardship while still actively employed. In addition, participants with
20 or
more years of service, who have an Employee Stock Ownership Plan carryforward
account balance within the 401(k) Plan, can elect to receive a one-time,
in-service distribution of 50% of this account balance.
The
Company also maintains a Benefit Restoration Plan (BRP) to supplement benefits
provided under the 401(k) Plan to 401(k) Plan participants whose benefits
are
restricted as a result of certain provisions of the Internal Revenue Code
of
1986. This plan provides for employer contributions in the form of a baseline
match and a performance match.
The
Company also maintains a non-qualified deferred compensation program called
the
Lowe’s Cash Deferral Plan. This plan is designed to permit certain employees
to
defer receipt of portions of their compensation, thereby delaying taxation
on
the deferral amount and on subsequent earnings until the balance is distributed.
This plan does not provide for employer contributions.
The
Company recognized expense associated with contributions to employee retirement
plans of $42 million, $136 million and $68 million in 2006, 2005 and 2004,
respectively.
Subsequent
to year-end, the Company made changes to the baseline and performance match
provisions of the 401(k) Plan. Effective May 5, 2007, the Company will
increase
the amount of the baseline match to a maximum of 4.25% (up from 2.25%)
but will
no longer offer a performance match. 401(k) Plan participants will be eligible
for the baseline match after 180 days of continuous service.
NOTE
11 - Income Taxes:
The
following is a reconciliation of the effective tax rate to the federal
statutory
tax rate:
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory
federal income tax rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
State
income taxes, net of
federal
tax benefit
|
|
|
3.3
|
|
|
3.6
|
|
|
3.5
|
|
|
Share-based
payment expense
|
|
|
-
|
|
|
0.1
|
|
|
0.2
|
|
|
Other,
net
|
|
|
(0.4
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Effective
tax rate
|
|
|
37.9
|
%
|
|
38.5
|
%
|
|
38.5
|
%
|
|
|
|
Components
of Income Tax Provision
|
|
(In
millions)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,657
|
|
$
|
1,514
|
|
$
|
1,077
|
|
|
State
|
|
|
242
|
|
|
254
|
|
|
174
|
|
|
Total
current
|
|
|
1,899
|
|
|
1,768
|
|
|
1,251
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(11
|
)
|
|
(31
|
)
|
|
80
|
|
|
State
|
|
|
5
|
|
|
(6
|
)
|
|
22
|
|
|
Total
deferred
|
|
|
(6
|
)
|
|
(37
|
)
|
|
102
|
|
|
Total
income tax provision
|
|
$
|
1,893
|
|
$
|
1,731
|
|
$
|
1,353
|
|
The
tax
effect of cumulative temporary differences that gave rise to the deferred
tax
assets and liabilities at February 2, 2007, and February 3, 2006, is
as
follows:
|
|
|
February
2, 2007
|
|
(In
millions)
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Total
|
|
|
Excess
property and store closing costs
|
|
$
|
17
|
|
$
|
-
|
|
$
|
17
|
|
|
Self-insurance
|
|
|
129
|
|
|
-
|
|
|
129
|
|
|
Depreciation
|
|
|
-
|
|
|
(837
|
)
|
|
(837
|
)
|
|
Rent
|
|
|
13
|
|
|
-
|
|
|
13
|
|
|
Vacation
accrual
|
|
|
8
|
|
|
-
|
|
|
8
|
|
|
Sales
returns reserve
|
|
|
22
|
|
|
-
|
|
|
22
|
|
|
Share-based
payment expense
|
|
|
59
|
|
|
-
|
|
|
59
|
|
|
Other,
net
|
|
|
44
|
|
|
(29
|
)
|
|
15
|
|
|
Total
|
|
$
|
292
|
|
$
|
(866
|
)
|
$
|
(574
|
)
|
|
|
|
February
3, 2006
|
|
(In
millions)
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Total
|
|
|
Excess
property and store closing costs
|
|
$
|
19
|
|
$
|
-
|
|
$
|
19
|
|
|
Self-insurance
|
|
|
81
|
|
|
-
|
|
|
81
|
|
|
Depreciation
|
|
|
-
|
|
|
(804
|
)
|
|
(804
|
)
|
|
Rent
|
|
|
26
|
|
|
-
|
|
|
26
|
|
|
Vacation
accrual
|
|
|
6
|
|
|
-
|
|
|
6
|
|
|
Sales
returns reserve
|
|
|
44
|
|
|
-
|
|
|
44
|
|
|
Share-based
payment expense
|
|
|
40
|
|
|
-
|
|
|
40
|
|
|
Other,
net
|
|
|
19
|
|
|
(11
|
)
|
|
8
|
|
|
Total
|
|
$
|
235
|
|
$
|
(815
|
)
|
$
|
(580
|
)
|
The
Company records a valuation allowance to reduce the carrying amount of
deferred
tax assets if it is more likely than not that all or a portion of the
asset will
not be realized. As of February 2, 2007, the Company had recorded a $4
million
valuation allowance.
The
tax
balances and income tax expense recognized by the Company are based on
management’s interpretation of the current tax laws of multiple tax
jurisdictions. Income tax expense reflects the Company’s best estimates and
assumptions regarding the level of future taxable income and interpretation
of
current tax statutes.
The
Company believes that its tax positions are consistent with applicable
tax laws
and that they are supportable. However, management believes that certain
positions are likely to be challenged by taxing authorities. These challenges
include a review of the Company’s tax filing positions, including the timing and
amount of income and deductions in various tax jurisdictions. In
evaluating liabilities associated with its various tax filing positions,
the
Company has accrued for probable liabilities resulting from tax assessments
by
tax authorities. The Company records these tax contingencies to address
the
potential exposures that can result from the diverse interpretations
of tax
statutes, rules and regulations. The amounts accrued were not material
to the
Company’s consolidated financial statements in any of the years
presented.
During
2006, the Company reached a settlement with the Internal Revenue Service
(IRS)
covering the tax years 2002 and 2003. Under the settlement agreement,
the
Company paid the IRS approximately $17 million, plus applicable interest
charges.
NOTE
12 - Earnings per Share:
Basic
earnings per share (EPS) excludes dilution and is computed by dividing
the
applicable net earnings by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share is calculated
based on
the weighted-average shares of common stock as adjusted for the potential
dilutive effect of stock options and convertible notes as of the balance
sheet
date. The following table reconciles EPS for 2006, 2005 and 2004:
|
(In
millions, except per share data)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
3,105
|
|
$
|
2,765
|
|
$
|
2,167
|
|
|
Weighted-average
shares outstanding
|
|
|
1,535
|
|
|
1,555
|
|
|
1,554
|
|
|
Basic
earnings per share
|
|
$
|
2.02
|
|
$
|
1.78
|
|
$
|
1.39
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
3,105
|
|
$
|
2,765
|
|
$
|
2,167
|
|
|
Net
earnings adjustment for interest on convertible debt, net of
tax
|
|
|
4
|
|
|
11
|
|
|
14
|
|
|
Net
earnings, as adjusted
|
|
$
|
3,109
|
|
$
|
2,776
|
|
$
|
2,181
|
|
|
Weighted-average
shares outstanding
|
|
|
1,535
|
|
|
1,555
|
|
|
1,554
|
|
|
Dilutive
effect of share-based awards
|
|
|
9
|
|
|
10
|
|
|
10
|
|
|
Dilutive
effect of convertible debt
|
|
|
22
|
|
|
42
|
|
|
53
|
|
|
Weighted-average
shares, as adjusted
|
|
|
1,566
|
|
|
1,607
|
|
|
1,617
|
|
|
Diluted
earnings per share
|
|
$
|
1.99
|
|
$
|
1.73
|
|
$
|
1.35
|
|
Stock
options to purchase 6.8 million, 5.6 million and 1.2 million shares of
common
stock for 2006, 2005 and 2004, respectively, were excluded from the computation
of diluted earnings per share because their effect would have been
antidilutive.
NOTE
13 - Leases:
The
Company leases store facilities and land for certain store facilities
under
agreements with original terms generally of 20 years. For lease agreements
that
provide for escalating rent payments or free-rent occupancy periods,
the Company
recognizes rent expense on a straight-line basis over the non-cancelable
lease
term and any option renewal period where failure to exercise such option
would
result in an economic penalty in such amount that renewal appears, at
the
inception of the lease, to be reasonably assured. The lease term commences
on
the date when all conditions precedent to the Company’s obligation to pay rent
are satisfied. The leases generally contain provisions for four to six
renewal
options of five years each.
Some
agreements also provide for contingent rentals based on sales performance
in
excess of specified minimums. In 2006, 2005 and 2004, contingent rentals
were
insignificant.
Certain
equipment is also leased by the Company under agreements ranging from
two to
five years. These agreements typically contain renewal options providing
for a
renegotiation of the lease, at the Company's option, based on the fair
market
value at that time.
The
future minimum rental payments required under capital and operating leases
having initial or remaining non-cancelable lease terms in excess of one
year are
summarized as follows:
|
(in
millions)
|
|
Operating
Leases
|
Capital
Leases
|
|
|
|
|
Fiscal
Year
|
|
|
Real
Estate
|
|
|
Equipment
|
|
|
Real
Estate
|
|
|
Equipment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
321
|
|
$
|
2
|
|
$
|
61
|
|
$
|
1
|
|
$
|
385
|
|
|
2008
|
|
|
322
|
|
|
1
|
|
|
62
|
|
|
-
|
|
|
385
|
|
|
2009
|
|
|
322
|
|
|
-
|
|
|
62
|
|
|
-
|
|
|
384
|
|
|
2010
|
|
|
321
|
|
|
-
|
|
|
62
|
|
|
-
|
|
|
383
|
|
|
2011
|
|
|
321
|
|
|
-
|
|
|
61
|
|
|
-
|
|
|
382
|
|
|
Later
years
|
|
|
3,917
|
|
|
-
|
|
|
335
|
|
|
-
|
|
|
4,252
|
|
|
Total
minimum lease payments
|
|
$
|
5,524
|
|
$
|
3
|
|
$
|
643
|
|
$
|
1
|
|
$
|
6,171
|
|
|
Total
minimum capital lease payments
|
|
|
|
|
|
|
|
$
|
644
|
|
|
|
|
|
Less
amount representing interest
|
|
|
|
|
|
|
|
|
251
|
|
|
|
|
|
Present
value of minimum lease payments
|
|
|
|
|
|
|
|
|
393
|
|
|
|
|
|
Less
current maturities
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
Present
value of minimum lease payments, less current
maturities
|
|
|
|
|
|
|
|
$
|
366
|
|
|
|
|
Rental
expenses under operating leases for real estate and equipment were $318
million,
$301 million and $250 million in 2006, 2005 and 2004, respectively.
NOTE
14 - Commitments and Contingencies:
The
Company is a defendant in legal proceedings considered to be in the normal
course of business, none of which, individually or collectively, are
believed to
have a risk of having a material impact on the Company’s financial statements.
In evaluating liabilities associated with its various legal proceedings,
the
Company has accrued for probable liabilities associated with these matters.
The
amounts accrued were not material to the Company’s consolidated financial
statements in any of the years presented.
As
of
February 2, 2007, the Company had non-cancelable commitments related
to
purchases of merchandise inventory, property and construction of buildings,
as
well as commitments related to certain marketing and information technology
programs of $2.3 billion. Payments under these commitments are scheduled
to be
made as follows: 2007, $1.1 billion; 2008, $485 million; 2009, $349 million;
2010, $379 million; 2011, $3 million; thereafter, $12 million.
NOTE
15 - Related Parties:
A
brother-in-law of the Company’s Executive Vice President of Business Development
is a senior officer of a vendor that provides millwork and other building
products to the Company. In 2006, 2005 and 2004, the Company purchased
products
in the amounts of $101 million, $84 million and $80 million, respectively,
from
this vendor. Amounts payable to this vendor were insignificant at February
2, 2007 and February 3, 2006.
NOTE
16 - Other Information:
Net
interest expense is comprised of the following:
|
(In
millions)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Long-term
debt
|
|
$
|
183
|
|
$
|
171
|
|
$
|
159
|
|
|
Capitalized
leases
|
|
|
34
|
|
|
39
|
|
|
38
|
|
|
Interest
income
|
|
|
(52
|
)
|
|
(45
|
)
|
|
(16
|
)
|
|
Interest
capitalized
|
|
|
(32
|
)
|
|
(28
|
)
|
|
(28
|
)
|
|
Other
|
|
|
21
|
|
|
21
|
|
|
23
|
|
|
Net
interest expense
|
|
$
|
154
|
|
$
|
158
|
|
$
|
176
|
|
Supplemental
disclosures of cash flow information:
|
(In
millions)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash
paid for interest, net of amount
capitalized
|
|
$
|
179
|
|
$
|
173
|
|
$
|
174
|
|
|
Cash
paid for income taxes
|
|
$
|
2,031
|
|
$
|
1,593
|
|
$
|
1,192
|
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
fixed asset acquisitions, including
assets
acquired under
capital lease
|
|
$
|
159
|
|
$
|
175
|
|
$
|
133
|
|
|
Conversions
of long-term debt to equity
|
|
$
|
82
|
|
$
|
565
|
|
$
|
6
|
|
Selected
Financial Data (Unaudited)
Sales
by product category:
|
(Dollars
in millions)
|
|
2006
|
2005
|
2004
|
|
Product
category
|
|
|
Total
Sales
|
|
|
%
|
|
|
Total
Sales
|
|
|
%
|
|
|
Total
Sales
|
|
|
%
|
|
|
Appliances
|
|
$
|
4,193
|
|
|
9
|
%
|
$
|
3,912
|
|
|
9
|
%
|
$
|
3,165
|
|
|
9
|
%
|
|
Lumber
|
|
|
3,690
|
|
|
8
|
|
|
3,689
|
|
|
9
|
|
|
3,305
|
|
|
9
|
|
|
Flooring
|
|
|
3,214
|
|
|
7
|
|
|
2,883
|
|
|
7
|
|
|
2,357
|
|
|
6
|
|
|
Millwork
|
|
|
3,137
|
|
|
7
|
|
|
2,935
|
|
|
7
|
|
|
2,428
|
|
|
7
|
|
|
Paint
|
|
|
3,073
|
|
|
7
|
|
|
2,774
|
|
|
6
|
|
|
2,317
|
|
|
6
|
|
|
Building
materials
|
|
|
3,002
|
|
|
6
|
|
|
2,756
|
|
|
6
|
|
|
2,230
|
|
|
6
|
|
|
Fashion
plumbing
|
|
|
2,893
|
|
|
6
|
|
|
2,616
|
|
|
6
|
|
|
2,163
|
|
|
6
|
|
|
Lighting
|
|
|
2,573
|
|
|
5
|
|
|
2,408
|
|
|
6
|
|
|
2,088
|
|
|
6
|
|
|
Tools
|
|
|
2,563
|
|
|
5
|
|
|
2,428
|
|
|
6
|
|
|
2,138
|
|
|
6
|
|
|
Lawn
& landscape products
|
|
|
2,356
|
|
|
5
|
|
|
2,090
|
|
|
5
|
|
|
1,827
|
|
|
5
|
|
|
Hardware
|
|
|
2,296
|
|
|
5
|
|
|
2,121
|
|
|
5
|
|
|
1,785
|
|
|
5
|
|
|
Seasonal
living
|
|
|
2,154
|
|
|
5
|
|
|
1,935
|
|
|
4
|
|
|
1,694
|
|
|
5
|
|
|
Cabinets
& countertops
|
|
|
1,903
|
|
|
4
|
|
|
1,726
|
|
|
4
|
|
|
1,348
|
|
|
4
|
|
|
Outdoor
power equipment
|
|
|
1,805
|
|
|
4
|
|
|
1,807
|
|
|
4
|
|
|
1,503
|
|
|
4
|
|
|
Rough
plumbing
|
|
|
1,664
|
|
|
4
|
|
|
1,416
|
|
|
3
|
|
|
1,161
|
|
|
3
|
|
|
Rough
electrical
|
|
|
1,479
|
|
|
3
|
|
|
1,203
|
|
|
3
|
|
|
977
|
|
|
3
|
|
|
Nursery
|
|
|
1,454
|
|
|
3
|
|
|
1,292
|
|
|
3
|
|
|
1,160
|
|
|
3
|
|
|
Home
environment
|
|
|
1,145
|
|
|
2
|
|
|
1,017
|
|
|
2
|
|
|
835
|
|
|
2
|
|
|
Walls
/ windows
|
|
|
1,101
|
|
|
2
|
|
|
1,054
|
|
|
2
|
|
|
908
|
|
|
2
|
|
|
Home
organization
|
|
|
1,001
|
|
|
2
|
|
|
946
|
|
|
2
|
|
|
793
|
|
|
2
|
|
|
Other
|
|
|
231
|
|
|
1
|
|
|
235
|
|
|
1
|
|
|
282
|
|
|
1
|
|
|
Totals
|
|
$
|
46,927
|
|
|
100
|
%
|
$
|
43,243
|
|
|
100
|
%
|
$
|
36,464
|
|
|
100
|
%
|
Selected
Financial Data (Unaudited) - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Statement of Earnings Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions, except per share data)
|
|
|
2006
|
|
|
2005
*
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Net
sales
|
|
$
|
46,927
|
|
$
|
43,243
|
|
$
|
36,464
|
|
$
|
30,838
|
|
$
|
26,112
|
|
|
Gross
margin
|
|
|
16,198
|
|
|
14,790
|
|
|
12,240
|
|
|
9,533
|
|
|
7,915
|
|
|
Earnings
from continuing operations
|
|
|
3,105
|
|
|
2,765
|
|
|
2,167
|
|
|
1,807
|
|
|
1,473
|
|
|
Earnings
from discontinued operations, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15
|
|
|
12
|
|
|
Net
earnings
|
|
|
3,105
|
|
|
2,765
|
|
|
2,167
|
|
|
1,822
|
|
|
1,485
|
|
|
Basic
earnings per share - continuing operations
|
|
|
2.02
|
|
|
1.78
|
|
|
1.39
|
|
|
1.15
|
|
|
0.94
|
|
|
Basic
earnings per share - discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.01
|
|
|
0.01
|
|
|
Basic
earnings per share
|
|
|
2.02
|
|
|
1.78
|
|
|
1.39
|
|
|
1.16
|
|
|
0.95
|
|
|
Diluted
earnings per share - continuing operations
|
|
|
1.99
|
|
|
1.73
|
|
|
1.35
|
|
|
1.12
|
|
|
0.92
|
|
|
Diluted
earnings per share - discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.01
|
|
|
0.01
|
|
|
Diluted
earnings per share
|
|
|
1.99
|
|
|
1.73
|
|
|
1.35
|
|
|
1.13
|
|
|
0.93
|
|
|
Dividends
per share
|
|
$
|
0.18
|
|
$
|
0.11
|
|
$
|
0.08
|
|
$
|
0.06
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance
S
heet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
27,767
|
|
$
|
24,639
|
|
$
|
21,101
|
|
$
|
18,667
|
|
$
|
15,790
|
|
|
Long-term
debt, excluding current maturities
|
|
$
|
4,325
|
|
$
|
3,499
|
|
$
|
3,060
|
|
$
|
3,678
|
|
$
|
3,736
|
|
Selected Quarterly Data:
| | | | | | | | | | | | | |
(In millions, except per share data)
| | | First
| | | Second
| | | Third
| | | Fourth
| |
2006
| | | | | | | | | | | | | |
Net sales
| | $
| 11,921
|
| $
| 13,389
| | $
| 11,211
| | $
| 10,406
| |
Gross margin
| | | 4,169
| | | 4,478
| | | 3,865
| | | 3,687
| |
Net earnings
| | | 841
|
| | 935
| | | 716
| | | 613
| |
Basic earnings per share
| | | 0.54
| | | 0.61
| | | 0.47
| | | 0.40
| |
Diluted earnings per share
| | $
| 0.53
| | $
| 0.60
| | $
| 0.46
| | $
| 0.40
| |
| | | | | | | | | | | | | | |
(In millions, except per share data)
| | | First
| | | Second
| | | Third
| | | Fourth *
| |
2005
| | | | | | | | | | | | | |
Net sales
| | $
| 9,913
| | $
| 11,929
| | $
| 10,592
| | $
| 10,808
| |
Gross margin
| | | 3,398
| | | 4,027
| | | 3,580
| | | 3,785
| |
Net earnings
| | | 586
| | | 839
| | | 646
| | | 693
| |
Basic earnings per share
| | | 0.38
| | | 0.54
| | | 0.41
| | | 0.44
| |
Diluted earnings per share
| | $
| 0.37
| | $
| 0.52
| | $
| 0.40
| | $
| 0.43
| |
Note: The selected financial data has been adjusted to present the 2003 disposal of the Contractor Yards as a discontinued operation for all periods.
* The fourth quarter of fiscal 2005 contained an additional week. Therefore, fiscal 2005 contained 53 weeks, while all other years contained 52 weeks.
Lo
w
e's
Quarterly Stock Price Range and Cash Dividend
Payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2006
|
|
Fiscal
2005
|
|
Fiscal
2004
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
1st
Quarter
|
|
$
|
34.83
|
|
$
|
30.58
|
|
$
|
0.030
|
|
$
|
29.99
|
|
$
|
25.36
|
|
$
|
0.020
|
|
$
|
29.33
|
|
$
|
25.85
|
|
$
|
0.015
|
|
|
2nd
Quarter
|
|
|
32.85
|
|
|
26.90
|
|
|
0.050
|
|
|
33.51
|
|
|
25.94
|
|
|
0.030
|
|
|
28.08
|
|
|
23.84
|
|
|
0.020
|
|
|
3rd
Quarter
|
|
|
31.55
|
|
|
26.15
|
|
|
0.050
|
|
|
34.48
|
|
|
28.92
|
|
|
0.030
|
|
|
28.88
|
|
|
22.95
|
|
|
0.020
|
|
|
4th
Quarter
|
|
$
|
34.65
|
|
$
|
28.59
|
|
$
|
0.050
|
|
$
|
34.85
|
|
$
|
29.83
|
|
$
|
0.030
|
|
$
|
30.27
|
|
$
|
27.53
|
|
$
|
0.020
|
|
